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April 5, 1999
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Mail Stop 6-9
Washington, D.C. 20549
Re: Securities Act Release No. 33-7607; Exchange Act No. 34-40633
Attn:Jonathan G. Katz, Secretary
Ladies and Gentlemen:
This letter is submitted on behalf of The Association of the Bar of the City of New York by the Committee on Securities Regulation and the Committee on Mergers, Acquisitions and Corporate Control Contests (the "Committees") in response to Release Nos. 33-7607 and 34-40633, dated November 3, 1998 (the "Release" or the "M&A Release"), in which the Securities and Exchange Commission (the "Commission") requested comment on its proposals to update and simplify the rules and regulations applicable to takeover, merger and acquisition ("M&A") transactions. Our Committees are composed of lawyers with diverse perspectives on securities issues, including members of law firms, counsel to both corporations and investors, academics and members of the judiciary. A list of our Committee members is attached.
We commend the Commission and the Staff for their efforts to adapt the regulatory regime governing M&A transactions to current realities. Recognition of the need for open and continuous communication upon commencement of a business combination, tender offer or proxy solicitation; attempts to "level the playing field" between cash tender offers and securities exchange offers; and the proposal to integrateand streamline the disclosure requirements for tender offers and mergers are all important improvements to the current system. We support those proposals, and our comments in these areas are intended to suggest ways to make these proposals even more effective.
However, as described in more detail below, we are generally opposed to certain other proposals, most notably the "Test the Waters" proposal and the proposal to eliminate the "five business day rule." We are of the view that these proposals, although interesting attempts to rethink the proxy solicitation and tender offer processes, could, if adopted, give rise to abuses that would outweigh their possible benefits to investors, issuers or other participants in the proxy solicitation and tender offer processes.
Set forth below are our detailed responses to the specific requests for comment contained in the Release. Our responses have been organized to track the headings and subheadings contained in the Release. Where numbers or letters are omitted, we had no comments.
* * *
B.2. Eliminate Restrictions on Pre-filing
Communications
B.3. Waiting Period and Post-Effective Period
Communications
B.4. Alternative Communications Proposals
B.5. Free Communications Under the Securities Act
B.6. Free Communications Under the Proxy Rules
a. Expand Rule 14a-12 Safe Harbor
b. "Test the Waters" Proxy Solicitations
c. Eliminate Confidential Treatment of Merger Proxies
d. Timing of Filings
B.7. Free Communications Under the Tender Offer Rules
a. Disclosure Triggering Commencement
b. Methods to Disseminate an Offer
C. Permit Exchange Offers to Commence on Filing.............
C.1. and C.2. Early Commencement; Dissemination of a
Supplement and Extension of the Offer
C.3. Tenders into an Offer Exempt from Sale Requirements of
the Securities Act
D. Integrate and Streamline the Disclosure Requirements for Tender
Offers and
Mergers................................................
D.1. Subpart 1000 of Regulation S-K ("Regulation M-A") and
Combination of Schedules
D.2. Streamline Disclosure Requirements and Improve
Disclosure
a. "Plain English" Summary Term Sheet
b. Revise Item 14 of Schedule 14A to Clarify
Requirements and Harmonize Cash Merger with Cash
Tender Offer Disclosure
c. Reduce Financial Statements Required for Non-
Reporting Target Companies
d. Registration Statement Form for Business
Combinations
E. Update the Tender Offer Rules............................
E.1. Permit Securities to be Tendered During a "Subsequent
Offering Period" without Withdrawal Rights
E.2. Clarify the Financial Information Required for Bidders
in Cash Tender Offers
a. When the Bidder's Financial Statements Are Required
in Cash Tender Offers
b. Content of Bidder's Financial Statements in Cash
Tender Offers; Financial Statements in Going-
Private Transactions
c. Bidder's Source of Funds
d. Pro Forma Financial Information in Two-Tier
Transactions
E.3. Clarify the Requirement that a Target Report Purchases
of its Own Securities After a Third-Party Tender Offer
is Commenced
E.4. Harmonize the Tender Offer and Proxy Rules Relating to
the Delivery of a Stockholder List and Security
Position Listing
E.5. Revise and Redesignate the Rule Prohibiting Purchases
Outside an Offer
a. Proposed Amendments Redesignating and Clarifying the
Rule
b. and c. Persons and Securities Subject to the Rule;
Excepted Transactions
d. Solicitation of Comments on Proposed Rule 14e-5
E.6. Safe Harbor for Forward-Looking Statements
* * *
Discussion
We strongly support the proposal to establish safe harbors allowing oral and written communications to be made prior to the filing of a registration, proxy or tender offer statement relating to a proposed M&A transaction. The following addresses specific issues related to the "free communications" proposals.
Content Restrictions
We agree with the Commission's view, as expressed in the Release, that there should be no restrictions on the content of pre-filing communications. Any content restrictions contained in the proposed safe harbor would likely be interpreted conservatively and have the practical effect of discouraging the types of disclosure the proposed safe harbor is intended to encourage. In any event, as noted in the Release, all pre-filing communications would be subject to the anti-fraud rules.
Limiting Availability of Safe Harbors to Large/Seasoned Issuers
The policy reasons and practical considerations that underlie the basic proposal to allow "free communications" in the business combination process are equally applicable to smaller or "unseasoned" companies and larger or "seasoned" participants. In particular, in a competitive context, if one bidder - the smaller or unseasoned suitor - is not permitted freely to communicate with investors prior to filing a full-scale disclosure document (e.g., a Form S-4 merger proxy/prospectus or Schedule 14D-1 or 14A) and a second bidder - the larger or "seasoned" suitor - is permitted to make such communication, the second bidder's offer will likely enjoy a significant advantage. Accordingly, we agree with the position taken in the Release that neither the size nor seasoned status of the parties to a transaction should determine the availability of the proposed safe harbor.
Filing of Written Communications
We support the Release's proposed requirement that written communications be filed on the day of first use and thereby be made accessible to all investors simultaneously. Such a filing requirement would be similar to the filing requirement applicable to written communications made in proxy contests.[1] We believe that, as is the case in proxy contests, a same day filing requirement would not have the effect of discouraging written communications. In any event, allowing transaction parties to delay filing written communications is not likely to make such communications more likely.
In addition, we do not believe permitting pre-filing communications will increase the likelihood that investors will sell their shares into the market before a full-scale disclosure document is made public. Rather, as is evident from the existence of a robust arbitrage market for shares of companies that are parties to merger and acquisition transactions, investors routinely sell (and buy) shares prior to the availability of a full disclosure document based on whatever limited information they are able to obtain. Permitting pre-filing communications should allow these investors to make their decision with the benefit of the additional information that will be communicated pre-filing.
Legend Requirement
We support the Release's proposal for a short legend advising investors to read the applicable registration, proxy or tender offer statement and noting the availability of the statement and other filed documents at the Commission's web site and from the company that will be filing the statement.
Oral Communications
We agree with the position of the Release that the "free communications" safe harbor should apply to oral communications. However, we believe it would be impossible, as a practical matter, for parties to keep track of and file notifications with the Commission disclosing all oral communications. For example, a party may have a number of persons responsible for responding to telephone and other inquiries made by investors, the media and financial analysts. A requirement that parties file a notice with the Commission after each such telephone or other contact would be impossible to comply with, and therefore would discourage most oral communications. Accordingly, we do not believe the Commission should institute a notice filing requirement in connection with oral communications.
Applicability of Free Communications Safe Harbor to Advisors
In today's M&A environment, where a participant's financial advisors, public relations advisors, proxy solicitors and other outside parties often play a crucial role in the success of a transaction, it is necessary for such advisors to be able to make communications at the request of their principal without any risk of making an "offer" in violation of Section 5(c) of the Securities Act or a "solicitation" in violation of the proxy rules. Accordingly, the free communications safe harbor should be extended to communications made by an advisor of a transaction party to the extent the advisor's communications are made at the transaction party's request. To the extent such communications on behalf of a transaction party are written, we believe they should be treated like all other written communications by the transaction party and, accordingly, should be required to be filed by the transaction party on the date the communication is first made.
Communications made by advisors without the authorization of the transaction party should not be attributed to the transaction party or subject the transaction party to liability, should be outside the scope of the proposed safe harbor and should not be required to be filed by the transaction party.
Dissemination of Research
Financial analysts play a significant role in interpreting information and facilitating its transmission to investors. In recognition of this role, the Commission has taken a no-action position to the effect that the proxy rules are not applicable to the dissemination of research reports in connection with registered securities transactions by a full-service securities, investment banking and financial advisory firm if the firm prepares and disseminates research reports in accordance with Rules 138 and 139 under the Securities Act. See Merrill Lynch Pierce, Fenner & Smith Incorporated (available October 24, 1997). We propose that the Commission adopt a rule codifying the position taken in Merrill Lynch. Moreover, because there appears to be no policy reason why this no-action position should not also apply to the dissemination of research reports in connection with transactions not involving the issuance of registered securities, we propose that this safe harbor be extended to investment banking firms acting as financial advisors in transactions not involving the issuance of registered securities, and to dealer-managers for tender offers. The general anti-fraud provisions of the Federal securities laws would continue to apply to such reports.
In the Securities Act Reform Release (generally referred to as the "Aircraft Carrier" Release), the Commission proposed a safe harbor for oral and written communications during (i) the period between the filing and effectiveness of a registration statement and (ii) the period after effectiveness of the registration statement. The safe harbor is intended to facilitate free communications between a company and potential investors. In the M&A Release, the Commission has proposed extending this safe harbor to the proxy and tender offer rules. We strongly support this proposal, for the same reasons we support the "free communications" proposal with respect to pre-filing communications: there is no sound reason to provide a safe harbor for pre- filing communications but not for communications after filing, particularly since the Commission proposes requiring written communications made subsequent to the filing of the applicable disclosure document be filed on the day of first use.
We believe prohibiting pre-filing communications after a short initial period following announcement of a transaction or imposing artificial "quiet periods" between pre-filing communications and dissemination of disclosure documents would prevent continuous and accurate disclosure regarding a transaction and would be inconsistent with the real-time nature of investors' decisionmaking process. Moreover, such restrictions would limit management's ability to provide necessary disclosure in the event of market, industry or other changes or to address investor concerns raised during a restricted period. Finally, a requirement that parties wait a prescribed 15, 30 or 45 day period between announcing a transaction and filing the applicable registration, proxy or tender offer statement would cause parties to bear market, industry and transaction risks unnecessarily for a significant period.
We support proposed Securities Act Rule 166(b), which would permit free communications by an offeror in connection with any registration statement relating to a business combination. We believe, however, that it should apply not only to offerors but also to other parties to a transaction, as well as to advisors under the circumstances indicated in our comments under "Applicability of Free Communications Safe Harbor to Advisors" at page 5 of this letter.
Deeming Pre-Filing Communications to be Prospectus Supplements
We agree with the position expressed in the Release that subjecting pre-filing communications to Section 12(a)(2) (as opposed to Section 11) liability would adequately protect investors and would increase issuers' comfort in making such communications. Providing that written communications be deemed incorporated into a registration statement and subjected to a strict liability standard under Section 11 would likely discourage written communications and increase the likelihood that issuers' disclosures will be made only orally. Treating communications in a proxy contest relating to securities offered in a business combination transaction (and rescinding Rule 145(b)(2), which provides that written communications made pursuant to Rule 14a-12 are not deemed to be "offers") so as to invoke Section 12(a)(2) liability should not chill such communications.
