April 5, 1999
Securities and Exchange Commission
Mail Stop 6-9
450 Fifth Street, N.W.
Washington, D.C. 20549-6009
Attention: Jonathan G. Katz, Secretary
File Number S7-28-98
Ladies and Gentlemen:
The Securities Law Committee of the American Society of Corporate Secretaries is pleased to submit comments on the proposed rules relating to the regulation of takeovers and security holder communications.
In general, we support the Commissionís proposals that would simplify the regulation of takeover transactions and allow freer communication with security holders prior to filing and disseminating the required disclosure documents. As corporate secretaries, members of the Society work to facilitate meaningful, timely and cost-effective communication with investors. We are, therefore, sensitive to the impact that technological advances have had on the dissemination of information about our companies and the transactions in which they become involved. We commend the Commissionís efforts to update its rules and regulations in order to take these changes into account in a manner that is consistent with the protection of investors.
Our comments follow the order of the principal issues discussed in the proposing release.
Communications Prior to Filing the Required Disclosure Documents
The release proposes to create safe harbors, without any content limitation, for oral and written communications about business combination transactions before the registration, proxy or tender offer statement is filed. The release also suggests two alternative communications proposals that would provide more limited flexibility for pre-filing communications. We prefer the principal proposal to the alternatives.
Our position is based on the view that, with limited controls, permitting issuers to provide more information to investors sooner will promote efficient markets. Hence we support requiring issuers to file written pre-filing communications with the Commission on first use. In order to assure that information is adequately disseminated, as well as to promote consistency between the proxy and tender offer rules, we also support mandating a minimum 20 business day period for proxy solicitations.
Given our view about efficient markets, we prefer not to see any content limitation imposed on pre-filing communications, or any filing (notice or otherwise) required for oral communications. We believe such requirements would be unduly burdensome, and would substantially undercut the usefulness of the proposed safe harbor. This would be especially true if written pre-filing communications are filed on first use and thus are widely available to investors, and if a minimum proxy solicitation period is mandated to ensure adequate dissemination of the disclosure document.
We would also prefer that the availability of the safe harbors not be restricted to issuers eligible to use proposed Form B. As the Commission suggests, business combinations often produce companies that are, in effect, new issuers. Allowing issuers to provide information to investors about proposed business combinations should be an overriding consideration regardless of the characteristics of the constituent entities.
If the Commission nevertheless determines to limit the availability of the safe harbor, we suggest doing so in a way that mirrors the proposed regulation of Form A issuers. For example, the Commission could adopt the alternative safe harbor that includes a quiet period prior to filing the required disclosure document. If the Commission were to do so, however, we think that selecting a period of time shorter than 30 days as well as including the period for staff review in the quiet period would be optimal. Such a period would suffice both to cure any conditioning effect that earlier communications may have had on the markets and to permit investors to focus on the more complete and balanced disclosure in the registration statement, proxy statement or tender offer material. Properly designed, this alternative would be preferable to permitting free communication for only a short period of time following the first public announcement of a proposed business combination.
Communications Under the Securities Act
Business combination transactions create a heightened need for communication to all of an issuerís shareholders. Accordingly, we see merit in the proposal to regulate pre-filing communications, including those in contested transactions, as "offers" subject to liability under Section 12(a)(2) of the Securities Act (and to require that they be filed as prospectus supplements under Rule 425). In this vein, it seems appropriate to regulate all pre-filing communications in this manner, without regard to how soon they are followed by the filing of a registration statement.
As distinguished from the capital-raising context, communications relating to a proposed business combination are more readily discernible from other communications. Therefore, the reference in proposed Rule 166(b)(1) to the period beginning with the first public announcement of the transaction appears to be workable, so long as the Commission defines the term "public announcement". If the Commission does so, we would prefer a definition that does not depend on Rule 135.
We support making the safe harbor available to participants other than the acquiring company (the offeror of the securities). The proposing release specifically mentions affiliates of the acquiring and to-be-acquired companies, their dealer managers and others acting on their behalf. These are examples of participants with respect to whom the companies presumably are in a position to exert some degree of control, at least in terms of their pre-filing communications. Insofar as that is the case, we do not see a compelling reason to exclude such persons from eligibility to rely on the safe harbor.
