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Final Rule:
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| I. Executive Summary and Background | |||
| II. Discussion of New Regulatory Scheme | |||
| A. Overview | |||
| 1. Increased Communications Permitted Before Filing Disclosure Document | |||
| 2. Eligibility | |||
| 3. Written Communications with Legend Filed on Date of First Use | |||
| B. Communications Under the Securities Act | |||
| 1. Securities Act Exemption and Filing Rules | |||
| 2. Liability for Communications | |||
| 3. Rules 135 and 145 | |||
| 4. Public Announcement | |||
| C. Communications Under the Proxy Rules | |||
| 1. Rule 14a-12 Expanded | |||
| a. The "As Soon as Practicable" Requirement | |||
| b. Participant Information | |||
| c. "Test the Waters" | |||
| 2. Limited Confidential Treatment of Merger Proxy Materials | |||
| 3. Timing of Filings | |||
| D. Communications Under the Tender Offer Rules | |||
| 1. "Commencement," Communications, and Filing Requirements | |||
| 2. Dissemination Requirements | |||
| E. Exchange Offers May Commence On Filing | |||
| 1. Early Commencement | |||
| 2. Dissemination of a Supplement and Extension of the Offer | |||
| F. Disclosure Requirements for Tender Offers and Mergers | |||
| 1. Schedules Combined and Disclosure Requirements Moved to Subpart 1000 of Regulation S-K ("Regulation M-A") | |||
| 2. Streamline and Improve Required Disclosure | |||
| a. "Plain English" Summary Term Sheet | |||
| b. Item 14 of Schedule 14A Revised to Clarify Requirements and Harmonize Cash Merger and Cash Tender Offer Disclosure | |||
| c. Reduced Financial Statement Requirements for Non-Reporting Target Companies in Stock Mergers and Stock Tender Offers | |||
| G. Tender Offer Rules Updated | |||
| 1. Bidders May Include a "Subsequent Offering Period" Without Withdrawal Rights | |||
| 2. Bidder Financial Information Clarified for Cash Tender Offers | |||
| a. When a Bidder's Financial Statements Are Not Required; Source of Funds | |||
| b. Content of Bidder's Financial Statements in Cash Tender Offers; Financial Statements in Going-Private Transactions | |||
| c. Pro Forma Financial Information Required in Two-Tier Transactions | |||
| 3. Target Is Required to Report Purchases of Its Own Securities After a Third-Party Tender Offer Is Commenced | |||
| 4. Tender Offer and Proxy Rules Relating to the Delivery of a Security Holder List and Security Position Listing Harmonized | |||
| 5. New Rule 14e-5: Revision and Redesignation of Former Rule 10b-13, the Rule Prohibiting Purchases Outside an Offer | |||
| a. Redesignating Rule 10b-13 as Rule 14e-5 | |||
| b. Clarification of Rule 14e-5; Prohibited Period | |||
| c. Persons and Securities Subject to the Rule | |||
| d. Excepted Transactions | |||
| e. Additional Exceptions Being Adopted | |||
| III. Effective Date and Transition | |||
| A. Communications | |||
| B. Confidential Treatment of Proxy Materials | |||
| C. Early Commencement | |||
| D. Disclosure Requirements and New Schedules | |||
| E. Subsequent Offering Period | |||
| F. Revised Security Holder List Rule for Tender Offers | |||
| G. New Rules 14e-5 | |||
| IV. Cost-Benefit Analysis | |||
| A. Communications | |||
| B. Filings | |||
| C. Tender Offers | |||
| V. Commission Findings and Considerations | |||
| A. Exemptive Authority Findings | |||
| B. Effect on Competition | |||
| C. Promotion of Efficiency, Competition and Capital Formation | |||
| VI. Final Regulatory Flexibility Analysis | |||
| A. Need for Action | |||
| B. Objectives of the Rule Amendments | |||
| C. Summary of Significant Issues Raised by the Public Comments | |||
| D. Description and Estimate of the Number of Small Entities Subject to the New Rules | |||
| E. Projected Reporting, Recordkeeping, and Other Compliance Requirements | |||
| F. Description of Steps Taken to Minimize the Effect on Small Entities | |||
| VII. Paperwork Reduction Act | |||
| VIII. Statutory Basis and Text of Amendments | |||
Last fall, we proposed comprehensive changes to the various regulatory schemes applicable to issuer and third-party tender offers, mergers, going-private transactions and security holder communications.10 The proposed changes were prompted by an increase in the number of transactions where securities are offered as consideration; an increase in the number of hostile transactions involving proxy or consent solicitations; and significant technological advances that have resulted in more and faster communications with security holders and the markets. Because these trends have continued since we issued the Proposing Release and commenters, for the most part, viewed the proposals as favorable,11 we are adopting the proposals, with some modification.
As we noted in the Proposing Release, the existing regulatory framework imposes a number of restrictions on communications with security holders and the marketplace. In addition, the disparate regulatory treatment of cash and stock tender offers12 may unduly influence a bidder's13 choice of offering cash or securities in a takeover transaction. We also noted unnecessary differences in regulatory requirements between tender offers and other types of extraordinary transactions, such as mergers.14 Finally, we noted that the multiple regulatory schemes that can apply to a transaction may impose additional compliance costs without necessarily providing a sufficient marginal benefit to security holders. Our goals in proposing and adopting these changes are to promote communications with security holders and the markets, minimize selective disclosure, harmonize inconsistent disclosure requirements and alleviate unnecessary burdens associated with the compliance process, without a reduction in investor protection.15
We also proposed broad changes to the regulation of securities offerings in a companion release.16 Our proposed treatment of communications in the Securities Act Reform Release differs from our approach in the Proposing Release. The differences were due to the special nature of business combination transactions17 in contrast to capital-raising transactions. At this time we are not adopting the Securities Act Reform proposals that are unrelated to business combination transactions. We are continuing to evaluate commenters' responses to the Securities Act Reform proposals and in the future we may take action on these proposals. We are adopting, however, several proposals in the Securities Act Reform Release that relate to business combination transactions. As a result, some proposals or concepts previously presented in the Securities Act Reform Release are incorporated into this release. Where we proposed changes that would appear in new forms included in the Securities Act Reform Release (Forms C and SB-3), those changes have been implemented in existing forms (Forms S-4 and F-4). In a separate release, we also are adopting significant changes to the regulatory scheme for cross-border tender offers, exchange offers and rights offerings.18
We believe these new rules and revisions should provide participants in the securities markets sufficient flexibility to accommodate changes in deal structure and advances in technology that continue to occur in today's markets. Briefly, the new rules and amendments adopted today will:
In several respects the rules adopted today differ from the proposed rule changes. The primary differences are as follows:
At this time we are not adopting several concepts that we solicited comment on, including:
In the future, depending on the effects of today's rule changes, we may consider proposing additional changes to further harmonize the regulatory requirements.
Today, merger and acquisition transactions are occurring at a faster pace, due in part to the rapid development of new technologies and advancements in communications. As a result of economic and regulatory pressures, many companies are releasing more information to the market before a registration, proxy or tender offer statement is filed publicly with us.21 In many cases, parties are releasing information on proposed transactions including pro forma financial information for the combined entity, estimated cost savings and synergies. As we noted in the Proposing Release, parties to business combination transactions provide several reasons for the need to disclose information early,22 including the duty under Rule 10b-5 to disclose material information in a manner that is not misleading.23 We also recognize that parties may be subject to other regulatory requirements to disclose information to the markets early.24
Existing restrictions on communications result primarily from the broad concepts of "offer"25 and "prospectus"26 under the Securities Act, "solicitation"27 under the Exchange Act proxy rules, and "commencement"28 under the Williams Act tender offer rules.29 We recognize that restricting communications to one document may actually impede, rather than promote, informed investing and voting decisions.
We are adopting, as proposed, non-exclusive exemptions under the Securities Act, proxy rules and tender offer rules that permit communications for an unrestricted length of time without a cooling-off period between the end of communications and filing. Written communications made in reliance on the exemptions must be filed. In response to comments, we have modified the exemptions slightly from those proposed, as discussed below.
