SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
Release Nos. 33-7376; 34-38068; IC-22413; File No. S7-12-96
RIN 3235-AG78
Odd-lot Tender Offers by Issuers
AGENCY: Securities and Exchange Commission.
ACTION: Final Rule.
SUMMARY: The Securities and Exchange Commission ("Commission")
is adopting an amendment to Rule 13e-4 under the Securities
Exchange Act of 1934 ("Exchange Act"). The amendment removes the
rule's requirement that an issuer cash tender offer made to odd-
lot holders specify a record date of ownership for eligibility to
tender into the offer. The amendment enables issuers to conduct
continuous, periodic, or extended odd-lot offers for their equity
securities. The Commission also is granting a class exemption
from Rule 10b-13, and a temporary class exemption from Rule 10b-
6, under the Exchange Act to permit issuers to conduct odd-lot
offers, to "round-up" odd-lots on behalf of odd-lot holders, and
to make purchases of their securities otherwise than pursuant to
the odd-lot offer.
EFFECTIVE DATE: [Insert date of publication in the Federal
Register.]
FOR FURTHER INFORMATION CONTACT: Lauren C. Mullen, Attorney,
Office of Risk Management and Control, Division of Market
Regulation, Securities and Exchange Commission, 450 Fifth Street,
N.W., Stop 5-1, Washington, D.C. 20549, at (202) 942-0772.
==========================================START OF PAGE 2======
SUPPLEMENTARY INFORMATION:
I. EXECUTIVE SUMMARY
The Commission is adopting an amendment to paragraph (h)(5)
of Rule 13e-4 ("Rule 13e-4" or "Rule") -[1]- under the
Exchange Act, -[2]- and is granting a class exemption from
Rule 10b-13, -[3]- and a temporary class exemption from Rule
10b-6, -[4]- under the Exchange Act in connection with
issuers' odd-lot tender offers. The amendment, which was
published for comment on April 25, 1996 ("Proposing Release"),
-[5]- and the class exemptions permit issuers to conduct
continuous, periodic, or extended odd-lot offers for their equity
securities without seeking exemptions from Rules 10b-6, 10b-13,
and 13e-4 from the Commission.
II. DISCUSSION OF THE AMENDMENT
Rule 13e-4 governs cash tender and exchange offers by
issuers for their equity securities. Paragraph (h)(5) of Rule
13e-4 excepts issuers' odd-lot offers from the provisions of the
Rule, other than the "all holders" and "best price" provisions of
---------FOOTNOTES----------
-[1]- 17 CFR 240.13e-4.
-[2]- 15 U.S.C. 78a et seq.
-[3]- 17 CFR 240.10b-13.
-[4]- 17 CFR 240.10b-6.
-[5]- Securities Exchange Act Release No. 37132 (April
25, 1996), 61 FR 18306.
==========================================START OF PAGE 3======
paragraphs (f)(8)(i) and (f)(8)(ii), respectively. -[6]- In
an odd-lot offer, the offer to purchase is limited to
securityholders who own fewer than 100 shares of the subject
security.
Prior to this amendment, paragraph (h)(5) of Rule 13e-4
required an issuer making an odd-lot offer to set a record date
prior to the offer's announcement for the purpose of determining
a securityholder's eligibility to participate in the offer. As
discussed in the Proposing Release, the record date requirement
was imposed to prevent certain perceived abuses. -[7]- The
Commission's experience with odd-lot offers, and the two comments
received in response to the Proposing Release, indicate that such
abuses rarely, if ever, occur. Therefore, to reduce the
regulatory burdens for issuers conducting odd-lot offers, and to
eliminate the need for the Commission to grant exemptions from
Rule 13e-4 on a case-by-case basis for extended odd-lot offers,
---------FOOTNOTES----------
-[6]- 17 CFR 240.13e-4(h)(5); see Securities Exchange
Act Release No. 19988 (July 21, 1983), 48 FR 34251
("Release No. 34-19988") (adopting the paragraph
now designated as (h)(5) of Rule 13e-4, which
excepts odd-lot offers from the Rule's
requirements).
Rule 13e-4(f)(8)(i) requires that the tender offer be open
to all securityholders of the class of securities subject to
the tender offer. 17 CFR 240.13e-4(f)(8)(i). Rule 13e-
4(f)(8)(ii) requires that consideration paid to any
securityholder pursuant to an issuer tender offer be the
highest consideration paid to any other security holder
during such tender offer. 17 CFR 240.13e-4(f)(8)(ii).
