APRIL 5, 1999
|Professor and Director,
Center for the Study of Mergers and Acquisitions
University of Miami School of Law
1311 Miller Drive
Coral Gables, FL. 33146
| Currently, Tax Policy Advisor,
Ministry of Finance,
Republic of South Africa,
240 Vermeulen Street, Room 2101c
Private Bag x115
Pretoria, 0001, South Africa
I submit these comments personally and not on behalf of any other person or organization. They are based on my experience as a teacher and scholar of the law of mergers and acquisitions and not on extensive practice in the securities law aspects of mergers and acquisitions.
These comments follow the structure of Section II., Discussion of Proposal, of the M&A Release and address each question raised in the discussion on which I have a view or comment.
As currently drafted Proposed Rule 166(b) has no content restriction on pre-filing communications regarding a merger or acquisition transaction, and the Release asks whether there should be any such restrictions. Apparently, the main problem Rule 166(b) is designed to address is the disclosure of expected synergies. If this is indeed the case, then it might be advisable to restrict this Rule to those types of disclosures. This would, of course, require the design of a definition of synergies, but this could probably be done on the basis of a review of past disclosures in this regard. The advantage of following this approach is the avoidance of untended consequences.
The Release points out that the Rule 166(b) safe-harbor applies both to written and oral communications; however, only written communications or other prospectuses must be filed under Proposed Rule 425. The Release asks whether oral communications should be protected by the safe-harbor and, if so, should a notice filing be required for such communications under Rule 425. As drafted, Rule 166(b) could permit selective oral disclosures, thereby giving the party to whom such a disclosure is made an unfair advantage in the market place. I do not believe oral disclosures should be prohibited; however, all oral communications that diverge in any material way from a prior or a contemporaneous written disclosure should be required to be filed under Rule 425 immediately after the disclosure is made. An exception might be made for oral disclosures made in a public forum to a significant number of members of the press. This type approach would prevent sophisticated investors from gaining an unfair advantage over average public investors.
To further mitigate any possible advantage a market participant to whom a pre-filing disclosure is made, whether written or oral, might have over other investors, I suggest that in addition to a filing requirement under Rule 425, a fair representation of such communication be immediately published in the financial press as a "Pre-Filing Communication." This type of requirement would be similar to the practice in some countries of the publication by a company of a "Cautionary Announcement" concerning a material event that has not previously been disclosed.
I believe that the free communication proposal set out in Section II.B.3., subject to the modifications proposed in paragraph 2 above, is a better approach than both of the alternative proposals: (1) permitting deal related disclosures only during a 48-hour period following the public announcement, and (2) permitting free communication for an unlimited period after disclosure of the deal, but requiring a quiet period for 45, 30, 20, or 15 days before filing the registration statement, proxy statement, or tender offer material.
The proposal would move the provisions of current Rule 145(b)(2), relating to the treatment of certain pre-filing written communications (e.g., limited press releases) as non-offers, to Proposed Rule 135(c). This is a sensible step because it places non-offer communications for business combinations in the same rule with non-offer communications for exchange offers. I have, however, two suggestions for modifying Rule 135.
First, the SEC should clarify the meaning of the terms "The basic terms of the exchange offer" in Proposed Rule 135(a)(2)(viii)(C) (1) and "the basis upon which the transaction will be made" in Proposed Rule 135(c)(2)(vi). The case law interpreting the current versions of these provisions seems to go in different directions. Compare, Chris-Craft Industries, Inc. v. Bangor Punta Corp., 426 F.2d 569 (2nd Circuit 1970) (finding a pre- filing communication concerning the value of securities to be issued in an exchange offer to be a gun jump and not within the Rule 135 safe harbor), with Sheinberg v. Fluor Corp., 514 F. Supp. 133 (S.D. N.Y. 1981) (finding a communication concerning the value of securities to be issued in a second-step merger that was to follow a tender offer to be a permissible communication under Rule 145 because of the required disclosure under the tender offer rules). The Sheinberg decision essentially followed the SEC's position in Interpretative Release No. 34-14699 (April 24,1978).