Communications Under the Proxy Rules
The Commission is proposing to broaden the Rule 14a-12 safe harbor to permit solicitations before filing and delivering a written proxy statement, regardless of the existence of an opposing solicitation and without being limited to the takeover context. As proposed, Rule 14a-12 would permit solicitations if (1) no form of proxy is furnished until a written proxy statement is furnished, (2) the identity of the participants and a description of their interests is included in the communication, and (3) a written proxy statement is provided to security holders at the earliest practicable date. Solicitations in written form would have to be filed upon first use and would bear a legend advising recipients to read the proxy statement.
We believe this proposal would permit and encourage management to communicate more freely with investors. This enhanced flexibility is potentially of great interest outside of the business combination context, particularly in opening the door to earlier substantive communications regarding corporate governance matters. Because of the conditions contained in proposed Rule 14a-12 itself, as well as the existing antifraud rules and the proposal, discussed above, to subject these pre-filing solicitations to Section 12(a)(2) liability if securities are offered, we believe that broadening the safe harbor is consistent with the protection of investors.
We are concerned about the requirement to deliver a proxy statement at the earliest practicable date following the communication made in connection with a solicitation. As the Commission suggests, there may be instances in which an issuer determines, on the basis of the earlier communications envisioned by Rule 14a-12, not to proceed with bringing a particular matter before its shareholders for a vote. Requiring that a proxy statement be delivered would substantially undercut the usefulness of the pre-filing safe harbor, which we believe would otherwise work well to accomplish all of the Commissionís objectives.
We believe that the alternative proposal to permit "testing the waters" communications also has some merit as well, but primarily for matters other than business combinations. It strikes us that business combination proposals are too market-sensitive to include them in the more liberal safe harbor that the "testing the waters" alternative contemplates until there has been an adequate opportunity to assess how revised Rule 14a-12 is operating. In addition, business combination proposals deal with specific transactions that management may be considering, and are less likely than other proposals to raise policy issues that can appropriately be discussed or debated with investors. We would, however, distinguish proposals that raise issues of broad corporate strategy. These proposals, as well as corporate governance proposals, generally raise policy matters that are appropriate for "testing the waters" communications.
If the Commission adopts the "testing the waters" alternative, we would support minimum content requirements that are consistent with changes being made elsewhere in the rules governing shareholder communications. We do not, however, endorse a general requirement that written "testing the waters" communications be filed regardless of their materiality to investors. In our view, imposing such a requirement would defeat the goal of encouraging communication with investors about matters that are perhaps still in their formative stages and may never develop into concrete proposals. However, if a matter that initially was the subject of "testing the waters" communications is ultimately included in a proxy statement, such communications should be filed no later than the time the proxy statement itself is filed. This approach would be consistent with the scheme being proposed for Form B offerings in the capital-raising context. Also, mirroring the Form B proposal, there need not be any required minimum cooling off period between the pre-filing communication and the request for a proxy card.
Finally, we support eliminating confidential treatment of preliminary merger proxy statements. Although the existing system has functioned well, it is difficult to justify retaining this exception for merger proxy statements while seeking to harmonize the rules governing shareholder communications in connection with business combinations. This seems particularly true in light of the current practice of disclosing extensive information before the filing of a proxy statement. If the Commission does decide to require that preliminary merger proxy statements be publicly available, however, we do not think it would be practicable (or necessary for the protection of investors) also to require that all exhibits to the wraparound registration statement be filed at the same time. In this regard, it is reasonable to assume that material information contained in exhibits which are responsive to the disclosure requirements of Form C or the proxy rules will have been fairly and accurately summarized in the proxy statement.
Communications Under the Tender Offer Rules
We generally support the Commissionís proposals to harmonize the tender offer rules with the rules applicable to shareholder communications in the context of registration statements and proxy statements. We agree that the five-day rule should be eliminated and that no distinction needs to be made between cash and stock offers for this purpose. In either case, it is true that there is a risk of increased (or at least more prolonged) market activity on the basis of incomplete information than occurs today. However, the tender offer rules should focus on treating pre-commencement communications in a manner similar to comparable pre-filing communications under the Securities Act and the proxy rules, if those provisions are changed as contemplated in the proposing release, in order to eliminate as much as possible any regulatory bias.