-[7]- See Securities Exchange Act Release No. 19246
(November 17, 1982), 47 FR 53398, 53400 ("Release
34-19246") (proposing adoption of the paragraph
now designated as (h)(5) of Rule 13e-4).
==========================================START OF PAGE 4======
the Commission proposed amending Rule 13e-4 to delete the record
date requirement from paragraph (h)(5). The amendment was
proposed to permit issuers to conduct odd-lot offers on a
continuous, extended, or periodic basis, and also to enable odd-
lot holders who obtain their holdings prior to or during the odd-
lot offer to participate in the offer.
The Commission has determined to adopt the amendment to Rule
13e-4(h)(5) as proposed, with a minor modification. -[8]-
In order to provide issuers with flexibility, the rule as amended
permits, but does not require, an issuer to set a record date for
eligibility to participate in an odd-lot offer.
One commenter requested clarification regarding the
appropriate procedures under the Rule for notifying beneficial
holders of odd-lots about the offer. As previously noted,
paragraph (h)(5) of Rule 13e-4 excepts issuers from the Rule's
requirements other than the "all holders" and "best price"
provisions. Nonetheless, in proposing paragraph (h)(5), the
Commission noted an issuer's affirmative duty under the Exchange
Act, and various rules promulgated thereunder, to disclose
material information to its shareholders as well as its own
---------FOOTNOTES----------
-[8]- One commenter suggested that the Commission exempt
issuers that conduct odd-lot offers from the
broker-dealer registration requirements under
Section 15(a) of the Exchange Act. The Commission
notes that this commenter's concerns were
specifically addressed by the staff in Letter
regarding Shareholder Communications Corporation
(July 25, 1996), 1996 SEC. No-Act. LEXIS 610.
This letter discusses the extent to which issuers
may participate in an odd-lot offer without
requiring registration as a broker-dealer.
==========================================START OF PAGE 5======
interest in the success of an odd-lot offer. -[9]- In
adopting the odd-lot exception, the Commission further stated
that odd-lot offers are required to be extended equally to
beneficial holders and record holders. -[10]-
The ability to participate equally means that beneficial
holders should have the same access to information about the
offer as record holders. -[11]- Accordingly, while Rule
13e-4(h)(5) does not contain dissemination requirements, an
issuer or its agent must take reasonable steps to disseminate
information about an odd-lot offer to beneficial holders in a
manner comparable to the dissemination to record holders.
The same commenter also suggested excepting issuer tender
offers made to a class of shareholders owning, in the aggregate,
less than five percent of the issuer's outstanding securities;
this commenter also suggested redefining the term "odd-lot" to
include more than 99 shares. The Commission believes that the
odd-lot exception to Rule 13e-4 is meant to cover an offer for
economically de minimis holdings, e.g., an amount of securities
for which high transaction costs create a disincentive for
trading the shares and which also is too small to warrant
servicing by the issuer. Moreover, increasing the exception's
---------FOOTNOTES----------
-[9]- Release No. 34-19246, 47 FR at 53399 n. 18.
-[10]- Release No. 34-19988, 48 FR at 34252.
-[11]- Cf. paragraph (e)(1)(ii) of Rule 13e-4, 17 CFR
240.13e-4(e)(1)(ii), and paragraph (a)(2) of Rule
14a-7 under the Exchange Act, 17 CFR 240.14a-
7(a)(2), respectively.
==========================================START OF PAGE 6======
threshold to an amount greater than 99 shares would raise various
concerns under the Rule, including the "all-holders" provisions.
Nevertheless, the Commission recognizes that the odd-lot
exception is intended to allow issuers to reduce the number of
small shareholdings where the costs to issuers of servicing small
shareholders, and the costs to shareholders of selling small
holdings, are disproportionate to the value of the security.
