AMERICAN BAR ASSOCIATION
Section of Business Law
750 North Lake Shore Drive
Chicago, Illinois 60611
FAX: (312) 988-5578
April 30, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Attention: Jonathan G. Katz, Secretary
Re: File No. S7-28-98
Release Nos. 33-7607, 34-40633; IC-23520. Regulation of Takeovers and Security Holder Communications
Ladies and Gentlemen:
This letter responds to your request for comments on the M&A Release captioned "Regulation of Takeovers and Security Holder Communications."
A special committee of the Committee on Federal Regulation of Securities of the Section of Business Law of the American Bar Association prepared these comments. We sent a draft of this letter for comment to members of the Subcommittee on Proxy Solicitations and Tender Offers, the Chairs and Vice-Chairs of other Subcommittees and Task Forces of the Committee, the Officers and the Advisory Committee of the Committee and the Officers of the Section. The Committee members who reviewed the draft letter generally agree with the views expressed. However, this letter is not an official position of the American Bar Association, the Section or the Committee, and it does not necessarily reflect the views of everyone who reviewed it.
We support most of the proposals in the M&A Release. We are pleased that you and your staff recognize the importance of promoting increased communications with security holders and the markets between the time a takeover transaction is initiated or agreed to and the filing of a registration statement. We also believe artificial distinctions between various types of takeover transactions should be reduced and we support your efforts to do so. While we support your proposal to integrate and streamline the disclosure requirements for tender offers and mergers as part of this effort, we urge you to consider, as indicated in this letter, more far-reaching changes than those you have proposed.
We also support the proposed rule amendments to level the playing field between cash tender offers and transactions involving an exchange of securities. We believe the current rules and procedures create a significant regulatory and timing advantage for cash offers, and that they favor cash offers, including partial offers, over offers in which securities are involved. This regulatory bias obstructs stockholders’ ability to make purely economic decisions as to which alternative best serves their interests.
We support your proposal to permit commencement of a registered exchange offer on filing, and we also support a subsequent offering period rule applicable to both stock and cash tender offers, as ways to reduce this regulatory bias. The regulatory burden is by no means the only factor that interferes with a pure economic comparison between cash and securities. However, the 45 to 75 day delay associated with the registration process is a significant impediment to the use of securities in business acquisitions. In transactions involving part cash - part securities, the risk arising from regulatory delay can be avoided by structuring the transaction as a cash tender offer for a majority of the shares, with the securities portion of the transaction to be accomplished through a merger after closing of the tender offer. The regulatory bias in favor of such "two-tiered" transactions is a further distortion of the outcome that would result from a purely economic evaluation. We have further suggestions as to the timing of effectiveness of the exchange offer registration statement which would help level the playing field with cash offers. We believe that the proposals in the M&A Release, together with the revisions suggested in this letter, would go a long way toward eliminating these economic distortions.
On March 2, 1999, we sent you a letter commenting on your "Cross-Border Tender Offers, Business Combinations and Rights Offerings" Release. We suggested in that letter that the rule proposals in the Cross-Border Release should be coordinated with the proposals in the M&A Release. There are two specific differences between the releases that we believe should be resolved in favor of the approach taken in the M&A Release. First, the 30 calendar day commencement requirement for tender offers in the Cross-Border Release should be abandoned. Second, the withdrawal right in the Cross-Border Release should not apply during the subsequent offering period proposed in the M&A Release.
We believe the M&A Release is a major step forward. It addresses important current issues and should be implemented as soon as possible. The proposals in the M&A Release are more straightforward and less controversial than the proposals in your Regulation of Securities Offerings Release. We urge you to move ahead with an adopting release based on the M&A Release and not to tie its fate to the resolution of the issues raised by the Securities Offerings Release.
We have a number specific comments which we have organized to follow the table of contents in Section II of your Release:
No comment is required.
You proposed eliminating current restrictions on communications about an upcoming merger, tender offer or other 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 did not propose to limit the content of these communications.
We believe that your proposal to eliminate the current restrictions on pre-filing communications about business combinations is a good one. We agree with your observations that the increased pace of today’s securities markets and the ready accessibility of information through electronic media have changed the environment in which business combinations are conducted. The pressures on companies to disclose deal-related information at an early stage are great. These pressures reflect a need to inform investors currently of material information (for example, synergies expected in a merger). Your proposal responds positively to these pressures. We expect that the result of the proposal will be the widespread dissemination of deal-related information to security holders and other interested parties on a more timely basis than permitted under the current regulatory framework. Companies whose securities are listed on a stock exchange are generally required by exchange rules to make prompt public disclosure of material developments. These requirements, together with the applicable anti-fraud rules, often require earlier (and sometimes more detailed) disclosure than is required under the Exchange Act’s periodic reporting requirements. The proposed rule changes should make it easier for companies to comply with these stock exchange rules, satisfy applicable anti-fraud rules and meet the demands of the marketplace for timely information, without fear of having inadvertently violated the Securities Act or the proxy or tender offer rules.
While you have not proposed any content limitation on pre-filing communications, you asked whether any content restrictions are appropriate. We believe strongly that a content restriction is inappropriate. Any restriction would necessarily detract from the stated purpose of your proposal to enable the free flow of information to all interested parties. One of the positive effects of your proposal would be to create an environment where companies have the flexibility to determine what pre-filing information is appropriate in any particular case. Such flexibility is necessary in the current rapidly changing environment. Further, your concern to protect investors is adequately met: as the Release noted, the antifraud rules will continue to apply, and a prospectus, proxy statement or tender offer statement will be provided to security holders before they are asked to vote or tender their shares.
You asked whether you should limit eligibility for the proposed safe harbor to transactions involving large or seasoned issuers. We agree with you that such a limitation is neither appropriate nor necessary. The reasons for allowing less restricted pre-filing communications — increased takeover activity, communications advances, pace of markets, need for full and timely disclosure — apply to all issuers, not just those that are large or seasoned. In today’s environment, there is no causal link between the size or seasoned nature of an issuer and security holders’ or security markets’ demand and need for timely information about proposed business combinations. Indeed, many smaller or less-seasoned companies are followed closely by analysts and the companies’ security holders, and the pressures on such companies for timely information about a proposed business combination and the benefits to the market of receiving that information are just as great as those for large or seasoned issuers. You are correct when you say that much of the information that the markets need relates to the combined entity and "synergies" that may result from the combination, and such information is necessary whether the issuer is large or small, seasoned or unseasoned.
We find acceptable as a general proposition your proposal to require companies to file on first use all written communications that are made from the date of the first announcement of the transaction or business combination. However, we would:
To encourage filing on first use, we would make the safe harbor unavailable for any communication that is not filed on first use. In doing so, we would make it clear that failure to qualify for the safe harbor by filing on first use does not itself establish a violation of Section 5, although the anti-fraud rules would continue to apply. We think you should further clarify that such a filing should be made on Form 8-K and indicate the scope of persons covered by the rule. In addition, we believe meaningful differences exist between business combination and capital-raising transactions in view of the more controlled nature of communications in business combination transactions, and that our acceptance of filing on first use in business combinations does not necessarily apply in the context of the Securities Offerings Release. If you adopt a "test the waters" proposal, which we recommend (see 6.b. below), the filing of written communications should conform to, and be consistent with, the requirements of that proposal.
Your proposal that pre-filing written communications contain a legend advising investors to read the registration, proxy or tender offer statement is appropriate where practicable. However, it should be acknowledged that in the ordinary course of business some pre-filing written communications may, because of time or other considerations, be made without the required legend notwithstanding a company's good faith efforts to ensure that all covered written communications are legended. Accordingly, the rule should provide that, upon filing such communications with the Commission, the required legend must be added to any pre-filing written communication from which the legend was omitted. This is important since some written communications may be prepared in a short time frame without the opportunity for legal review. While a legend on the communication may be desirable, it is not as meaningful as the written communication itself.
In addition, while it is appropriate for the legend to advise investors that they can obtain copies of filed documents for free from your web site, it is inappropriate for the legend to explain or list which documents are available from the Commission. Interested parties can easily obtain such information from your web site, and listing each available document in each communication would be unduly burdensome. We believe that the only other requirement for the legend should be the name of the person making the communication.