At the same time, we urge the Commission to note publicly, in the interests of clarity and certainty, that all forward-looking statements contained in oral or written pre-filing and post-filing communications will be subject to the specific liability standards set forth in the Private Securities Litigation Reform Act of 1995, if the requirements of Section 102 of the Act are complied with.
The Commission questions whether it is necessary to condition the availability of the Securities Act safe harbor for "pre-filing" communications on the timely filing of such communications, as proposed. In our view, such a limitation on the safe harbor is unwarranted. The Commission should find another means of compelling timely filing.
a. Expand Rule 14a-12 Safe Harbor
Broadening Rule 14a-12 Safe Harbor to Apply to All Solicitations
We support the proposal to expand Rule 14a-12 to cover all types of proxy contests and all parties. We also agree that retaining current safe harbor conditions in Rule 14a-12 such as participant disclosure and filing of communications will help assure that both management and security holders can remain adequately informed as to what solicitations are taking place and the facts and circumstances underlying those solicitations.
With respect to participant disclosure, however, we would suggest that proposed Rule 14a-12(a)(2)(i) be modified to provide for more abbreviated disclosure than the current rule requires. Participant list information has become lengthy, fineprint boilerplate inconsistent with the Commission's plain English initiative and rarely read by security holders. In addition, the disclosure currently required is costly to communicate, particularly in a newspaper or television advertisement, and virtually impossible to communicate in a radio advertisement. Accordingly, we would suggest that proposed Rule 14a-12(a)(i) require simply a boldface legend advising 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 the soliciting party or from the Commission. This abbreviated disclosure would accomplish the Commission's disclosure goals at least as effectively as the current boilerplate disclosure and in a more cost-effective manner.
The Commission has asked for comment as to whether the requirement of proposed Rule 14a-12 to deliver the proxy statement "at the earliest practicable date" would be unduly burdensome under various circumstances. The Release's questions on this matter seem to indicate that the Commission envisions a literal interpretation of the phrase "at the earliest practicable date" under the revised rules that is inconsistent with the current application of that concept under the existing rules and with practices permitted by the Commission over the years. The requirement of current Rules 14a-11 and 14a-12 that the proxy statement be delivered "at the earliest practicable date" is commonly interpreted to mean that the party relying on these rules must have a present intent, at the time it is soliciting, to deliver a proxy statement and proxy card prior to the applicable stockholder meeting. As a result, if the stockholder meeting to which a solicitation under Rule 14a-11 or 14a-12 relates is not scheduled to occur for a number of months, the proxy statement itself may be sent long after the initial solicitation. In addition, under the current application of Rules 14a-11 and 14a-12, so long as the soliciting party has a present intention at the time of the solicitation to send the proxy statement and proxy card to security holders, if that party's intentions change, it is not required to send the proxy statement simply to comply with the literal terms of the rule. The following examples taken from recent transactions are illustrative:
(1) From August through November of 1998, AlliedSignal Inc.
relied on Rule 14a-11 to solicit consents to elect its nominees to
AMP Incorporated's Board of Directors. However, after AMP executed a
definitive merger agreement with Tyco International Ltd.,
AlliedSignal terminated its consent solicitation and never delivered
proxy materials to AMP's stockholders.
(2) In February 1997, H.F. Amhanson & Company announced an
unsolicited stock-for-stock acquisition proposal for Great Western
Financial Corporation. Both Amhanson and Great Western sent
communications to Great Western security holders pursuant to Rules
14a-11 and 14a-12 months in advance of Great Western's annual
stockholder meeting. Subsequently, Great Western and Washington
Mutual, Inc. signed a merger agreement and ultimately filed a
registration statement on Form S-4. Amhanson communicated its
opposition to that merger in reliance on Rule 14a-12, yet it never
filed or distributed to Great Western stockholders a proxy statement
in connection with its solicitation against the Great
Western/Washington Mutual merger.
Assuming that by retaining the requirement to deliver a proxy statement "at the earliest practicable date," the Commission also intends to retain the customary and flexible interpretation of that requirement described above (i.e., that the soliciting party have, at the time of its communication, a then-current intention to send a definitive proxy statement with respect to the stockholder meeting at issue), we do not believe that the proxy delivery requirement is unduly burdensome. We believe, therefore, that if management desired to communicate under Rule 14a-12 about a merger transaction under consideration, it would be free to do so, provided that it had a then-current intention to send a definitive proxy statement and proxy card in the future if and when a stockholder meeting would be called to consider the transaction. As to the use of Rule 14a-12 as a means to "road-test" a management proposal such as an executive compensation proposal with large security holders, while we believe that proposed Rule 14a-12 might be a useful safe harbor, we do not consider this type of activity to be prohibited under the current rules. In the ordinary course of their investor communications, managements seek the views of investors on a variety of matters, including potential future plans. We do not believe that such communications have been, or should be, viewed as solicitations.
We agree with the Commission that the expansion of Rule 14a-12 would have the intended effect of permitting freer communications between management and security holders and enhancing the timing and quality of that information. The proposed rule will permit management to communicate important facts promptly, rather than being forced to wait for an opposition group to materialize and send out its mailings. In a cash merger situation, currently there is often a delay of up to two months from the signing of the merger agreement to the mailing of the related proxy statement. During that period, investors, particularly small investors, often ask basic questions about the transaction that could be efficiently answered in a letter or other written communication. While some large institutional investors or analysts may have the opportunity to ask questions during a post-announcement conference call, most security holders do not participate in these calls. Proposed Rule 14a-12 would enable management to send a communication to all security holders designed to provide essential facts and answer these basic questions in advance of the proxy statement mailing, thereby providing information to a broader set of security holders and on a more timely basis than under the current rules.
We agree that the proposed expansion of Rule 14a-12 would eliminate the need for Rule 14a-11.
Federally Mandated Minimum Proxy Solicitation Period
We strongly oppose a federally mandated minimum solicitation period for mergers and similar proposals. As a practical matter it will generally take at least 20 business days to solicit sufficient votes to approve such transactions, and therefore, in most cases, the 20-day minimum would have no effect.
In those cases in which solicitation could be completed more quickly, we believe that the operational and other risks of delay would outweigh any potential benefit of a longer solicitation period. Managements involved in these transactions generally find the period between execution of an acquisition agreement and closing of the transaction to be difficult from an operational standpoint, posing the risk to investors that the business being acquired will deteriorate. In addition, delaying a transaction can make financing more expensive or difficult, a risk that also is ultimately borne by investors in the combined company.
We believe, therefore, that if proxies representing sufficient votes to approve a merger or similar transaction are received on a timetable that complies with requisite state law, but is less than 20 business days, the solicitation period should not be extended by Federal rule to a 20 business day minimum. Minimum notice (voting) periods have historically been a matter of state law, and we urge the Commission not to establish a new regulatory allocation of responsibility in this regard.
Lastly, we note that technological advances, including Internet posting of disclosure documents, permit investors to obtain prompt access to communications, including merger proxy statements and the documents incorporated by reference. We expect this trend to continue and accelerate, affording investors more time to consider the merits of a proposed transaction even in a solicitation period of less than 20 business days. (See also our comment under "Registration Statement Form for Business Combinations" at page 29.)
b. "Test the Waters" Proxy Solicitations
We believe that in light of the proposed amendments to Rule 14a-12, the proposed "Test the Waters" proposal is unnecessary and contrary to the Commission's goals of increased communication. By failing to require that solicitations be filed, the proposal runs contrary to the goal of "open communications" fostered in the other proposals in the Release. In addition, we believe the "Test the Waters" proposal would permit parties to conduct unregulated and secret solicitations that may not be discovered by other interested parties until it is too late for those parties to present an effective response. In order to ensure a process that is fair to all parties involved, and that there is an appropriate flow of information to the trading markets and investors generally, we believe parties should be required to conduct their solicitations on the public record, by filing their written communications and participants' lists. In our view, the expansions to Rule 14a-12 discussed in Section II.B.6.a above are a more appropriate means of allowing broader communications by interested parties, while still informing all interested parties and security holders of the nature of solicitations and the parties conducting those solicitations.
While we oppose the "Test the Waters" proposal, we would support an alternative modification to Rule 14a-2(b)(2) to further level the playing field for all interested parties. We suggest that the 10-person solicitation permitted in that rule be expanded to permit all parties, including registrants, to make those solicitations. In light of the goals of the Release to provide an open communications process that is fair to all parties, the exclusion of registrants from that provision is unjustified.
We agree that if the Commission adopts the "Test the Waters" proposal (which we oppose for the reasons stated above), Rules 14a-11 and 14a-12 could be eliminated. Alternatively, if the Commission adopts the expanded version of Rule 14a-12 discussed in II.B.6.a above (which we support for the reasons set forth in that section), then, as noted above, Rule 14a-11 could be eliminated.
The Commission has also asked about the advisability of amending Rule 14a- 12(b)(1) to eliminate the exceptions set forth therein so that the Rule could be used by a registrant company and interested parties. Such a revision would create the same potential for stealth solicitations noted above and should not be adopted.
In response to the Commission's request for comment as to whether written communications made under the "Test the Waters" proposal should be filed in whole or simply on a notice basis, for the reasons stated above, we believe that the communications themselves should be filed. We would note, however, that if such a filing requirement were included in the "Test the Waters" provision, the provision would be indistinguishable from proposed Rule 14a-12.
The Commission has also solicited comment regarding whether the "Test the Waters" proposal as currently proposed, without a filing requirement, should be unavailable for business combination communications. There are a variety of matters other than business combinations that raise concerns of fundamental importance to a company and its investors. For example, the outcome of a contested election could have an immediate impact on a company's strategy and operations. Therefore, we see no reason to isolate business combination transactions as the only context in which filing of written communications should be required, and would urge that all written communications be filed pursuant to proposed Rule 14a-12.
The Commission has asked whether the current requirements of Rules 14a-11 and 14a-12 to follow up communications with a proxy statement are preferable to the "Test the Waters" proposal. As discussed above, in light of the customary interpretation of Rule 14a-12 that requires a soliciting party to have a present intention to deliver a proxy statement in the future but does not impose a particular deadline for that delivery (see the AMP/AlliedSignal and Amhanson/Great Western/Washington Mutual examples above), we believe that the current system more effectively promotes open and fair communications while preventing the potential abuses in "Test the Waters" solicitations.
The Commission has solicited comment regarding the advisability of a mandated cooling-off period between a "Test the Waters" solicitation and a request for proxy card. We believe that such a proposal could unfairly advantage one party over another in a contested situation. For example, if a target company tested the waters to see how institutions would vote in an election contest, an opponent of the target's candidates could file its preliminary proxy materials at the beginning of the mandated cooling-off period, thereby assuring itself several weeks of uncontested campaigning. The potentially devastating impact of such a disparity might well deter many participants from using the "Test the Waters" process in the first instance.
For the various reasons stated above, we believe that, rather than adopt the "Test the Waters" proposal, the Commission should rely on revised Rules 14a-2 and 14a-12 to promote free and open communications in the proxy arena.
c. Eliminate Confidential Treatment of Merger Proxies
We do not agree that the expanded safe harbors for early disclosures should lead the Commission to eliminate confidential treatment of preliminary proxy materials for business combinations.
