One Elk Street
Albany, NY 12207
July 27, 1999
Securities and Exchange Commission
450 Fifth Street N.W.
Mail Stop 6-9
Washington, DC 20549
E-mail address: email@example.com
Attention: Jonathan G. Katz, Secretary
Re: Securities Act Release No. 33-7607
Exchange Act No. 34-40633
File No. S7-28-98
Ladies & Gentlemen:
The Committee on Securities Regulation of the Business Law Section of the New York State Bar Association appreciates the opportunity to comment on Release Nos. 33-7607 and 34-40633, dated November 13, 1998.
The Committee on Securities Regulation is composed of members of the New York State Bar Association, a principal part of whose practice is in securities regulation. The Committee includes lawyers in private practice and in corporation law departments. A draft of this letter was circulated for comment among members of the Committee and the views expressed in this letter are generally consistent with those of the majority of the members who reviewed the letter in draft form. The views set forth in this letter, however, are those of the Committee and do not necessarily reflect the views of the organizations with which its members are associated, the New York State Bar Association, or its Business Law Section.
We appreciate the efforts of the Commission to address anew and harmonize regulation of communications and publicity during pre-filing/ waiting/post-effective periods and the timing, forms, disclosure and liability among alternative forms to accomplish an acquisition, such as mergers, cash tender offers, and exchange offers.
We agree with the Commission's stated intent to conform the securities regulations to the realities of today's environment surrounding takeover transactions, while maintaining high quality investor protection and enhancing the timing and quality of information available to investors. We support the Commission's overall goals of providing the market with more information on a more timely basis; rationalizing disparate regulatory schemes; and taking advantage of technology for the benefit of issuers and investors.
Although this is an enormous and most ambitious undertaking, there is ample opportunity in the proposals to achieve the Commission's objectives and also accommodate the legitimate, good faith interests of investors and issuers for the mutual benefit of both.
Notably, there is one aspect of the Commission's proposals that stands in contrast to the areas of common interest among issuers and investors. That is the proposal in the Release that would extend the liability applicable to a statutory prospectus generally to an issuer's written communications related to a proposed business combination. This proposal is particularly puzzling today when it is widely recognized that more information is available more quickly than ever before. Also, as the Commission itself has maintained, the "fraud on the market" theory acknowledges that information is quickly and broadly reflected in securities prices regardless of how it was initially disseminated. Although we believe that the liability issue can be analyzed based on public policy considerations, we note that there may also be an issue as to whether the proposed liability provisions are inconsistent with the rationale of the Supreme Court's decision in Gustafson.1 We believe there should be a compelling public need, such as demonstrated abuses or public harm, for the Commission to impose additional liability on issuers.
The approach we have taken in considering various of the proposals in these comments is whether the proposal meets the Commission's broad objectives as cited above. The section headings and numbers below conform to those used in Part II of the Release.
You propose to eliminate the current restrictions on communications regarding an upcoming business combination by providing a safe harbor for oral and written communications about the transaction before filing a registration statement, proxy statement or tender offer statement. You propose to neither restrict the content of these communications (although the anti-fraud rules would be applicable) nor restrict eligibility for the safe harbor based upon issuer size. Written transaction-related communications would have to be filed upon first use and include a legend advising investors to read the registration statement, proxy statement or tender offer statement. Although the safe harbor purports to protect oral statements, the proposal is unclear about how the safe harbor may be invoked for oral communications.
Our objective, as well as yours, is to permit issuers to provide the information increasingly demanded by investors and the market in a manner that provides reasonable certainty for issuers and reasonable protection for investors.
We strongly support the Commission's proposal to allow oral and written communications regarding business combinations to be made prior to the filing of a registration statement, proxy statement or tender offer statement. We agree that neither the content of the communication, nor the size of the issuer should be relevant to safe harbor eligibility.
However, we strongly disagree with the requirement that the issuer file all written communications related to transactions subject to the Securities Act with the Commission upon first use, or at any time thereafter. Filing these communications would trigger potential liability under Section 12(a)(2), unnecessarily subjecting all such transaction-related communications to potential prospectus liability. We believe that such an expansion of liability would contravene the Commission's stated objective to increase the flow of information to investors. Issuers would be faced with an unfortunate trade-off; heightened potential liability would be the high price of fuller communication. This correlation would serve as a disincentive to communicate freely and would have a chilling effect on the communications flow.