Accordingly, the Commission will consider, on a case-by-case
basis, issuer offers involving tenders of more than 99 shares
from each holder, where such offers involve a number of
securities that represent a de minimis proportion of the value of
the issuer's outstanding securities. -[12]-
III. CLASS EXEMPTION FROM RULE 10b-13 AND TEMPORARY CLASS
EXEMPTION FROM RULE 10b-6
As discussed in the Proposing Release, odd-lot offers also
raise issues under Rule 10b-13, which prohibits an issuer
conducting a cash tender or exchange offer from purchasing the
same security that is the subject of the offer (or any other
security which is immediately convertible into or exchangeable
for such security) otherwise than pursuant to the offer. Rule
10b-13 is designed, inter alia, to prevent larger shareholders
from demanding greater or different consideration for the tender
---------FOOTNOTES----------
-[12]- The Commission, through its Division of Market
Regulation, will consider requests regarding such
programs. Such requests should be directed to the
Office of Risk Management and Control, Division of
Market Regulation, Securities and Exchange
Commission, 450 Fifth Street, N.W., Stop 5-1,
Washington, D.C. 20549 at (202) 942-0772.
==========================================START OF PAGE 7======
of their shares than that which is paid pursuant to the tender
offer. Larger shareholders are ineligible to participate in odd-
lot offers because, by definition, an odd-lot offer is available
only to shareholders owning 99 or fewer shares of the issuer's
securities. Accordingly, the Commission believes that purchases
of an issuer's securities otherwise than pursuant to an odd-lot
offer do not raise the concerns that Rule 10b-13 is designed to
address.
The Commission, therefore, hereby grants an exemption from
Rule 10b-13 to permit any issuer or agent acting on behalf of an
issuer in connection with an odd-lot offer to purchase or arrange
to purchase the security that is the subject of the offer (or any
other security which is immediately convertible into or
exchangeable for such security) otherwise than pursuant to the
odd-lot offer from the time that the odd-lot offer is publicly
announced or otherwise made known to odd-lot holders, until the
offer's expiration. Among other things, this will allow the
issuer or its agent to purchase the issuer's securities to
satisfy requests of odd-lot holders to "round-up" their holdings
to 100 shares.
Also, the Commission today is adopting Regulation M under
the Exchange Act, the Securities Act of 1933, -[13]- and
the Investment Company Act of 1940, -[14]- and is
---------FOOTNOTES----------
-[13]- 15 U.S.C. 77a et seq.
-[14]- 15 U.S.C. 80a-1 et seq.
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rescinding Rule 10b-6 under the Exchange Act, among other rules.
-[15]- Rule 102 of Regulation M, which along with Rule 101
replaces Rule 10b-6, contains an exception that permits issuers
to purchase odd-lots while engaged in a distribution of the same
or related securities. This exception allows issuers to conduct
odd-lot tender offers, including continuous, periodic, or
extended odd-lot offers, during a distribution of the same or
related securities. The exception also allows issuers to
purchase securities on behalf of odd-lot holders who wish to
"round-up" their holdings to a round lot (i.e., 100 shares).
-[16]- The exceptions for odd-lot transactions under
Regulation M will accomplish the same relief intended by the
class exemption from Rule 10b-6 that was discussed in the
Proposing Release. -[17]- The exception for odd-lot
transactions from Rule 102 of Regulation M, and a similar
exception from Rule 101 for distribution participants and their
affiliated purchasers, will be effective as of 60 days from
publication of Regulation M in the Federal Register.
To accommodate odd-lot offers in the interim, the Commission
---------FOOTNOTES----------
-[15]- Securities Exchange Act Release No. 38067
(December 20, 1996).
-[16]- Additionally, the Commission notes that sales of
tendered odd-lots into the open market are not
subject to Rules 101 and 102 of Regulation M (or
Rule 10b-6) where such sales do not satisfy the
magnitude and special selling efforts and selling
methods elements of a distribution for purposes of
those provisions.
-[17]- Proposing Release, 61 FR at 18307.
==========================================START OF PAGE 9======
hereby grants an exemption from Rule 10b-6 on a temporary basis
to permit an issuer, or an agent acting on behalf of the issuer,
to bid for or purchase odd-lots, or to effect transactions to
allow odd-lot holders to "round-up" their holdings to 100 shares
during an odd-lot offer conducted pursuant to Rule 13e-4(h)(5),
during a distribution for the purposes of Rule 10b-6. This class
exemption will terminate as of the effective date of Regulation
M.
IV. REGULATORY FLEXIBILITY ACT ANALYSIS
The Chairman of the Securities and Exchange Commission
certified in connection with the Proposing Release that the
proposed amendment to Rule 13e-4 and the proposed class
exemptions from Rules 10b-6 and 10b-13, if adopted, would not
have a significant impact on a substantial number of small
entities. None of the comments addressed the certification.