You asked whether parties involved in tender offers would be reluctant, in light of the filing requirement, to disclose forward-looking information absent a safe harbor for liability for that information. We believe such a concern is legitimate, and that a safe harbor from liability for forward-looking information is appropriate. Such a safe harbor would encourage disclosure of forward-looking information. Further, it would recognize that the rationale for providing such a safe harbor for tender offers is the same as for mergers, where a safe harbor exists, and would further your goal of achieving a high degree of consistency in the regulation of differing business combination methods.
You asked whether parties to a transaction would communicate more freely if written communications could be filed at a later date and not on first use. We believe that the filing on first use proposal is the better alternative presented in your proposals. It is a requirement that is relatively straightforward in terms of compliance, serves your goal to ensure that information is available to all interested parties at the same time and assures that one group is not advantaged over another by having earlier access to material information.
You asked whether the proposed safe harbor should apply to oral communications. We believe that oral communications should have the same safe harbor as written communications. Oral communications are a necessary part of the current communication environment, whether it be to clarify a written statement or otherwise. For this purpose, you should not treat them differently than written communications. However, we do not believe it is appropriate or practicable to require an issuer to update the written filing on record to reflect oral communications that may be interpreted as amending or supplementing an earlier written communication.
Furthermore, we believe that it is impractical to require that oral communications be reduced to writing or that a notice be filed when such communications are made. An issuer may have a number of people responding to press, analyst and investor inquiries, and it would be impossible to notify the Commission of all oral communications made in the context of a merger transaction. We believe that the general anti-fraud rules and prohibitions on trading on inside information provide a sufficient safeguard for investors and help prevent selective disclosure issues relating to oral communications.
You proposed permitting free oral and written communications during the period between filing and effectiveness of the registration statement.
We agree with your proposal. The rationale for removing the current restrictions applies to each stage of the registration process, whether it be pre-filing, post-filing/pre-effectiveness or post-effectiveness. This proposal would bring a welcome consistency and simplicity to this complex area of securities regulation. Materially new or different information contained in post-filing but pre-effective communications should be included in an amendment to the registration statement. However, in the event further amendments to the rules under the Securities Act (such as proposed Rule 425) are adopted, such communications may be filed in accordance with those rules.
You asked us to consider alternatives to the free communications safe harbors proposed above. Each alternative is discussed below.
While it is appropriate for you to consider a variety of alternatives when assessing the merits of any proposal, we believe strongly that your original proposal is the most appropriate, will achieve your stated purpose and will respond most effectively to the rapidly changing market in which companies now operate.
You asked whether there should be only a specified period of "free communications" — 48 hours, 72 hours, or some other time — after the announcement of a transaction. We believe this is inappropriate, inconsistent with the proposal and would have an adverse effect on securities markets when compared to your original proposal. You stated that the purpose of the current proposals is to respond to the changing environment and enable companies to provide information on a timely basis to those concerned. A time-based restriction would prevent companies from disclosing material information to the market when they are under pressure to do so due to the regulatory or economic factors identified by you in your introductory remarks. It might also prevent companies from informing the marketplace of material changes that occur some time after a proposed merger is announced. Such a result is undesirable. In today’s market, the appropriate course is to eliminate the current restrictions on pre-filing communications and have a first-use filing requirement.
You suggested, as an alternative, a 30-day quiet period before the filing of the registration statement, proxy statement or tender offer material. We believe strongly that this alternative is inappropriate. It would be impracticable and unrealistic in the current environment. Investors and analysts pressure companies for information on a daily basis. It is simply unworkable to require a period of silence when requests for information could not be answered or new material information could not be disclosed. As a result, it would be difficult for companies, responding to these pressures and demands, and cognizant of their other regulatory obligations, to adhere to such a requirement. This could well lead to "gridlock," with business combinations coming to a halt because every time there is a response to a request, the 30-day time period would start over again. Further, a period of silence would lead to uncertainty in the securities markets as to whether any of the information previously disclosed had changed or should be supplemented. Finally, this alternative is inconsistent with your stated purpose of the reform. This quiet period is contrary to the very heart of the free flow of information that you have proposed and could limit the flow of information during the free communication period as issuers would be uncertain as to their ability to update or supplement information previously provided to the market. Furthermore, an initial bidder could be disadvantaged if it is in a quiet period at a time when a subsequent bid is made. The initial bidder could lose any timing advantage if it publicly responds to the second bid and is forced to start a new 30-day time period or have its bid disrupted by being unable to publicly respond to the second bid. Investors are adequately protected under your original proposal by the liability provisions to which companies are subject, by analysts and other commentators analyzing and commenting on any proposed business combination, and by the first-use filing requirement.
You proposed Rule 166(b) to implement the "free communications" proposal described above, by providing an exemption from Section 5(c) of the Securities Act.
We believe that your proposed new Rule 166(b) appropriately implements the free communications proposals. You asked whether any parties, other than the offeror/acquiring company and the company to be acquired, should be covered by proposed new Rule 166(b) and therefore exempted from Section 5(c). We believe Rule 166(b) should be worded so that the safe harbors apply to anyone who could be viewed as an offeror, including affiliates, financial advisors, proxy solicitators and public relations firms, and that it should also cover the target and its affiliates and advisors.
You asked whether communications made prior to the filing should be incorporated into the registration statement and be subject to Section 11 liability. We believe strongly that this is inappropriate. As you said, Section 12(a)(2) liability is appropriate for pre-filing written communications because it provides adequate protection to investors and would not have the same "chilling" effect that subjecting all such written communications to Section 11 liability would necessarily have.
You asked whether the Section 5(c) safe harbor should be conditioned on the timely filing of pre-filing written communications. We believe this is inappropriate and that such a penalty would be excessive and disproportionate under the circumstances.
You proposed eliminating the current provision that certain communications in contested transactions are not "offers" under the Securities Act, and asked whether this would chill communications in hostile situations. It is difficult to say what effect such a change would have. However, we agree that it is appropriate to treat communications for contested proxy solicitations the same as for friendly transactions, as this will lead to a greater degree of consistency and simplicity in the statutory scheme.
You asked whether Rule 135 notices should be filed. We believe it is inappropriate to file these notices. Such a filing requirement adds little to the existing proposals and would be an unnecessary requirement.
You asked whether a rule should be adopted which states that communications more than 30 days before the filing of a registration statement do not constitute offers for the purpose of Section 12(a)(2) liability. We believe that such a rule is inappropriate. All communications for business combinations should be treated the same, whenever they occur. There is no reason to treat them differently based on when they were made, and such a rule would create an unnecessary and arbitrary distinction between types of communications.
You asked whether there is a need to define "public announcement." While a definition tied to Rule 135 may provide some additional certainty, an alternative definition that may be preferable would tie the definition to "any announcement reasonably designed to inform security holders in general of a business combination." This would assure that communications prior to the time an issuer sought broad dissemination of information related to a business combination would not be offers under Section 5(c). You should also clarify that the use of the term "participants" in proposed Rule 167 is not limited to parties to the transaction but includes advisors, financing sources and other interested parties. This would be a clear, precise and understandable definition, making compliance with the rules of the Commission easier than a broader definition of "public announcement."
You proposed broadening the safe harbor in Rule 14a-12 to apply to all solicitations, not just those involving contested matters. You would 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 of written solicitations on first use.
As discussed under 6.b. below, we favor the "test the waters" proposal and the elimination of Rules 14a-11 and 14a-12. Therefore, our comments on your proposed changes to Rule 14a-12 would not be applicable if the "test the waters" proposal is adopted.
We believe that the proposal to expand Rule 14a-12 to cover all matters and all parties (both companies and others making solicitations) is a good one. We emphasize that the provisions being retained are essential for both management and security holders to function in an atmosphere where all parties are knowledgeable as to what solicitations are taking place. We would, however, suggest that you modify the participant disclosure rule (proposed Rule 14-12(a)(i)) to require only a legend that advises security holders that they can obtain a detailed list of names, affiliations and other information required by Instruction 3 to Item 4 of Schedule 14A from either the party making the solicitation or from a filing with the Commission. Over the years, participant list information has become a fine-printed boilerplate that can take up to one-quarter or one-third of a page. This is often not read yet very costly to communicate, especially in a newspaper or television advertisement, and is virtually impossible to communicate in a radio advertisement. A bold face legend listing the general categories to be disclosed, such as names and affiliations and where to get detailed information, would accomplish the goals of disclosure without laundry lists of names in small print that are not read by, or of interest to, most security holders.