Communications by an issuer outside a registration statement or proxy statement already are subject to liability under the more general liability standards of Rule 10b-5 broadly applicable to statements in the marketplace. There is no reason to take Section 12(a)(2) prospectus liability, which is designed to cover a set of specific information required for a specific purpose, and apply it to statements made day in and day out in the marketplace just because the statements may be tangentially related to a proposed acquisition. We believe that Rule 10b-5 provides sufficient protection for investors.
By design, the investment decision in a business combination is primarily made based upon disclosure in the prospectus. Accordingly, liability may be imposed for any materially inaccurate information in a prospectus. Additional information may be available regarding a proposed business combination which may have an effect on the market value of a shareholder's securities. For example, the Commission itself recognizes that information provided to analysts is widely disseminated and reflected in the market. Any decision by a shareholder to buy or sell prior to the conclusion of the transaction is simply an open market transaction. Rule 10b-5 of the Exchange Act is designed to protect investors from inadequate or inaccurate information when engaging in open market transactions. Conversely, the Securities Act is designed to protect investors from making their investment decision on whether to participate directly in a business combination on inadequate or inaccurate information. By imposing Section 12(a)(2) Securities Act liability on information relied upon in open market transactions (which, again, is covered by Rule 10b-5) you expand Securities Act liability into an area which it was not intended to cover. Such an expansion is inappropriate.
The definitions and prohibitions of the Securities Act were devised, inter alia, to prohibit certain communications prior to filing a registration statement. The intent was not to require filings of such communications or to impose liability on such communications, but instead to prohibit them. The needs of investors and the market dictate eliminating that prohibition. However, to do so does not also require that such communications now must be filed with the Commission as statutory prospectuses or be subjected to statutory prospectus liability. In an environment of rapidly changing technological advancements, issuers face increased pressure to disseminate transaction-related information more rapidly. However, technological advancement should not automatically translate into increased liability.
Additionally, issuers may file certain information on Form 8-K, which would be subject to liability under the Exchange Act and the Securities Act to the extent incorporated in a registration statement or prospectus, or disseminate the information through use of press releases or other announcements, or use some combination thereof. Existing avenues already are available to provide investors with the ability to address potential liability for failure to make material disclosures or concerns about selective disclosures without the need for imposing on issuers additional filing requirements and additional risks of statutory liability.
Furthermore, the proposal for filing written communications is not workable and would have a chilling effect on the willingness or ability of issuers to provide additional information. First, attaching Section 12(a)(2) liability would encourage issuers to release information orally to avoid the filing requirement and the corresponding potential liability. Certainly that would not further the objective of the Commission.
Second, literal compliance with the proposal would be burdensome and impractical. There are many instances where proper disclosure dictates that multiple communications refer to a proposed acquisition. Keeping track of every written communication disseminated from a large corporate organization seems patently impossible. An issuer would be at constant risk that it later could be determined that certain communications should have been filed but were not, despite the issuer's best efforts. The issuer would have to have some way of collecting possible communications, preferably prior to issuance, for review and consideration for filing. Assuming arguendo that an issuer could document and file every single written communication, in order to avoid potential liability issuers would have to file multiple communications containing the very same information. Issuers would also have to subject every communication which referred to a proposed acquisition to the same rigorous review that statutory prospectuses now receive. Ultimately, the only way an issuer could effectively establish procedures to protect itself would be to severely limit any communications about a proposed acquisition.
Third, the filing requirement may inhibit an issuer's willingness to disseminate important non-merger related information as well. For example, after two companies with complementary product lines announce a merger, any subsequent product oriented communications often include references to the pending transaction. A literal reading of the filing requirement would dictate that each press release or other communication regarding product development would have to be filed, even though the true subject matter only involved non-merger issues.