We note that the information communicated by companies soon after the announcement of a transaction is generally quite different from the information for which companies often seek confidential treatment. For example, although it is common for companies to disclose, at the time a business combination is first announced, a term sheet-type summary of the transaction - often accompanied by estimates of the synergies of the business combination and limited pro forma combined financial data, such as accretion/dilution estimates - such disclosure is not nearly as detailed as the pro forma financial information contained in the proxy statement. Moreover, companies at "announcement time" generally do not provide voluminous "background descriptions" of the transaction, extensive "reasons for the transaction/factors considered by the board" or full-scale pro forma financial statements. Yet these sections, among others, form a significant portion of the proxy statement and often elicit extensive Staff comments.
As the Commission has recognized, 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, especially in the context of a business combination, the trading markets could act on the original information (which by hypothesis did not meet the Staff view of appropriate disclosure), which heightens the liability concerns of companies.
In light of these considerations, we would urge the Commission to withdraw its proposal to require preliminary proxy statements to become publicly available upon first filing. As discussed in our comments under "Subpart 1000 of Regulation S-K ("Regulation M-A") and Combination of Schedules" at page 24, we propose revisions pursuant to which one filing would satisfy all of the obligations of an acquiror arising under the Securities Act and the Exchange Act. If confidential treatment for merger proxy statements is retained, the revisions to the rules should permit this "one-stop" filing to be made confidentially.
The Commission has also 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 the Commission should continue the practice of requiring filing of exhibits when available. As a practical matter, many of the required exhibits which must ultimately be filed either do not exist or are not in finalized form when the proxy or 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 be in the process of negotiation when the proxy or registration statement is first filed. To require that every exhibit be filed on "day one" would be burdensome, delay the filing and review process (and, consequently, consummation of the transaction to the potential detriment of companies and security holders) and would not necessarily provide greater usable information regarding a transaction.
d. Timing of Filings
We believe that the Commission's filing proposals are appropriate 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 specific time limit (e.g., 9 am or 12 noon) for next day filing is necessary. Since parties should be presumed to act in good faith, they will likely file promptly the next morning, absent unforeseen delaying circumstances. A fixed time limit for filing also creates the risk that a party will violate the rule, if, for example, the electronic filing system goes "down."
a. Disclosure Triggering Commencement
Proposal to Eliminate the Five Business Day Rule
Our Committees found this proposal to be perhaps the most controversial. On balance, most members who participated in the drafting of this letter concluded that the initial rationales for the five business day rule continue to hold true for unsolicited cash takeover bids. First, the five business day rule, by fully occupying the regulatory field for hostile cash bids, assists in preempting "first generation" state takeover laws that intentionally impose lengthy delays on the bidder. Second, the rule prevents putative bidders, who may not have a sincere intention or ability to commence an actual hostile cash offer, from triggering prematurely market mechanisms, such as arbitrage activity. Threatened hostile cash bids historically were intended to and did cause a significant number of security holders to make investment decisions without complete information about the offer, leading to a change in security holders from those prioritizing long-term objectives to those favoring short- term gains.
Although the new safe harbor for pre-filing communications will probably result in the availability of more information, such information is likely to be limited to information intended to "sell" the market on the attractiveness of the transaction from the viewpoint of the acquiror. The safe harbor is unlikely to result in security holders receiving the mix of information required by Schedule 14D-1 or 13E-3. We do not believe that the proposed obligation to file and disseminate information when security holders are first solicited to tender adequately addresses the concerns raised by elimination of the five business day rule. By the time tenders are first solicited, significant market activity is likely to have taken place.
Many Committee members believe that the ability to "test the waters" by making an announcement of an unsolicited tender and waiting to see what happens may have a more powerful effect on the market, in terms of putting a company in play, than a "bear hug" letter that mentions only a negotiated deal. This is particularly the case for proposed acquirors which are not "blue chip" companies, since there is a question whether these bidders will actually proceed on a hostile basis, or have the wherewithal (psychological or economic) to do so. Second, elimination of the five business day rule would allow a "test bid" with very little up-front cost to the proposed hostile bidder, thus possibly making such announcements a more attractive strategy for marginal bidders, or those interested solely in putting a company in play.
Proposed Rule 14e-8, in our view, does not provide the same protection as the five business day rule in the context of announcements of hostile tenders without the intent or ability to follow through. If a third party comes in, or the target company engages in a transaction, in response to a proposed hostile offer, and the proposed offer is never commenced, it will be difficult, if not impossible, to determine the intent of the proposed bidder, even assuming there is a party left to litigate the issue. A party which simply intended to put the company into play or otherwise obtain short-term benefits from its investment will have accomplished its goal, and the resulting transaction could not be undone even if such party were later found to have violated Rule 14e-8.
Conversely, Rule 14e-8 as proposed may provide grounds for frivolous litigation by targets. For example, several law firms have already publicly commented that the rule's provision as to no "reasonable belief that the person will have the means to purchase the securities sought" will likely create a new fertile ground for target lawsuits in hostile takeovers, as discussed below.
On the other hand, there was a strong consensus in our Committees that the five business day rule is less important, and probably is not needed, in negotiated transactions, where the target company's board, in approving the transaction, has the ability and responsibility to assess the acquiror's ability to complete the acquisition and can bargain for prompt commencement of the offer as part of the negotiated agreement. In these situations, the requirement to commence the offer within five business days of announcement of the agreement has often put undue time pressure on the participants with little, if any, value to security holders.
Based on these considerations, we suggest that the Commission consider retaining the five business day rule but provide an exemption from the rule for any tender offer which, at initial announcement, is either part of a negotiated agreement with the target or recommended by the target's board. We note that such an exemption would not "tilt the balance" between negotiated and unsolicited bids, since the hostile bidder is in control of the timing of an announcement that would trigger the rule.
Proposed Rule 14e-8
With respect to proposed Rule 14e-8, we submit as an initial matter that it will be unnecessary if the Commission, as we have suggested, retains its current rules forcing prompt commencement of a hostile tender offer after it is announced. In our view, the current rules provide target security holders adequate protection against hostile "test the waters" tender offer announcements. With respect to negotiated transactions, proposed Rule 14e-8 is unnecessary for the reasons we discussed above in the context of the five business day rule: a target board can assess an offeror's capacity to consummate the offer and can negotiate for prompt commencement.
We have concerns about proposed Rule 14e-8, however, independent of its utility if the five business day rule is retained for hostile offers. As stated above, proposed Rule 14e-8 may provide targets with grounds for litigation, due to problems of interpretation, that would not necessarily serve as any protection to security holders. For example:
*Could the phrase "without intent to commence and complete the offer" be triggered by an offeror who required certain approvals but was unwilling to take all steps necessary to get them (such as an acquiror who might be required to agree to divest certain operations in order to avoid antitrust issues, but was not willing to make whatever divestiture was demanded by the Department of Justice or the Federal Trade Commission)?
*What about an offeror whose conditions include the inapplicability of a state takeover statute, if the offeror has no rational grounds to attack the statute, or is unwilling to expend the resources to exhaust all appeals, and the statute does not provide (as does Section 203 of the Delaware General Corporation Law) for an exemption upon receipt of a specified number of tendered shares, so that an exemption is completely within the control of the target's board?
*What is required for a proposed bidder to have "a reasonable belief that [it] will have the means to purchase the securities sought," particularly in offers subject to a financing condition?
Since such litigation will occur absent guidelines from the Commission, we believe that if the Commission adopts Rule 14e-8, it should set forth guidelines as to how offers would meet the rule's standard. We note that the Commission, in footnote 33 to Release Nos. 34-17120; 33-6239 (September 4, 1980) adopting Rule 14e-3, set forth events which it considered to be "substantial steps" to commence a tender offer. We would suggest, at a minimum, that the release adopting Rule 14e-8 state that the rule is not violated by the inclusion of any financing condition unless the offeror knows that no financing on terms acceptable to it will be available, nor by any condition with respect to regulatory approval or elimination of anti-takeover devices (rights plans, state statutes or charter or by-law provisions).
Delivery of First Written Communication
We concur with the Commission's proposal to require delivery of the first written communication to the target and any other bidder setting forth the offeror's and the target company's identity, the amount and class of securities sought in the proposed offer and the price or range of prices offered (proposed revised Rule 14d-2(b)(2)). However, we would suggest that the proposed rule be further revised (along with current Rule 14d-3(a)(2), which requires delivery of tender offer statements and additional tender offer materials) to eliminate the requirement that materials be hand delivered, and instead to require either hand delivery or facsimile transmission of only a brief notice of filing of such documents with the Commission, containing only the identities of bidder and target, amount and class of securities and price or range of prices.
Given companies' access to EDGAR filings, we believe that hand delivery of complete filings (particularly to companies headquartered outside of major metropolitan areas) represents an unnecessary timing burden for bidders without providing any meaningful benefit to target companies or competing bidders. We do believe, however, that a filing under EDGAR, in and of itself, may not provide timely notice, and that faxed or hand-delivered notice of the existence of a filing to targets and other bidders would assure such notice without being burdensome or costly to bidders.
Legend
As stated above, we concur with the requirement in proposed Rules 13e-4(c) and 14d-2(b)(2) that each communication made in reliance on the safe harbor advise security holders to read the complete tender offer material when available.
Additional Tender Offer Materials
We support retention of the requirement under Rule 14d-6(c) (proposed to be redesignated Rule 14d-6(b)) that basic information about the identity of the bidder and subject company, the form and amount of consideration and the expiration date of the offer be included in "additional tender offer materials."
Target Communications
We do not see any reason to treat targets differently from bidders, and thus support a requirement that a target's communications be required to contain a statement advising security holders to read the complete recommendation, when available.
We note that the proposed revision to Rule 14d-9 to deal with the "free communications" safe harbor for targets provides that a communication with respect to a tender offer will not be deemed to constitute a recommendation or solicitation if the communication is filed as required and the tender offer has not commenced under Rule 14d-2. Under the rule as written, however, a target could unwittingly violate the safe harbor by disseminating a communication on the day on which, but prior to the time at which, the acquiror disseminates its offer. Given that a tender offer is deemed to commence at 12:01 a.m. on the day an acquiror disseminates its offer, the target would be deemed to have disseminated such communication after the tender offer had commenced and thereby would unwittingly not obtain the benefit of the safe harbor. We would therefore suggest that the rule exempt communications prior to the target's receipt of notice that a tender offer statement has been filed. Alternatively, the rule could provide that communications made on the day on which the tender offer is commenced will obtain the benefit of the safe harbor unless the communication is made in response to the tender offer filing.
b. Methods to Disseminate an Offer
In our experience, tender offers made as part of negotiated acquisitions are generally commenced by summary advertisement in combination with a mailing to record holders and the provision of sufficient additional copies to nominee holders for transmission to beneficial owners of the subject securities. Hostile offers are generally commenced by summary advertisement, followed by delivery to the "street" of materials and mailing to record holders. Such mailing is either pursuant to stockholder lists and related materials obtained through a request for such information under applicable state law or under Rule 14d-5, depending upon which is strategically better. Bidders take into consideration both the provisions of applicable state law (which may, in certain states, allow delays by targets) and the fact that targets generally elect under Rule 14d-5 to mail rather than supply lists and (absent the proposed expansion of the rule) are not required, unlike under Delaware law, to provide information available to the target with respect to beneficial owners.
