Linda L. Rittenhouse
Vice President, Advocacy,
Legislative & Regulatory Affairs
Tel: (804) 963-6828
Fax: (804) 980-9730
June 8, 1999
Jonathan G. Katz, Secretary
U.S. Securities and Exchange Commission
Mail Stop 6-9
450 Fifth Street, N.W.
Washington, D.C. 20549-6009
RE: File No. S7-28-98—Regulation of Takeovers and Security Holder Communications
Dear Mr. Katz:
The Association for Investment Management and Research (AIMR) is pleased to comment on the U.S. Securities and Exchange Commission’s proposed rules regarding the regulation of takeover transactions. The AIMR Advocacy Advisory CommitteeAircraft Carrier Subcommittee (AIMR Committee) provides its comments below.
Summary and Background
The SEC proposal updates and simplifies the rules and regulations applicable to takeover transactions and security holder communications. Three primary objectives are contemplated: 1) increase the early flow of communications to security holders and the securities markets about business combination transactions; 2) reduce the timing advantage of using cash instead of stock in tender offers; and 3) integrate and streamline disclosure requirements and procedures for different types of business combinations.
The AIMR Committee strongly supports the objectives of the Proposal because they promote disclosure and a level playing field among market participants and they reduce the regulatory complexity associated with business combinations, while generally maintaining adequate investor protections. Adequate disclosure gives investors the ability to make informed investment decisions. This is especially important in transactions involving business combinations because such transactions may have a profound effect on an investor’s existing investment. The AIMR Committee does suggest, however, modifications to certain of the proposed rules, as discussed below.
The Securities Exchange Act of 1934 permits a company to suspend its reporting to the SEC if the number of its record holders falls below 300. The AIMR Committee is concerned about the amount of information that is provided to an issuer’s bondholders. Bondholders (like equity shareholders) need to have timely, reliable, and relevant information in order to evaluate companies’ performances and make appropriate investment decisions.
The AIMR Committee believes that the utility of this "300 holder rule" is outweighed by the need for information. Additionally, this rule can impair the liquidity of the debt securities subject to it, because such securities are more difficult to price and trade without public information. An illustration of these concerns is an enterprise, having both common stock and debt issues publicly traded and outstanding, that decides to go private through a leveraged buyout or is acquired by a foreign enterprise that is not required to file under the Exchange Act. In these cases, the enterprise’s common stock is no longer publicly traded and therefore, it is not required to file periodic reports even though debt issues have not been retired or are still publicly traded. Consequently, bondholders’ interests may have been compromised because they are unable to monitor the performance of the enterprise and to anticipate issues that may significantly affect the value and liquidity of their holdings.
The AIMR Committee believes that this rule neither serves the interests of investors nor promotes an efficient capital market. The AIMR Committee, therefore, encourages the SEC to eliminate this exemption and to modify the disclosure rules so that disclosures are based on the needs of investors in general, rather than on which investors are allowed to vote. In this way, both stock and bond investors will have the information they need to make informed investment decisions.
The Proposal would require a bidder to disseminate a prospectus supplement or post-effective amendment regarding material changes to the information contained in a preliminary prospectus used in an early commencement offer. The exchange offer would remain open five business days following dissemination of a supplement containing a material change other than price. The AIMR Committee recommends that the exchange offer period after dissemination of information about material changes remain open for ten business days, in order to provide the market with adequate time to absorb such information. The AIMR Committee believes that lengthening the period to ten business days provides sufficient time for such information to be absorbed by the market, particularly when the company is a relatively small and/orone that is not widely covered by analysts or the media.
Furthermore, some small custodian banks may have difficulty disseminating information into the market within the time frame proposed by the SEC because many banks hold securities in "street name." Lengthening the disclosure period to ten business days should provide small custodian banks with sufficient time to meet their disclosure obligation, even taking into consideration the added complexity of disseminating the information to investors whose securities are held in street name.
The SEC proposes to require targets and acquirors to provide two years of their latest financial statements when financial statements are required in the proxy statement. The AIMR Committee believes that this requirement is cumbersome and unnecessary where shareholders already have financial reports readily available to them. Rather thanthen require inclusion of the full financial statements in the proxy statement, the AIMR Committee believes that the proxy statement should address whether material changes have occurred since the latest financial reports were filed. If no material changes have occurred, then the proxy statement should so state.
Furthermore, to ensure that important financial information is conveyed to shareholders, the AIMR Committee also believes that the proxy statement should incorporate financial statements by reference and provide information on how to obtain financial reports quickly (e.g., by fax, e-mail, or hyperlink). These recommendations facilitate business combination transactions without denying important investment information to shareholders.
The Proposal requires non-reporting foreign target companies, where the acquiring company’s shareholders are not voting on the transaction, to provide a reconciliation with U.S. GAAP, unless a reconciliation is not available or otherwise not obtainable without reasonable cost. The AIMR Committee believes that this rule should be clarified or strengthened to ensure that financial information about the foreign target company is disseminated where it is available and that this requirement cannot be easily skirted. The AIMR Committee strongly believes that shareholders and potential investors need to have this GAAP reconciliation to evaluate properly the transaction and combined enterprise that results from the transaction and to make informed investment decisions. Furthermore, this information will increase the transparency and comparability of data, which will promote more efficient allocation of capital.
Under the Proposal, the SEC would not require non-reporting companies in a business combination transaction to provide a full set of financial statements (including footnote disclosures) in the prospectus. The AIMR Committee suggests, however, that the SEC require non-reporting companies to include the full set of financial statements in the prospectus.
The AIMR Committee believes that it is important to provide shareholders with adequate financial information so that investors can make informed decisions about the impact of the business combination transaction on their investment. Having this detailed information is particularly important because such information is not readily available for non-reporting companies. In addition, the full set of financial statements may contain detailed information in footnotes that otherwise may not appear in the pro forma financial information that is required. Furthermore, the AIMR Committee strongly believes that providing a full set of financial statements would not be an additional burden because the company would have had to prepare the same information for the pro forma statements.
EF. Safe Harbor for Forward Looking Statements
The SEC is considering whether it should extend the current safe harbor for forward looking statements to include forward looking statements made in connection with a tender offer. The AIMR Committee strongly supports extending the safe harbor, so long as the limits of the safe harbor are clearly defined. The AIMR Committee encourages the SEC to clearly define the safe harbor so that business information about concrete items that are used to guide a company’s future growth, (e.g., competitive environment, capital projections, etc.) are permitted, but misleading statements are not. The AIMR Committee considers forward looking information to be a critical component of investment recommendations made by financial analysts and other investment professionals. The voluntary dissemination of such information should be encouraged because the type of information that analysts need is not limited to that which is disclosed in mandatory SEC filings.
AIMR strongly supports the SEC’s proposal to simplify and update the business combination regulations. If adopted, the proposed regulatory changes will facilitate business combinations, while providing investors with adequate information to make informed investment decisions. Please contact Linda Rittenhouseme if you have any questions about the AIMR Committee’s comments on the Proposal or if we can provide additional information.
/s/ Philip Barton, CFA /s/ Linda L. Rittenhouse
Philip Barton, CFA Linda L. Rittenhouse
ChairChair Vice President, Advocacy,
AIMR Aircraft Carrier Subcommittee Legislative & Regulatory Affairs Vice President, AIMR, Advocacy,
AIMR Aircraft Carrier Subcommittee Legislative & Regulatory Affairs