As I understand the current law, in an exchange offer or stand-alone Rule 145 business combination the concepts of the "basic terms of the exchange offer" and the " basis upon which the transaction will be made" do not encompass pre-filing disclosures regarding the value of securities to be issued, even though the value is an essential feature of the deal. However, if the Rule 145 transaction is the second step of a combined tender offer--merger, then a disclosure with regard to the value of securities to be issued in the merger is required to be disclosed if the value is part of the deal. I believe that there are good reasons for harmonizing the disclosures in all of these transactions by amending Proposed Rule 135 to permit disclosure of information concerning the value of securities to be issued in an exchange offer or stand-alone business combination, provided the value is an essential and bona fide term of the transaction. Thus, this rule would apply to a term requiring that the securities to be issued have a certain value in the opinion of an investment banking firm. It is important for investors to have this type of information as soon as possible, and this concern for immediate disclosure, I believe, far out weights any concern that the disclosure would operate as a gun jump.
As I understand Rule 166(b), disclosures of this type of value information could be made under that provision, but I believe it is important for the SEC to encourage this type of disclosure in the initial press releases announcing the deals under Rule 135.
My second suggestion is that there should be cross-references between Rules 135 and 166(b).
I agree with the "filing on first use" requirement for pre-filing written disclosures, and I also believe this requirement should extend to oral communications of material information relating to business combinations. Further, for the reasons discussed in paragraph 2 above, I believe that as a condition to use of the pre-filing safe harbor, the party making the disclosure should be required to immediately published in the financial press as a "Pre-Filing Communication" a fair representation of such communication.
I believe that there should be a federally mandated solicitation period for all forms of non-tender offer business combinations, and the 20 calendar day rule that applies to Schedule 14C transactions would appear to be a sensible rule for other forms of deals.
I do not feel strongly about the proposed repeal of the "five business day rule," pursuant to which a tender offer must be commenced or withdrawn within five days after announcement. Without regard to whether the "five business day rule" is abolished, I concur with the principle of free communication before commencement of a tender offer. However, consistent with the proposals made above for all forms of non-tender offer transactions, I recommend that filings be required for oral as well as written disclosures and that the party making the disclosure be required to immediately published in the financial press as a "Pre-Filing Communication" a fair representation of such communication.
I concur with the proposed elimination of the long form publication option, and I support the idea of retaining the short form communication device, without limitation on the information that can be disclosed as proposed in Rule 14d-6(a)(2).
You propose to permit early commencement of third party exchange offers. Under Proposed Rule 14d-4(b), an exchange offer would commence at the time the bidder filed the registration statement and delivered a preliminary prospectus and tender offer statement, or on a later date designated by the bidder. Under Proposed Rule 162, the bidder could receive tenders on the basis of the preliminary prospectus but could not close the exchange offer and purchase the target's securities until the registration statement became effective. Under Proposed Rule 14d-4(d)(2), if the bidder is required to make material changes to the preliminary prospectus, the offer is extended by 5, 10, or 20 business days depending on the nature of the change. Thus, under this scheme, if a bidder commences an exchange offer at the time of filing the registration statement and the registration statement is declared effective within 20 business days of filing, then the bidder can close the exchange offer after 20 business days.
This is a sensible scheme for exchange offers; it should apply to both Form A and Form C filers. In response to your question concerning whether a bidder should be able to declare its registration statement effective, I think the answer is a clear no. With the modification regarding expedited review outlined below, exchange offers by both Form A and Form B filers should be on a level playing field with cash tender offers without compromising the disclosures required by the 33 Act.
You ask whether there should be expedited staff review for exchange offers, and I believe there should be, particularly in situations involving competing offers. In such cases, the staff should be required to complete its review within 15 business days of (1) the filing of a registration statement in a situation in which there is an outstanding competing tender offer for the target at the time of such filing, and (2) the filing of a competing tender offer in a situation in which there was no competing tender offer at the time of the filing of the registration statement.
