1101 Market Street, 11 th Floor
Philadelphia, PA 19107-2911
Phone: (215) 238-6300
Fax: (215) 238-1159
April 5, 1999
Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Re: Release No. 33-7607; 34-40633; IC-23520; File No. S7-28-98
Dear Mr. Katz:
On behalf of the Business Law Section of the Philadelphia Bar Association, we are pleased to submit comments on the amendments proposed by the Securities and Exchange Commission (the "SEC") in Release No. 33-7607; 34-40633; IC-23520 (hereinafter, the "Takeover Regulation Release"). These comments were prepared by the M&A Subcommittee of an ad hoc committee formed by the Business Law Section's Securities Regulation Committee to review and comment upon the SEC's proposals in the Takeover Regulation Release and Release No. 33-7606A; 34-40632A; IC-23519A (hereinafter, the "Securities Offerings Release"). Those participating in this process are named below following the signatures.
As a preliminary matter, we would like to emphasize the significance of the SEC's undertakings in the Takeover Regulation Release. We applaud the SEC's attempt to amend the rules governing business combinations in view of the vast changes that have transpired in the marketplace in the last several decades and to advance the goal of investor protection in a regulatory environment that permits business combinations to be completed as efficiently as possible. We also applaud the SEC's efforts to structure rules which are sufficiently flexible to accommodate future changes in the business combination area. Based on the SEC's proposals, we are convinced that significant improvements in the regulatory framework governing business combination transactions can and will be enacted.
Our comments to a number of the SEC's specific proposals are as follows:
1. Pre-Filing Communications . We believe that, subject to a resolution of the liability issues discussed below, the SEC's proposal regarding filing of written transaction-related communications is generally appropriate. We would, however, encourage the SEC to clarify that, to the extent such filings constitute "prospectus supplements," issuers will not be subject to a prospectus delivery requirement for each such communication. In our view, a dissemination requirement could have an unintended effect of restricting, rather than promoting, communications.
Likewise, our view is that a "quiet period" to cure any conditioning of the market, regardless of its duration, would be difficult to put into practice and could even be counterproductive in the transaction setting, where there is normally active trading in the securities of the companies involved in the business combination. We believe that, in keeping with its proposals in other areas, the SEC should be encouraging more timely release of information, rather than restricting communications. In this light, we note that a quiet period proposal would likely present the same conflict with stock exchange (and, in certain cases, SEC) rules requiring issuers to provide full and prompt disclosure to investors that exists under the current regulatory regime. 1
We are not in favor of the proposal conditioning the free communications safe harbor for stock transactions on acceptance of liability under Section 12(a)(2) of the Securities Act of 1933, as amended (the "Securities Act"), or the rescission of Rule 145(b)(2) under the Securities Act. We understand the SEC's desire to advance the goal of investor protection, but increasing the liability burden of issuers ultimately creates a tradeoff with the goal of increasing disclosure to investors, particularly with respect to the forward looking information investors actively seek in the context of business combination transactions. From a liability perspective, we believe the manifold existing antifraud rules, including Rule 10b-5 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in many cases, Section 11 of the Securities Act, more than adequately serve the goal of investor protection. Subjecting all transaction-related communications to Section 12(a)(2) liability will likely have a chilling effect on such communications, particularly in view of the plaintiff's relaxed pleading burdens under Section 12(a)(2) for reliance and causation, as compared with those in effect under Rule 10b-5.
The proposed additional liability standard under Section 12(a)(2) is not necessary from a practical perspective. One would expect that much of the transaction-related information contained in the proposed "first-use" filings, to the extent material, would also be presented in the prospectus (either directly or incorporated by reference), which is subject to Section 11 of the Securities Act. Moreover, practice suggests that many targets and bidders file Form 8-K's with respect to selected transaction-related communications, which are subject to liability under the Exchange Act and, to the extent subsequently incorporated by reference into the base disclosure document, the Securities Act as well. Under the existing regulatory structure, companies are afforded the flexibility to decide what information to publicly file based on their own views of pertinent disclosure matters, including materiality.
