Excerpt from Current Issues and Rulemaking Projects Outline (November 14, 2000)
Section II.D.3. Mergers & Acquisitions - Current Issues - Schedule 13E-3 Filing Obligations of Issuers or Affiliates Engaged in a Going-Private Transaction
Generally, Exchange Act Rule 13e-3 requires that each issuer and affiliate engaged, directly or indirectly, in a going-private transaction file a Schedule 13E-3 with the Commission and furnish the required disclosures (e.g., the statement of "reasonable belief" as to the fairness or unfairness of the proposed transaction) directly to the holders of the class of equity securities that is the subject of the transaction. A joint filing may be permissible in this situation, provided each filing person individually makes the required disclosures and signs the Schedule 13E-3.
Two separate but related issues may be raised with respect to the determination of "filing-person" status in situations where a third party proposes a transaction with an issuer that has at least one of the requisite "going-private" effects: first, what entities or persons are "affiliates" of the issuer within the scope of Rule 13e-3(a)(1) and, second, when should those affiliates be deemed to be engaged, either directly or indirectly, in the going-private transaction. While resolution of both issues necessarily turns on all relevant facts and circumstances of a particular transaction, you should note the following.
First, the staff consistently has taken the position that members of senior management of the issuer that is going private are affiliates of that issuer. Depending on the particular facts and circumstances of the transaction, such management also might be deemed to be engaged in the transaction. As a result, such management-affiliates may incur a Schedule 13E-3 filing obligation separate from that of the issuer. For example, the staff has taken the position that members of senior management of an issuer that will be going private are required to file a Schedule 13E-3 where the transaction will be effected through merger of the issuer into the purchaser or that purchaser's acquisition subsidiary, even though:
• such management's involvement in the issuer's negotiations with the purchaser is limited to the terms of each manager's future employment with and/or equity participation in the surviving company; and
• the issuer's board of directors appointed a special committee of outside directors to negotiate all other terms of the transaction except management's role in the surviving entity.
An important aspect of the staff's analysis was the fact that the issuer's management ultimately would hold a material amount of the surviving company's outstanding equity securities, occupy seats on the board of this company in addition to senior management positions, and otherwise be in a position to "control" the surviving company within the meaning of Exchange Act Rule 12b-2 (i.e., "possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.").
Second, questions have arisen regarding the nature and scope of the Schedule 13E-3 filing obligation of an acquiring person, or "purchaser," in a merger or other going-private transaction. In the situation described in above, where management of the issuer-seller that will be going private is essentially "on both sides" of the transaction, the purchaser also may be deemed to be an affiliate of the issuer engaged in the transaction and, as a consequence, required to file on Schedule 13E-3. See Exchange Act Release No. 16075 (August 2, 1979) (noting that "affiliates of the seller often become affiliates of the purchaser through means other than equity ownership, and thereby are in control of the seller's business both before and after the transaction. In such cases the sale, in substance and effect, is being made to an affiliate of the issuer..."). Accordingly, the issuer-seller, its senior management and the purchaser may be deemed Schedule 13E-3 filing persons in connection with the going-private transaction. Where the purchaser has created a merger subsidiary or other acquisition vehicle to effect the transaction, moreover, the staff will "look through" the acquisition vehicle and treat as a separate, affiliated purchaser the intermediate or ultimate parent of that acquisition vehicle. Accordingly, both the acquisition vehicle and the entity or person who formed it to acquire the issuer would have separate filing obligations (although, as noted, a joint filing may be permitted by the staff).