In proposing revised Rule 14a-12, you raised a number of questions about the impact of requiring delivery of a proxy statement "as soon as practicable" and whether under various circumstances this requirement would be too burdensome or difficult in terms of compliance. We believe that the literal emphasis on proxy delivery "as soon as practicable" in these questions is inconsistent with how the existing rules are applied and with the practices the Commission has permitted over the years. In essence, we have read the "proxy delivery as soon as practicable" test to mean that companies in availing themselves of Rule 14a-12 must have a present intent at the time they are soliciting to deliver a proxy statement and proxy card prior to the stockholder meeting in question. We would clarify Rule 14a-12 to state that the soliciting party must have a good faith intention to deliver proxies at the appropriate time. Rule 14a-12 solicitations are sometimes made many months before a definitive proxy is sent to stockholders because the stockholder meeting may not be held for months. Moreover, a party soliciting under Rule 14a-12 may never ultimately send a proxy statement and proxy card to stockholders because while such party may have had a then-present intent to do so when it relied on Rule 14a-12, by the time the meeting is about to occur (often months later) such party’s intent may have changed and it is no longer interested in soliciting proxies at the stockholder meeting.
The following examples taken from recent transactions are illustrative. AlliedSignal Inc. relied on Rule 14a-11 from August 1998 through November 1998 in support of its consent solicitation to elect its nominees as a majority of the AMP Incorporated board of directors. AlliedSignal filed its definitive consent solicitation materials just before AMP and Tyco International Ltd. executed a definitive merger agreement on November 22, 1998. Faced with these changed circumstances, AlliedSignal abandoned its consent solicitation and never delivered proxy materials to AMP’s stockholders.
In February 1997, H.F. Ahmanson & Company announced an unsolicited stock-for-stock acquisition proposal for Great Western Financial Corporation. Both Ahmanson and Great Western sent communications to Great Western stockholders pursuant to Rules 14a-11 and 14a-12 months in advance of Great Western’s annual meeting. Subsequently, Great Western and Washington Mutual, Inc. signed a merger agreement and ultimately filed a registration statement on Form S-4. Ahmanson communicated its opposition to that merger in reliance on Rule 14a-12, yet it never filed or distributed to Great Western stockholders a definitive proxy statement in connection with its solicitation against the Great Western/Washington Mutual merger. Nine days before the stockholder meeting called to approve the Great Western/Washington Mutual merger, Amhanson officially dropped its solicitation efforts and withdrew its opposition to the deal.
Given our view of the flexibility of the regulatory structure currently in place, we do not believe the proxy delivery requirement (delivery of a written proxy at the earliest practicable date) is too burdensome, thereby requiring modification. We believe, therefore, that if management desired to communicate under Rule 14a-12 about a merger transaction that was merely under consideration, management could do so, provided that it had a then-current intent at the time of its communications to send a definitive proxy statement and proxy card at some time in the future when a stockholder meeting would be called to consider the transaction. While an expanded Rule 14a-12 could be viewed as a safe harbor useful to "road test" an executive compensation proposal with large security holders, we do not consider this sort of activity prohibited by the current rules. Typically, management, in the normal course of communicating with the company’s large institutional investors, discusses future plans and inquires as to the investors’ views on the subject. Such plans may include, for example, executive compensation proposals, and we do not believe that such communications have been, or should be, viewed as "solicitations."
We agree with your assertion that the expansion of Rule 14a-12 to non-contested situations would permit management to communicate more freely with security holders. If proposed Rule 14a-12 is adopted, management will be able to communicate with security holders on any particular topic before (if ever) a party opposing management’s view formally sent out mailings. For example, a company that has signed a merger agreement can send a letter to security holders highlighting a few significant features of the transaction before it mails a definitive proxy statement to security holders. Often there is up to a two to three-month delay between the signing of a merger agreement and the mailing of definitive merger proxy materials to security holders. Yet, during this "lull" (and particularly after a deal is just announced) security holders call the company asking basic questions about the transaction, which could easily be addressed in a letter. While large institutional investors and analysts often participate in management conference calls once a deal is announced, most security holders do not participate in these calls. Under proposed Rule 14a-12, management could get essential facts out to a broader category of security holders on a more timely basis.
We agree that the proposed expansion of Rule 14a-12 would eliminate the need for Rule 14a-11 which, in essence, would be subsumed within Rule 14a-12.
You would mandate a minimum time period for disseminating a merger proxy statement, possibly as long as 20 business days before the related shareholders' meeting.
We believe that there should not be a federally mandated solicitation period for mergers and similar proposals. In many circumstances it will probably take 20 business days (or perhaps longer) to solicit sufficient votes to approve a merger or similar transaction since merger-style transactions generally require approval of at least a majority of all outstanding shares (and sometimes a supermajority vote) rather than merely a majority of a quorum. In those instances, a minimum 20-business day solicitation period will be a moot point. Most corporate executives believe that delays between executing an acquisition agreement and closing a transaction are not beneficial to the combining companies from an operational standpoint. Moreover, financing windows can close, or at least become more expensive, even if there is only a one week delay in closing a transaction. Ultimately, delays redound to the disadvantage of investors who may find that financing costs increase (or financing becomes unavailable altogether) or the business to be acquired deteriorates. Therefore, we believe that if proxies representing sufficient votes to approve a merger or similar transaction are received on a timetable that complies with applicable state law, but is less than 20 business days, the solicitation period should not be extended to 20 business days (unless the 20-business day rule set forth in Form S-4 applies because information is incorporated by reference). This should not affect the 20-calendar day requirement under Regulation 14C. Finally, because of the significant technological advances in communications you noted, investors do have access to communications, including merger proxy statements, on an expedited basis through internet web sites. We expect this trend to accelerate and, as a result, many investors will likely have more time, rather than less time, to consider a transaction, even if the solicitation period is less than 20 business days.
You would broaden Rule 14a-2 to permit both written and oral solicitations by any party (e.g., the registrant company, a party opposing management, institutional investors, etc.) to security holders without compliance with the proxy statement disclosure and dissemination requirements. This proposal will be referred to in this letter as the "test the waters proposal."
We believe the test the waters proposal is eminently sound, takes into account current practice and technology, will eliminate significant and unnecessary legal uncertainty and will serve the interests of investors. In 1992, when the Commission granted institutions and others not seeking proxy authority exempt status under the proxy rules, we strongly recommended that any proposal to remove uncertainty as to the definition of "solicitation" with its "chilling effect" should be applicable to all parties, including registrants. In the intervening years, events have increasingly underscored the importance of such action. Shareholder communications are no longer seasonal; large institutional investors and other shareholders require timely communications with registrants; and the markets rely on the availability of information to analysts. Therefore, free communication among registrants, management, directors, affiliates, shareholders and others should be legally encouraged and permitted under the proposed rules.
The test the waters proposal can be implemented within the current framework of the proxy rules, including Rule 14a-2(b)(1), while preserving the current exempt solicitation concept in certain situations. In general, we would allow free communications by all parties, including registrants and their affiliates, without any filings at any time prior to, in the case of business combinations, the first public announcement or, in other cases, the first public announcement or use of a solicitation (including an exempt solicitation) or other publicized activity in connection with a proposed action or election by shareholders (a "proxy contest"). This would permit all parties to test the waters freely prior to the time of announcement of an action or election without any filing requirements. This would be implemented by amending Rule 14a-2(b)(1) as discussed below. After the first public announcement of a business combination or public announcement or use in a proxy contest, Rule 14a-2(b)(1) would continue to apply and allow parties during this exempt solicitation period to continue communications as long as proxy authority is not sought. However, during this period, written communications subject to Rule 14a-2(b)(1) would be required to be filed upon first use. Finally, a person who seeks proxy and voting authority would be subject to the full proxy delivery and filing requirements under the proxy rules.