The proposed liability standard of 12(a)(2) liability could also have the effect of encouraging selective disclosure since 12(a)(2) liability would attach to written but not oral communications. This distinction could encourage acquirors to transmit information orally to selected groups of investors or analysts rather than publicly filing it and would thus undermine the SEC's stated goal of encouraging disclosure of information to the entire investing public.
We believe the SEC's proposal to require filing of pre-offering materials upon "first use," creates difficult practice issues. 2 Requiring public filing of all transaction-related information prior to the drafting and dissemination of the offer document may force issuers to take premature disclosure postures on many difficult issues which are normally vetted during the prospectus preparation process. This in turn may serve to inhibit early disclosure rather than foster it.
We support the proposal to extend the safe harbor established by the Private Securities Litigation Reform Act to tender offers. This will encourage the free flow of information and eliminate an anomalous distinction among transaction structures.
We would also like to emphasize, in light of the uncertainty associated with final adoption of the rules proposed in the Securities Offering Release, that the SEC should clarify that the proposed reforms for transaction-related communications contemplated by the Takeover Regulations Release are independent of the communication reforms proposed in the Securities Offerings Release. Business combination transactions and related communications raise issues different from those in the traditional capital raising transactions addressed in the Securities Offerings Release. Therefore, we would encourage the SEC to adopt the proposed business combination communications safe harbors even if the SEC declines to adopt the communications reforms proposed in the Securities Offerings Release.
2. Confidential Treatment of Proxy Materials. We appreciate the disclosure benefits of the proposed confidential treatment for preliminary proxy materials. However, we believe the SEC needs to consider the issue further in view of the active trading that can occur in a target's or bidder's shares based on the content of preliminary filings. As noted above, practice suggests that there are difficult or unanticipated issues - particularly although not exclusively in the accounting area - which require changes in the offer document prior to effectiveness. We question whether these can or should be obviated solely through pre-filing conferences with the SEC staff. The proposed elimination of confidential filings creates a need for additional clarification of the liability standards that apply to such preliminary filings, particularly where the filers do not take independent steps to disseminate such filings.
3. Safe Harbor for Proxy Solicitations . We support the extension of the Rule 14a-12 safe harbor for proxy solicitations involving opposed matters to all proxy solicitations. As with the proposed safe harbor for transaction-related communications under the Securities Act, the proposal supports the goal of providing increased disclosure to investors.
We do not support, however, the requirement that a proxy statement be delivered "as soon as practicable" following such communications. If one looks to the proposed communications safe harbor under the Securities Act as a template, there is no corresponding requirement following a communication regarding delivery of the mandated disclosure requirement. The effect of such a requirement will be to delay, if not restrict, the flow of information to investors, which is at odds with the avowed purpose of the proposal.
4. Test the Waters Proxy Solicitation . We support the SEC's approach to permit so-called "test the waters" solicitations. It strikes us as reasonable to allow registrants to discuss the desirability of certain proposals with selected stockholders without triggering the solicitation rules and, likewise, it is difficult to discern any significant investor protection concern where no proxy authorization can be granted. We would also suggest that so long as such "test the waters" communications are made to a limited number of shareholders, the SEC should not require filing of such communications in any form.
We are not in favor of any "cooling off" period in this area for reasons similar to those set out above in the discussion of the "quiet period" alternative for transaction-related communications.
5. Federally Mandated Solicitation Period . Given the advances in technology, the increased pace of information flow in the modern age and the increased importance of the investment research industry as a source of information for even the smallest investors, we do not believe there is a need for a federally prescribed period to "digest" mandated communications. Minimum proxy solicitation periods effectively exist at present under state law and rules of national securities exchanges, and we are unaware of any empirical data suggesting that federalizing the law in this area is necessary to facilitate "more informed voting decisions" by shareholders or to regularize the minor variations that may be in effect from state to state. Consistent with this approach, we support the SEC's proposal to eliminate the mandated 20-business day solicitation period for proxy statements which incorporate information by reference.