Based on the above, we do not believe commencement by summary advertisement alone should be eliminated, since such elimination would create timing and other burdens for bidders in hostile tender offers, the usual situation where such form of dissemination is used. In hostile offers, elimination of this commencement mechanism would require the bidder to "tip its hand" prior to commencement or provide for a longer offer period (because actual commencement would not occur under the rule until several days after filing and summary advertisement, when the offer was mailed). In addition, if a bidder believes that the expenses demanded by a target company for the mailing of a bidder's offer to purchase are excessive, it would be forced either to incur the expense or delay the commencement of its offer while attempting to obtain court-ordered relief. Even in certain negotiated transactions, where events have proceeded rapidly, the time required to generate stockholder lists and related materials could delay commencement of an offer.
Given wide access to EDGAR, as well as the desire of most bidders to get materials into the hands of record and beneficial owners, we do not believe security holders are disadvantaged by the current rule allowing commencement by summary advertisement alone. For the same reasons, we do not believe the stockholder list requirement should be expanded to require mailing of amendments disclosing material changes. The comparison to registered offerings and proxy solicitations is inapt, in that in both such cases the offeror or person soliciting proxies has additional time to procure the stockholder list under state law.
Requiring summary publication in addition to the use of stockholder lists does publicize tender offer information while it is in the process of being mailed, and may reach beneficial owners who otherwise may suffer delays in receiving materials from their nominees.
Although long-form publication is rarely if ever used, we see no particular reason to eliminate it as a means of commencement and dissemination.
Although we believe use of the Internet for dissemination of information will continue to increase, we do not believe at the present time that there are any electronic sources of information as commonly available and widely followed both by those within the financial community and by investors as newspapers of general circulation, and we therefore do not believe that any electronic form of dissemination should be accepted in lieu of the current alternatives.
C.1. and C.2.Early Commencement; Dissemination of a
Supplement and
Extension of the Offer
For the reasons stated in the Release, we believe that reducing the regulatory disincentives to offering securities as consideration in a tender offer would be useful to bidders and would not create any disadvantage to security holders. The Commission's proposal for optional commencement of an exchange offer upon the filing of a registration statement would significantly reduce the timing disadvantage of an exchange offer, particularly if the Commission were to commit to an expedited review and comment process. However, we believe that without this commitment by the Commission and without the provision of adequate resources to the Staff to fulfill that commitment, it is unlikely that the goal of eliminating or substantially reducing the existing disparity between stock and cash offers will be achieved.
Putting Cash and Stock Tender Offers on an Equal Footing
In both "friendly" and "hostile" tender offer contexts, the current regulatory scheme often is a significant factor in a bidder's determination to offer cash consideration. Bidders seeking control generally desire to complete a business combination transaction quickly in order to (i) reduce the risk that a competing bidder will emerge or that favorable market conditions will change, (ii) timely capture the synergy and other benefits of the business combination and (iii) minimize the potential disruption to the businesses and organizations of the parties following public announcement of a transaction. A cash tender offer provides the fastest timetable for gaining control, since it can be accomplished in as little as 20 business days. Where a bid is "hostile," this timing advantage is a significant consideration, although the widespread adoption of poison pill rights plans over the last 15 years effectively delays the ability of a hostile bidder to acquire control well beyond such 20 business day period. Where a transaction is "friendly," benefits to be gained by quickly obtaining majority control can be an overriding consideration.
We strongly support the Commission's goal of placing stock exchange offers on a more even footing with cash tender offers. However, because the Securities Act requires an effective registration statement before completion of a stock exchange offer, we believe that permitting early commencement without also significantly reducing the minimum time necessary to complete a stock exchange offer would not fully realize the objectives set forth in the Release. Shortening the Commission review process for exchange offer registration statements would significantly reduce the minimum time necessary to complete the offer, and, we believe, would help fully to achieve the objective of putting cash and stock tender offers on an equal footing. Accordingly, we suggest the Commission publicly announce a goal of expediting and completing the Staff's review of exchange offer registration statements within 20 business days.
We recognize that expedited review would increase the burden placed on the Staff's resources. We note, however, that the Staff committed to, and achieved, a 10 calendar day comment period in connection with its recent "plain English" initiative pilot program. Furthermore, as discussed below, business combination transactions structured as exchange offers are relatively uncommon compared to mergers due to factors such as tax treatment and stock exchange rules. Therefore, the increased burden on the Commission review process should not be too great. Requiring that the preliminary prospectus contain all material information,[2] as well as requiring dissemination of a supplement to disclose any material changes (and, if required, extension of the offer period), as proposed, would eliminate any incentive on the part of offerors to take unfair advantage of an expedited Staff review process, as well as continue to ensure that security holders receive timely information on which to base an informed investment decision.
We believe that expedited review should be available even if a bidder chooses not to commence its exchange offer immediately upon filing of the registration statement. Allowing expedited review for all exchange offers, whether or not commenced upon filing, would provide the bidder significant flexibility in balancing the competing business objectives of speed and expense minimization. In order to avoid the expense of disseminating both the prospectus included in the registration statement and a prospectus supplement reflecting changes in response to Commission comments, a bidder might choose to delay commencement until the Commission review is completed or at least until it has received and responded to the Staff's first round of comments. Reducing the initial review period for exchange offers to 20 business days would still reduce the timetable for such bidders to complete the exchange offer by approximately 20- 40 days relative to the current practice. A bidder for whom speed is of paramount importance could choose to commence immediately and bear the risk of the additional expense and, if no supplement is required, could close its exchange offer in 20 business days.
As indicated above, we agree with the Release that a bidder should not be required to commence its exchange offer immediately upon filing or to disseminate a prospectus to all security holders upon filing. Any such requirement could create additional expense for the bidder without providing significant benefits to investors. The proposed requirement of prospectus dissemination should insure that security holders will receive full and timely disclosure prior to the deadline for making their decisions to tender or withhold. Although an investor arguably might otherwise take some other market action based on the prospectus information if immediate dissemination were required, we believe that the availability of the filing through readily accessible electronic media would sufficiently protect investor interests. Furthermore, in cases where the bidder chooses not to immediately commence its exchange offer, a requirement to disseminate upon filing would have the effect of accelerating the commencement of the period during which Regulation M's restrictions would apply.
We do not believe that automatic effectiveness for exchange offer registration statements as an alternative to early commencement with expedited review would provide bidders significantly greater certainty as to when their exchange offers could close. As discussed in the Release, under this alternative the Staff would not have an opportunity to review the prospectus information before it is disseminated to security holders, but could review it after effectiveness, just as it now reviews cash tender offer materials. This approach would technically put cash and stock tender offers on an equal regulatory footing. As a practical matter, however, it is significantly more likely that Staff review of a prospectus relating to a stock tender offer would require a post-effective amendment and redissemination to security holders, due to the increased disclosure requirements of the exchange offer prospectus, such as inclusion of pro forma financial information, compared to a cash tender offer disclosure document. Thus, we believe that the structure of early commencement coupled with expedited Staff review is far more preferable. Moreover, what would happen if Staff comments were not provided prior to expiration of the exchange offer? Would the Staff be estopped from comment? Would tendering security holders be entitled to rescission or damages? Concerns such as these, we believe, would as a practical matter lead most offerors to defer closing their exchange offers until all Staff comments had been received and addressed in their offering documents.
Issuer Exchange Offers
Issuer self tender offers for stock, like third-party exchange offers, are commenced in connection with both friendly and hostile transactions and present the same timing and competitive concerns as third-party exchange offers. Thus, we believe that issuers should have the option of commencing a self tender offer upon filing of a registration statement and should be similarly afforded expedited Staff review. Under the proposed rules, security holders would receive the basic disclosure document and any required supplement in the event of a material change. Investors arguably need even less time to make an informed investment decision in connection with an issuer self tender offer compared to a third-party exchange offer because they must evaluate information relating just to the company in which they are already investors. Furthermore, because issuer exchange offers are rare, we would not expect the availability of expedited Staff review to significantly increase the burden on the Staff's resources.
Tender Offers Versus Mergers
Relatively few negotiated business combination transactions are structured as stock exchange offers due to a number of significant factors in addition to the timing disadvantage created by the disparate regulatory treatment of cash and stock tender offers. Thus, although adoption of the proposed rules would be a significant step towards putting cash tender offers and stock exchange offers on a more equal regulatory footing, the number of transactions that would be structured differently as a result of the new rules is likely to be limited.
We note that the proposal to permit commencement of exchange offers upon filing creates a timing advantage for exchange offers compared to stock mergers, analogous to the timing advantage of cash tender offers over cash mergers. Under the proposed new rules, as now, an offeror would be required to deliver a final prospectus for a stock merger to the target's security holders before they vote; accordingly, an exchange offer could be completed on a faster timetable than a merger requiring a stockholder meeting. Mitigating this potential timing advantage for exchange offers is the risk that the exchange offer would not be integrated for tax purposes with a second-step stock merger. Unless the bidder acquires at least 80% of the target's shares for stock in the exchange offer, the exchange offer may not be tax-free to the target's security holders. Also offsetting the possible timing advantage of exchange offers compared to mergers are requirements for pooling accounting treatment and stock exchange and NASD rules requiring the bidder's security holders to approve the issuance of the shares used to effect the transaction if such additional shares represent more than 20% of the bidder's outstanding shares.
The Release indicates that the Commission is considering, though it has not proposed, harmonizing the proxy rules with the tender offer rules by providing a proxy analogue to the early commencement proposal. We believe that the merger situation differs from the tender offer situation in a number of significant respects that would make a proxy analogue less desirable from both the security holders' and the parties' perspectives.
First, proxy solicitations present a greater risk that the relevant investment decision will be made without the benefit of all material information. In a tender offer, the beneficial owner of the securities is the only party who can make the decision to tender or withhold. Accordingly, if a material change in fact or circumstance occurs, the holder will have the opportunity to reconsider his or her decision to tender or withhold based on the new information. However, in a proxy solicitation, only security holders on the record date for the stockholder meeting are entitled to vote, and nothing restricts those security holders from transferring the shares before or after they are voted. If a security holder delivers a proxy and thereafter sells the related securities, the selling security holder will no longer have an economic incentive to reconsider its vote if a material change should occur. Thus, it is more important in a proxy solicitation context that final materials be provided initially to security holders to increase the likelihood that those voting will have all material information when voting.
Second, without a company having certainty, prior to the time the proxy statement is mailed, as to when the proxy statement will become effective, companies choosing to commence a proxy solicitation upon filing would have to initially set the stockholder meeting date further out in the future than is currently the practice in order to ensure sufficient time to clear the Staff review process and, if required, disseminate a supplemental disclosure document. Whereas companies generally allow for approximately 30 days between Staff clearance and the stockholder meeting date under the current regulatory scheme, early commencement would require a much longer time period from the filing date to the meeting date and would most likely push the meeting date out to the maximum allowed under state law notice requirements, or generally 60 days. The period from the record date to the meeting date would also necessarily be extended, with the undesirable consequence, as discussed above, of increasing the likelihood that those security holders entitled to vote would no longer own the shares. This consequence would be further exacerbated if material changes resulting from Staff review were to require extension of the proxy solicitation period. Finally, we recognize that expedited Staff review of merger proxy statements to fully harmonize the proxy rules with the tender offer rules may be impractical due to the significant additional burden that would be placed on the Staff's resources. For these reasons, we do not presently recommend a proxy analogue to the early commencement proposal for tenders.
We support the Commission's proposed Securities Act Rule 162, designed to allow the tendering of securities into an exchange offer before a registration statement is effective without the tender being viewed as a sale subject to Securities Act requirements for sales.
Schedules
We support the Commission's proposal to clarify and simplify the filing requirements for disclosure documents relating to business combinations. We believe that the changes included in the Release are steps in the right direction. However, we suggest making changes, principally to the format of the schedules, that we believe would make them significantly easier to use.