One major benefit of permitting earlier communications is that more information will be available generally to all security holders, not simply to a limited audience of analysts and financially sophisticated market participants. Because the new rules do not require oral communications to be reduced to writing and filed, some selective disclosure may continue to occur.30 Nevertheless, the rules adopted today are designed to reduce selective disclosure by permitting widespread dissemination of information through a variety of media calculated to inform all security holders about the terms, benefits and risks of a planned extraordinary transaction. We believe that parties to business combination transactions generally wish to inform the marketplace at large about their deals, and will use the new rules to accomplish this end. The new regulatory scheme is not intended to be used as a means to substitute selective oral disclosure for written and oral disclosure that becomes public on a widespread basis.31 Although this release does not impose new requirements on oral communications, we remain extremely troubled by the selective disclosure of material information.32 The staff is considering broader regulatory approaches to limit or inhibit written and oral selective disclosure by issuers in all contexts, including those addressed in this release. If we decide to pursue these approaches, we will issue a separate release seeking public comment.33
The scheme we adopt today provides the maximum amount of flexibility to disclose information to security holders and the markets.34 This new communications scheme, however, does not change the current requirement that security holders receive a mandated disclosure document before they are asked to make a voting or investment decision (e.g., a prospectus, proxy statement, or tender offer statement setting forth complete and balanced information).35 Of course, security holders may buy or sell in the market before they receive the mandated disclosure document. That is true under the current regulatory scheme as well as under the new one. Under the new rules, security holders are likely to have information about the transaction at an earlier point in time, and they can choose to act on this information or wait for the complete disclosure document.
While it is possible under the new scheme to announce a proposed transaction long before a mandated disclosure document is filed, we do not believe acquirors will delay the filing of a mandated disclosure document unnecessarily because the longer they wait the greater the risk that market forces will affect the terms of the deal or another potential acquiror will announce a competing transaction. We believe that companies announcing a transaction should, and we encourage them to, file the mandated disclosure document as soon as possible after announcing a proposed transaction.
Our long-held concern regarding communications that could condition the market before dissemination of a mandated disclosure document is mitigated by the continuing requirement to deliver a disclosure document before any voting or investment decision can be made, and the attendant liability for false or misleading statements. Communications made in reliance on the new exemptions would, of course, be subject to Section 10(b) liability.36 We remind persons relying on the exemptions that fraudulent statements in these communications could not be cured by subsequent filings. In light of these considerations, we believe that the benefits conferred on the marketplace by the disclosure of more information on a timely basis outweigh the risks that the information will be incomplete or potentially misleading.
Our proposals did not make distinctions based on size and seasoned status. Due to the extraordinary nature of business combination transactions, security holders and the markets need full and timely information regarding those transactions regardless of the size or seasoned status of the companies involved. We recognized the inherent difficulties in selecting the appropriate focus for purposes of applying an eligibility test (i.e., should you look at the status of the acquiror, the target or the combined entity?). All commenters who addressed the issue agreed with our view. Therefore, the exemptions are adopted as proposed, without any eligibility requirements.
We also asked whether the exemptions should be limited to the parties to the transaction or available to others who may be acting on behalf of the parties to the transaction. In particular, we noted that in a third-party stock offer the company to be acquired would not ordinarily be subject to the Securities Act restrictions on communications, but under certain circumstances, it could be viewed as joining with the acquiror in making the offer. In that case, the exemptions would need to extend to additional parties. In addition, we asked whether the parties' affiliates, dealer-managers, and others acting on behalf of the parties to the transaction should be permitted to rely on the exemption. Again, most commenters were consistent in recommending that we expand the exemptions to these persons. While we realize that in many circumstances the exemptions would not be necessary for persons other than the parties to the transaction or the party making the offer, we want to encourage full, complete and continuous communications with security holders.
Therefore, we are adopting the exemptions to cover all persons acting on the parties' behalf.
We are adopting, as proposed, a condition to the communications exemptions that all written communications in connection with or relating to a business combination transaction be filed on or before the date of first use.37 In addition, all written communications must include a prominent legend advising investors to read the registration, proxy or tender offer statement, as applicable.38 We believe that a prompt filing requirement is necessary to protect security holders and assure that these communications are available to all investors on a timely basis.39 In most cases, this information will need to be filed electronically via the EDGAR System, and thus will be rapidly disseminated to the marketplace.40
In the Proposing Release, we asked whether parties relying on the exemptions should be permitted to file written communications on a later date (e.g., when the mandated disclosure document is filed or some other date). While several commenters viewed the requirement as reasonable, a few believed it would be burdensome. The latter group of commenters stated that a same-day filing requirement could cause parties to delay the release of information. These commenters believed that communications that would otherwise be made late in the day will be postponed until the materials can be filed on the same day. We believe, however, that in most cases parties to business combination transactions will be able to time their communications so that it is possible to file them on the same day they are made. Also, Rule 13(d) of Regulation S-T permits communications that are made outside of the Commission's business hours to be filed electronically as soon as practicable on the next business day.41 Further, we have clarified that an immaterial or unintentional delay in filing will not preclude reliance on the Securities Act exemption.42
The filing requirement applies to written communications that are made public or are otherwise provided to persons that are not a party to the transaction.43 As a general matter, this would include, for example, scripts used by parties to the transaction to communicate information to the public and other written material (e.g., slides) relating to the transaction that is shown to investors.44 In contrast, internal written communications provided solely to parties to the transaction, legal counsel, financial advisors, and similar persons authorized to act on behalf of the parties to the transaction would not need to be filed. Also, as explained in the Proposing Release, business information that is factual in nature and relates solely to ordinary business matters, and not the pending transaction, would not need to be filed. We expect that filing persons will apply traditional legal principles in determining whether a particular written communication is made in connection with or relates to a proposed business combination transaction.45
Several commenters criticized the proposed filing requirement because it could result in the filing of duplicative or substantially similar information when similar communications are made over time. In response to this concern, we are clarifying that any republication or redissemination of the same information would not need to be filed again to comply with the exemptions. If, however, information is either added to or changed from the content of an earlier communication, then the revised written communication must be filed.46
We are exercising our exemptive authority to create an exemption that will permit more communications with security holders and the markets regarding a planned business combination transaction.47 We find that free communications relating to business combination transactions are in the public interest and consistent with the protection of investors. Accordingly, we adopt new Rules 165, 16648 and 42549 and amend Rules 135 and 145.50 These new and amended rules permit parties to communicate freely about a planned business combination transaction before a registration statement is filed, as well as during the waiting period and post-effective periods, so long as their written communications used in connection with or relating to the transaction are filed beginning with the first public announcement51 and ending with the close of the proposed transaction.52 As noted in the Proposing Release, these communications are not excluded from the definition of "offer" in the Securities Act,53 as no content restriction is imposed on the communications.54 Instead, new Rule 165 exempts persons making these communications from Sections 5(b)(1) and (c) of the Securities Act.55
New Rules 165 and 166 are available only for business combination transactions. New Rule 165 defines a business combination transaction as a transaction specified in Rule 145(a) or an exchange offer. Thus, either the proxy rules or the tender offer rules must be applicable to the transaction. We have added a preliminary note to Rules 165 and 166 to state that the exemption is not available to communications that may technically comply with the rule, but have the primary purpose or effect of conditioning the market for a capital-raising or resale transaction.56
As proposed, both oral and written communications made in reliance on the Securities Act exemption would be offers subject to Section 12(a)(2) liability, based on the belief that this level of liability would adequately protect investors without chilling communications.57 Approximately half the commenters who addressed the issue agreed with the proposed liability standard, while the others believed that this potential level of liability could have a chilling effect on communications.
We are adopting the proposed regulatory scheme. To the extent that these communications constitute offers, they currently would be subject to Section 12(a)(2) liability. As a result, we do not believe that the adopted rules alter the current liability levels for these communications.58 In light of the extensive pre-filing communications that are ongoing in the marketplace now with respect to business combination transactions, we believe that a Section 12(a)(2) standard of liability would not significantly chill communications.