6. Five Business Day Rule . We support elimination of the five business day commencement rule for tender offers, subject to our constitutional concerns noted below. This change will eliminate various superficial mechanisms now used to avoid the rule (such as couching takeover proposals as "mergers" rather than "tender offers"). 3 In addition, to the extent that the proposed safe harbor for transaction-related communications is adopted in the context of the Securities Act, elimination of the five business day rule will enhance the effort to limit the differences between tender offers and other business combination structures. Prior to eliminating the five business day rule, however, we believe the SEC needs to review the impact that such elimination might have on the constitutional issues with respect to certain state antitakeover statutes that have pre-commencement filing requirements. We believe that it is important to ensure that such state antitakeover statutes are not permitted to negate the intent of the SEC proposals.
We also support the SEC's proposal liberalizing communications by a target company in advance of filing a Schedule 14D-9, as a tandem change.
7. Proposed Rule 14e-8 . We do not believe this proposed rule is warranted. We are unaware of any empirical data suggesting that announced tender offers are often being employed as a manipulative device, and we think it is premature to suggest that the proposed relaxation of the five business day rule may invite such abuse. 4 Bidders who couch their announced proposeal in the form of a cash merger proposal would not be burdened by the liability risk that this rule creates. More significantly, we are concerned that the vagueness of the rule and the subjective analysis it invites (with respect to intentions, reasonable beliefs and similar matters) would provide an open avenue for frivolous litigation. 5 We suspect the rule could also have the effect of discouraging a bidder from announcing a tender offer until such time as the bidder is absolutely certain the offer will succeed. This would discourage, rather than promote, the dissemination of information. Under existing rules, tendering shareholders are entitled to the benefit of, at a minimum, a five business day extension once a bidder has obtained committed financing. Thus, in the situations where a bidder commences an offer without financing in place, the tendering shareholders have adequate time to evaluate the financing when it becomes available.
8... Exchange Offer Commencement on Filing . We support this important rule change. We believe that the time delay which now accompanies stock transactions is inimical to investor interests and our capital markets and economy generally. Where, however, exchange offer documents are subject to SEC review (and bidders thus run the risk of recirculation of offer documentation), our view is that the "commencement upon filing" procedure should be optional to the bidder so as to permit a bidder to assess whether this risk is justifiable in the circumstances of a given transaction.
Because of the regulatory delay that affects stock deals, and in view of the significant market trading that occurs before any final disclosure document is cleared by the SEC and disseminated, the SEC should expedite the document review process, and set a specific time frame for review, so that exchange offers can be planned for and implemented on a more predictable and accelerated schedule. Indeed, we believe the SEC should permit bidders who are large issuers (i.e., issuers who are large enough to be eligible to use Form B as described in the Securities Offerings Release) to control the timing of effectiveness so that timing uncertainty is eliminated entirely and the issuer can operate with the same flexibility it would enjoy in a primary offering.
While we applaud the proposed changes in this area, we believe that substantial elimination of the regulatory bias against exchange offers will not occur unless the SEC permits bidders to control the timing of effectiveness of their registration statement. Limiting this power to control effectiveness to large issuers will minimize any competitive timing advantage in a contested offer since, as a practical matter, large bidders tend to compete either with other large bidders, who would possess the same timing flexibility, or with financial buyers, who tend not to offer registered securities as part of their offer.
We do not believe going private transactions should be excluded from the proposed revision which permits commencement of an offer upon filing, given that a twenty day dissemination requirement exists under Rule 13e-3(f)(1)(i) under the Exchange Act and all-cash going private tender offers can now commence upon filing. However, we would suggest that for going private transactions, issuers should not control the timing of effectiveness, as these transactions should be subject to SEC staff review.