Since 1992, unaffiliated shareholders who are not seeking proxy authority have a broad exemption from the proxy delivery and filing requirements under Rule 14a-2(b)(1). Inasmuch as the obligation to comply with the proxy rules depends on whether a communication falls within the definition of "solicitation," the 1992 amendments expanded the safe harbor list of communications deemed to be outside that definition to include public statements by a shareholder who is not engaging in a solicitation (other than an exempt solicitation) announcing how the shareholder intends to vote and the reasons for such vote. If a shareholder, who does not seek proxy authority, cannot come within the safe harbor (e.g., the shareholder is not merely stating its position and reasons therefor), that shareholder’s only obligation is to file written statements under Rule 14a-6(g) as an exhibit to a Notice of Exempt Solicitation. We believe that this structure has worked effectively for almost seven years and should be preserved while changes are made to enable all persons, including the registrant, to test the waters. One way to achieve this result is to amend Rule 14a-2(b)(1) so as to eliminate in its entirety the proviso limiting the use of Rule 14a-2(b)(1) and to add a provision clarifying that a solicitation requiring delivery of a proxy or consent solicitation statement will not be deemed to occur until a proxy card or other instrument seeking proxy or voting authority, or written consent, is sent to shareholders. Prior to that time, communications, oral or written, which are preliminary to the actual mailing or delivery of the proxy card, would not constitute a solicitation requiring delivery of a proxy or consent solicitation statement. We would amend Rule 14a-6(g) to require the filing of written material and a Notice of Exempt Solicitation (Rule 14a-103) in connection with an exempt solicitation under Rule 14a-2(b)(1) that is made after the first public announcement of a business combination or proxy contest.
If the test the waters proposal is adopted, Rules 14a-11 and 14a-12 will not be necessary.
Our suggested changes would provide that written materials in connection with an exempt solicitation be filed only in connection with business combinations and proxy contests. The written materials should be filed either under a Notice of Exempt Solicitation (Rule 14a-103) or a comparable and modified form. The filing requirement would commence on first use. The form to be filed with the written statement at the time a solicitation (without seeking proxy authority or consents) commences would contain the following provisions:
· As at present, it would be filed by any person who does not qualify for the safe harbor under Rule 14a-1(l) and who owns more than $5 million of the class of securities.
· Registrants would have the option to use the form or Form 8-K or any other applicable form under the Exchange Act (but the $5 million exemption would not be applicable to them).
· Notice would be required to be sent to the registrant or, in the case of a filing by the registrant, to the other party in a proxy contest.
· Written materials would be filed from the date of first use.
· Excepted from the filing requirement would be written communications where the information (a) is not material, (b) is given in response to a specific inquiry without widespread distribution or (c) has been previously publicly disclosed in material respects. This should effectively make available to the public new material information and would be responsive to concerns that have been expressed as to selective disclosure.
When proxy authority or a consent is requested, the proxy delivery and filing requirements under the proxy rules would be fully applicable and all filings would be made under those rules.
We believe that these changes in the proxy rules will balance the public interest by facilitating test the waters solicitations while enabling security holders to make informed voting or investment decisions after receipt of definitive proxy materials or a prospectus. In the case of business combinations, there is usually at least a 20-day time period, which differs from capital-raising transactions under the Securities Act where decision-making is often required during a short time frame.
We concur in your effort to eliminate distinctions between different kinds of business combinations. Elsewhere in this letter we make further suggestions to achieve that objective. The form of the transaction or the statute under which the materials are filed should not be determinative with respect to free communications. The test the waters solicitation which we have discussed is consistent with the other free communications proposals under the M&A Release.
You asked whether a "cooling-off period" of 20 or 30 days is appropriate between the test the waters solicitation and a request for a proxy card. We believe that if you adopt the test the waters proposal it would be inappropriate to insert a cooling-off period between the solicitation and the mailing of a proxy card. Proxy contests are a two or more party game. Requiring one party to sit on the sidelines could provide the other party (or parties) with an unfair advantage. For example, if a target company tested the waters to see how institutions would vote in an election contest and a dissident filed preliminary proxy materials on day one of the target company’s cooling-off period, the target would be unable to respond for up to one month of the dissident party’s campaign. This could be devastating to the target company’s management and to the ability of security holders to receive the information they need to make an informed decision. Rather than promote free communication, a cooling-off period rule could deter parties from using the test the waters route because of the negative consequences associated with a cooling-off period.
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.
On balance we believe issuers should be able to keep preliminary proxy materials relating to business combinations confidential if they are willing to forego the proposed expanded safe harbor rules permitting early disclosure of information during the period commencing on the date of such confidential filing and ending at such time as proxy materials are made publicly available. There are situations where confidential filing of a merger proxy statement may be of considerable importance. For example, a public company may be acquiring a non-public company in a transaction for which registration is required and which is not material to the public company. The parties may not wish to disclose the transaction until later in the process in order to avoid harm to the target's business or because there are conditions or contingencies yet to be resolved. In this and other cases, there may be difficult disclosure issues or accounting matters to be resolved. The ability to file confidentially, as has long been part of the filing regime, is important in these situations and the parties may be prepared to forego the safe harbor during the period between the time of confidential filing and the time proxy materials are made publicly available. The reasons that led the Commission in 1992 to preserve the option of confidential treatment in these situations remain applicable today, particularly when the parties are willing to forego extensive public disclosure pending making the proxy materials publicly available.
There are additional reasons for maintaining a confidential filing option. For example, there is not a perfect correlation between the information divulged "early on" by companies announcing merger transactions and the information many companies seek to keep confidential in a preliminary proxy statement. To illustrate, it is common for companies to disclose at the time a business combination is announced "initial" pro forma financial statements and projections which demonstrate the synergies of a particular business combination. However, companies generally do not, at "announcement time," provide voluminous "background descriptions" of the transaction or extensive "reasons for the transaction/factors considered by the board." Yet, these sections are a significant part of the proxy statement and often are the subject of the Staff’s comments. We agree with you that confidential treatment makes registrants more comfortable with amending their materials to comply with Staff comments, as the marketplace is not aware of the nature of the changes. If public disclosure had previously been made, the trading markets could have acted on the original information. This heightens the liability concerns of companies. As an example, accounting changes, which frequently occur after a transaction is announced, might affect the trading markets and investor expectations.
If preliminary filings do not retain confidential status, it should be anticipated that there will be an increase in pre-filing conferences with the Staff on complex or uncertain issues.
You asked whether registrants would be at a significant disadvantage if they were required to file all exhibits when they filed their registration statements publicly, or whether they would continue the practice of filing exhibits when available. You also asked whether you should permit the filing of a proxy statement before the wrap-around registration statement, even if the proxy statement would be public. As a practical matter, many of the exhibits that must be filed either do not exist or are not in final form when the registration statement is filed. For example, a business combination may result in a new holding company structure requiring a new charter and by-laws that must be drafted and filed as exhibits. Similarly, employment and credit agreements may still be negotiated after the registration statement is first filed. To require that every exhibit be filed on "day one" would be burdensome, would delay the registration process and would not necessarily provide greater useable information regarding a transaction. Additionally, if confidential treatment of preliminary merger proxy statements is eliminated, registration statements probably should be filed at the same time as such preliminary proxy statements. The reason registration statements are filed subsequent to the preliminary merger proxy statement is precisely because confidential treatment is not afforded to registration statements. If confidential treatment for preliminary merger proxy statements no longer exists, the rationale for separate filings also no longer exists.
Since proxy materials must be filed electronically, you would eliminate the old rules permitting parties to file proxy materials by mailing documents. Definitive proxy materials would be required to be filed no later than the date they are sent or given to security holders. If proxy materials are disseminated on a non-business day, which would include dissemination after the end of the Commission's business hours, filing would be required as soon as practicable on the next business day.
We believe these filing proposals are sensible in view of the electronic filing requirements currently in place. The next business day "as soon as practicable" filing rules are also acceptable. We do not believe that a rigid specific time limit such as 9 a.m. or 12 noon for next day filing is necessary. If, for example, the electronic filing system goes "down," a fixed time limit for filing creates the risk that a party will violate the rule. Parties should be presumed to act in good faith and will likely file promptly the next morning – a fixed time for filing does not seem to be necessary.
You would permit bidders 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 and eliminating the requirement to promptly file a registration statement after public announcement of an exchange offer.
We agree with you that public announcement of an intention to commence a tender offer should not trigger the need to file or disseminate information. The focus should be on when security holders are provided the means to tender their shares. It is in the interests of a target’s security holders to have access to as much timely information as possible. Relaxing the restrictions on pre-commencement communications will allow this access. Shifting the focus of the filing requirement to when security holders are provided the means to tender their shares will allow an overall increase in the amount of information available, while still ensuring that a security holder has all of the information required at the time a decision to tender must be made.