We believe that it is not necessary or desirable to have a separate Form TO, Regulation M-A, Form SB-3 and Form C. Rather, we believe that there should be only one form and related rules which would be used for disclosure documents relating to business combinations, whether they are structured as tender offers or mergers and whether the consideration used is cash, securities or a combination of cash and securities. We also believe that all the rules requiring information in the disclosure document relating to a business combination, however structured, should be collected in one place.
Specifically, we suggest that requirements for business combination disclosure documents should be set forth in a chart that would be similar in form to the chart used to set forth the requirements for exhibits for certain Securities Act and Exchange Act filings which is found in Item 601 of Regulation S-K. Similar to Item 601, this format would:
* combine requirements for Securities Act and Exchange
Act filings;
*have a left column which would have a brief description of the disclosure requirement (e.g., financial statements of acquiror, financial statements of target, background of transaction) and a fuller description of the requirement immediately following the table; and
* combine all of the rules for required disclosure in one
place.[3]
Significantly, unlike in Item 601 in which each column is headed by the title of the filing, in our proposed format, each column would be headed by a description of the form of transaction. Rather than a column headed by Schedule TO or Form C, there would be columns headed with, for example,
* a third party all cash tender offer;
*a third party tender offer in which securities are at least part of the consideration and where the acquiror's security holders vote;
*a third party tender offer in which securities are at least part of the consideration but no vote of the acquiror's security holders is required;
* a cash merger in which only the target's security
holders vote;
* a stock merger in which only the target's security
holders vote;
*a stock merger in which both the target and the acquiror's security holders vote;
* an issuer cash tender offer;
* an issuer exchange offer; and
* a response to a tender offer (instead of Schedule 14D-
9).
Each form of transaction should fit into only one column. Under the current system, a disclosure document relating to a tender offer in which the consideration includes registered securities and the issuer's security holders will vote has to comply with Schedule 14D and Form S-4. Under the format we suggest, the disclosure document would only have to include the information required in the column entitled "third party tender offer involving issuance of registered securities where the issuer's security holders vote on the issuance."
In this format, any additional information which is required as a result of the transaction having a going-private effect or being a roll-up would be set forth beneath the table. This would eliminate the need for a separate Schedule 13E-3.
Also, this format contemplates a rule which provides that if the issuer is a Form B, seasoned Form A or seasoned Form SB-2 company, the disclosure document would be able to incorporate prior and subsequent filings. We believe that, notwithstanding the fact that a disclosure document only needs to remain effective for a relatively short period of time (from the mailing of the document to the vote or expiration of the tender offer), issuers should be able to incorporate subsequent filings in order to avoid having to mail supplements.
We believe that this format would have significant advantages over the current system as well as the format proposed by the Release:
* it would be significantly easier to use and understand;
* cross-referencing would be limited;
*disclosure requirements would not be separated between rules and schedules;
*it would eliminate the need for Schedule 13E-3, Form C and Form SB; and
*it would highlight the differences between disclosure requirements for each type of transaction, which would make it more likely that the differences would be logical and intentional.[4]
The format used to file the disclosure document would follow the form of Securities Act filings. Securities Act filings start with a cover page and are followed by the disclosure document (the prospectus), Part II pages, signatures and exhibits. Similarly, the format we suggest would start with a cover page on which the filer would check a box next to the type of transaction involved. (The list of transaction types would be identical to the column headings of the table.) The disclosure document would follow immediately after the cover page. If the transaction involved the issuance of securities, there would be Part II pages. After the Part II pages, if any, would be the signatures and exhibits. This format would eliminate the need for schedules which incorporate the disclosure document, which we believe have no disclosure value.
As indicated by our proposal that there be only one form for all disclosure documents relating to business combinations, however they are structured, we believe that only one filing should be required. There is no additional disclosure benefit to filing the same disclosure documents with a different "wrap". There is also no logic to the fact that if a disclosure document relating to a merger in which registered securities are being issued is filed as a proxy statement, it must also be filed as a registration statement, but if it is first filed as a registration statement, it does not have to be filed later as a proxy statement.
If the Commission determines not to accept our proposal, and decides instead to proceed with adoption of Regulation M-A, Schedule TO and Form C in the forms it has proposed, we request that the Commission consider our specific comments in the Appendix to this letter with respect to these proposed schedules and forms.
a. "Plain English" Summary Term Sheet
We support the Commission's proposal of a requirement that disclosure documents relating to issuer and third-party tender offers, cash mergers and going-private transactions begin with a short "plain English" summary term sheet, highlighting the most important features of the proposed transaction. This will ensure that certain basic terms of these transactions are available to investors in a readable and understandable format.
The Commission has solicited comment on whether the proposed summary term sheet requirement should specify information that must be addressed in most situations. We believe the summary term sheet requirement should specify the items to be addressed, in order to provide appropriate and uniform guidance to filing parties.
b.Revise Item 14 of Schedule 14A to Clarify Requirements and Harmonize Cash Merger with Cash Tender Offer Disclosure
As discussed above, we propose that the requirements for information to be included in a disclosure document relating to all types of business combination transactions be set forth in a new form and related rules which would be used for all types of business transactions. This proposal would eliminate Item 14.
In any event, however, 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 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. It would be unnecessarily burdensome, both in terms of time and expense, to require preparation of additional or different information from that which such security holders have been accustomed to receiving in the course of holding their investment. Similarly, there is no reason to believe that target security holders need more information about their investment to determine the advisability of exercising dissenters' or appraisal rights than they would generally need in evaluating opportunities that may arise (including sale opportunities) in the course of holding their investment.
c.Reduce Financial Statements Required for Non-Reporting
Target Companies
We agree with the Commission's position that the current rules regarding financial disclosure for non-reporting target companies should be relaxed when the acquiror's security holders are not voting on the transaction. We support the Commission's proposal to reduce the number of years of financial statements required to be disclosed.
We do not support the proposal to require reconciliation to U.S. GAAP where the non-reporting target is a foreign company and the target's financial statements are prepared on the basis of non-U.S. GAAP. We believe that the proposal does not provide sufficient regulatory relief to filers. Requiring the production of financial statements reconciled to U.S. GAAP could cause substantial expense and delay in the transaction. Given that the proposal, by its terms, only applies where security holders of the acquiror are not voting, it appears that the beneficiaries of such disclosure will be security holders of the target (for example, in the context of a stock-for-stock merger). However, such security holders will presumably not have been provided with reconciled financial statements in making their initial and ongoing investment decisions, and therefore should not need such a reconciliation to determine the advisability of a merger transaction.
The Commission has requested comments on whether the special treatment given to non-reporting target financial statements provides any benefit to acquirors. We believe that the special treatment given to non-reporting target financial statements provides acquirors with a timing benefit, because it enables the proxy statement to be mailed without the delay of producing audited financial statements for inclusion. A transaction can then close more quickly. This in turn provides more certainty to investors as to the likelihood of achieving a successful transaction, and enables them to receive the benefits of the transaction sooner.
d. Registration Statement Form for Business Combinations
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 a Form C, since registered offers would utilize the form used for all business combinations.
We support the Commission's proposal to eliminate requirements for a federally mandated solicitation period when incorporation by reference is used in a disclosure document. For the reasons discussed above in our comments relating to Section B.6.a. of the Release (see page 10 of this letter), we believe that there should not be any federally mandated minimum solicitation period for mergers and similar proposals, regardless of whether or not a disclosure document includes filings incorporated by reference.
We believe the proposed rule, with several important modifications, would be beneficial to both bidders and security holders.
Prior to the adoption of Rule 14d-7, which extended withdrawal rights for the entire offering period of a tender offer, bidders frequently accepted tendered securities for purchase (and paid for such securities) upon the initial expiration date of the offer (or any later date to which the offer was extended and at which all offer conditions were satisfied or waived) and then further extended the offer and purchased additional shares as tendered. Generally, this was done in offers for all shares in order to obtain a sufficient number of shares to complete a short-form merger following the initial offer period without setting a high minimum condition.
Currently, however, offerors must either set a minimum condition at the percentage required under state law for a short-form merger (generally 90%) or reserve the right to extend the offer for a period, even if a lower minimum condition and all other conditions are met, in order to attempt to reach 90%. As a practical matter, bidders almost universally opt for the latter structure, because a very high minimum condition is believed to discourage tenders. Moreover, negotiated merger agreements which provide for first-step tender offers for all shares usually contain a specific provision allowing for such an extension under specified conditions.
In many friendly or negotiated cash offers, the bidder receives a sufficient number of the target's shares during the initial 20 business day period to effect a short-form merger immediately. In the balance of cases, however, the result under the present withdrawal rule is that the bidder chooses to extend the offer to acquire sufficient tenders to invoke the short-form merger statute, thus delaying both the bidder's ability to take control of the company and tendering holders' receipt of payment for their shares. The Commission's proposal would have the desirable effect in these situations of allowing the bidder to purchase and pay for all tendered shares immediately, while also extending the offer period in order to acquire sufficient additional shares to invoke the short-form merger mechanism.
While we support the Commission's proposed rule, we do have the following comments and suggestions for important modifications in response to certain questions raised in the Release:
*The bidder should be able to reserve in its initial offer the right to take down tendered securities upon the later of expiration of the initial offering period or expiration of any extension at which all conditions are satisfied or waived, without having to announce prior to the expiration date an extension of the offer for a "subsequent offering period."
*Both lawyers and investment bankers are concerned that the proposed requirement that an offeror must announce its intention at least 10 business days prior to the initial expiration date (and to require the offer to remain open 10 business days following any change in such intention) may cause security holders to hold back their tenders and result in longer initial offer periods, negating the benefits of the rule.
*We note that, unlike the City Code on Take-overs and Mergers, the central purpose of the proposed subsequent offering period is not to protect security holders who fail to tender during the initial offering period from being left with an illiquid investment for a relatively long period of time, but rather to facilitate prompt short-form mergers.
*Given what we perceive as the benefits of the proposed rule, the length of the subsequent offering period should not be mandated by the rule but, rather, left to the bidder to determine, subject perhaps to a short minimum (such as three business days). Otherwise, the period could delay the second-step short form merger, to the detriment of the bidder. Likewise, the bidder should be able to extend the subsequent offering period at its option, since such extension does not adversely impact security holders.
*In all circumstances, the subsequent offering period (and any extensions thereof) should be treated like other extensions in requiring a public announcement by the bidder of the number of shares tendered and accepted at the close of each extension of the offering period.
We do not believe it to be necessary for the protection of security holders in offers for all shares to condition availability of the subsequent offering period on the offeror having accepted for purchase any minimum number of shares. If, however, the Commission were to impose such a condition, the offeror should be permitted to aggregate its pre-tender ownership of target shares to shares purchased at the end of the initial offering period in determining whether such minimum has been met.
We concur in making the rule available for both cash and exchange offers, and regardless of whether the proposed back-end merger is for cash or securities. We believe it appropriate to limit the rule to offers for all shares at this time. After some experience with the working of the rule, the Commission may wish to consider expanding its availability to partial offers and issuer tenders. We do not, however, see the rationale for requiring an intent to consummate a back-end merger. Although it is rare to encounter an offer for all shares that does not contemplate a back-end merger, the rule would offer security holders some protection against being left with an illiquid investment following such an offer if it were to be available for all offers for all shares.
a.When the Bidder's Financial Statements Are Required in Cash Tender Offers
We strongly support the Commission's proposals to clarify the extent and type of financial disclosure required in cash tender offers. We believe that the proposed "materiality" test will be beneficial to both bidders and security holders.