We note the SEC's effort to harmonize the proxy and tender offer rules in considering a proxy analogue to the early commencement proposal. We support such harmonization, and our experience leads us to believe that such a rule would prove useful in the transaction context.
Given the SEC's proposal to require bidders using "early commencement" to disseminate supplements to disclose any material change in information previously provided (and to require mandatory extensions for certain changes), we do not believe that bidders who take advantage of early commencement should also be obligated to deliver a final prospectus. As the SEC has noted in the Securities Offerings Release, if all material information has been presented in a preliminary prospectus, it is hard to see how investor protection is meaningfully enhanced by requiring the delivery of a final prospectus.
9.. Streamlining Business Combination Disclosure Requirements . We support the integration of the various SEC disclosure schedules contemplated by the Takeover Regulation Release. We would, in fact, support use of a single filing to satisfy additional disclosure items beyond those items required by Schedules 14D-1, 13E-4 and 13E-3. For example, we believe that a combined Schedule TO and Schedule 13D should be permitted for original filings on Schedule 13D and not merely for amendments to a Schedule 13D already on file.
As an additional matter, we are of the view that there are some disclosure rules which apply to some transaction structures (but not others) in an apparently arbitrary manner. For instance, under Item 9 of Schedule 13E-3 and Item 14(a)(10) of Schedule 14A, as interpreted by the SEC staff, parties are required to set forth in a going private or merger disclosure document elaborate disclosure about any fairness opinion, valuation methodology, reference range, key valuation assumptions and similar matters. However, this disclosure is not required in a Schedule 14D-9.
10. Financial Statement Disclosure Requirements . We support the SEC's overall approach of eliminating or limiting disclosure of target financial statements in certain transaction contexts and the corresponding revision of Item 14 of Schedule 14A. However, given the elimination of the requirement for target financial statements in all-cash transactions where the acquiror's security holders are not voting on the transaction, we question whether there should be a continuing requirement for target financials in stock transactions where the acquiror's security holders are not voting on the transaction and the target is a non-reporting company. It is not apparent to us why the difference in the type of consideration to be paid to target security holders should result in a variation in the financial disclosure to the target security holders.
We also believe the SEC should consider expanding the exception for financial statement disclosure. If a tender offer is subject to a financing condition, we question the need for providing financial disclosure where the bidder's financial condition is not material to obtaining financing. 6 In the past, the SEC staff has, in our view, somewhat unpredictably applied the financial statement requirements to these types of "private bidders." We suggest that in all-cash offers which are subject to a financing condition, financial statements should not be required if (i) the financial condition or assets of the bidder or its controlling entities is not a material source of financing (i.e., the external funding is not based on the bidder's status) or (ii) in an offer where the bidder's funds are required as part of the financing, the funds are provided prior to commencement of the offer.
Separately, we believe the requirement for pro forma financial statements for two-tier transactions is not appropriate. Pro forma financial statements, in and of themselves, can often be misleading because of their mechanical application. They also often rest on key assumptions which require additional disclosure necessary to fully understand the disclosure and the context in which it is presented. Further, there are material items aside from pro forma financial statements which are at least as meaningful to a tendering stockholder regarding back-end consideration, such as "risk factors" for any securities to be issued and historical financial information, which would not be required to be disclosed. While pro forma financial statements in two-tier transactions may provide some marginal disclosure benefits, we believe they are not sufficiently discrete to present alone without creating a risk of ambiguous or misleading disclosure.
We do not support the SEC's proposal to expand the bidder's financing section. We believe the present line item is sufficiently flexible and expansive to encompass material conditions, sources of funds and similar material matters.