New rule 14e-8 is well designed to deter the most likely abuses in connection with pre-commencement communications that put a target into play. We would, however, support requiring the bidder to certify its compliance with the rule when it first files Schedule TO. In addition, we feel that pre-commencement communications should be required to identify the putative bidder and note the absence of endorsement by the targetís board of directors, as well as advise the recipient to read the offer to purchase or target company recommendation. In this regard, we believe that targets should be allowed to make use of the safe harbor as much as bidders, consistent with the scheme laid out in the proposing release.
We also generally support the changes included in the proposing release for dissemination of the offer to purchase. Specifically, we agree with eliminating long-form publication of the offer and with eliminating dissemination by summary advertisement alone. We recommend retaining the requirement that bidders using stockholder lists also publish summary advertisements to ensure that a changing shareholder base receives adequate information about the offer. Moreover, we support amending Rule 14d-6(a)(2) to delete the language limiting the information that can appear in a summary advertisement. We express caution regarding the use of electronic media and think that the Commission is correct in not yet proposing that electronic media be permitted to be used as the sole means of dissemination. In general, we have a concern that electronic sources of information are not yet followed as widely as newspapers and are still structured so that a user will be less likely to come across news that he or she is not already looking for.
Permitting Exchange Offers to Commence on Filing
We generally agree with putting cash and stock tender offers on an equal footing to as great an extent as is possible consistent with the protection of investors. This approach will inevitably leave stock tender offers at somewhat of a disadvantage because, all other things being equal, an offer of securities presents additional disclosure issues compared to a cash offer. We believe that the Commissionís proposal, for the most part, strikes an appropriate balance. We support the concept of permitting third-party exchange offers to commence as early as the filing of a registration statement and tender offer statement and dissemination of a preliminary prospectus, with purchases not being permitted until the registration statement is effective. We also support:
We would go even further and give consideration to allowing issuer exchange offers, going private transactions and roll-up transactions to commence on filing. In the case of issuer exchange offers, information about the issuer will be as available (if not more so) to investors as in the case of third party offers. The same could be true of going private transactions and roll-ups. However, if the Commissionís concern about such transactions arises from their inherent potential conflicts of interest, these strike us as essentially matters of state corporate law and not so much as disclosure questions that merit delaying their commencement. We do not favor imposing a mandatory commencement date for any type of stock offer because we feel that the potential for abuse is adequately addressed by proposed rule 14e-8.
For all stock offers, in order to harmonize their timing with cash offers, we understand the Commissionís interest in either considering expedited staff review of the registration statement or permitting exchange offers registered on Form C to be effective on filing. Of these two alternatives, we favor the first, although even expedited review is most necessary only when a competing cash tender offer emerges. As for making Form C-registered exchange offers effective on filing, although we would not oppose it, we question the rationale inasmuch as business combinations can be said to involve "new" issuers about which there may have been little, if any, prior disclosure. If the Commission were to decide to continue to have the staff review these filings, we think bidders would continue to take the risk of receiving staff comments into account as one factor among many in deciding whether to offer cash or securities, but we do not find that to be an objectionable result.
We further support harmonizing the proxy rules with the tender offer rules by permitting proxy cards to be sent with the preliminary proxy statement. Were this to become the rule, shareholders would have the same degree of protection as they do in the tender offer context because they would be free to revoke their proxies before the vote, just as they can withdraw any tendered securities prior to the expiration of the offer. We are not certain, however, how much this change will help issuers get in their votes any earlier because the bulk of the institutional vote generally comes in shortly before the meeting date.
We are not particularly concerned about the current capacity of the existing system to disseminate any supplements to the initial proxy statement to beneficial holders in time for them to reconsider their investment decision. This is particularly true in light of the Commissionís proposed time periods during which an exchange offer will have to be kept open after a supplement is sent, which we find to be reasonable and appropriate and which we feel could sensibly be used for all exchange offers, not just "early commencement" offers. We suspect that the Internet at this point is not a widely enough used alternative to prudently allow the proposed time periods to be shortened. As indicated above, it is not yet clear what proportion of the investing public has come to be comfortable using the Internet to find new information about companies in which they have invested. We do believe, however, that at some future time, this would be both appropriate and welcome.