The Commission has asked for comments as to whether the determination of materiality of bidder financial statements should hinge upon whether financing is in place, as opposed to whether the offer is subject to a financing condition. In our view, it should not. There is no practical difference from the target security holders' standpoint whether the financing has actually been obtained as long as the offer is not subject to a financing condition. However, a rule requiring that financing be in place would be unnecessarily burdensome for the bidder who would be required to incur financing costs in advance of closing to qualify for the exception. Similarly, where there is no financing condition we do not see any distinction, from the target security holders' standpoint, between a self-financed offer and one financed by a third party. In both situations the only risk is the risk of a failed transaction resulting from a breach, which is present in any transaction.
With respect to foreign issuers, it is our view that the financial statements requirements should not be applied differently when the bidder is a foreign company. We discussed above under "Reduce Financial Statements Required for Non-Reporting Target Companies" (page 28 of this letter) our view that security holders should not need a reconciliation to U.S. GAAP to consider the advisability of a business combination transaction. The added burden and delay associated with requiring a non-reporting foreign bidder to provide financial statement reconciliation to U.S. GAAP where target security holders are merely receiving cash for their respective investments seems to us to be unwarranted.
b.Content of Bidder's Financial Statements in Cash Tender Offers; Financial Statements in Going-Private Transactions
We believe that harmonizing (and reducing) the bidder financial statement content requirements with respect to third party tender offers, issuer tender offers and going-private transactions will benefit both bidders and security holders, both by expediting the tender offer process and by simplifying the disclosure document so that security holders can more easily focus on what is most relevant to the particular decision they are being asked to make.
The Commission has asked for comment on its proposal to reduce the financial statement requirements to two (rather than three) years and whether such proposal will have any impact on informed investor decisions. We believe that the proposal to reduce financial statement requirements should go further. In the case of an all-cash offer, if bidder financial statements are material (either because the offer is subject to a financing condition or because the bidder is a non-reporting company making a partial tender offer) we believe that one year of financial statements should be sufficient (and is all that is relevant, from a practical standpoint) for target security holders to assess the likelihood of satisfying the financing condition.
The Commission has also asked for comment on whether the additional information required by Rule 1-02(bb), including information on redeemable preferred stock, minority interests and summarized financial information for unconsolidated subsidiaries and 50 percent or less owned persons, is necessary to informed investor decisions. We believe that the additional information required by Rule 1-02(bb) is not necessary and is in fact irrelevant to assessing an all-cash offer, regardless of whether bidder financial statements are otherwise required.
The Commission has solicited comment with respect to the efficacy of continuing to allow summary financial information to be disseminated to security holders rather than full financial statements. We believe that the decision whether to disseminate full financial statements to security holders as opposed to summary financial statements should be left to the discretion of the bidder. For the purposes that target security holders would be using such financial disclosure, summary financial statements without notes should be more than adequate.
c. Bidder's Source of Funds
The Commission proposes to expand the "Source of Funds" item requirement in the tender offer and going-private rules to require the specific source(s) of financing, any conditions(s) to the financing, and the bidder's ability to finance the offer if the primary source of financing falls through. We support the proposal, but we believe that with respect to transaction expenses, disclosure should be required only to the extent such expenses are material.
d. Pro Forma Financial Information in Two-Tier
Transactions
We believe that the Commission's proposal to require pro forma financial information at the cash tender offer stage when a two-tier transaction is contemplated would be unduly burdensome in the case of negotiated transactions. It would defeat one of the primary goals of the Release as a whole, which is to create a more informed marketplace by permitting more disclosure sooner. In the context of hostile transactions, or in negotiated deals where the parties have not determined the nature of the back-end consideration, we believe the requirement would simply be unworkable.
In the context of a two-tier negotiated transaction, the requirement to include pro formas at the cash tender offer stage, because of the time required for their preparation, would have the result of delaying filing and dissemination of a disclosure document for a significant period, in many cases three to four weeks or more. The result would be a marketplace trading solely on the basis of the limited disclosure about the offer contained in a press release, without the benefit of a disclosure document that discusses such issues as the conditions to the transaction, regulatory issues, and financing. In addition, it will delay target security holders' receipt of their cash for the first step of the transaction.
It is also unclear how the requirement could work in the context of a transaction where the parties have not yet determined the nature of the back- end consideration, or, more generally, in any hostile transaction. We believe that in many hostile bids, the bidder does not commit to the nature of the back-end consideration at the time the cash tender offer is launched. Often, in such situations, acquisition of control is the paramount concern, and the bidder has not determined the nature of the back-end consideration at the time the tender offer is launched. Moreover, in the context of a hostile bid, the bidder simply will not have access to the information necessary to prepare accurate pro forma information. Target management and target accountants certainly will not cooperate with a hostile bidder. The result will be disclosure couched in disclaimers that will be of little value to investors in making an informed investment decision. Unsophisticated investors may place undue reliance on such pro forma information, not realizing how speculative it may be, given the lack of participation by the target in its preparation.
We believe that Rule 13e-1, in and of itself, provides no significant investor protection. Moreover, it has been interpreted by one court in such a way as to result in less protection to target security holders in connection with substantial open-market purchases to defeat a tender offer. See Commission v. Carter Hawley Hale Stores, Inc., 587 F. Supp. 1248 (C.D. Cal. 1984), aff'd, 760 F.2d 945 (9th Cir. 1985), in which the Ninth Circuit viewed the language of Rule 13e-1 as evidencing "a recognition that not all issuer repurchases during a third party tender offer are tender offers." Carter Hawley Hale, 760 F.2d at 949.
The Carter Hawley Hale court, utilizing the eight-factor analysis of Wellman v. Dickinson, 475 F. Supp. 783 (S.D.N.Y. 1979), aff'd, 682 F.2d 355 (2d Cir. 1982), cert. denied, 460 U.S. 1069 (1983), refused to find that CHH's open- market repurchases of over 50% of its common stock, in response to a partial tender offer (to be followed by a second-step common-stock merger) by The Limited, Inc., constituted an unconventional tender offer.[5] On appeal, the Commission argued that the district court erred in concluding that issuer repurchases to defeat a third party tender offer are authorized by the tender offer rules (Section 13(e) and Rules 13e-1 and 13e-4). In applying the Wellman test, the district court found, and the Ninth Circuit confirmed, that the publicity surrounding the repurchases did not constitute a solicitation, since the only public announcements made by CHH were those mandated by Commission or New York Stock Exchange rules. The Ninth Circuit refused to apply the test in S-G Securities, Inc. v. Fuqua Investment Co., 466 F. Supp. 1114 (D. Mass. 1978) (publicly announced intention to acquire a block of stock for purpose of acquiring control and subsequent rapid accumulation through open-market and privately negotiated purchases), noting that it "offered little guidance to the issuer as to when his conduct will come within the ambit of Rule 13e-4 as opposed to Rule 13e-1." Carter Hawley Hale, 760 F.2d at 953
The existence of Rule 13e-1 thus creates an unnecessary ambiguity with respect to when issuer repurchases should be deemed an "unconventional tender offer" requiring compliance with the tender offer rules.
We therefore would support repeal of Rule 13e-1. Rules 10b-5 and 14d-9 would mandate disclosure of any significant repurchase program, and no additional protection is afforded by current filings or mailings under Rule 13e-1. We believe this would be the case even with the Commission's proposed revisions, since we view such revisions as possibly exacerbating the interpretive problem highlighted in Carter Hawley Hale.
The Commission has proposed revisions to Rule 14d-5 to require a company that elects to provide a bidder with stockholder lists to also provide the most recent list of non-objecting beneficial owners ("NOBOs"), as well as record holders. We believe that Rule 14d-5 should require that the NOBO list be supplied in the format possessed or subsequently obtained by the target company, which is a straightforward standard. The proposed requirement that security holder list information be supplied "in the format requested by the bidder to the extent the format is available to the subject company without undue burden or expense" is subject to interpretation. We note, however, that target companies generally choose to mail rather than supply lists under Rule 14d-5.
There are sometimes significant delays in receipt by beneficial owners of offering materials from record holders, despite the fact that offerors (whether or not they mail to record holders) generally provide such materials to the "street" and pay nominees' expenses of mailing to beneficial holders. Although direct mailing of offer materials to NOBOs might alleviate delays in such holders' receipt of information, either from their nominee holders or by direct request to the offeror or its information agent, such direct mailings would not address the problem in all cases.
Moreover, we are concerned that direct mailing only to beneficial holders and not record holders could cause significant logistical problems, even if the mailing is accompanied by information clearly stating that the beneficial owner must contact the record holder of his or her shares in order to tender such shares (and any letter of transmittal sent with such mailing contains a legend that states it is for informational purposes only and may not be used to tender shares). There is no way for a beneficial owner to tender shares held by a nominee, and record holders would need to receive copies in any event in order to assist their beneficial holders. Even with such a legend, unsophisticated beneficial holders may still not understand that they cannot use the documents to tender shares, just as currently they often do not understand that in mergers they must instruct their nominees to exercise appraisal rights. We therefore conclude that the current practice of having nominees forward tender offer documents to beneficial owners, with specific forms provided by nominees pursuant to which beneficial owners can instruct nominees, is preferable to direct mailing to all beneficial owners as a solution to the problem.
We also note, however, that at present, there is no rule, like Rules 14b- 1(b)(2) and 14b-2(b)(3) with respect to proxy solicitations, requiring nominees to forward tender offer materials to beneficial owners, and that there is often a substantial delay in certain brokerage firms' forwarding of such materials. If the Commission is concerned about beneficial holders, particularly less sophisticated investors, receiving materials on a timely basis, we would suggest adoption of a rule requiring the forwarding of such materials within a short time (perhaps three business days) of receipt of the materials from the bidder or the target company, with the bidder being required to reimburse for mailing costs (as is the case with proxy materials).
We have also recently been advised, and believe the Commission should be aware, that a number of brokerage firms, primarily discount brokers, are charging their customers fees for accepting tenders with respect to shares held by such firms as nominees. Our understanding is that such fees are generally in the $20 range but can be as high as $80 per account and are deducted from proceeds received from the tender, although some firms will waive the fee if the account receives a de minimis amount from the tender. As a result, some security holders are waiting to exchange their shares in back- end mergers rather than tendering in the first-step offer, in order to avoid such charges.
a. Proposed Amendments Redesignating and Clarifying the
Rule
The Commission has solicited comment regarding whether proposed Rule 14e-5 should apply if the bidder advises a limited number but not all security holders that it intends to conduct a tender offer for the subject securities. Rule 10b-13, and proposed Rule 14e-5, apply from the time the offer is first publicly announced or otherwise made known to holders of the subject securities through expiration of the offer. Such language has always been read to mean widespread knowledge, not knowledge by certain security holders. Otherwise, once an acquiror were in negotiations with respect to an acquisition involving a tender offer, it could not agree with respect to option or similar types of lock-up agreements with security holders, or agreements with respect to roll-over of options or securities held by management or employees, without violating the rule. See plaintiff's argument, rejected by the court, in Lerro v. Quaker Oats Co., 84 F.3d 239 (7th Cir. 1996). Thus, we do not believe the rule should apply if some but not all security holders are advised of the bidder's intention to conduct a tender offer.
b. and c.Persons and Securities Subject to the Rule; Excepted Transactions
Purchases by or for Plans
To the extent that the proposed rule limits purchases of a bidder's shares during an offer on behalf of employee benefit plans to those by independent agents, as defined in Regulation M, we do not believe this unduly limits bidders. In our experience, employee plans making such purchases utilize independent agents, and we find it difficult to conceive of a bona fide plan that could not provide for an independent agent. Thus, there is no reason for the rule to allow issuers or their agents (other than independent agents) to make such purchases.