Finally, we believe the proposed filing requirements and accompanying liability provisions would encourage strike suits. Plaintiffs lawyers would have a whole new field of communications for liability claims. The pleading standards for Section 12(a)(2) liability are much less rigorous than for Rule 10b-5, which would otherwise apply to the communications in question. In addition, the proposal would set up liability for what may be a narrow communication that is not even part of the complete statutory prospectus containing mandated disclosures. Also, liability would presumably be in connection with open market or secondary market transactions and not the investment decisions that Section 12(a)(2) addresses. Liability for such communications and transactions is best dealt with under Rule 10b-5, and not Section 12(a)(2).
Notwithstanding our primary position, as outlined above, if the Commission were to require the filing of written communications, we believe that Section 12(a)(2) liability would adequately protect investors. We do not believe that all written communications related to the transaction should be incorporated into the registration statement and subject to Section 11 strict liability. Further, we believe that such filings should be limited to material information and exclude previously disclosed information as well as responses to specific inquiries that are not widely disseminated. We believe that adhering to the proposed safe harbor would be impractical, if not impossible.
You propose to permit free oral and written communications during the period between filing and effectiveness of the registration statement.
We believe that the rationale for removing the current restrictions on communications applies to each stage of the registration process. For reasons detailed in the immediately preceding comment, we agree that oral and written communications regarding business combinations made during the period between filing and effectiveness of the registration statement, proxy statement or tender offer statement should be allowed, irrespective of the content of the communication, or the size of the issuer. However, we strongly disagree with the proposed requirement that the issuer file written communications with the Commission upon first use, or at any time thereafter, because of the corresponding increase in liability.
As an alternative to the proposals referred to in Items 2 and 3 above, you propose to allow issuers to make deal-related disclosures only during a certain period of time, such as 48 hours, following the public announcement of a definitive merger agreement or takeover plan. There would be no content restrictions on the communications. After the 48-hour period, issuers would be required to remain quiet regarding the transaction until a registration, proxy or tender offer statement is filed. As a second alternative, you propose to permit free communications for an unlimited period of time following a deal announcement as long as it is followed by a defined quiet period, such as 30 days, before filing the registration statement, proxy statement or tender offer material.
We do not support either alternative proposal. We believe that investors' interests are best served by a continuous flow of information regarding a business combination. We suggest that the Commission refrain from imposing artificial constraints on the flow of information between issuers and investors and instead, that it should encourage the exchange of information. Further, we believe that a quiet period designed to cure market conditioning may delay the release of important transaction-related information, impeding the information flow.
You propose a new Rule 166(b) to implement the "free communications" proposal described above, by providing an exemption from Section 5(c) of the Securities Act.
We support the intent of proposed Rule 166(b) to permit free communications by an offeror in connection with any registration statement relating to a business combination by exempting such communications from Section 5(c). We propose that the safe harbor be made available to participants in addition to the offeror (acquiror), specifically the acquiree, affiliates of the acquiror and acquiree, dealer managers and others acting in their behalf, as well as financial advisors, proxy solicitors and public relations firms. We believe, however, that the Commission should adopt a safe harbor provision with an express exception that would permit communications prior to filing a registration statement, proxy statement, or tender offer statement instead of proposed Rule 166(b).
For the reasons given above, we object to the requirement to file written communications with the Commission and the corresponding imposition of liability, whether under Section 12(a)(2) or Section 11. Further, we believe that conditioning the Section 5(c) safe harbor on the timely pre-filing of written communications would be inappropriate and that such a penalty would be excessive, particularly when the practical problems of compliance, as previously described, are considered.
Regarding Rule 135, we do not believe that Rule 135 notices involving prospective business combinations should be filed, even if they contain the initial announcement of the transaction.
a. Expand Rule 14a-12 Safe Harbor
You propose to broaden the safe harbor in Rule 14a-12 to apply to all solicitations, not just those involving contested matters, and retain the provisions of Rule 14a-12 regarding the failure to furnish a form of proxy, disclosure of participant information, delivery of a written proxy statement to shareholders as soon as practicable, and filing written solicitations upon first use. Each communication would be required to expressly advise security holders to read the proxy statement and would be protected by the Rule 14a-9 anti-fraud provision. You also propose to mandate a minimum proxy solicitation period, possibly 20 business days.