Integrating and Streamlining the Disclosure Requirements for Tender Offers and Mergers
The Commission is also proposing various means of consolidating disclosure requirements and combining disclosure schedules. These include:
We support all of these proposals.
With respect to the additional proposal either to permit a single combined filing to satisfy both the tender offer and going private disclosure requirements or to eliminate Schedule 13E-3 entirely for most transactions, we favor the latter because in most cases it eliminates one filing without any loss of critical information. We also tentatively support, with some concern, the suggested broadening of this combined filing concept to permit tender offer disclosure requirements to be satisfied in a single filing that also complies with applicable Securities Act and proxy rule requirements. Our concern in this regard is, as the Commission has observed, the extent of the common signature requirement that would be part of such a change.
We like the Commissionís proposal for a plain English Summary Terms Sheet in issuer and third party tender offer statements, cash merger proxy statements and going private disclosure documents. We feel that the filing person should determine the most significant facts to highlight, so there is no need for a rule specifying the information that must be addressed. This flexibility would also be consistent with the movement toward freer communications with security holders. Reacting to another suggestion in the proposing release, we do not feel strongly about extending the Summary Term Sheet requirement to stock mergers or stock tender offers since there already is a plain English requirement in place for the summary section of those documents.
We find the proposed changes to the financial statement requirements contained in Item 14 of Schedule 14A to be appropriate. The proposed revisions clarify that financial statements and other information about the acquirer in a cash merger are necessary only if material to the voting security holdersí evaluation of the transaction, and reduce the financial statements required for the acquirer from three years to two. In addition, the revisions eliminate the required financials and other information about the target in a cash merger when the acquirerís holders are not voting, except for going private and roll-up transactions (when required, target company financials would generally still be for three years).
The rationale for the latter change is that target holders have received financial information previously with respect to their company. We think this rationale is sensible and would support encompassing going private transactions and possibly roll-ups as well. In any event, we do not see the compelling logic in requiring, as the Commission suggests it is considering, that financial statements of public targets in cash mergers be incorporated by reference in the proxy statement so as to impose incremental liability for materially false or misleading information. Nor do we support the notion that rarely exercised state law appraisal rights should be a significant factor in deciding whether two or three years of target company financial statements must be available in cash mergers.
For stock mergers and stock tender offers (except in the case of roll-ups), when the acquirerís holders are not voting, the Commission is proposing to require only one year (or more, if the target has previously provided its security holders with more) of GAAP financial statements for non-reporting companies, and to continue to require audited financial statements (to the extent practicable) only for the most recent fiscal year, if not already audited earlier than that. We do not find this change objectionable from the standpoint of investor protection. We agree that it is likely to facilitate registered business combinations of non-reporting companies (but perhaps only marginally) by avoiding or postponing the extra effort and expense of preparing audited financial statements. In the same vein, we perceive a modest benefit in leaving undisturbed the rules that allow the use of Rule 14a-3(b) financial statements for a non-reporting target, even if later the acquirer must provide audited financials for the periods specified in Rule 3-05 of Regulation S-X.
Updating the Tender Offer Rules
The first of the Commissionís proposals in this area is to permit securities to be tendered during a 10-day subsequent offering period. Although bidders may not use this device out of a concern that its disclosure in the initial offer could deter tenders prior to the expiration of the initial offer, it is a good idea with no serious disadvantages for target security holders. In our view, if adopted it should be as flexible as possible consistent with investor protection. For example, we would favor not making the subsequent offering period mandatory, allowing it to be extended, and not limiting it to offers where a certain percentage of the securities were tendered prior to the expiration date or to certain types of cash mergers or to third party offers.
The Commission has also proposed clarifying the financial information required for bidders in cash tender offers. First, bidder financial statements would not be considered to be material in an all cash offer with no financing condition, provided either that the bidder is a public company or that the offer is for all target shares. In light of both proposed rule 14e-8 and the ready access to public bidder financial information through electronic means, we think the proposed revision should be adopted regardless of the possibility that some public bidders may be self-financed or that financing may not otherwise be committed at the time the offer is made. The proposing release suggests that in certain instances the criteria for determining whether the bidderís financial statements are material might be different, such as where the bidder is a foreign company whose financials are not readily available; we concur. Addressing another feature of the proposed revisions, we agree that the source of funds disclosure requirements in the tender offer and going private rules ought to be clarified so that more meaningful disclosure is provided to security holders than has been the case.