Several commenters also indicated that the proposed Section 5(c) exemption should not be conditioned on timely filing of all written communications. Commenters were concerned that a failure to timely file a written communication could result in a loss of protection under the exemption, resulting in a Section 5 violation that would give security holders a right of rescission. In proposing the filing requirement, we did not intend to provide security holders with an automatic right of rescission if a communication is either filed late or there is an unintentional failure to file. To clarify this issue, we are revising the filing requirement in new Rule 165 to state that an immaterial or unintentional failure to file or delay in filing will not result in a loss of the exemption from Section 5(b)(1) or (c), so long as a good faith and reasonable attempt to file the written communication is made and the communication is filed as soon as practicable after discovery of the failure to file.59
Currently, Rule 135 provides that disclosure of certain limited information in notice form will not be deemed an "offer" for purposes of Section 5 of the Securities Act.60 A Rule 135 notice is typically made upon announcement of a proposed securities offering before a registration statement is filed.61 Rule 145(b)(1) contains a similar provision regarding the information in a stock merger that will not be deemed a "prospectus" or "offer."62
We proposed several revisions to Rules 135 and 145 in the Proposing Release and the Securities Act Reform Release. In particular, we proposed moving the substance of Rule 145(b)(1) to Rule 135, as both rules contain similar provisions regarding the information that will not be deemed an offer. We are adopting those revisions.63
In addition to the changes proposed, we asked whether Rule 135 notices should be filed. Although Rule 135 does not currently require these notices to be filed, in many cases the 135 notice would be the first written communication relating to a proposed business combination transaction. We believe it is important for this information to reach the marketplace promptly and on a widespread basis. Generally, these notices are short documents (e.g., press release or other form of written notice of an intended offer). Currently, the first press release or other written communication announcing a proposed business combination transaction often is filed under cover of Form 8-K.64 In addition, under the new regulatory scheme these communications would have to be filed under the proxy or tender offer rules, if applicable. As a result, we do not believe that a filing requirement for the first public communication regarding a business combination will impose a significant burden.
We are adopting a filing requirement that encompasses Rule 135 notices. These notices must be filed under new Rule 425 because they are written communications relating to a proposed transaction. Even though we are requiring these notices to be filed, our rules provide that they will not constitute offers and therefore will not have Section 12(a)(2) prospectus liability.65 In addition, subsequent notices or announcements made under Rule 135 that do not contain new or different information are not required to be filed. This approach is consistent with the filing requirement under each of the three regulatory schemes.
Under the terms of the exemptions, written communications must be filed beginning with the first public announcement of the business combination transaction. Today we are adopting a specific definition of "public announcement" that encompasses all communications that put the market on notice of a proposed transaction. For purposes of determining when a filing obligation is incurred under the exemptions, "public announcement" means any communication by a party to the transaction, or any person authorized to act on a party's behalf, that is reasonably designed to, or has the effect of, informing the public or security holders in general about the transaction.66 We asked in the Proposing Release whether the term "public announcement" should be defined, and if so, how it should be defined. Although the commenters that responded favored a bright line definition, they opposed a broad definition that could potentially create difficulties in determining when a filing obligation is triggered.
We agree that a definition is necessary, but we believe that the definition should be sufficiently broad to cover communications that are reasonably designed to, or have the effect of, putting the markets or the security holders on notice of a proposed transaction. We do not believe the definition should be so narrow that the parties must actually intend to effect a broad dissemination of the information.67
We are revising Rule 14a-12,68 substantially as proposed, to permit both written and oral communications before the filing of a proxy statement so long as all written communications related to the solicitation are filed on the date of first use.69 This is the same filing requirement adopted for the communications exemption under the Securities Act.70 This exemption is not limited to business combination transactions, but is available regardless of the subject matter of the solicitation. Oral communications do not need to be reduced to writing and filed. In revising Rule 14a-12, we retain substantially all the proposed conditions to reliance on the exemption. These conditions are that no form of proxy is furnished until a proxy statement is delivered, the obligation to disclose participant information, and the requirement to file all written communications with a prominent legend advising security holders to read the proxy statement.
As a result of these changes to Rule 14a-12, management can communicate more freely with security holders about significant corporate events, including a proposed merger or acquisition, or other significant corporate governance matters that may require a security holder vote. Likewise, security holders are able to communicate more freely with one another. The revised rule does not, however, expand a company's or security holder's ability to secure promises to vote a certain way before a proxy statement is provided.71 The expansion of Rule 14a-12 to non-contested matters is premised on the same rationale for increasing communications related to business combination transactions under the Securities Act. We recognize the many recent developments in technology that have enabled companies to communicate more frequently with security holders at a significantly reduced cost. In addition, security holders and the markets are demanding more information from public companies about new developments and proposed transactions. In light of the rapid pace of change in the securities markets and developments in technology, we believe the time has come to update the proxy rules to permit security holder communications to flow more freely and to facilitate a more informed security holder base.
We believe that the requirement to file all written communications, the condition that no proxy or form of proxy be furnished to security holders before a written proxy statement is delivered, and the requirement to include a legend on all written communications advising security holders to read the proxy statement and where to find participant information should be sufficient to protect against misleading solicitations. Together with the antifraud provisions of Rule 14a-9,72 these requirements should maintain the integrity of the solicitation process and adequacy of information disseminated to security holders.73 In addition to these safeguards, security holders will receive a complete proxy statement before they can vote.
In the Proposing Release we solicited comment on whether a federally mandated proxy solicitation period would be appropriate for mergers and similar transactions in light of the free communications permitted under the exemption. We noted that security holders may need a minimum amount of time (e.g., 20 business days), similar to that in tender offers, to digest the free communications together with the information in the proxy statement. Most commenters that responded to this question were opposed to a minimum solicitation period. Because this is an area that traditionally has been governed by state corporate law, and in light of the improved ability of security holders to access information though electronic means, we believe that the existing solicitation periods are adequate. We are not adopting a minimum solicitation period at this time.
We also asked whether the proxy rules should be amended to permit direct delivery of proxy statements and other soliciting materials to non-objecting beneficial owners to facilitate more timely and informed voting decisions. We were concerned that security holders holding securities in street name may not receive materials from banks, broker-dealers, or other nominees in a timely fashion. While we believe that direct delivery of proxy materials to non-objecting beneficial owners may have benefits for security holders, at this time we reserve this concept for a future rulemaking project.
a. The "As Soon as Practicable" Requirement
Many of the commenters urged us to revise the current and proposed condition in Rule 14a-12 that a written proxy statement meeting the requirements of Regulation 14A be sent or given to solicited security holders at the earliest practicable date. These commenters pointed out that, in practice, when the purpose of a solicitation becomes moot or the solicitation is otherwise discontinued, persons making pre-filing communications in reliance on the rule generally do not, and should not be required to, send security holders a written proxy statement. We recognize that literal adherence to the delivery requirement in Rule 14a-12 in circumstances where a solicitation is canceled prematurely may not provide a significant benefit to security holders, but could result in unnecessary costs to the soliciting parties and potentially mislead security holders into believing that the solicitation is ongoing.
In view of these concerns, current practice, and the overall approach to communications adopted today, we are eliminating the current "as soon as practicable" requirement. As revised, Rule 14a-12 requires that a definitive proxy statement be furnished to security holders when a form of proxy is either given to or requested from security holders.74 When proxies are first requested from security holders the mandated disclosure document must be delivered to them so they can make informed voting decisions. This approach is consistent with the delivery requirements adopted under the other regulatory schemes.75 As a result, parties relying on the rule are not obligated to furnish a written proxy statement if the solicitation is discontinued for any reason. If a solicitation is discontinued, we believe it would be appropriate for the soliciting persons to inform previously solicited security holders that the solicitation is over and provide a brief explanation of why it is being canceled.
b. Participant Information
We are modifying the current requirement to disclose participant information in proxy materials. Instead, the revised rule requires a prominent legend on written communications advising security holders where they can obtain a detailed list of the names, affiliations and interests of participants in the solicitation.76 Of course, the soliciting materials could include the participant information in full, as currently required, instead of a legend.
The legend may refer to either a previously filed communication that contains the participant information, or a separate statement that contains the participant information and is filed as Rule 14a-12 material.77 We are not eliminating the requirement to make participant information available to security holders. Rather, we are requiring disclosure of this information once instead of in every communication.
c."Test the Waters"
In addition to our proposal to expand Rule 14a-12, we solicited comment on adopting a broader "test the waters" approach to proxy solicitations. Under this approach, parties could engage in soliciting activities without filing proxy material so long as no form of proxy is requested or sent. Test the waters would permit both written and oral proxy solicitations before the filing of a proxy statement. Unlike the proposed expansion of Rule 14a-12, however, test the waters would not require written communications to be filed on first use.