We support the proposal to expand Rule 14a-12 to cover all types of solicitations and all parties. We believe that the effect of the proposal would be to permit freer communications between management and security holders. We also agree that the proposed Rule would subsume the current Rule 14a-11. We would, however, suggest that you modify proposed Rule 14a-12(a)(i) to require only a legend directing security holders to obtain a detailed list of names, affiliates and other information required by Instruction 3 to Item 4 of Schedule 14A from either the party making the solicitation or the Commission. Participant list information is largely boilerplate which is rarely read by investors and expensive to reproduce. Reference to its availability and location would adequately serve its intended purpose.
The Commission should not adopt a requirement to deliver a proxy statement at the earliest practicable date. Current practice and interpretation contemplates that a proxy statement may not be delivered if the soliciting party changes its mind. There is no reason to adopt a different rule.
We oppose a federally mandated minimum proxy solicitation period. In the current environment, it generally takes more than 20 days to solicit an adequate number of votes to approve mergers or similar transactions, making the issue fundamentally moot. However, it is possible in limited circumstances to have such transactions approved in less than 20 days. In those instances, the solicitation period should not be artificially extended to meet a minimum requirement that serves no clearly defined purpose. Further, minimum notice periods have historically been a matter of state law and we believe that the Commission's decision to reserve that issue for the states should be retained, absent a compelling protective interest.
b. "Test the Waters" Proxy Solicitations
You propose to broaden Rule 14a-2 to permit both written and oral solicitations by any party (e.g., the registrant, a party opposing management, institutional investors) to security holders without compliance with the proxy statement disclosure and dissemination requirements.
We do not support the "Test the Waters" proposal which, if adopted, would eliminate the need for Proposed Rule 14a-12 and Rule 14a-11. Overall, the Commission's proposals provide increased access to information to security holders. We believe that the "Test the Waters" proposal is inconsistent with this effort because in certain situations this access would not be allocated equally. Specifically, in a hostile takeover situation, granting unlimited access to security holders to a hostile bidder would put the issuer at a competitive disadvantage.
c. Eliminate Confidential Treatment of Merger Proxies
You proposed eliminating Rule 14a-6(e)(2). This rule provides that preliminary proxy materials relating to certain reclassifications and business combinations may be filed confidentially.
We strongly disagree with the elimination of confidential treatment of merger proxy statements. We believe that its availability should be retained without modification, i.e., with neither a limitation on its availability under specified circumstances, nor a connection to an issuer's utilization of the new safe harbors permitting increased communication. The same reasons that persuaded the Commission to retain confidential treatment in 1992 remain today.
We believe that confidential filing serves a specific and useful purpose, even in light of an issuer's extensive deal related disclosure soon after the execution of a merger agreement. First, it should be noted that the kind of information that is disseminated upon announcement and the kind of information about which an issuer seeks confidential treatment are quite different. It is the extensive background information, information related to the transaction's rationale, as well as the pro-forma financial statements that trigger most of the staff's comments and that are most sensitive to the issuer. The nature and extent of these details are not generally disseminated at the time of announcement, and we believe that it is in the best interest of investors to receive this critical information after it has been reviewed and is no longer subject to material change.
Second, because many filings are complex, material modifications are sometimes inevitable. This could be confusing to investors and could lead to a whole new breed of "strike suit" litigation without a corresponding benefit. In that regard, it needs to be borne in mind that any pre-definitive proxy statement disclosures will be subject to Rule 10b-5 so that investor protection is more than adequately served. Finally, elimination of confidential treatment may make it more difficult for issuers to reach agreement on Staff comments when faced with possible litigation. There must be some mechanism through which issuers may resolve complex, uncertain issues with the Commission. Confidential treatment works both effectively and efficiently to accomplish this purpose. If confidential filing is eliminated, we suggest that you implement some procedure for confidential pre-filing review by the Commission.