We do not believe that the establishment of a new plan by a bidder and the purchases of shares pursuant to such a plan, through an independent agent, would have a potential for abuse that would not be adequately addressed by other rules under the securities laws, ERISA and state laws with respect to fiduciary duty.[6]
Unsolicited Purchases by a Dealer-Manager
We concur with the proposed exemptions dealing with broker-dealers. We have the following specific comments:
*We do not believe a definition of "dealer-manager" is necessary for the "dealer-manager" exception to the proposed rule. The term is well understood, and offering documents identify the firm(s) acting as such.
*We believe that large firms with both market-making functions and substantial financial advisory practices typically cease market-making activities in target securities where the firm is acting as an advisor to the offeror, and are not interested in an exemption to permit such activities, although such an exemption could be useful to the market where there is only a limited number of market-makers.
*We note that if, by "other protections," the Commission has in mind provisions similar to those contained in the City Code,[7] we believe such provisions would be unworkable under our regulatory scheme and/or sufficiently burdensome that advisors would not take advantage of the exception.
d. Solicitation of Comments on Proposed Rule 14e-5
For the following reasons, we believe that the Commission should broaden proposed Rule 14e-5 to permit a tender offer bidder, during the offering period, to purchase shares outside such offer (regardless of whether the tender offer is for all outstanding shares) if (a) the purchase is pursuant to an agreement entered into prior to the public announcement of the offer and (b) the purchase complies with Rule 14d-10 (i.e., the per-share purchase price paid is no higher than the price being offered in the tender offer).
First, Rule 14e-5 as currently proposed specifically permits a bidder who is the owner of securities that are immediately convertible into, exchangeable for, or exercisable for securities which are the subject of the offer to convert, exchange or exercise those securities outside of the tender offer. The M&A Release proposes broadening this exemption to include the exercise of options acquired prior to commencement of the tender offer. We support this proposal; however, we cannot discern any public policy rationale for permitting purchases of shares pursuant to such conversions, exchanges or exercises while prohibiting purchases pursuant to pre-tender offer contracts that do not technically constitute conversions, exchanges or exercises. In fact, such a distinction elevates form over substance, and creates an unnecessary and artificial obstacle to the negotiation of pre-offer agreements facilitating economically sound business combination transactions.
Second, nothing under present law prohibits a bidder in a partial tender offer from purchasing shares subsequent to the closing of its tender offer pursuant to an agreement entered into prior to the announcement of the tender offer. In a partial tender offer, a bidder who is party to such an agreement will simply seek a number of shares in the offer (as is permitted by law) that takes into account the number of shares subject to the agreement. We do not believe that a regulatory scheme that requires a bidder to delay purchasing shares pursuant to a pre-tender offer agreement until immediately after the closing of a tender offer furthers any regulatory goal.
We also note that certain case law referencing both Rules 10b-13 and 14d-10 has created uncertainty as to the ability of offerors to enter into agreements with respect to the purchase or exchange of shares prior to commencing an offer within the meaning of Rule 10b-13 and consummating such purchase after completion of the offer at least when the consideration is different from the tender offer consideration. In Epstein v. MCA, Inc., 50 F.3d 644 (9th Cir. 1995), reversed on other grounds sub. nom. Matsushita Electric Industrial Co. v. Epstein, 116 S.Ct. 873 (1996), the Ninth Circuit, among other things, granted plaintiffs' summary judgment motion on their claim that an agreement to exchange target shares held by the target's chief executive officer for preferred stock of the acquiror, reached by the acquiror prior to announcement of its tender offer but conditioned upon, and closed after, successful consummation of the offer, violated Rule 14d-10's "all-holder, best-price" rule. Plaintiffs had also alleged that such agreement violated Rule 10b-13, but the court did not consider that claim on the basis that, on the facts of the case, any relief plaintiffs could obtain under Rule 10b-13 was also available under Rule 14d-10.
We do not believe that either Rule 10b-13 or Rule 14d-10 (which specifically relates to consideration paid "during" a tender offer) was intended to affect an acquiror's ability to enter into agreements with respect to target securities prior to public announcement of a tender or proposed tender. To the extent that such agreements constitute a breach of fiduciary duty by the security holder or the target board, security holders have adequate remedies under state law. We would therefore suggest the Commission specifically include, in the adopting release, a statement that payments pursuant to agreements entered into before commencement will not violate Rule 14e-5 or Rule 14d-10, whether or not:
(i)the form of consideration paid pursuant to such agreements is different from the consideration paid pursuant to the tender offer;
(ii)the amount of consideration paid is greater than the amount paid pursuant to the tender offer; or
(iii)the consummation of such agreements is conditioned upon consummation of the tender offer.
We strongly encourage extension of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 to all forward-looking statements made in connection with tender offers, whether or not made in communications under the proposed "free communications" rules. In today's investment environment, projections and other forward-looking information received from an issuer are crucial factors in the investment decisions of most investors.
The current state of the law creates unwarranted distinctions between mergers and tender offers. There is nothing in the legislative history or in prior Commission releases with respect to forward-looking information that suggests a rationale for these distinctions.[8] Forward-looking information, if relevant, is equally relevant regardless of the form of the transaction or solicitation, and we do not believe that tender offers present a greater opportunity for abuse.
The current law also creates an uncertainty as to whether the safe harbor is available for statements made in a proxy or consent solicitation made in conjunction with a tender offer or for statements made in an exchange offer. The safe harbor is available for statements in the registration statement but arguably not in tender documents.[9]
In light of the importance of projections and other forward-looking information to investors' decisions regarding all types of transactions, we propose that the Commission also extend the safe harbor to going-private and roll-up transactions, both of which are specifically excluded from the coverage of the current safe harbor. In our view, no interest of investors is served by the exclusion of going-private and roll-up transactions from the safe harbor's scope.
We believe that extension of the safe harbor may result in filers being less concerned about the ramifications of acceding to the Staff's routine requests for disclosure of targets' projections used by their financial advisors in connection with their rendering of fairness opinions, even if not provided to the offeror.
* * *
**FOOTNOTES**
[1]:Under Rules 14a-11 and 14a-12, "solicitations" may be made in connection with a proxy contest prior to the delivery of a publicly disclosed proxy statement, if, among other things, all written solicitation materials are filed with the Commission on the date they are first delivered to shareholders.
[2]:We believe that the commencement prerequisite in proposed Rule 14d-4(b) that the registration statement contain "pricing information" could be interpreted to require essentially final pricing information. In our view, such a requirement would be unreasonable. In many exchange offers, a final exchange ratio is not set until only days before the exchange, so that the final pricing reflects as much as possible the latest valuations. We propose that the Commission modify proposed Rule 14d-4(b) to provide that the pricing information requirement will be met if the material elements of the formula for calculation of the price are disclosed.
[3]:For example, unlike in the present system where, as noted in footnote 169 to the Release, the requirement to disclose the expiration of a tender offer is found in both Regulation 14D and Schedule 14D, this requirement would be found only in the table. (Obviously, this would require revisions to the proxy rules, tender offer rules, and going-private rules.)
[4]:For example, it would facilitate distinguishing between the signature requirements for different types of transactions. We suggest that filings relating to the issuance of securities require the same signatures requirements as Security Act filings, while other filings require only the signature of the filing person.
[5]:CHH announced its plan to purchase up to 15 million shares for an amount not to exceed $500 million in a Schedule 14D-9 and in a Rule 13e-1 transaction statement. It commenced purchases on April 16 and by April 22 had purchased 15 million shares. It announced an increase in the number of shares authorized for purchase to 18.5 million and terminated its purchases on April 24, after purchasing approximately 17.5 million shares.
Such purchases were made, together with the issuance to a third party of preferred stock carrying voting rights equal to 22% of its voting securities (33% upon completion of the repurchases), for the express purpose of "defeat[ing] the attempt by The Limited to gain voting control of the Company and to afford shareholders who wish to sell their shares at this time an opportunity to do so." Carter Hawley Hale, 760 F.2d at 946.
[6]:We note the holding in Donovan v. Bierwirth, 680 F.2d 263 (2d Cir.), cert. denied, 103 S. Ct. 488 (1982), that trustees of Grumman's pension plan, who included members of management, breached their ERISA duties in causing the plan to reject the LTV tender offer and purchase Grumman stock in the face thereof. The court found that they had placed themselves in a position where their actions as officers in opposing the LTV bid prevented their functioning with the complete loyalty to participants demanded of pension plan trustees.
[7]:Such protective provisions in the City Code include:
1.dealings by the market-maker cannot be with the purpose of assisting the offeror or the offeree company, as applicable;
2.an offeror and persons acting in concert with it may not deal with such market-maker during the offer period;
3.securities owned by a market-maker connected to the offeror cannot be tendered until the offer is unconditional [the equivalent under the proposed rules would be during a subsequent offering period under proposed Rule 14d-11];
4.securities owned by a market-maker connected to the offeror or target cannot be voted in the context of an offer; and
5.all dealings in "relevant securities" (as defined in City Code, Rule 8, to include voting securities of each company and convertibles, options and derivatives) must be disclosed to the London Stock Exchange, Panel and press.
[8]:Senator D'Amato, in discussing the legislation, stated that the Senate Banking Committee made "a policy decision to exclude from the safe harbor certain companies and certain transactions in which the incentives for making overly optimistic forward- looking statements might be present," including statements in connection with tender offers, described by Senator D'Amato as "often ... hotly contested takeover battles." Given that most tender offers are not hostile transactions, that cash tender offers do not really create incentives to make overly optimistic forward-looking statements, and that Congress allowed the safe harbor for statements made in connection with mergers, the only transaction involving the type of abuse noted and covered by the exception is the hostile exchange offer, where the marketplace and opposing parties have been quite efficient at attacking overly optimistic statements.
In a speech entitled "Final Thoughts on Litigation Reform" at the 23rd Annual Securities Regulation Institute in San Diego, California on January 24, 1996, Commission Chairman Arthur Levitt noted that the exclusions from the safe harbor for IPOs, partnership offerings, tender offers, going-private transactions, penny stock or blank check companies and companies that have been found to have violated the securities laws within the past three years "ended up in the legislation because the Commission asked for them." He did not elaborate.
Nowhere in its prior releases relating to the disclosure of forward-looking information has the Commission indicated a particular desire to limit disclosure in connection with certain types of transactions See, e.g., "Statement by the Commission on the Disclosure of Projections of Future Economic Performance" Release Nos. 34-9984; 33-5362 (Feb. 2, 1973); Release Nos. 34-11374; 33-5581 (April 28, 1975); Release Nos. 34-12371; 33-5699 (April 23, 1976); the proposed guidelines (Guides 62 and 4, "Disclosure of Projections of Future Economic Performance" of the Guides for the Preparation and Filing of Registration Statements under the Securities Act of 1933 and of the Guides for the Preparation and Filing of Reports and Proxy and Registration Statements under the Securities Exchange Act of 1934, respectively) representing policies and practices followed by the Commission's Division of Corporation Finance in administering disclosure requirements under the Federal securities laws, and the adopted Guides 62 and 5 in "Guides for Disclosure of Projections of Future Economic Performance," Release Nos. 34-15305; 33-5992 (November 7, 1978); and both the proposing (Release Nos. 34-15306; 33-5993 (December 29, 1978)) and adopting (Release Nos. 34-15944; 33-6084 (June 25, 1979)) releases for Rule 175 under the Securities Act and 3b-6 under the Exchange Act.