Many commenters favored our concept of test the waters, but a few commenters expressed concern that it could result in unregulated and secret solicitations. At this time, we believe that our expansion of Rule 14a-12, as adopted, should provide sufficient flexibility to companies to communicate more frequently with security holders on a timely basis. After we gain some experience with communications under the expanded Rule 14a-12, depending on its effects, we may consider moving toward a test the waters approach in future rulemaking.
Today, a proxy statement relating to a merger, consolidation, acquisition or similar matter may be filed confidentially with the Commission.78 If the staff decides to review the proxy statement it may issue comments to the filing parties. When all comments are resolved, a public filing is made _ either a definitive proxy statement or, if securities are being offered, a registration statement that wraps around the proxy statement. We proposed to eliminate the provision for confidential treatment. We note the practice of disclosing extensive deal-related information to the market before a registration statement or proxy statement is filed publicly. We do not believe that material public information regarding a merger should receive confidential treatment.
Many commenters opposed eliminating confidential treatment due to a concern for increased liability. These commenters pointed out that they may be required to make revisions to their proxy statement disclosure in response to staff comment that would be subject to unnecessary public scrutiny. It is not clear, however, why the proxy statement situation warrants different treatment from exchange offers and other public filings that are routinely amended in response to staff comment. One commenter suggested that we retain confidential treatment when the parties to a transaction do not publicly disclose information about the transaction outside the proxy statement.
We have decided to retain confidential treatment under limited circumstances. Where the parties to a merger or other business combination transaction limit their public communications to those specified in Rule 135,79 confidential treatment will continue to be available for the proxy materials. If, however, the parties elect to publicly disclose, either orally or in writing, information relating to the transaction that goes beyond Rule 135, confidential treatment will not be available.80
As a result, the parties to the transaction may choose either to forgo confidential treatment and communicate publicly about the deal in reliance on one of the new exemptions, or invoke confidential treatment and refrain from any publicity outside the proxy statement, except for the basic information permitted by Rule 135. We will use Rule 135 as a bright line in determining whether parties to a transaction have publicly disclosed sufficient information to the point that confidential treatment of the proxy materials is no longer warranted. This bright line will be applied whether or not the transaction is subject to the Securities Act and Rule 135. If a preliminary proxy statement is filed confidentially, but information beyond Rule 135 is subsequently disclosed, confidential treatment will no longer be available and all proxy materials related to the transaction must be filed publicly.
Two commenters recommended that we institute a procedure that would allow parties to seek an expedited, confidential pre-filing review of pro forma financial statements and other accounting matters if confidential treatment is eliminated. Currently, parties are permitted to, and frequently do, initiate pre-filing conferences with our accounting staff to resolve sensitive accounting issues before the filing a merger proxy statement. Our accounting staff will continue to be available for pre-filing conferences with filing parties.
Several commenters also indicated that if we decided to eliminate confidential treatment, we should not require that all exhibits be filed with the first public filing of the proxy statement. These commenters noted that in many cases some exhibits may not exist or are not in final form when the proxy statement is first filed. The limitation on confidential treatment adopted today would not require that all exhibits be filed with the initial filing of a proxy statement. As is the case today, a proxy statement may be filed first, without any exhibits. Schedule 14A does not have any exhibit requirements. Exhibits could be filed at a later date when the registration statement is wrapped around the proxy statement. If all exhibits are not final or complete at the time the registration statement is first filed, then those exhibits could be filed in an amendment to the combined proxy statement/registration statement.
Rule 14a-6(b) requires that definitive proxy materials be "filed with, or mailed for filing to, the Commission not later than the date such material is first sent or given to security holders."81 Similar language appears in several other proxy and information statement filing rules.82 The mailing alternative, however, is no longer an option because companies must file electronically.83 Therefore, we are amending the proxy and information statement filing rules as proposed to require filing no later than the date the materials are first sent or given to security holders.84 This change is consistent with the filing requirements imposed under the exemptions adopted today.
We continue to believe that definitive materials should be available to security holders, the market and the staff as promptly as possible. EDGAR and other electronic sources of information, including the Internet, increasingly are relied upon by the investment community for information regarding public companies. When there is a lag between the time information is first disseminated and the time it is filed, persons relying on our filings for information on public companies are placed at a disadvantage.
Currently, the tender offer rules restrict a third-party bidder's communications regarding a proposed tender offer. The restrictions on communications stem from the concept of "commencement," the five business day rule for cash tender offers,85 and the requirement that a registration statement be filed promptly for registered exchange offers.86 A target's communications regarding a tender offer are similarly restricted.87 To harmonize the treatment of communications regarding business combination transactions under the three regulatory schemes, and to promote the dissemination of information to all security holders on a more timely basis, we are modifying the definition of "commencement" and eliminating the five business day rule and the requirement to promptly file a registration statement after announcing a registered exchange offer.88
In place of these rules, we are adopting a filing requirement for all written communications that relate to a tender offer beginning with and including the first public announcement of the transaction.89 As with communications subject to the Securities Act and the proxy rules, written communications must be filed on the date that the communication is made.90 In addition, written communications must contain a legend advising security holders to read the full tender offer or recommendation statement when it becomes available.
Under the revised rules, "commencement" is when the bidder first publishes, sends or gives security holders the means to tender securities in the offer.91 We believe that security holders need the information required by the tender offer rules when they are either asked or able to tender their securities in an offer.92
To minimize the potential for dissemination of false offers into the marketplace in the absence of the five business day rule, we are adopting new Rule 14e-8. As proposed, this rule prohibits bidders from announcing an offer: without an intent to commence the offer within a reasonable time and complete the offer; with the intent to manipulate the price of the bidder or the target's securities; or without a reasonable belief that the person will have the means to purchase the securities sought. We believe that a specific rule prohibiting such conduct is appropriate. This antifraud rule is intended as a means to prevent fraudulent and misleading communications regarding proposed offers under the new communications scheme, in addition to the existing antifraud provisions.
Two commenters expressed concern that the rule could create new grounds for frivolous litigation, while others supported the proposal. Of course, if a target or other party decided to litigate under this new rule, the plaintiff would have the burden of showing that the bidder either did not have an intent to commence and complete the offer or did not reasonably believe it had the ability to purchase the securities. Although not required, a commitment letter or other evidence of financing ability (e.g., funds on hand or an existing credit facility) would in most cases be adequate to satisfy the rule's requirement that the bidder have a reasonable belief that it can purchase the securities sought.93
Although we noted in the Proposing Release that eliminating the current restrictions could have potentially destabilizing effects on the securities markets,94 it is not clear that the market effects differ greatly from those caused by merger announcements, which are not subject to the same constraints. Based on our experience with tender offers95 and the factors discussed above influencing our decision to permit more communications regarding business combination transactions, we believe that the availability of more information on a timely basis will better assist security holders in making well informed individual investment decisions when confronted with news of a pending or proposed business combination. Accordingly, we are adopting the changes to the tender offer communications provisions substantially as proposed.
In reaching this conclusion, we note that communications regarding issuer tender offers are not similarly restrained.96 Also, it appears that some bidders do not use the term "tender offer" in their public announcement of a proposed business combination transaction in an attempt to avoid triggering application of Rule 14d-2. Furthermore, security holders today, upon hearing news of a proposed tender offer for their securities (either directly by the formal notice published by the bidder or indirectly through rumors in the marketplace), must decide whether to: (i) retain their securities until a tender offer statement is filed and disseminated so they can tender into the offer; or (ii) sell into the market at prevailing prices based on the limited information available.97 Under the new approach, more time may elapse between announcement and the filing of the tender offer statement, but more information also may be available during that period. We do not believe there is a sufficiently compelling basis to continue treating third-party cash offers, exchange offers, issuer tender offers and mergers differently.98
Most of the commenters that addressed the proposals favored eliminating the five business day rule and the requirement to promptly file a registration statement after announcement of an exchange offer, as well as the revised definition of "commencement." A few commenters, however, expressed concern that elimination of the five business day rule could revive certain inconsistent state law requirements. We do not believe that elimination of the five business day rule will result in a resurgence of inconsistent state anti-takeover statutes that impose disclosure or other requirements incompatible with our new regulatory scheme.