We strongly believe that the Commission should continue to allow exhibits to be filed when they are available as opposed to when the registration statement is filed. As a practical matter, many exhibits that are required to be filed are not available in final form or are simply unavailable at the time that the registration statement is filed. For example, a business combination may result in a new holding company structure with a new charter and by-laws, along with new employment and credit agreements. It is likely that these documents will be in
the drafting or negotiation stages at the time of filing. To require that all exhibits be filed with the registration statement would be burdensome and unquestionably delay the filing itself. We believe that the investors' interests are best served by filing exhibits in their most complete form at the time at which they become available.
a. Disclosure Triggering Commencement
You propose to permit a bidder in a third party cash tender offer to engage in free communications before commencement of a tender offer by eliminating the obligation to commence or withdraw a cash tender offer within five business days of making a public announcement (eliminating the "five business day rule") and eliminating the requirement to promptly file a registration statement after public announcement of an exchange offer. In place of these requirements, you propose to require bidders to file and disseminate the required information when tenders are first requested. You propose to amend Rule 14e-8 to explicitly prohibit announcing a tender offer without the intention to commence and complete the offer; with the intent to manipulate the price of either the bidder's or the target's securities; or without a reasonable belief that the person will have the means to purchase the securities sought.
We support your proposal to disassociate the public announcement of an intention to commence a tender offer with the requirement to file or disseminate information. This proposal focuses its attention on the point at which security holders are provided the means to tender their shares, that is, the point at which an "investment decision" becomes possible. However, we believe that the 5-day rule should be eliminated only in a situation where the company to be acquired has agreed to the acquisition. In a situation where there is no agreement by the company to be acquired, we believe that the 5-day rule should remain in effect. In these cases, the 5-day rule assures bona fide offers, generally requires a higher level of commitment and helps to prevent manipulation. Eliminating the five-day rule in cases where the company to be acquired has agreed to the acquisition is consistent with the Commission's overall goal of increasing the flow of information to investors. The explicit prohibitions embodied in proposed Rule 14e-8 would be adequate to protect security holders in such cases from those persons who would otherwise abuse the privilege of freer communications.
1. Early Commencement
You propose to amend Rule 14d-4(b) to permit third party exchange offers to commence upon filing of a registration statement or at a later date selected by the bidder. The effect of commencement upon filing would be to start the minimum 20-business day offering period. The registration statement filed would have to contain pricing information and be disseminated to all security holders. A tender offer statement would have to be filed. However, bidders could not purchase shares until after the registration statement became effective. In the case of a going-private or roll-up transaction, the registration statement would first have to become effective to commence the 20-business day minimum offering period.
We support your efforts to put cash tender offers and exchange offers on a more level regulatory playing field. However, we believe that your proposals are not sufficient to ensure equality. Because exchange offer registrations may still be subject to significant delay beyond the 20-business day tender offer period due to the Commission's review and comment process, exchange offers would still be at a disadvantage in comparison to cash tender offers. We believe that an appropriate change would be to make the registration statement effective upon filing and have comments addressed via post effective amendments or supplements. Also, the Commission would have to commit to some form of expedited review for exchange offers. Unless the Commission is willing to accelerate effectiveness and expedite review, we do not see a practical way to eliminate the disparity between the methods. Further, we suggest that the commencement upon filing should be optional for the bidder as opposed to universally applied. Thus a bidder would have the discretion to determine its appetite for the risks associated with recirculation of offering materials.
You propose to require bidders using "early commencement" to disseminate supplements to disclose material changes and to extend the period the offer remains open after the supplement is sent. These changes would be incorporated into Rule 14(d)-2.
We support your proposed requirement that bidders utilizing early commencement be required to disseminate supplements to disclose any material change in the offering document. We believe that material changes to the offering materials, either before or after effectiveness of the registration statement, indicate a change in the terms of the transaction and warrant an extension of the offering for some period of time, as suggested by your proposal.
D. INTEGRATE AND STREAMLINE THE DISCLOSURE REQUIREMENTS
FOR TENDER OFFERS AND MERGERS
You propose to integrate the disclosure schedules for issuers and third party tender offers, tender offer recommendations and going private transactions via Regulation M-A which would become a new sub-part of Regulation S-K. You propose to create new Schedule TO which would replace current schedules
13E-4 and 14D-1. You further propose to introduce a Plain English summary term sheet; clarify and simplify proxy statement requirements; harmonize the cash merger and cash tender offer disclosure to security holders; reduce financial statement requirements for non-reporting companies to reduce complexity and expense; and introduce a new registration statement, Form C, for business combinations.