Indeed, the Commission noted in "Safe Harbor For Forward-Looking Statements", Release Nos. 34-34831; 33-7101 (October 1994), that forward-looking statements, including projections, might be required pursuant to Rule 10b-5 in the context of a business combination or transactions involving an issuer's or affiliate's purchase of the issuer's shares, and projections might also be contained in documents required to be filed and discussed pursuant to specific line item requirements, such as Item 4(b) of Form S-4 and Item 9 of Schedule 13E-3.
The only statement by the Commission Chairman in the record with respect to the excluded transactions appears in a letter to Senator D'Amato as Chairman of the Senate Banking Committee dated May 19, 1995, criticizing the safe harbor provisions in the House bill and stating a concern that the bill would immunize promoters of blank check offerings, penny stocks and roll-ups and that the bill "should also address conflict of interest problems that may arise in management buyouts and changes in control of a company."
[9]:We note that the "Forward-Looking Statement" disclosure in the proxy statement of Mentor Graphics Corporation with respect to a special meeting of shareholders of Quickturn Design Systems, Inc., conducted in connection with a cash tender for Quickturn, included the following sentence in response to a Staff comment: "It has not been judicially determined that the safe harbor provided by Section 21E of the Exchange Act applies to forward-looking statements in an agent designation solicitation or proxy solicitation conducted in connection with a tender offer."
1
Members of our two Committees would be pleased to answer any questions you might have regarding our comments, and to meet with the Staff if that would assist the Commission's efforts.
Respectfully submitted,
/s/ Stephen J. Schulte
Stephen J. Schulte, Chair of Committee on Securities Regulation
/s/ Alexander R. Sussman
Alexander R. Sussman, Chair of Committee on Mergers, Acquisitions and Corporate Control Contests
/s/ Charles M. Nathan
Charles M. Nathan, Chair of "M&A Release" Comment Letter Task Force
"M&A Release" Comment Letter Task Force:
Charles M. Nathan, Chair
Barry A. Bryer
Lawrence A. Cunningham
Nancy Lieberman
Neila B. Radin
Faiza J. Saeed
Erica H. Steinberger
Roslyn Tom
1
cc:Hon. Arthur Levitt
Chairman, Securities and
Exchange Commission
Hon. Paul R. Carey
Commissioner
Hon. Isaac C. Hunt, Jr.
Commissioner
Hon. Norman S. Johnson
Commissioner
Hon. Laura Simone Unger
Commissioner
Brian J. Lane
Director, Division of Corporation Finance
0259577.10
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APPENDIX
Comments on Proposed Regulation M-A
Item 1003(c)(2), (3), (4) (Background of Filing Natural Persons)
The Commission should consider adding the instructions to Item 2(d), (e) and (f) of Schedule 14D-1 to the instructions to Item 1003 of Regulation M-A.
In addition, the Commission should consider making clear that the judicial or administrative proceedings that must be described pursuant to Item 1003(c)(4) are those of a civil nature. Item 1003(c)(4) provides that a statement should be made "whether or not the person was a party to any judicial or administrative proceedings..." however, in each of Schedules 14D-1 and 13E-3 the word "civil" is inserted prior to the word "judicial" in a similar instruction.
Item 1004(a) (Terms of the Transactions)
The Commission should consider whether a description of securities should be required only where the consideration offered consists solely of stock exempt from registration. We note that Form S-4 does not limit the description to cases where exempt stock is being offered (in which case a registration statement on Form S-4 would not be required). Schedule 14A, Item 14(a)(vi) requires a description of securities for any securities that are exempt from registration and are being issued in connection with the merger or other similar transaction.
The Commission should consider clarifying in Item 1004(a)(2), which provision applies to "mergers or similar transactions", that transactions involving the issuance of securities as part of the consideration offered to security holders should set forth the information required by 1004(a)(2). For example, without such clarifying language, an exchange offer, which may not be a "merger or similar transaction", would not need to set forth an explanation of material differences in the rights of security holders or a brief statement as to the accounting treatment of the transaction. Yet this information is required by Form S-4, Item 4(a).
Item 1005(e) (Agreements Involving the Subject Company's Securities)
Language should be added to make clear that the agreement, arrangement or understanding to be described should be in connection with the transaction in question, as currently is the case in Schedules 13E-4 and 13E-3. Please see our mark-up on Annex A hereto.
Item 1008 (Interest in Securities of the Subject Company)
Please see Annex A hereto for a mark-up of proposed comments. Generally, our comments are intended to make clear the provisions that are applicable to a third-party tender offer versus a going-private transaction consistent with the disclosure requirements in Schedule 14D-1 and Schedule 13E-3.
We note that the disclosure required by Item 1008(a) (securities ownership) is not required by Schedule 13E-4. The Commission should consider revising Item 8 of the Schedule to indicate that Item 1008(a) information is not applicable to an issuer tender offer.
Comments on Proposed Schedule TO
Cover Page and Instructions
We are unclear why the cover page for reporting persons in Schedule 14D-1 is eliminated in proposed Schedule TO. Also, proposed Schedule TO does not make clear if it is intended that it be used to also satisfy an initial filing on Schedule 13D.
Instruction G to Schedule TO discusses only amendments to Schedule 13D on Schedule TO, and refers to the 14 disclosure items on the cover page of Schedule 13D being on the cover of Schedule TO when used as a combined filing. The Note on the cover page of Schedule 14D-1 appears to contemplate that the cover page of Schedule 14D-1 can also be used to satisfy an initial filing on Schedule 13D.
"Special Instructions for Complying with Schedule TO" refers to the mandatory disclosure of the information specified in such schedule, "except for I.R.S. identification numbers, disclosure of which is voluntary." We note that Schedule TO currently does not require disclosure of I.R.S. identification numbers, and that such disclosure usually is set forth in the Schedule 14D-1 or Schedule 13D cover page. Also, it is unclear whether the reference to Section 13(e) and going-private transactions is applicable in these Special Instructions, as Schedule 13E-3 does not have such a cover page or such special instructions.
General Instruction C
The required disclosure for the persons enumerated in General Instruction C to Schedule TO should be applicable only to Items 3 and 5-8 of Schedule TO for a third-party tender offer (not Items 5-9). Item 9 relates to "Persons/Assets Retained, Employed, Compensated or Used", which corresponds to Item 8 in Schedule 14D-1, and General Instruction C of Schedule 14D-1 does not extend to such Item 8.
In addition, "partnership" in General Instruction C should be clarified as a "general partnership", as indicated in the mark-up on Annex A hereto. See, for example, General Instruction C to Schedules 13E-3 and 13E-4, each of which refers to "general partnership".
Comments on Proposed Form C
Item 14 (Incorporation by Reference by Seasoned Form A Companies)
Item 14(a) should require the same disclosure required by Item 12(a)(3) regarding the description of capital stock and certain market information.
Item 18 (Information Required for All Other (Non-Small Business) Companies)
Item 17 of Form S-4 makes a distinction between a target company that is a reporting company and a target company that is not. Under Item 17(a), a target company that is a reporting company (or a target company that elects to comply with Item 17(a) instead of Item 17(b)) is required to furnish the same information required of a bidder that does not meet the requirements for use of Form S-2 or S-3. Generally, this means that non-reporting target companies that comply with Item 17(b) are not obligated to furnish as much information as a reporting target company complying with Item 17(a), although the disclosure that is not required to be included under Item 17(b) is not particularly onerous to prepare (i.e., description of business in accordance with Item 101 of Regulation S-K, and Items 102 (description of property), 103 (legal proceedings) and 304(a) (changes in and disagreements with accountants) of Regulation S-K). With respect to foreign private issuers, non-reporting target companies also would not be required to prepare disclosure regarding exchange controls and other limitations affecting security holders, and regarding taxation.
However, in Item 18 of Form C, there is no such distinction in disclosure between reporting companies and non-reporting companies, which means that non- reporting companies would need to furnish the same information as reporting companies. While it is arguable that the additional required disclosure is not onerous, the Commission should consider whether the distinction should be maintained in Form C.
In addition, Items 18(c) and (e) need to be clarified to indicate the applicable financial statement requirements for foreign private issuers as opposed to domestic issuers. Please see the mark-up on Annex A hereto. The mark-up is consistent with the requirements of Form F-4.
Item 23(a)(6) (Vote Required for Approval)
Item 23 sets forth the information required if proxies will not be solicited or in an exchange offer. It would seem that if the transaction is an exchange offer, the registrant should not be required to provide information on the vote required for approval pursuant to Item 21 of Schedule 14A. We note that while Form S-4 requires such information for an exchange offer (see Item 19(b) of S-4), Form F-4 does not (see Item 19(b) of F-4). We suspect there may have been a typographical error in Form S-4 which has been carried over into Form C.
Instruction to Item 25(a) (Material Contracts)
We believe that material contracts should not be required for both the registrant and the company being acquired, but rather just for the registrant as in Forms S-4 and F-4.
THE ASSOCIATION OF THE BAR
OF THE CITY OF NEW YORK
COMMITTEE ON SECURITIES REGULATION
Stephen J. Schulte, Chair
Andre Weiss
Klaus Ilmonen
Talee S. Zur
Robert D. Joffe
Elizabeth S. Stong
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Members
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Gerald S. Backman Richard Holmes Rowe
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James N. Benedict Roslyn Tom
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William P. Bowden, Jr. Richard H. Weiss
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Reid Figel Irshad S. Karim
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Philip E. Foster Neila B. Radin
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Jeffrey A. Klafter Craig Stuart Barrack
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Andrew Joshua Levander Mark H. Barth
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John A. Mac Kinnon Professor Lawrence A.
Cunningham
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Charles Evan Stewart Mitchell S. Fishman
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Professor Marcel Kahan Peter J. Loughran
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Paul L. Lee Abby Sue Meiselman
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Jonathan H. Churchill Charles Merrill Nathan
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Peter C. Clapman David Walter Pollak
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Sarah E. Cogan Faiza J. Saeed
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David B. Harms Elliot Schnapp
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Sarah Hewitt Hon. John S. Martin, Jr.
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James B. McHugh Walter G. Ricciardi
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Ernest T. Patrikis
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COMMITTEE ON
MERGERS, ACQUISITIONS, AND CORPORATE CONTROL CONTESTS
Alexander R. Sussman, Chair
Michael E. Krawitz
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Members
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Jill S. Abrams Ellen J. Odoner
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William T. Allen Louise M. Parent
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Barry A. Bryer Robert F. Quaintance, Jr
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Peter C. Clapman Richard W. Reinthaler
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Professor John C. Coffee, Jr. Brian L. Schorr
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Lori Anne Czepiel Steven G. Schulman
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Steven R. Dowe Christine J. Smith
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James A. Fanto Ronald M. Soiefer
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Walter T. Gangl Erica H. Steinberger
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Alan S. Goudiss Judith R. Thoyer
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David J. Greenwald Robert I. Townsend, III
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John L. Hardiman Marc Weingarten
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Melissa B. Lautenberg Allen I. Young
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Nancy A. Lieberman William D. Zeller
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0259577.10
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