We have long defined when a tender offer commences. This definition served several purposes, including implementing a uniform nationwide timetable for the tender offer process, regulating the flow of information by identifying the date by which required disclosure filings must be made with the Commission, and helping to create a level playing field between bidders and targets. Under well-established principles, any state law that conflicted with this provision was preempted.
The new definition continues to serve these sorts of purposes _ it establishes a uniform time at which a tender offer is deemed to commence, it continues to balance the rights and obligations of bidders and targets, and it facilitates the free flow of information from both bidders and targets before that date (subject to the antifraud provisions), based on our judgment that this flow of information is in the best interests of the holders of securities. The elimination of the five business day rule and the other changes in the rule are intended to provide security holders with the broadest possible disclosure of information at the earliest date possible.
We believe that courts would hold that any state law that conflicted with the new rule by attempting to establish a different commencement date or otherwise frustrating operation of the rule would be preempted.99 For instance, we believe that any state provision that made it impossible to comply with both state and federal requirements or that created obstacles to the accomplishment and execution of the full purposes and objectives of the new rule would continue to be preempted.100
Security holders ultimately have the choice to sell into the market based on information disclosed early or wait until a complete, mandated disclosure document is sent to them before making an investment decision. The ability of security holders to sell into the market before a complete disclosure document is filed and disseminated is no different from their current position between the time a transaction is announced and the time a mandated disclosure document is filed and disseminated. However, we believe that liberalizing early communications will better serve investors and the markets by providing them with more information at an earlier date. The bidder continues to have the flexibility to commence promptly after the first public announcement. We encourage bidders to commence their offers as soon as they are able to do so, since security holders and other market participants will benefit from the complete information in the mandated tender offer materials. To the extent, however, that there are delays between announcement and commencement, we believe that investors will benefit from the free flow of information provided by the new regulatory scheme. Therefore, we are changing the current regulatory scheme, and in doing so we are clearly expressing our intent that these new rules serve, as an integrated whole, to regulate the various communications that persons may make regarding a potential or proposed business combination transaction.
Two commenters favored retaining the five business day rule for hostile offers, but eliminating it for negotiated transactions. We believe, however, that applying the rule only to hostile offers could present problems when the same target is the subject of both a negotiated transaction and a hostile offer, or when a negotiated transaction becomes hostile as a result of changed circumstances or another offer. Further, in light of the communications scheme we adopt today, it does not appear that security holders' best interests would be served by permitting expanded communications only with respect to negotiated transactions.
One commenter believed that the five business day rule provides investors and the markets with a degree of certainty regarding proposed offers and results in the dissemination of better information in a relatively short time. We believe that our requirements to file all written communications relating to a proposed transaction on first use will result in more information on a timely basis. As noted above, we do not believe bidders will have an incentive to unnecessarily delay commencing their offers because of the risk that market forces may affect the terms of the offer or a competing bidder will emerge.
Under these new and revised rules, bidders and targets alike have an increased ability to communicate with security holders along with the requirement to file all written communications related to an offer. Under the new scheme, the target must file all written communications relating to the transaction on the date the communication is made.101 Targets need not file a formal recommendation statement until after the offer is formally commenced and a recommendation is made. The target remains obligated, however, to take a position with respect to the offer no later than 10 business days after the offer commences under Rule
14d-2.102 If the target makes a recommendation after commencement, but before the tenth business day, then it must file a recommendation/solicitation statement on Schedule 14D-9 on or before the time the recommendation is first made.
These rules apply to issuer and third-party tender offers alike. In addition, the new rules make no distinction based on the form of consideration offered to security holders (e.g., cash or stock). We do not believe that there is sufficient justification to treat tender offer communications differently based on either the nature of the bidder or the consideration offered. Security holders ultimately face the same investment decision -- whether or not to tender in the offer.
We also reviewed the various methods to commence a tender offer in the Proposing Release.103 In reviewing these methods, we noted that long form publication104 is rarely used by bidders due to the cost associated with publishing extensive information about the offer in a newspaper.105 We proposed to eliminate long form publication.
Several commenters agreed that long form publication is rarely used, but urged us to retain the method, citing the lack of any abuse under the rule. In addition, these commenters noted that, in the future, long form publication may become a viable means of disseminating an offer using the Internet or another electronic delivery system. At this time, we do not believe that technology has developed to the point where bidders can rely solely on electronic media to disseminate information about a tender offer to security holders. In particular, posting the information on a web site alone would not be adequate dissemination.106 Nevertheless, in response to commenters' requests that we retain long form publication as a means of commencement, we have decided not to eliminate it.
We solicited comment on whether the rules should continue to permit an offer to be commenced and disseminated by summary advertisement alone.107 Currently, bidders that rely on the summary advertisement method to disseminate an offer tend also to mail their offering documents to security holders using a security holder list under Rule 14d-5. We asked whether bidders should always be required to use security holder lists when disseminating an offer. Two commenters favored retaining summary publication without the use of security holder lists. Both cited the lack of any abuse with the rule and the possibility that its elimination could force bidders to tip their hand when requesting a security holder list from the target in hostile transactions. Accordingly, we are not changing this aspect of the summary advertisement rule.108 However, in keeping with the expansion of permissible communications, we are eliminating, as proposed, the current restriction on the information that may be included in a summary advertisement.109
Currently, bidders must hand deliver a copy of their tender offer statement and any additional tender offer materials to the target company as well as any other bidder that has made an offer for the same class of securities.110 We proposed a similar delivery requirement for the first written communication disclosing a proposed offer. Under the new communications scheme for tender offers, bidders are able to disclose information about a proposed offer without commencing the offer.111 In light of the many different communications media available to bidders, we believe targets need a reliable way to learn about proposed offers for their securities so they can respond in a timely manner. Therefore, we are adopting a requirement that the bidder deliver to the target and any other bidder the first written communication relating to the transaction that is filed, or required to be filed, with the Commission.112 This material must be delivered on the date of the communication.113
We are adopting the early commencement provision substantially as proposed, but extended to cover issuer exchange offers. Currently, registered exchange offers may not commence until the related registration statement becomes effective.114 As we noted in the Proposing Release, this results in cash and stock tender offers being treated differently. Cash tender offers have a distinct timing advantage over stock tender offers because cash offers can commence as soon as a tender offer statement is filed and disseminated.115 This change should minimize this regulatory disparity by permitting stock tender offers to commence as early as the date the related registration statement is first filed.
Almost all of the commenters that addressed early commencement indicated that it was a step in the right direction, but they believed more was needed to fully balance the regulation of cash and stock offers. We recognized in the Proposing Release that early commencement alone may not be sufficient to level the playing field between cash and stock tender offers because bidders would not be able to purchase shares tendered in the offer until after the related registration statement is effective. Accordingly, cash offers could close earlier than stock tender offers due to possible staff review and comment on the registration statement. We solicited comment on whether there are other changes (e.g., expedited staff review, automatic effectiveness on filing or effectiveness within a specified time after filing), that might further reduce the disparity in regulatory treatment. We also asked whether expedited staff review would minimize the regulatory differences.
Commenters had mixed views. Some commenters favored automatic effectiveness or effectiveness shortly after filing, while others believed the potential for post-effective staff review and comment would discourage bidders from offering securities as consideration in a tender offer.116 Most commenters, however, were in agreement that expedited staff review is essential to balancing the regulatory treatment of the two types of offers. Due to the risks associated with automatic effectiveness and effectiveness shortly after filing (before the staff has had an adequate opportunity to review the disclosure), we believe these measures would not be in security holders' best interests, especially in the business combination context where the disclosure and accounting issues can be particularly complex. We are, however, committed to expediting staff review of exchange offers so that they may compete more effectively with cash tender offers.
As proposed, early commencement was limited to third-party offers. We solicited comment, however, on whether early commencement would provide any benefits to issuers making exchange offers for their own securities. Several of the commenters believed that issuers should have the same ability to commence an exchange offer upon filing.117 We agree that there is no reason to exclude issuer exchange offers from early commencement, and therefore, we have decided to treat third-party and issuer exchange offers alike under the new rule.