You asked whether the five-day rule provides any benefits that the proposed rule would not provide. The five-day rule places an artificial constraint on communications. We believe that the elimination of the five-day rule is consistent with the Commission’s intention of increasing the free flow of information in business combination transactions which would allow both bidders and targets to put information in the marketplace before any required filings are made. The proposed rule will protect security holders by prohibiting a person from announcing a tender offer without the intent to commence or 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. Without such a rule, it would be possible for a person to make announcements without any intent to follow through, or worse, to make announcements in an effort to confuse or mislead. Any rule should, however, make it clear that it is acceptable for a bidder to have a financing or other condition to the tender offer. Many bona fide offers are made subject to the availability of financing and the satisfaction of other conditions such as regulatory approvals, and such offers should not be discouraged or prohibited.
You asked whether you should require delivery to the target company and any other bidder of the first written communication a bidder makes that sets forth its identity, the identity of the target company, the amount and class of securities sought and the price or range of prices offered. We agree that it is appropriate to require bidders to deliver a copy of such communication directly to these parties. The fact that the communication must be filed with the Commission does not, in our view, reasonably provide adequate notice to the target company and any other bidder. With direct disclosure, the parties will have actual notice of the information, keeping all parties in an equal position.
We do not believe that there is a need for the Commission to mandate the content of communications made in reliance on this safe harbor, other than requiring that such communications advise security holders to read the complete tender offer materials. Because communications that do not set forth certain basic information will, on their face, make very little sense, it seems unnecessary to mandate such content. Once the tender offer has commenced, however, the Commission should continue to require specified information, because at this stage of an offer security holders are being asked to tender their shares and the risk of confusion is greater. Relaxing the rules governing the post-commencement period increases the risk of deceptive practices by bidders by allowing less than full disclosure.
You asked whether there is any reason to treat bidders and targets differently with regard to pre-commencement communications. We believe that pre-commencement communications of bidders and targets should be treated the same. There is no logical reason why they should be treated differently. We do not believe that either the target or bidder has an unfair advantage under the current rules. This should be preserved under any new rules. If bidders are allowed free communication prior to formal commencement of an offer, target companies should be free to respond before filing a formal recommendation. To achieve more complete parity, since bidders’ communications will be required to advise security holders to read the complete offer, targets’ pre-commencement communications should also advise security holders to read the complete recommendation when it becomes available.
You would amend the methods available to bidders to "commence" a tender offer by eliminating long form publication, possibly eliminating dissemination by summary advertisement alone and possibly allowing means other than summary advertisement in conjunction with the use of a stockholder list to disseminate tender offer materials.
We agree with you that long form publication is rarely used. We see no harm, however, in retaining long form publication as a possible method. If a bidder wishes to use this method, we see no reason to prevent the bidder from doing so.
You asked whether you should eliminate the use of summary advertisement alone as a means of commencing a tender offer. We are not aware of any problems or mischief in connection with the use of this method. We believe that dissemination by summary advertisement alone should not be eliminated. If a bidder believes that summary advertisement without the use of a stockholder list will be sufficient to prompt a large number of security holders to request a copy of the tender offer materials, we see no reason to prohibit the bidder from using this material.
We agree that the current requirement that bidders using stockholder lists also publish summary advertisements should be retained. Keeping the requirement serves as an additional means of publicizing tender offer information. This is especially important because the record owner of securities is very often not the beneficial owner. Through use of summary advertisements, bidders can reach beneficial owners who can then request the tender offer materials directly.
While the Internet and other forms of electronic media are growing in popularity and reach, we consider it premature to allow a bidder to use these means alone to disseminate information to the public about the tender offer. Many security holders rely on more traditional sources of information, and these security holders should not be put at a disadvantage. We believe that your goal should be to ensure that as many people as possible are exposed to tender offer disclosures. As such, electronic media should be allowed as a means of dissemination, but only in conjunction with publication in the traditional media.
You would amend Rule 14d-4(b) to permit commencement of a registered exchange offer upon filing of an appropriate registration statement containing pricing information and delivery of a preliminary prospectus. In the case of a going private or roll-up transaction, however, the registration statement would first have to become effective to commence the 20-business day minimum offering period.
We believe that allowing bidders to commence registered exchange offers upon filing a registration statement is a step forward in leveling the playing field between cash tender offers and registered exchange offers. However, this action alone is not sufficient to reduce the timing and regulatory advantage in favor of cash tender offers. The requirement of filing a registration statement in order to begin the 20-business day minimum offering period will perpetuate the regulatory disadvantage for securities exchange offers. In order to truly level the playing field, the Commission should commit to an expedited review procedure which would assure that registered exchange offers could become effective within the 20-business day period or provide immediate effectiveness of registration statements with respect to such offers as discussed below.
We believe that treating issuer self-tenders and Rule 13e-3 transactions differently from transactions with unrelated third parties serves no useful regulatory purpose. We have great concerns about your proposal to continue the existing regulatory bias against Rule 13e-3 transactions. First, it is a mistake to refer to all such transactions as "going private" transactions. Since the transactions in question involve the issuance of securities to the public, the one thing these transactions do not involve is "going private." The scope of Rule 13e-3 includes all transactions involving "affiliates" (assuming a class of the issuer’s equity securities will be eliminated or reduced below one of the specified thresholds). While such transactions may raise sensitive conflict-of-interest issues, we do not believe that transactions within Rule 13e-3, as a class, necessarily involve more difficult disclosure issues (whether relating to conflicts of interest or not) than other transactions. In our view, a regulatory scheme that favors offers from unrelated third parties and prejudices offers from affiliates, even if they involve greater value, does not serve the interests of security holders. State courts have been very effective in dealing with fiduciary abuses in connection with self-dealing transactions, and you will retain very effective means of addressing disclosure issues without the proposed regulatory bias.
We are concerned with a requirement that the registration statement include pricing information in order to commence the 20-business day minimum offer period. It is quite common in a merger or exchange offer for the final exchange ratio or pricing information to be determined based on market conditions during a specified period ending shortly prior to the exchange. Such provisions serve a legitimate purpose in helping to assure that the value of the securities received will, in fact, be that contemplated when the transaction was negotiated or proposed. Consistent with the requirements of existing Rule 14e-1 and proposed Rule 14d-4, you could logically require that an exchange offer remain open for 5 business days after the final determination of pricing terms (unless they amount to a change in price triggering a 10-business day period), but the proposed requirement that such information be determined before the 20-business day minimum tender offer period may begin to run would create a heavy bias against such pricing mechanisms. To avoid this problem, we suggest that language be added to proposed Rule 14d-4(b) specifying that the requirement for pricing information will be satisfied if such terms are to be established based upon a reasonably ascertainable objective standard which is disclosed. The application of "collars" and other pricing provisions should also be disclosed. As examples, we believe that either of the following should be acceptable: (i) a provision that the exchange ratio will be determined by dividing a fixed dollar amount by the average closing prices of the acquirer stock on a national securities exchange during the xxx days ending xxx trading days prior to the termination date of an exchange offer, or (ii) a provision that the interest rate of debt securities would be determined by the financial advisors to the parties at least xxx business days prior to the termination date so that the securities may be expected to trade at par. We suggest that you clarify how the filing fee should be calculated for formula-based pricing.
You asked whether the same timing and competitive concerns apply to issuer exchange offers as they do to third party exchange offers. We believe they do, but with one important difference — the existence of the Section 3(a)(9) exemption from the registration requirements of the Securities Act. As in the case of third party offers, an issuer contemplating a registered exchange offer must allow an additional period of 45 to 75 days, as compared to a cash tender offer. Where timing is important, the regulatory burden can often be avoided by structuring the exchange offer to comply with Section 3(a)(9). However, we do not believe that any purpose is served by putting registered exchange offers at a timing disadvantage to Section 3(a)(9) transactions. Accordingly, we believe the new rules, permitting commencement upon filing of a registration statement, should be made applicable to issuer tenders.
You asked whether the bidder should be required to commence its exchange offer immediately, or within some defined time limit, after filing its registration statement. As we understand it, the only significance of such a requirement is that it would force the distribution of preliminary prospectuses no later than the end of such time period. We do not believe this is necessary because registration statements are immediately available through the EDGAR system.
You also asked whether bidders would continue to communicate with large institutional investors to the exclusion of small retail investors, and whether it is necessary to require dissemination of a prospectus to all holders in those cases where commencement is to be deferred until some date after the filing of the registration statement. Management communications inevitably will be greater with institutional investors than with retail investors. It would be akin to "pushing water uphill" to try to legislate otherwise. The requirement that all written soliciting material be filed with the Commission will be helpful in providing greater access to information for retail investors. However, we believe that the expense of requiring the mailing of preliminary prospectuses would be disproportionate to any advantage achieved in view of the availability of such documents through EDGAR.