The Commission has also proposed reducing the financial statement requirements for third party cash tender offers from three years to two when the bidderís financials are material under the revised criteria. This would harmonize these requirements with the current requirements applicable to issuer tender offers and going private transactions, as well as the proposed reduction from three years to two of the financial statements, if required, in cash merger proxy statements. This strikes us as a reasonable change, but we would not go further to reduce the required financial statements to one year because of the difficulty in assessing trends when comparative information is not at hand.
We have no particular reaction to certain of the related proposals regarding summary information, other than to observe that full financials probably need not be included in the document sent to security holders as this information is usually readily available. With respect to the proposal to require pro forma and related financial information in the first tier of a partial cash tender offer when a second tier is contemplated, we think the benefits to holders receiving this information would outweigh the potential burden on bidders in complying with the requirement, but would not be dissatisfied with a decision to require less pro forma information than Form C or Article 11 of S-X contemplates.
Although we do not believe rule 13e-1 adds much value, if it is to be retained, we favor the proposal to revise it so that the disclosure of an issuerís purchases of its own securities would occur only after a third party tender offer is made. If the issuer commences a self-tender in response to the third party offer, the issuerís tender offer schedule should satisfy rule 13e-1 requirements. If the Commission retains the rule, the information sought by the current rule seems appropriate. The rule should not apply to routine purchases for employee benefit plans, where the issuer has little or no discretion.
We favor revising rule 14d-5 regarding dissemination of tender offers by use of shareholder lists and security position listings to harmonize with rule 14a-7 regarding dissemination of proxy materials. Given the convergence of these methods of contesting for corporate control, it makes little sense to treat them differently with regard to the dissemination of the disclosure documents. Since the proxy rules have not proven to be unduly burdensome or disadvantageous to issuers, it seems sensible to apply them in the tender offer arena as well. In this vein, we find it to be useful to permit bidders to send tender offer materials directly to NOBOs in issuer tender offers.
We also favor the Commissionís proposals with respect to rule 10b-13 (including re-designating it as rule 14e-5). Specifically, we support expanding the rule to cover subsequent offer periods as well as situations where the bidder advises some but not all security holders that it intends to conduct a tender offer. We support clarifying that the rule applies to related securities that are convertible into or exchangeable for the securities that are the subject of the tender offer. We also support clarifying the rule to permit routine purchases by independent plan agents of the issuer, as well as exemptions for issuer odd lot tender offers and for purchases by a dealer-manager made on an agency basis to permit it to continue customary brokerage business. We also favor adopting the British practice that permits purchases outside the tender offer if the consideration is increased to the highest price paid for any shares so acquired; this would be consistent with the all holder and best price principles of current tender offer regulations.
Finally, we favor extending the PLSRA safe harbor for forward-looking information to information issued in connection with a tender offer. This position is based on a view that there is no principled basis for treating forward-looking information differently in different takeover contexts, particularly in light of the Commissionís explicit effort to harmonize as many of the underlying regulatory requirements as possible. Bidders, as well as targets, have a legitimate interest in commenting on the anticipated benefits or potential problems associated with a proposed takeover regardless of the form of the transaction. This type of information is highly relevant to an investorís decision and extending the PLSRA safe harbor to cover it in the context of tender offers will facilitate its dissemination. We do not think it necessary or advisable to condition the availability of the PLSRA safe harbor on complying with the free communication safe harbor, assuming it is adopted, either in the context of tender offers or in the context of any other takeover structure. Our view is that the two safe harbors are intended to serve overlapping but not identical purposes and, therefore, that the regulatory system ought not to confuse them.
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We trust the Societyís comments are helpful to the Commission and would be pleased to discuss any of them further.
Very truly yours,
Thomas A. Witt
Chair, M&A Comment Task Force
Margaret M. Foran
Chair, Securities Law Committee