We also asked whether there should be a proxy analogue to early commencement so that parties to a business combination transaction involving a voting decision would be able to furnish proxy cards with preliminary proxy materials. Currently, proxy cards may only accompany the definitive proxy statement/prospectus.118 A proxy analogue would further balance the regulatory treatment of mergers and tender offers.
We are not adopting a proxy analogue to early commencement at this time. We note that all tender offers must remain open for at least 20 business days.119 Currently, the minimum proxy solicitation period is dictated by applicable state corporate law requirements.120 A proxy solicitation period, accordingly, could be less than 20 business days. Further, under the new rules adopted today, we are specifying the appropriate time periods necessary for dissemination of a prospectus supplement when there are material changes to the information previously disseminated. The proxy rules do not have similar provisions. Since the proxy solicitation area has traditionally been governed by state law, and because we are not adopting a federally mandated proxy solicitation period,121 we are not adopting an analogue to early commencement that would permit the sending of proxy cards along with preliminary proxy materials. We may consider extending the concept to the solicitation of proxies once we have sufficient experience with early commencement of exchange offers. Any proxy analogue to early commencement would, of course, require the establishment of a uniform proxy solicitation period and well-defined time periods for the dissemination and receipt of a supplement containing all material changes from the preliminary proxy statement previously sent or given to security holders.122
Under the new rules,123 to commence an exchange offer early (before effectiveness of a registration statement), a bidder must file a registration statement relating to the securities offered and include in the preliminary prospectus all information, including pricing information,124 necessary for investors to make an informed investment decision.125 Information may not be omitted under Rule 430 or Rule 430A under the Securities Act.126 Bidders also must disseminate the prospectus and related letter of transmittal to all security holders and file a tender offer statement with us before the exchange offer can commence.127 Early commencement is at the option of the bidder. Exchange offers can commence as early as the filing of a registration statement, or on a later date selected by the bidder up to the date of effectiveness.128 If a bidder does not commence its exchange offer before effectiveness of the related registration statement, then the exchange offer would need to commence on or shortly after effectiveness, as is the case today.
As proposed, we are adopting new Rule 162 to permit the tender of securities into an exchange offer before a registration statement is effective. 129 New Rule 162(a) exempts the tender of securities from Section 5(a) of the Securities Act.130 Security holders may withdraw tendered securities until they are purchased, and bidders may not purchase the tendered securities until the registration statement is declared effective, as is currently the case. Because security holders must receive a mandated disclosure document before having to make an investment decision, we believe that early commencement, together with the communications scheme adopted today, is consistent with the public interest and the protection of investors. Early commencement gives bidders an incentive to disseminate their offering materials broadly to all security holders as soon as practicable. Further, the new rule provides bidders with greater flexibility in choosing the form of consideration to offer in a business combination transaction and should serve to facilitate the growth of our capital markets.
Under the early commencement provision adopted, bidders are required to disseminate a prospectus to all security holders. If a bidder wants to commence its exchange offer early, it must disseminate a preliminary prospectus to all security holders as discussed above. The new rules also provide that bidders sending a preliminary prospectus must disseminate a supplement to security holders if there are any material changes, whether as a result of staff review, or due to any other material changes in the information previously disclosed. Exchange offers must remain open for a specified minimum period of time after a supplement is sent to security holders containing the new information, depending on the significance of the change. This is to permit security holders to react to the information by tendering securities or by withdrawing securities already tendered.
Since the tender offer rules do not currently establish specific minimum time periods necessary for the disclosure and dissemination of material changes, other than those relating to changes in price or the amount of securities sought,131 we are establishing well-defined periods necessary for the dissemination of a prospectus supplement that contains material changes under early commencement. The mandated periods we adopt today are consistent with our current rules and interpretive positions in this area.132 Therefore, we are revising Rule 14d-4 to specify the minimum time periods necessary for the dissemination of changes to preliminary prospectuses that are used to commence an exchange offer early.133 As a result, exchange offers that commence early must remain open for at least:
Of course, if a material change in the information previously disseminated to security holders occurred shortly before the expiration of the offer, a prospectus supplement would need to be disseminated to security holders and the offer extended for the appropriate length of time. We also believe that these time periods represent general guidelines that should be applied uniformly to all tender offers, including those subject only to Regulation 14E.135
We asked whether bidders should be required to deliver a final prospectus to security holders. Commenters who addressed the issue believed that the requirement to deliver prospectus supplements containing all material changes should effectively eliminate the need for the dissemination of a final prospectus. We agree that the informational purpose of the prospectus may best be served by requiring bidders to deliver to security holders prospectus supplements containing material changes rather than redeliver a final prospectus repeating substantial amounts of information that was previously delivered.136 The use of prospectus supplements should adequately inform security holders of the information they need to make an informed investment decision.
Accordingly, we are using our exemptive authority137 to exempt exchange offers that commence early from the final prospectus delivery requirement.138 In doing so, we are not changing the final prospectus delivery requirement in Exchange Act Rule 15c2-8(d).139 Under these circumstances, where a preliminary prospectus is delivered to security holders along with prospectus supplements containing material changes to the information previously disseminated, we believe that the cost of delivering a final prospectus is not justified by any marginal benefit to security holders. Although we are eliminating the requirement to deliver a final prospectus, bidders would still need to file a final prospectus.
Currently, there are different disclosure schedules for issuer tender offers, third-party tender offers and going-private transactions.140 Since a given transaction may involve more than one of these regulatory schemes, a company may be required to file a separate disclosure document to satisfy each applicable disclosure regime. In addition, the disclosure requirements appearing in the rules and schedules can often lead to duplicative, and sometimes inconsistent, requirements. In light of the increased pressure to announce a business combination transaction soon after it is entered into and the attendant requirement to file mandated disclosure documents quickly, we proposed to integrate, simplify and update the disclosure requirements currently in the rules and schedules. Our basic approach was to combine all the disclosure requirements in one central location in a subpart of Regulation S-K, called Regulation M-A. The specific disclosure requirements in schedules were keyed to items under Regulation M-A in a manner consistent with the integrated disclosure system previously adopted for proxy and registration statements.
All commenters addressing the proposed changes in this area believed that it was time to update and simplify the disclosure requirements for business combination transactions.141 We are adopting Regulation M-A substantially as proposed. This series of disclosure items incorporates all the current disclosure requirements for issuer and third-party tender offers, tender offer recommendation statements and going-private transactions. The new regulation includes some disclosure items for cash merger proxy statements as well. We have made slight modifications, where necessary, to harmonize and clarify the requirements, as well as a few substantive changes that are discussed below in more detail. In some cases the disclosure requirements may appear different, but that is because we have made an effort to draft the items in Regulation M-A using clear, plain language. In the future, we expect to expand this new regulation to cover additional disclosure items as necessary.
We are combining current Schedules 13E-4 and 14D-1 (the schedules now used for issuer and third-party tender offers, respectively), into new Schedule TO, as proposed.142 In addition, we are changing the rules to allow one filing to satisfy both the tender offer and going-private disclosure requirements.143 As a result, the information required by Schedules 14D-1, 13E-4 and 13E-3 can be disclosed in one combined filing.144 We believe that these revisions will reduce the need to file two or more schedules for what is essentially the same transaction.145
We have included an instruction in new Schedule TO, as proposed, listing the specific line items that must be complied with for different types of transactions.146 In addition, we have revised the current instruction requiring information that is incorporated by reference to be filed as an exhibit. As revised, filers can incorporate information included in documents previously filed electronically on EDGAR without refiling that information as an exhibit to the schedule.147 To the extent that the existing schedules permit filers to include negative answers in the schedule, but not in the disclosure document sent to security holders, filers will continue to have the ability to omit that information from documents sent to security holders.148
At this time we are not extending the one filing satisfies all approach to encompass transactions involving the Securities Act and proxy rules as well as the tender offer and going-private rules. In the future, we may consider integrating the requirements further, to permit the satisfaction of the disclosure required under all four regulatory schemes with one filing.