You accurately point out that a "level playing field" between cash and securities tender offers cannot be achieved if registration statements are subject to delay beyond the 20-business day tender offer period by reason of the Staff’s review and comment procedures. Except in the case of registrations presenting unusual issues, we believe that the best solution for this, consistent with the proposals being considered for registration statements generally under the Securities Offerings Release, is for the registration statement to become effective on filing, with Staff comments to be dealt with through a post-effective amendment or supplement. Such a procedure would allow the Staff at least 20 business days to complete its review of a registration statement. If there are material deficiencies, the dissemination requirement proposed in Rule 14d-4(d) would normally provide a sufficient means for dealing with the situation. In the very unusual case in which the Staff s review raises material disclosure issues that are not resolved by the termination date of an exchange offer, we believe you can deal with the situation through the commencement of a stop order proceeding or (in all likelihood) a voluntary extension of the exchange offer by the offeror to avoid the commencement of such proceedings.
Most registered exchange offers could be completed on the same 20 business day schedule as a cash tender offer if the Staff review can be accomplished within approximately 10 to 12 business days of filing. In the case of transactions presenting particular complexities or sensitive issues, we believe that most registrants would cooperate with Staff requests for additional time for review. In this connection, we note that you have not found it necessary to amend the proxy rules to extend the 10-day period specified for review of preliminary proxy statements, even without the leverage afforded by the requirement of acceleration or the availability of the automatic bar provided in Section 5(c) of the Securities Act when an examination is commenced pursuant to Section 8 looking to the possible issuance of a stop order.
You said you are considering whether to harmonize the proxy rules with the tender offer rules. In many circumstances, a merger transaction is preferable to an exchange offer. For example, the requirements for a tax-free exchange are less stringent in a merger than in a share exchange. Accordingly, it is highly desirable that your rules not differentiate between the two. We believe your suggestion that procedures in respect of merger proxy statements be harmonized with the tender and exchange offer rules is an excellent one. We know of no reason why security holder risks in mergers would justify or require longer regulatory delay or greater regulatory review than is the case in exchange offers.
One purely practical problem related to the ability of a registrant to solicit proxies before its registration statement is effective. Most of the time spent in any proxy solicitation consists of the giving of voting instructions by beneficial owners to their brokers. If material changes are made to proxy materials after distribution of a preliminary proxy statement, a mechanism must be provided to assure that instructions previously provided are reaffirmed after dissemination of the revised information before they may be acted upon.
You proposed requiring 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.
We support the proposed requirements to be included in Rule 14d-4(d). The exact time periods provided can be debated, but uniform requirements should apply to cash tender offers, exchange offers and (as we noted above) mergers. The time periods proposed have been in effect for some time in the case of cash tender offers and seem to have worked satisfactorily. We know of no compelling reason not to continue to follow them.
You asked whether bidders would be likely to take advantage of the "early commencement" procedure, recognizing that the information provided could require a supplement. A similar procedure is routinely followed in institutional private placements, with information in the private offering memorandum supplemented as required at closing to take account of material developments. There is no apparent reason why a comparable procedure would not be equally desirable in the case of registered exchange offers and mergers involving the issuance of securities.
You also asked whether bidders who use the "early commencement" rule should be required to deliver a final prospectus after there has been dissemination of a preliminary prospectus. We believe that, in most cases, the most effective disclosure of material changes in the prospectus would be a supplement that sets forth a "plain English" description of the additional or changed information provided, as well as the exact text of the changes. Repetition of the entire document would seem to serve no useful purpose; indeed it would detract from the clarity of the new disclosures by burying them in a mass of unnecessary materials.
You propose to exempt transactions involving tender offers commenced under the "early commencement" proposals from Section 5 of the Securities Act during the "waiting period." You have asked whether this is an appropriate use of your exemptive authority.
As stated above, we support your efforts to equalize the timing and regulatory requirements applicable to cash tender offers and securities exchange offers. The proposed amendment is both appropriate and necessary if your purpose is to be accomplished.
You propose to integrate the disclosure items contained in the schedules relating to issuer and third-party tender offers, tender offer recommendations and going private transactions.
We strongly support the proposal to integrate into one set of rules the disclosure items contained in schedules relating to business combination transactions whether (i) they are structured as tender offers (either by the issuer or a third party) or mergers, (ii) the consideration is paid in cash, securities or a combination of cash and securities or (iii) the transaction is a going private transaction. We also strongly support the proposal to satisfy all disclosure requirements under the rules governing proxy solicitations, tender offers, going private transactions and issuances of securities in business combinations with one filing. However, while we support these proposals, as described below, we believe that the changes should be presented in a different format and be somewhat more far-reaching than those suggested by the Release.
Specifically, we propose that the integration of, and reduction in, filing obligations be accomplished by establishing one Form (entitled, perhaps, "Form M-A") and one set of rules governing disclosure obligations (entitled, perhaps, "Regulation M-A"), which would be used for all exchange offers, mergers and other business combinations, however they are structured. The proposed Schedule TO would combine issuer and third party tender offers, tender offer recommendations and going private transactions as well as "some disclosure items for cash merger proxy statements and business combination registration statements." We believe that the new form should include all of the requirements for these disclosure documents.
Form M-A would consist primarily of a cover page, the disclosure document sent to security holders, Part II pages, if applicable, signatures and exhibits, much like a registration statement currently consists of a cover page, the document distributed to the public (the prospectus), Part II pages that are filed but not distributed, signatures and exhibits. Schedules such as Schedule 13E-3, 13E-4 and 14D are currently used simply as cross-reference sheets to a disclosure document and we do not believe that their use is helpful to investors.
The registrant would identify the structure of the transaction on the cover page of Form M-A. The required information would be included in the disclosure document, which would be filed immediately after the cover page much like a prospectus is filed immediately after the cover page of current Securities Act filings. The disclosure document would include the information required by Regulation M-A.
Under our proposal, Regulation M-A would begin with a table modeled after Item 601 of Regulation S-K (which deals with exhibits that are required in both Securities Act and Exchange Act filings). Accordingly, Regulation M-A would begin with a tabular presentation of the information required to be disclosed in the disclosure document for each type of transaction and would have a column for each of the possible transactional structures for business combinations and exchange offers:
Likewise, the introductory table would have a row for each item of required information, such as:
A disclosure document with respect to a transaction would be required to include the information shown to be required in the column relating to the form of transaction used.
Form M-A would provide that any information with respect to a party may be incorporated by reference from its prior filings if the party is eligible to use Form S-3 or, under the Securities Offerings Release proposals, would be a Form B, seasoned Form A or seasoned Form SB-2 company.
Each item, as in Item 601 of Regulation S-K, would then be described in detail following the table. Following the table, there should also be a fuller explanation of which transactions are governed by each column, as well as a list and description of additional disclosure requirements that would be applicable if the particular transaction has a going private effect or is a roll-up transaction.
A tabular presentation with a description of the disclosure requirements for all business combinations, however structured, would have a number of advantages:
The tabular presentation would also facilitate distinguishing between the signature requirements for Securities Act filings and those not involving the Securities Act, such as a cash merger or tender offer. We propose that filings made under the Securities Act should have the signature requirements of Securities Act filings, including signatures of a majority of the board of directors, while other business combination filings would be signed by the filing person.
This form of presentation would also eliminate the current overlap between the requirements of a Rule 13e-3 transaction and a similar transaction that is not a Rule 13e-3 transaction. It would also highlight the additional disclosure required in a Rule 13e-3 transaction, which would make it more likely that any additional information required would be information that is more meaningful in the going private context than it is in the non-going private context. As noted above, we are not convinced that the rules for going private transactions should require any additional information.