11. Subsequent Offering Period . We do not believe a subsequent offering period is necessary for investor protection, although we would support a subsequent offering period (without withdrawal rights) at the option of the bidder if the bidder is not required to disclose its intentions in its initial tender offer materials. Requiring bidders to disclose their intentions up front will likely create significant free rider problems in partial tender offers as investors would wait for the subsequent period to tender. The proposed rule borrows from the United Kingdom's City Code on Take-overs and Mergers, which embodies a different regulatory framework for takeover bids. In the United Kingdom, takeover bids are usually for 90% of the outstanding shares so as to permit compulsory acquisition of the remaining stock in the tender offer. Practice in the United Kingdom suggests that when the bidder believes it will receive 90% of the outstanding shares, it usually lowers the minimum tender condition, usually to 50%, and thereby terminates the tendering shareholders' withdrawal rights without a need for prior disclosure of the change of the minimum tender condition. The subsequent offering period then commences a continuation of the offer. As U.S. regulations treat withdrawal rights differently, this offering period would not serve such a purpose.
To the extent partial offers raise issues of "coercion", we believe state law remedies are adequate.
12. Delivery of Tender Offer Documents . We do not support the elimination of the option to disseminate a tender offer by means of a long form publication pursuant to Rule 14d-4(a)(1) only. Although most bidders use the summary publication and mailing of offer documents form of offer, we do not see why the long form publication option should be eliminated. There does not appear to be any evidence that the use of long form publication has been abused or created other problems for investors.
13. Access to Non-Objecting Beneficial Owners in Tender Offers . We support granting bidders access to shareholder lists similar to that in Rule 14a-7 and support permitting bidders to mail soliciting materials to such non-objecting beneficial owners.
|Very truly yours,
|Gregory H. Mathews
|Chair, Business Law Section
|Merritt A. Cole
|Chair, Securities Regulation Committee
|John B. Wright, II
|Chair, Aircraft Carrier and M&A Release
|Comment Letter Committee
William G. Lawlor, Chair
Robert A. Friedel
Herbert Henryson, II
David S. Denious
Brian M. McCall, Reporter
Remainder of Full Committee
|Barry M. Abelson
|Justin P. Klein
|Christine J. Arasin
|Brian J. Lynch
|H. John Michel, Jr.
|Justin W. Chairman
|Donald S. Morton
|Robert W. Cleveland
|Ann C Mulé
|Paul T. Porrini
|Albert S. Dandridge, III
|John F. Reilly
|Joseph P. Galda
|Carl W. Schneider
|Gail P. Granoff
|Richard A. Silfen
|Patricia A. Gritzan
|Gerald J. Guarcini
|Gary Arlen Smith
|Richard P. Jaffe
|Robert N. Sobol
|James W. Jennings
|Raymond K. Walheim, Secretary
|John W. Kauffman
|J. Peter Wolf
|Mark K. Kessler
|John B. Wright, II, Chair
|N. Jeffrey Klauder
|Adopting a quiet period would also provide an effective regulatory advantage to cash tender offers, as opposed to exchange offers, and thus impede the SEC's goal of reducing variations in the regulatory treatment of different transactions.
|Given that the concept of "first use" can itself be ambiguous and the other practical difficulties associated with SEC filings, we would encourage the SEC to strike a reasonable balance between the potentially conflicting goals of reducing selective disclosure and creating a regulatory structure that avoids incentives to delay or limit disclosure (or to change written disclosures to oral disclosures).
|We note also that the five business day rule has created issues for bidders conducting offers for the securities of foreign private issuers, since some jurisdictions require the public announcement of a tender offer a specified period of time (more than five days) prior to mailing documents. While the proposals set forth in Release No. 33-7611; 34-40678 will in certain cases mitigate such issues, elimination of the rule entirely will further promote comity with the takeover regulations of foreign jurisdictions.
|We note also that Section 9(a)(2) of the Exchange Act prohibits manipulation of stock prices by means of fraudulent tender offer announcements.
|Our experience suggests that in hostile transactions, target companies already have an arsenal of litigation "weapons" to employ against bidders.
|This is often the case with special purpose vehicles established by private investors, partnerships or private equity funds.