We also are revising the rules that require filing persons to include a fair and adequate summary of the information required by the schedules in the disclosure document sent to security holders. Instead of specifying some items and excluding others, as the current rules do,149 the revised rules simply require that the document given to security holders summarize all items in the schedule (except for exhibits).150 As noted in the Proposing Release, this change is not intended to increase the amount of information that is given to security holders. Instead, it is intended to simplify the requirements. We expect filers to exercise their judgment in determining the specific information that must be included in the disclosure document sent to security holders to provide a fair and adequate summary. We are not, however, changing the current requirement that certain disclosure required in a going-private transaction be set forth in full in the disclosure document delivered to security holders.151
As a result of today's changes, filers no longer need to answer each item of the schedule with a statement that the required information is incorporated by reference from certain pages or sections of the primary disclosure document. Under the revised rules, it is sufficient to include a general statement in the schedule that all information in the disclosure document filed as an exhibit is incorporated by reference in answer to all or some of the items in the schedule. The revised schedules, as proposed, would include a cover page, any exhibits and the required signatures. Specific item numbers from the schedule must be included only to the extent necessary to provide information that is not in the disclosure document sent to security holders, but is required to be disclosed under an item in the schedule.152 This change is designed to make the schedules easier to prepare. Of course, filers still must provide all the required information.153
a. "Plain English" Summary Term Sheet
We proposed to require a plain English summary term sheet in all cash tender offers and all cash mergers, as well as going-private transactions. The disclosure documents in these transactions often can be difficult to understand, especially in the context of a business combination transaction where a vast amount of information may be available. We believe security holders should be provided with a concise, easy to read term sheet that highlights the most important and relevant information regarding an extraordinary transaction.
Accordingly, we are adopting the plain English summary term sheet requirement as proposed.154 We are not adopting a plain English summary term sheet for transactions involving the registration of securities155 because these transactions already are required to have a plain English summary, although the format may be somewhat different from the summary term sheet approach.156 The summary term sheet must begin on the first or second page of the disclosure document, and must highlight the most important or material features of a proposed transaction.157 This requirement applies to all issuer and third-party cash tender offers, cash mergers and going-private transactions. We believe the disclosure in these transactions can be improved through the use of a plain English summary term sheet.
In proposing this requirement, we did not mandate the specific items or questions that must be addressed in every case. Instead, we gave examples of information that most security holders would need when confronted with a tender offer or merger. Most commenters favored the proposed approach of keeping the requirement general and giving filers the flexibility to determine the issues that rise to the level of addressing in a plain English summary term sheet. We are adopting this approach.
As noted in the Proposing Release, in most cases, we believe bidders should address the following questions in the summary term sheet accompanying their cash tender offers:
As for merger proxy statements, we believe a summary term sheet should provide a brief outline of the particular matters proposed, the material terms of the proposals, including the parties to the proposed transaction, the consideration to be received by security holders, the board's recommendation on how to vote or their position regarding the transaction, the effect of a vote for and against each matter presented, including the effects of not voting, the procedures for voting and changing or revoking a vote, and the existence of appraisal rights.
Several commenters provided useful suggestions on other information that may assist security holders. We agree with these commenters that a plain English summary term sheet should address, to the extent applicable, the vote required to approve each matter presented, the number of votes, if any, already committed to vote in a particular way, any material interests of insiders or affiliates, as well as the accounting and federal income tax treatment of the transaction. In the context of a going-private transaction, we believe that the receipt of opinions, appraisals, or other similar reports158 regarding the fairness of a transaction would be of material interest to security holders. In addition, the identity of the filing persons, including the affiliates engaged in the transaction, a description of their affiliation or relationship with the issuer, and their role in the transaction may be important disclosure. Of course, we do not attempt to provide an exhaustive list in this release of all the matters or issues that may be material to security holders warranting inclusion in a plain English summary term sheet. We leave that determination for filers based on the particular facts and circumstances of their transaction.
b. Item 14 of Schedule 14A Revised to Clarify Requirements and Harmonize Cash Merger and Cash Tender Offer Disclosure
Item 14 of Schedule 14A specifies the information required in proxy and information statements relating to extraordinary transactions.159 We are revising Item 14 substantially as proposed, except that the revised item refers filers to the applicable disclosure requirements in Forms S-4 and F-4, instead of Forms C and SB-3, which are not being adopted at this time. This approach should make the item easier to understand, and harmonize the proxy and registration statement disclosure requirements. Since the disclosure and incorporation by reference requirements in Forms S-4 and F-4 are essentially the same as in current Item 14, this streamlined approach will not greatly modify the disclosure required in a merger proxy statement. We are retaining in Item 14 the existing disclosure requirements applicable to investment companies.160
In addition, we are adopting several substantive changes regarding the information required for acquirors and targets under Item 14. All commenters that addressed the proposed changes to Item 14 believed they were appropriate. We continue to believe that in certain circumstances the disclosure requirements in Item 14 may be unnecessarily burdensome and inconsistent with the level of information that would be required if the same transaction was structured as an all-cash, all-share tender offer. Therefore, we are adopting the following proposed revisions:
The changes adopted today do not change the current requirement to provide financial statements of the target and other company information when the acquiror's security holders are voting on the transaction, since those security holders may not know anything about the target. In addition, target information is required in merger proxies that are going-private or roll-up transactions. We believe that target security holders have a need for current financial statements of their company if it is subject to one of these types of transactions.
We are not adopting two proposed changes. Under the proposal, Item 14 would no longer permit information to be incorporated by reference from the "glossy" annual report sent to security holders. Further, we proposed to eliminate the instructions in Schedule 14A and Form S-4 that require filers to send the mandated disclosure document to security holders at least 20 business days before the meeting date or the expiration date of an exchange offer if information is incorporated by reference.166 At this time we believe there still may be a number of security holders that do not have the ability to access information electronically, so we are not eliminating the 20 business day incorporation by reference provision.167 We are retaining incorporation by reference from the glossy annual report because this information is delivered to security holders.168
c. Reduced Financial Statement Requirements for Mergers and Stock Tender Offers
The previous section addressed information requirements in cash mergers. We also have examined financial statement requirements in the context of stock mergers and stock tender offers. As we noted in the Proposing Release, financial statements of the target generally are required when registered securities are being offered. The rules currently provide special treatment when the target is not subject to the Commission's reporting requirements, but we believe these requirements can be further relaxed. Currently, the rules require the filing person (the acquiror) to provide financial statements of the non-reporting target going back three years.169 We noted that providing three years of financial statements prepared in accordance with Regulation S-X170 for a non-reporting company can be costly and burdensome to prepare. In some cases they may not be available. Therefore, we proposed to reduce the financial statements required for non-reporting targets when the acquiror's security holders are not being asked to vote on the transaction.
Most commenters believed that the proposed reduction was appropriate and would facilitate acquisitions of non-reporting targets. We continue to believe that the requirement to provide target financial statements can be curtailed, particularly because in many cases target security holders likely made their initial investment decision in the non-reporting company based on less extensive information than what is currently required. In addition, security holders are being offered securities in a public company for which there should be significantly more information available and a more liquid market to sell into. Therefore, we are reducing the financial statement requirement substantially as proposed.171 In addition, where the non-reporting target is not significant to the acquiror and the acquiror's security holders are not voting on the transaction, we believe the financial statement requirements can be reduced even further.
Accordingly, we are eliminating the requirement to provide financial statements for the non-reporting target altogether when the acquiror's security holders are not voting on the transaction and the non-reporting target is not significant to the acquiror above the 20% level.172 The security holders that purchased securities in the non-reporting company generally would be aware that they invested in a company that is not subject to our reporting requirements and they would not expect to receive the same level of financial information that is required for a public reporting company. Moreover, if the non-reporting company is not significant to the acquiror, we believe security holders would likely rely on the financial statements of the acquiror in making their voting or investment decision. Because a combination of an insignificant non-reporting target company and a public acquiror should not materially alter the financial condition of the acquiror, we believe that non-reporting target security holders are likely to rely on the required acquiror financial information alone.173 In addition, the 20% threshold is the standard adopted in 1996 for the requirement of audited financial statements in filings made under the Securities Act and the Exchange Act for business acquisitions.174
Accordingly, we are revising the financial statement requirements for non-reporting targets when the acquiror's security holders are not voting on the transaction,175 as follows:
These revisions apply equally to foreign and domestic non-reporting target companies. If the target's financial statements are prepared on the basis of a comprehensive body of accounting principles other than U.S. GAAP (foreign GAAP), a reconciliation to U.S. GAAP is required unless a reconciliation is unavailable or not otherwise obtainable without unreasonable cost or expense.178
The current requirement to provide "audited" financial statements for the non-reporting target remains the same. Financial statements for the latest fiscal year must be audited only to the extent practicable. Audited financial statements are not required for years before the most recent fiscal year if the target's financial statements were not previously audited.