We also strongly support your suggestion that one filing satisfy all of the obligations arising under the Securities Act and the Exchange Act, including Rule 13e-3 going private transactions. We believe a single filing would have at least two advantages. First, as the Release suggests, the current practice of filing a Schedule 13E-3, which merely incorporates information that has previously been filed, does not benefit investors; accordingly, eliminating the separate filing would simplify requirements without harming investors. Second, requiring only one filing would eliminate the possibility that there may be a difference in the fee payable depending on whether the filing is made as a registration statement or as a proxy statement followed by a registration statement wrap-around (the latter method often being used in order to obtain confidential treatment on the initial filing). If the filing is made only as a registration statement (which, under Rule 14a-6(j), satisfies the proxy rules as well), a fee is payable only under Rule 457(f). If the disclosure document is filed first as a proxy statement, a fee is payable under Rule 0-11 (which may be offset against the fee due under Rule 457(f) when the document is later filed as a registration statement). Depending on a number of factors, a fee calculated pursuant to Rule 0-11 may be greater than one calculated pursuant to Rule 457(f) and therefore a different fee could be payable if the disclosure document is filed as a proxy statement before being filed as a registration statement.
You proposed several amendments to existing rules and regulations to streamline and improve disclosure.
We support your proposals and respond to your requests for specific comments in this section of our letter.
We support your proposal to require business combination disclosure documents to begin with a short "Plain English" summary term sheet highlighting the most important features of the transaction. We believe that this would be helpful to investors. We also believe that the rules should list the items that normally would be important to security holders in order to give the filer a checklist of items that should be included in the summary. Items appropriate for the term sheet would include:
As discussed above, we propose that the requirements for information to be included in a disclosure document relating to a business combination transaction be set forth in a new Form M-A and Regulation M-A. This proposal would eliminate Item 14.
We support the proposal to clarify that financial statements and other information about the acquiror in a cash merger are necessary only if material to the voting security holders’ evaluation of the transaction.
We support the proposal to reduce the financial statements required for the acquiror under Item 14 from three years to two.
We support the proposal to eliminate the requirement to provide information about the target in a cash merger when the acquiror’s security holders are not voting on the transaction since the target security holders, who are the only security holders making an investment decision, already have information about the company in which they have invested.
We support the proposal to eliminate the requirement to provide information about the target when target security holders are voting on whether to approve a merger with consideration consisting of acquiror securities exempt from Securities Act registration.
We agree that target information should be required where the acquiror’s security holders are voting on the transaction.
We do not believe that the federal securities laws should require that target security holders in mergers be provided financial statements and other information about their own company in order to determine whether to exercise their dissenters’ or appraisal rights under state law. We believe that if the target company is a reporting company, any reasonably relevant information is readily available to the target security holders. If the target company is not a reporting company, the target security holders should be expected to have negotiated the right to receive whatever information they might deem necessary to make such a decision.
We support the proposal that when the acquiror’s security holders are not voting on the acquisition, financial statements of the non-reporting target should be required to be prepared in conformity with GAAP for only the latest fiscal year. We also believe that if the non-reporting target previously provided its security holders with GAAP financial statements for either of the two fiscal years before the latest fiscal year (or both), GAAP financial statements also should be required for those years.
As discussed above, we believe that only one form should be used for any transaction involving an exchange offer, merger or business combination. Thus, there would not be any need for current Form S-4 or proposed Form C since registered offers would be disclosed on a Form M-A.
We agree that since information that is filed with the Commission can be obtained quickly, there is no need for a mandated period between the mailing of the disclosure documents and the vote when incorporation by reference is used. Also, we believe that even absent a federal rule, shareholders will have sufficient time to make an investment decision since state laws generally provide that notice of a shareholder meeting relating to a merger must be given at least 20 calendar days prior to the meeting.
You proposed a new tender offer rule that would permit tenders during a limited period after the initial offer is completed.
For the reasons stated in the Release, we believe that a provision for a subsequent offering period should be included in the revision of the tender offer rules. The subsequent offering period presents no disadvantage to security holders and, if adopted in the form we recommend, would be useful to bidders.
We agree that the subsequent offering period should only be available for an offer for all outstanding shares.
Where the bidder is offering to acquire all outstanding shares, the bidder usually wants the highest possible number of tenders in the initial offering period. The bidder for all outstanding shares is seeking control, usually subject to a minimum tender condition (most often 50%), and generally seeks to obtain the 90% or 95% of the shares necessary for a second-step short-form merger. If the bidder does not receive the minimum tender in the initial offering period, the bidder will be concerned about ending up with a non-control position and uncertainty as to achieving control. If a bidder receives the minimum tender but falls short of the percentage needed to effect a short-form merger, the bidder sometimes extends the offer for a few days to try to achieve that percentage. This can disadvantage security holders who have tendered by delaying the purchase of, and payment for, their shares.
Security holders have an incentive to tender in the initial offering period in order to be paid as soon as possible and, if there is a minimum tender condition, to be sure the minimum is satisfied. The usual incentive to tender in the initial offering period does not apply if security holders believe that there may be a topping bid, or that by not tendering the minimum tender condition would not be met and the bidder would increase the price. The prospect that some security holders would not tender in the initial offering period, knowing that if they are wrong about the minimum tender offer condition being met or a topping bid, they still will be able to tender the next day and receive prompt payment, will deter bidders from providing a subsequent offering period. Furthermore, a subsequent offering period will be unnecessary if the bidder obtains a sufficient number of shares in the initial offering period to effect a short-form merger.
Therefore, the subsequent offering period should be at the bidder’s option without any requirement that the bidder commit to it in advance. A subsequent offering period should be treated for disclosure purposes the same way as an extension of the offer under Rule 14e-1(d), which the bidder is not required to announce before 9 a.m. on the next business day after the scheduled expiration date. The bidder’s right to establish a subsequent offering period, like its right to extend the offer, would be disclosed in the tender offer materials. If the bidder is permitted to announce a subsequent offering period promptly after the completion of its initial offer, both bidders and security holders may enjoy its advantages and neither will suffer any disadvantage.
We believe that the bidder should be required to issue a public announcement at the beginning of the subsequent offering period as to the number of shares tendered in the initial offering period.
We suggest that the subsequent offering period be between five and 10 business days, as determined by the bidder, with the bidder having the option of extending the subsequent offering period up to a total of 20 business days.
While it is unusual that the bidder for all outstanding shares does not intend a second-step merger, we do not see any reason why this should be a condition to using the subsequent offering period.
We believe the subsequent offering period:
You proposed a new instruction to Schedule TO that would state when a bidder’s financial statements are not material.
We support proposed Instruction 2 to Item 10 of Form TO specifying that a bidder’s financial statements are not material, and therefore not required to be disclosed in a tender offer, when (i) only cash is offered, (ii) there is no financing condition, and (iii) either (a) the bidder is an Exchange Act reporting company or (b) the offer is for all outstanding securities of the subject class, with one change: the application of the exception to Exchange Act reporting companies should be limited to those companies for which the required financial statements are available on EDGAR. With this change, the proposed instruction provides a reasonable balance, and takes appropriate account of the wide availability on EDGAR of financial statements of public companies. Foreign private issuers that do not file their Form 20-F electronically would be covered by the exception to the same extent as non-reporting companies, i.e., only in the case of offers for all securities of a subject class.
We would not recommend narrowing the exception in the Instruction further by permitting a non-reporting bidder to omit its financial statements only if it conditions its offer for all shares upon acquiring a controlling interest, or by substituting a requirement that financing be in place in lieu of the absence of a financing condition. Bidders making offers without financing conditions will often defer seeking specific financing arrangements until after the public announcement of the offer, since a broad search for competitive financing terms prior to such an announcement could jeopardize the confidentiality of the planned bid.
With respect to financial statements of bidders who are natural persons, we support the concept set forth in the first sentence of Instruction 4 to Item 10 that, where such financial statements are material, such person’s net worth be disclosed. However, the further instruction requiring "appropriate disclosure" where the bidder’s net worth is derived from material amounts of assets that are not readily marketable or there are material guarantees and contingencies is too vague and, we believe, unlikely to provide benefits to investors that outweigh the potential detriment to persons having to comply with such disclosures.
Where financial statements of a bidder are material, we support the proposed reduction in the number of years covered by such financial statements from three years to two years, which is consistent with the requirements for issuer tender offers and going private transactions. Two years of financial information are useful for comparison purposes, and we would not suggest further reducing the required financial information to one year. We support retaining the ability for bidders to furnish summary financial information instead of full financial statements in the disclosure documents sent to security holders. The proposed change for summary financial information to reference Rule 1-02(bb) of Regulation S-X, however, should not include information with respect to redeemable preferred stock, minority interests and unconsolidated subsidiaries, which are not currently required disclosure in tender offer materials and are generally not useful to investors.