We generally support your proposals to streamline, integrate, harmonize and simplify disclosure requirements by implementing Regulation M-A; combining Schedules 13E-4 and 14D-1 and in certain cases, Schedule 13E-3; requiring a Plain English Summary Term Sheet; revising Schedule 14A; reducing financial statements required for non-reporting target companies; and introducing Form C. In particular we like the flexibility provided by the Plain English Summary Term Sheet because it allows the issuer to determine the most significant and material facts to highlight. This flexibility is also consistent with the Commission's movement toward freer communications. We feel that the Summary Term Sheet should be extended to stock mergers and stock tender offers.
We strongly support your clarification of Item 14 of Schedule 14A which limits financial statements and other information about acquirors in cash mergers to information that would be material to the voting security holder's evaluation of the transaction. We also agree with your proposal to reduce the financial statements required for the acquiror from three years to two. This modification reduces unnecessary effort and expense.
1. Permit Securities to be Tendered During "Subsequent Offering Period" without Withdrawal Rights
You proposed a new tender offer rule that would permit tenders during a limited period after the initial offer is completed.
We believe that most tender offers now do not close until the acquiror has enough shares to do a short form merger (usually 90%). As a result, there is normally no significant delay in receipt of funds even without a subsequent offering period. Also, acquirors would be unlikely to use the rule as proposed because it would provide a disincentive for shareholders to tender their shares within the tender offer period. However, with one change, we believe the proposal could provide a useful benefit for acquirors and shareholders. If you would eliminate the requirement that an acquiror make a prior disclosure of the intention to provide a subsequent offering period, acquirors could then utilize the proposal without providing a disincentive for shareholders to tender their shares.
2. Clarify the Financial Information Required for Bidders in Cash Tender Offers
You propose to include an instruction to proposed Schedule TO stating that the bidder's financial statements are not material when: (1) only cash is offered;
(2) there is no financing condition; and (3) either (a) the bidder is a public reporting company; or (b) the offer is for all outstanding securities of the target. You propose to reduce the financial statements requirements for third party tender offers to two years. You propose to expand the source of funds item in the tender offer and going private rules to require disclosure of specific sources of financing, and the bidders ability to finance the offer if the primary source of financing falls through. You also propose to require pro forma and related financial information in the tender offer materials for the cash tender offer portion of a two-tier transaction where any securities remaining after the tender offer would be acquired in a back-end merger where securities are offered as consideration.
We disagree with the proposal to require bidders to disclose specific sources of financing, any conditions to the financing and the bidder's ability to finance the offer if the primary source of financing falls through. First, we are unaware that incomplete or inadequate financing is a significant problem in the current merger and acquisition environment. It is our opinion that, unless the Commission has evidence that this problem has some degree of magnitude and impact, the current regulations should stand. Second, we believe that the proposal could require bidders to release sensitive competitive information about banks or other firms willing to provide financing without any demonstrated need to protect the interests of investors.
6. Safe Harbor for Forward-Looking Statements
You propose extending to tender offers the safe harbor provided by the Private Securities Litigation Reform Act of 1995 for forward-looking statements made in connection with mergers.
We strongly support the extension of the provisions of the PSLRA to forward looking statements in connection with a tender offer.
We hope that you will find these comments helpful. We would appreciate an opportunity to meet with you at your convenience to discuss these comments further.
COMMITTEE ON SECURITIES
By: Guy P. Lander/MJH
Guy P. Lander
Chairman of the Committee
Michael J. Holliday
cc: The Honorable Arthur Levitt, Chairman The Honorable Paul R. Carey, Commissioner The Honorable Isaac C. Hunt, Jr., Commissioner The Honorable Norman S. Johnson, Commissioner The Honorable Laura Simone Unger, Commissioner Harvey J. Goldschmid, General Counsel Office of General Counsel Brian J. Lane, Director Division of Corporation Finance P. J. Himelfarb, Special Counsel Office of Chief Counsel Division of Corporation Finance James J. Moloney, Special Counsel Office of Mergers and Acquisitions Division of Corporation Finance1 Gustafson v. Alloyd Company, Inc., 513 U.S. 561 (1995). Although the case involved a private placement, the analysis in Gustafson would apply equally to what constitutes a statutory prospectus in a registered offering.