Under this approach, an exchange offer that commenced on the filing of a registration statement and that was not materially deficient would be on a level playing field with a competing cash tender offer. If the exchange offer were filed at a time when there was an outstanding offer, the exchange offer could close after 20 business days assuming no material deficiencies. This is the same rule that applies to cash tender offers. On the other hand, if the exchange offer were filed at a time when there was no competing tender offer but a competing offer was then filed, the exchange offer could close (at the latest) after 15 business days, assuming no material deficiencies. Although in this situation, the exchange offer might not close as fast as it would have if the exchange offer had been a cash offer, the exchange offer could close at least 5 business days before the competing offer.
Any pre-commencement disclosures in exchange offers should be subject to the same restrictions as those outlined in paragraph 6 above for other pre-commencement disclosures. Further, in response to your question concerning the ability of a bidder in an exchange offer to communicate with institutional investors, I believe that a bidder should have to immediately file and publicly disclose any material communication with any party. This is the only way to keep the playing field level.
If the acquiror's security holders do not vote in a cash merger, you propose to eliminate the current requirement that the proxy statement contain financial information about the target. You explain that this change would "harmonize the disclosure required in cash merger transactions with that required in all-cash, all-share tender offers." You ask whether target security holders in these transactions need financial and other information regarding the target to determine whether to exercise dissenters' rights.
I believe that a cash merger is fundamentally different from an "any and all" cash tender offer, because of the compulsory nature of the merger. Further, an "any and all" cash tender offer is generally followed by a second step cash, freezeout merger. In this type of merger, financial information with respect to the target is required to allow, among other things, the target's security holders to decide whether to exercise appraisal rights. The straight cash merger is properly analogized to the second step cash merger rather than to a cash tender offer, and the target's security holders need financial and other information in both types of mergers. Further, consideration should be given to requiring financial information on the target in a cash tender offer; you note that bidders often voluntarily provide this information, and this is a good indication that such information is likely to be material.
Proposed Rule 14d-11 would permit bidders to elect to have a ten business day subsequent offering period during which the bidder could, under certain conditions, accept tenders after the closing of the tender offer. You ask whether this procedure would be "useful to bidders and security holders." I think the procedure could be of help to both bidders and security holders, and it is difficult to see how the procedure would be hurtful to either bidders or security holders. Indeed, since the procedure is elective for bidders, they can be expected to use the procedure only in situations in which it will be helpful to them. For investors, the procedure merely offers another option, and additional options are generally positive. It appears to me that while it might be appropriate to mandate a minimum ten business day subsequent period, bidders should be permitted to extend the period for a reasonable period, such as an additional ten business days.
You ask whether current Rule 13e-1, which requires a target of a tender offer to file a notice before purchasing its securities during the tender offer, should be repealed. I think investors should be apprised of any purchases made by a target during a tender offer because such information is likely to be material. Thus, I think the rule should be retained and strengthened as you propose by requiring the filing of the notice after the tender offer is made.
Proposed Rule 14e-5 would supercede Rule 10b-13 and would continue the prohibition against the purchase by a bidder and certain related persons of a target's securities outside of the tender offer. You ask whether this prohibition continues to be appropriate. I think it is central to the equal opprotunity principle embodied in the tender offer regulatory scheme that the bidder be prohibited from making purchases outside of the tender offer during the term of the tender offer and any subsequent offering period.
You ask whether the safe harbors for forward looking statements currently in Section 27A of the 33 Act and 21E of the 34 Act should be extended to tender offers. I believe that particularly in view of the pre filing communication proposals it would be sensible to extend this safe harbor to tender offers.
The staff and the Commission are to be commended for the excellent and thoughtful proposals set out in the M&A Release. I hope the above comments will be helpful in the final decision-making process.
SAMUEL C. THOMPSON, JR.