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U.S. Securities and Exchange Commission

Speech by SEC Chairman:
Opening Statement at the Commission Open Meeting


Chairman Christopher Cox

U.S. Securities and Exchange Commission

Washington, D.C.
October 18, 2006

Good morning. This is a meeting of the Securities and Exchange Commission conducted under the Government in the Sunshine Act on October 18, 2006. Today, we will consider changes to the tender offer best-price rule. These amendments will clarify that the best-price rule applies only to the consideration paid for securities tendered in a tender offer, and also that employment compensation, severance or other employee benefits should not be considered part of the "best price" being paid in a tender offer.

The purpose of the best-price rule is, as its name implies, to ensure that all shareholders are treated equally, and paid the same price in a tender offer. But even the simplest of concepts can be rendered confusing by the complexities of the real world — particularly where there are lawyers involved. Over the last decade, the courts have differed in their interpretation of the rule. Some courts have said that if a shareholder receives compensation for services, that amount has to be added to the price paid to other shareholders in the tender offer. Other courts disagree with this approach. They have said that while the rule does require that consideration paid for shares tendered in a tender offer must be the highest paid to any other security holder, it was not intended to capture amounts paid for services as part of an employment arrangement. That's not the "best-price" being paid for shares — it's being paid for something else.

To address these conflicting interpretations, in December, we proposed changes to the best-price rule. Our proposed rule upheld the principle of equal treatment when it comes to payment for shares in a tender offer, while excluding payments that are not in consideration for shares — including specifically, payments made under employment and severance arrangements. Since December, we received 11 comments. Most were positive and highlighted the need for these amendments. Several of them suggested excellent modifications to our proposal, and staff have incorporated them in the rule considered today.

The final amendments to the best-price rule that we are considering today will clarify that the rule applies only with respect to the consideration offered and paid for securities tendered in a tender offer. The amendments will clearly exclude compensation arrangements, so long as they meet certain requirements. And they will provide a safe harbor for compensation arrangements that are approved by independent directors.

These changes to the rule recognize that compensation arrangements are often a critical aspect of a business combination, because the retention or severance of key employees can be a very important consideration in deciding whether to proceed with a transaction. And to insure that investors are protected and the fundamental purpose of the rule is upheld, the exemption contains specific substantive standards that must be satisfied, and a safe harbor that hinges upon approval of independent members of the board of directors.

I'm convinced that these changes to the best-price rule will provide greater clarity and greater certainty to our regulation.

I would like to thank the staff of the Division of Corporation Finance for their hard work on this rulemaking, particularly Marty Dunn, Mauri Osheroff, Brian Breheny, and Mara Ransom, as well as their colleagues in the Offices of General Counsel and Economic Analysis and the Division of Investment Management.

Now I'll turn it over to the Director of Corporation Finance, John White to hear a more detailed description of the proposals.


Modified: 10/18/2006