You proposed expanding the "source of funds" disclosure requirement to include the specific sources of financing, the material conditions to such financing and the alternative financing arrangements or plans, if any, in the event the primary financing plans fall through. In the case of tender offers that contain a financing condition, such additional disclosure should improve the ability of investors to assess the likelihood of a bidder’s successful and timely completion of its offer.
However, the proposed additional disclosure is not material in the case of tender offers that have no financing condition. Indeed, the existing disclosure requirement in Item 4(b) of Schedule 14D-1 is unnecessarily broad for offers without financing conditions. Under that Item, bidders expecting to borrow money to pay the tender offer consideration are required to provide a summary of each loan arrangement, including the term, collateral, interest rates and other material terms or conditions. A summary of such terms in a loan agreement is not material information to investors considering whether to sell their shares, particularly in light of your proposal to clarify that the bidder’s financial statements are not material in the case of cash offers without financing conditions (where the bidder is a reporting company or, for offers for all shares, even a non-reporting company).
We support the proposal that cash tender offers that constitute the first part of a two-step cash/stock transaction should include pro forma financial disclosure in tender offers made pursuant to a merger agreement negotiated between the parties. Rather than requiring all of the information that would be included in current Form S-4 or proposed Form C filed when the securities are offered in the second-step, we believe that the pro forma information specified in Item 1010(b) of Regulation M-A should be adequate. Such information includes the pro forma effect on the company’s most recent balance sheet, statement of income, earnings per share, ratio of earnings to fixed charges and book value per share. We do not believe it is practical or meaningful to require pro forma information where the terms of the second step have not been agreed to or where the parties are not cooperating in the preparation of the pro forma financial information.
Rule 13e-1, which was adopted over 30 years ago, prohibits an issuer whose securities are the subject of a third-party tender offer from repurchasing any of its equity securities until information about the issuer’s acquisition is filed and is sent or given to security holders. You propose to update the rule by requiring that such filing be made only after a tender offer is made and rewrite the rule in "plain English."
You noted that issuers have rarely filed statements under Rule 13e-1. We believe the advance disclosure and dissemination requirements under Rule 13e-1 provide an expensive burden to issuers without a corresponding benefit to investors. We recommend that the rule be rescinded, and in its place that Schedule 14D-9 be expanded to include certain information currently required by Rule 13e-1. Item 7 of Schedule 14D-9 should be expanded to require disclosure of the issuer’s acquisitions of, or plans or proposals to acquire, securities of the issuer during the tender offer. If such acquisitions or plans were made, the issuer should be required to make additional disclosures in Schedule 14D-9 of the information required by Items 1006(a) (purpose of the transaction), 1006(b) (use of securities acquired), 1007(a) (source of funds) and 1007(d) (disclosures regarding borrowings) of Regulation M-A. By incorporating the material information required by Rule 13e-1 in the existing Schedule 14D-9, the separate filing fee and printing and mailing expenses of the Schedule 13E-1 would be eliminated. In addition, issuers would retain greater flexibility to make repurchases by replacing the prohibition on issuer repurchases prior to filing and mailing such Schedule by the requirement to disclose the material information in the issuer’s initial Schedule 14D-9 or in an amendment promptly filed after any material changes to the information contained in the initial Schedule 14D-9.
You propose to revise Rule 14d-5 to more closely align it with the 1992 amendments to Rule 14a-7.
We support the proposal to revise Rule 14d-5 to require a company that elects to provide the bidder with a stockholder list instead of mailing the bidder’s materials to provide a non-objecting beneficial owner (NOBO) list it has in its possession or subsequently obtains. This revision is consistent with changes made to the proxy rules in 1992 and would enhance the bidder’s ability to communicate with investors. We believe that tender offer materials should still be furnished to record holders even if bidders also deliver materials to beneficial holders, in order to assure more accurate transmittals of tendered securities, which are required to be made by record holders.
Rule 10b-13 prohibits a person making a tender offer from purchasing or arranging to purchase, directly or indirectly, the subject security (or any security immediately convertible into or exchangeable for such security) other than as part of the offer. You propose to make certain revisions and redesignate the rule as Rule 14e-5.
We believe you should consider terminating the prohibition on purchases by the bidder after the initial offering period expires and permit purchases outside the offer during the subsequent offering period provided the purchase price is not in excess of the offer price. The most common use of the subsequent offering period, with the changes we have recommended above, will be to permit the bidder to acquire a sufficient number of shares to consummate a short-form merger. This benefits both the investor, by accelerating the payment of the offer price (compared to waiting until a long-form merger), and the bidder, by shortening the time period required to acquire 100% control. Permitting the bidder to make purchases outside the offer during the subsequent offering period will facilitate both of these aims, and does not implicate your concerns regarding fraud, deception and manipulation that could arise in connection with such purchases during the initial offering period. Once the initial offering period has been completed, the bidder’s conditions, including any minimum tender, have been satisfied. There would be no benefit to investors from precluding a bidder who elects to provide a subsequent offering period from making purchases at a lower price outside such offer while permitting a bidder who allows the offer to expire to make purchases at any price.
We believe the rule should apply from the time the offer is first publicly announced or otherwise made known to holders of the subject securities, as proposed. Your suggested alternative of applying Rule 14e-5 as soon as the bidder advises some security holders that it intends to conduct a tender offer would be practically unworkable, and would preclude customary stock lock-up arrangements that a bidder enters into immediately before it announces its tender offer that are an essential feature of many transactions. It is important that there be a "bright line" test to measure the time period during which the restrictions under Rule 14e-5 (as well as Rule 14d-10) are applicable. The dangers of an ambiguous rule are evident from the Ninth Circuit’s application of the "best-price rule" under Rule 14d-10 for consideration paid "pursuant to the tender offer" to encompass a transaction that was entered into prior to the announcement of a tender offer and consummated shortly after the purchase of shares in the tender offer. Epstein v. MCA, Inc., 50 F.3d 644 (9th Cir. 1995), reversed as to other issues, 516 U.S. 367 (1996). Compare Lerro v. Quaker Oats Company, et al., 897 F.Supp. 1131, aff'd, 84 F.3d 239 (7th Cir. 1996). We recommend that you emphasize that Rule 14d-10 does not apply to agreements or transactions entered into prior to the public announcement of a tender offer.
You interpreted Rule 10b-13 to cover not only the bidder but also the bidder’s affiliates and the dealer-manager. Rule 14e-5 would codify this interpretation through a definition of "covered person." However, as proposed, "covered person" includes not only the dealer-manager (who is an agent of the bidder) but any "other advisors" and any persons acting in concert with the bidder, its affiliates, the dealer-manager or such other advisors. We believe the definition of "covered person" should be limited to financial advisors to clarify the scope of the prohibition. To the extent that lawyers, accountants, consultants or other advisors act in concert with the bidder or its affiliates, they would still be included in the rule’s prohibitions. We also believe that you should exclude bona-fide market-making activities by dealer-managers and financial advisors so long as such activities are not in connection with the tender offer.
We support the clarification in Rule 14e-5 that options are included within the definition of "related securities" that are subject to restriction, but that the rule does not apply to exercises by the bidder or any other covered person during the tender offer of options acquired prior to the commencement of the tender offer. We think an analogous exception should be provided to permit the purchase of securities during the tender offer pursuant to a purchase contract executed prior to the commencement of the offer at a price below the tender offer price. Such exception would not create the dangers posed by a bidder’s purchases outside the offer.
We also agree with the proposed exceptions provided in Rule 14e-5 for purchases by plans, purchases during odd-lot offers and unsolicited purchases by dealer-managers.
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 support the extension of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 to forward-looking statements issued in connection with tender offers. As in mergers, bidders often make statements regarding expected synergies, restructuring costs and expected dilution. In addition, tender offers often include projections of the target’s future financial performance that were furnished to the bidder. It would be appropriate to provide the same protection for such forward-looking statements as apply to mergers, provided, of course, that such statements are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ significantly from those disclosed.
We appreciate the opportunity to submit comments. We are available to meet with the Commission or the Staff and respond to any questions.
/s/ JOHN M. LIFTIN
JOHN M. LIFTIN, Chair
Committee on Federal Regulation of Securities
/s/ ROBERT TODD LANG
ROBERT TODD LANG, Co-Chair
/s/ BRUCE ALAN MANN
BRUCE ALAN MANN, Co-Chair
Robert Todd Lang
Bruce Alan Mann