We are not changing the current requirement that a resale registration statement include audited financial statements in accordance with Rule 3-05 of Regulation S-X.179 Also, to the extent that a transaction is significant to the acquiror, audited financial statements would ultimately need to be provided under Item 7 of Form 8-K. Of course, if the acquiror's security holders are voting on the transaction, then the current financial statement requirements apply.
In addition to the changes discussed above, some of which affect tender offers, we proposed to update the tender offer rules, which have not been revised since 1986. For the most part, commenters favored our approach to updating the regulations. As a result, these changes are being adopted, substantially as proposed.180 The significant changes are discussed below.
We also solicited comment on whether the Private Securities Litigation Reform Act of 1995 ("PSLRA") safe harbor for forward-looking statements should be extended to tender offers. We are not extending the PSLRA safe harbor to tender offers at this time. Given the relative infancy of the body of law interpreting the PSLRA generally and the safe harbor in particular, we do not believe that extending the reach of the safe harbor would be prudent. We note, for example, that we recently filed an amicus curiae brief out of concern about certain language in an appellate court decision regarding the application of the safe harbor.181
We are adopting the subsequent offering period rule with several modifications described below. Under the new rules third-party bidders may provide, at their election, a subsequent offering period during which security holders can tender securities into the offer without withdrawal rights. The purpose of the subsequent offering period is two-fold. First, the period will assist bidders in reaching the statutory state law minimum necessary to engage in a short-form, back-end merger with the target. Second, the period will provide security holders who remain after the offer one last opportunity to tender into an offer that is otherwise complete in order to avoid the delay and illiquid market that can result after a tender offer and before a back-end merger.
The subsequent offering period may be disclosed in the bidder's initial offering materials, or in a subsequent amendment to the tender offer materials that is disseminated to security holders. In either case, the bidder's determination to include a subsequent offering period must be disclosed sufficiently in advance of the expiration of the initial offering period.
Commenters generally were favorable to the proposal, but many commenters criticized the advance notice requirement. They expressed the view that advance notice would create a "hold-out" problem with security holders waiting until the subsequent offering period to tender shares. In response to these comments, we are not adopting a specific requirement in the rule that the determination to add a subsequent offering period must be disclosed before the end of the initial offering period. Nevertheless, we continue to believe at this time that the addition of a subsequent offering period once an offer has commenced would constitute a material change to the terms of that offer. Thus, bidders must disseminate the new information to security holders in a manner reasonably calculated to inform them of the change sufficiently in advance of the expiration of the initial offering period (generally five business days).182 After the Division of Corporation Finance gains practical experience with the operation of the subsequent offering period, the Division may decide, through staff interpretation, to shorten or possibly eliminate the requirement for advance notice.183
In short, we are adopting new Rule 14d-11, which permits bidders to include a subsequent offering period in a third-party tender offer during which no withdrawal rights are available,184 so long as:
The rule, as proposed and adopted, permits bidders to use a subsequent offering period in both cash and stock tender offers.187 Similarly, the rule permits bidders to offer either cash or stock in any planned back-end merger. There is no specific requirement that a minimum number of shares be tendered in the initial offering period. Of course, the same consideration must be paid in both the initial and subsequent offering periods.188
The new rule includes a requirement that bidders announce the results of the initial offering period (including the number and percentage of securities tendered) before 9:00 a.m. on the next business day following the close of the initial offering period.189 We believe an announcement is necessary to inform remaining security holders whether the offer was successful and whether or not a back-end merger is imminent. Because of this requirement to announce the results before 9:00 a.m. on the next business day, the subsequent offering period must begin on that day. This will avoid any delay in the offer between the initial offering period and the subsequent offering period. We believe that this will prevent any confusion in the market as to whether the offering period is still open.
We proposed conditioning the subsequent offering period on the bidder stating its intention to engage in a back-end merger with the target. Commenters addressing this issue did not believe that this requirement was necessary. We are not adopting this requirement because we believe security holders may benefit from a subsequent offering period whether or not the bidder intends a back-end merger transaction.
As proposed, Rule 14d-1(e)(8) would have defined the subsequent offering period as a ten business day period following the initial offering period. Several commenters, however, recommended that bidders be permitted to determine the duration of the subsequent offering period. In response to these comments, we have decided to adopt a more flexible approach to the subsequent offering period. New Rule 14d-11 will allow the subsequent offering period to be a minimum of three business days and a maximum of 20 business days. Bidders could opt for a relatively short subsequent offering period and later extend the period if necessary. Any extension of the subsequent offering period must be made in accordance with Rule 14e-1(d).190
a. When a Bidder's Financial Statements Are Not Required; Source of Funds
We are clarifying when financial statement information of the bidder must be disclosed in a cash tender offer.191 Currently, this information is required in a cash tender offer when the information is material to a security holder's decision whether to tender, sell or hold.192 The instructions in Schedule 14D-1 provide some guidance on when financial statement information is material.193 These instructions also specify the type of information that will satisfy the financial statement disclosure requirement.194
We noted in the Proposing Release that generally there are several factors that should be considered in determining whether financial statements of the bidder are material. Those factors are as follows:
We also noted that these factors are not exclusive, and not all factors are necessary to meet the materiality test. In order to provide more guidance to bidders, we are adopting a new instruction to Schedule TO specifying when the financial statements of a bidder are not material and do not have to be provided. Commenters generally supported the proposal, offering some suggestions on how to modify the instruction so that it achieves its intended purpose. We are, therefore, adopting the instruction with some minor changes. We believe that under the circumstances specified in the new instruction, the burden of providing the bidder's financial information in tender offer materials may outweigh the usefulness of the information to security holders.197
As adopted, Item 10 to new Schedule TO198 includes an instruction stating that a bidder's financial statement information is not material when:
Several commenters addressed the financing condition element to the instruction. Most of these commenters indicated that the status of a bidder's financing arrangements (e.g., commitment letter, definitive financing in place, or sufficient funds on hand) is not determinative so long as the offer is not subject to a financing condition. We agree. We believe security holders may need financial information for the bidder when an offer is subject to a financing condition so they can evaluate the terms of the offer, gauge the likelihood of the offer's success and make an informed investment decision. Whether an offer is conditioned on obtaining satisfactory financing arrangements (e.g., receipt of a commitment letter or execution of other definitive financing documents) or the actual receipt of funds from a lender,200 the offer is considered subject to a financing condition and the bidder may not omit financial information in reliance on the instruction.
We also asked whether foreign companies whose financial statement information may not be readily available should be treated any differently. Foreign companies are permitted to file reports in paper and are not required to file electronically.201 As a result, security holders may have more difficulty obtaining information for foreign bidders. Two commenters indicated that foreign bidders that file reports (e.g., Form 20-F)202 in paper should not be able to satisfy the third prong of the instruction. We agree that the instruction should take into account the availability of financial statement information for foreign bidders. If information is available on EDGAR (via the Internet and other sources), we believe there is less need to require disclosure of the bidder's financial statements in its tender offer materials. Therefore, we have revised this condition to state that the bidder must be a reporting company that files reports electronically on EDGAR.203 Of course, foreign bidders that choose to file reports electronically on EDGAR can rely fully on this new instruction. Alternatively, a bidder that is non-reporting or files reports in paper may rely on the instruction if the offer is for all outstanding securities of the target.204
We also proposed to codify the current practice of providing net worth information when the bidder is a natural person. The one commenter that addressed this proposal supported it, but believed the requirement to provide "appropriate disclosure" when a bidder's net worth is derived from material amounts of assets that are not readily marketable or there are material guarantees and contingencies was too vague. Therefore, we are adopting this instruction, substantially as proposed, but with a clarification that the bidder must disclose the nature and approximate amount of the individual's net worth consisting of illiquid assets and the magnitude of any guarantees or contingencies that may ne