V. EFFECTS ON COMPETITION AND OTHER FINDINGS
Section 23(a)(2) of the Exchange Act -[18]- requires
the Commission, in adopting rules under the Exchange Act, to
consider the anti-competitive effects of such rules, if any, and
to balance any impact against regulatory benefits gained in terms
of furthering the purposes of the Exchange Act. Furthermore,
Section 2 of the Securities Act of 1933 -[19]- and Section
3 of the Exchange Act, -[20]- as amended by the recently
---------FOOTNOTES----------
-[18]- 15 U.S.C. 78w(a)(2).
-[19]- 15 U.S.C. 77b.
-[20]- 15 U.S.C. 78c.
==========================================START OF PAGE 10======
enacted National Securities Markets Improvement Act of 1996
("Markets Improvement Act"), -[21]- provide that whenever
the Commission is engaged in rulemaking, and is required to
consider or determine whether an action is necessary or
appropriate in the public interest, the Commission also shall
consider, in addition to the protection of investors, whether the
action will promote efficiency, competition, and capital
formation. The Commission has considered the amendment to
Rule 13e-4 and the class exemption from Rule 10b-13 in light of
the standards cited in Sections 3 and 23(a)(2) of the Exchange
Act and believes that, for the reasons stated herein, the
adoption of the amendment and the granting of the class exemption
will promote efficiency for issuers conducting odd-lot offers,
will have no adverse affect on capital formation, and will not
impose any burden on competition not necessary or appropriate in
furtherance of the Exchange Act.
The Commission finds, in accordance with the Administrative
Procedure Act, -[22]- that the adoption of the amendment to
Rule 13e-4 and the class exemptions from Rules 10b-6 and 10b-13
relieve mandatory restrictions and are exemptive in nature.
Accordingly, the foregoing action becomes effective immediately.
VI. STATUTORY BASIS
Pursuant to Sections 3(b), 9(a)(6), 10(b), 13(e), 14(e), and
---------FOOTNOTES----------
-[21]- Pub. L. No. 104-290, 106, 110 Stat. 3416 (1996).
-[22]- 5 U.S.C. 553(d).
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23(a) of the Exchange Act; 15 U.S.C. 78c(b), 78i(a)(6), 78j(b),
78m(e), 78n(e), and 78w(a); the Commission amends Rule 13e-4 in
Chapter II of Title 17 of the Code of Federal Regulations by
amending paragraph (h)(5) of 240.13e-4.
List of Subjects in 17 CFR Part 240
Brokers, Confidential business information, Fraud, Reporting
and recordkeeping requirements, Securities.
TEXT OF THE PROPOSED AMENDMENT
For the reasons set out in the preamble, the Commission
amends Title 17, Chapter II of the Code of Federal Regulations as
follows:
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PART 240 - GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE
ACT OF 1934
1. The authority citation for part 240 continues to read,
in part, as follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77eee, 77ggg,
77nnn, 77sss, 77ttt, 78c, 78d, 78f, 78i, 78j, 78k, 78k-1, 78l,
78m, 78n, 78o, 78p, 78q, 78s, 78w, 78x, 78ll(d), 79q, 79t, 80a-
20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4 and 80b-11, unless
otherwise noted.
* * * * *
2. Section 240.13e-4 is amended by revising paragraph
(h)(5) to read as follows:
240.13e-4 Tender offers by issuers.
* * * * *
(h) * * *
(5) Offers to purchase from security holders who own an
aggregate of not more than a specified number of shares that is
less than one hundred: Provided, however, That:
(i) The offer complies with paragraph (f)(8)(i) of this
section with respect to security holders who own a number of
shares equal to or less than the specified number of shares,
except that an issuer can elect to exclude participants in an
issuer's plan, as that term is defined in 242.100 of Regulation
M, or to exclude security holders who do not own their shares as
of a specified date determined by the issuer; and
(ii) The offer complies with paragraph (f)(8)(ii) of this
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section or the consideration paid pursuant to the offer is
determined on the basis of a uniformly applied formula based on
the market price of the subject security;
* * * * *
By the Commission.
Jonathan G. Katz
Secretary
December 20, 1996