Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Attention: Jonathan G. Katz, Secretary
Re: File No. S7-29-98
Release Nos. 33-7--611, 34-40678; International Series Release No. 1171--Cross-Border Tender Offers, Business Combinations and Rights Offerings
Ladies and Gentlemen:
This letter is submitted in response to the request of the Securities and Exchange Commission for comments on its November 13, 1998 release entitled Cross-Border Tender Offers, Business Combinations and Rights Offerings.
These comments have been prepared by a special committee of the Committee on Federal Regulation of Securities (the "Committee"), Section of Business Law (the "Section") of the American Bar Association. The special committee includes members of the Subcommittees on International Securities Matters and on Proxy Solicitations and Tender Offers. A draft of this letter was circulated for comment among certain members of the Committee and the Chairs and Vice-Chairs of Subcommittees and Task Forces of the Committee, the Officers of the Committee and the Advisory Committee of the Committee and the Officers of the Section. A substantial majority of those who have reviewed the letter in draft form have indicated their general agreement with the views expressed. However, this letter does not represent the official position of the American Bar Association, the Section or the Committee, nor does it necessarily reflect the views of all of those who have reviewed it.
In general, we support the proposals set forth in the Release and commend the Commission and its Staff for the manner of presentation of the issues and, in particular, the clear identification of the questions that commentators are asked to address. We believe that the current proposals are responsive to the issues under the Securities Act of 1933 and the Securities Exchange Act of 1934 raised in the Commission’s June 6, 1990 international tender offer concept release (the "Concept Release") and the June 5, 1991 international tender and exchange offers release and rights offering release (the "1991 Releases") and take into account the evolution of the cross-border markets since that time.
We strongly support the Commission’s objectives -- to recognize the continuing globalization of securities markets and to facilitate the participation of U.S. investors in cross-border tender offers, exchange offers, business combinations, rights offerings and similar transactions that are an increasingly common feature of global markets, without compromising important investor protection principles that are critical to the success of the U.S. markets. U.S. investors can be expected to benefit from an increasing ability to participate in the kinds of transactions covered by the proposals, whereas the existing registration, disclosure and procedural rules too often result in offerors and issuers excluding U.S. investors, to the detriment of both the investors and the markets. The proposals set out in the Release go a long way toward addressing the difficulties in the existing rules.
Many of our comments address the proper balance between making it more attractive for offerors and issuers to include U.S. markets and U.S. investors in these kinds of transactions and assuring proper levels of continuing investor protection in the United States. In considering this balance, we would propose that the Commission consider in particular three general areas addressed in the Release and also discussed in this letter. First, while we strongly support the continuing applicability of the anti-fraud provisions, we urge that the Commission clarify the standards that would apply. It would be useful, in particular, for the Commission to stress the importance that it would place on compliance with the disclosure standards and procedural rules of the home jurisdiction or principal market. Second, our comments regarding increasing the thresholds for the Tier I, Rule 801 and Rule 802 exemptions to 15%, rather than 10% and 5%, are intended to encourage the inclusion of U.S. investors and the U.S. market in more transactions, which we believe is beneficial, while maintaining high standards of investor protection. The percentage limit should be based on ownership by U.S. persons without excluding large non-U.S. holders from the calculation. Third, we strongly support the concept of equal treatment as a condition to the exemptions proposed in the Release. However, allowing a cash-only offer in the United States where the offer outside the United States is for securities or a combination of securities and cash would be a very important feature in making it more likely that the offer will be extended into the United States. Equivalent value would protect U.S. investors from a financial standpoint.
The Release reaffirms the Commission’s view that, even in essentially foreign transactions, U.S. investors are entitled to the protection of the U.S. anti-fraud rules. We support this view. Unfortunately, despite the significant benefits of the current proposals, our experience suggests that the uncertain application of the anti-fraud rules and the potential for litigation in U.S. courts under those rules may still deter foreign companies from including U.S. shareholders in their offers. We expect this will be particularly true when the offeror (or, in a consensual transaction, the target company) has not previously entered the U.S. capital markets by listing its securities on a U.S. exchange or making a registered public offering. We also note that the proposals have not changed the view of the U.K. Panel on Takeovers and Mergers that, in light of the "different ethos in the U.S. over litigation compared with the U.K.", the Panel should not require offers for U.K. companies to be posted into the U.S.
We suggest that the opportunity for U.S. shareholders to participate in foreign offers will be enhanced if, in the adopting release, the Commission affirms the applicability of the anti-fraud rules but also discusses the realistic U.S. litigation risks under the anti-fraud rules once the proposals are adopted. Such a discussion could recognize the Commission’s position that scienter (rather than a lesser standard such as negligence) should govern in the case of challenges to disclosure in transactions relying on Tier I, Tier II, Rule 801 and Rule 802. Such a discussion could also emphasize that materiality -- the importance to an investor as part of the overall mix of information available -- is the standard by which purported misstatements and especially omissions will be evaluated, and that whether an omission relates to a line item in a Commission form or rule, or merely the difference between U.S. and home country accounting standards from which the offer has been exempted, will not be a relevant consideration. The Commission could point out the basic protection afforded through compliance with home country disclosure requirements, accounting standards and procedural requirements in such transactions. Moreover, materiality for disclosure purposes may differ from U.S. standards in foreign jurisdictions, particularly in matters such as corporate governance and takeover laws.
Differences between foreign and U.S. legal requirements should not be presumed to be indicative of fraud. Indeed, in our experience working with lawyers from other major capital markets drafting disclosure documents, we have generally not encountered differences in judgment as to what disclosures are necessary to prevent fraud. We also believe it would be appropriate for the Commission to note that U.S. courts, in considering extraterritorial application of U.S. securities laws, have been mindful of principles of comity.
We have considered the interplay of the proposals in the Release and the recent Commission proposals outlined in Release No. 33-7607; 34-40633; IC-23520 (November 3, 1998) (the "M&A Release") proposing far-reaching amendments to the registration, disclosure and timing provisions of the Securities Act and the Exchange Act in the context of exchange and tender offers and business combinations. The proposals made in the Release and those made in the M&A Release are largely complementary and can be considered independently. However, the Tier II proposal that a cross-border tender offer would commence only upon mailing or publishing the offer rather than announcing it, if the bidder mails the offering document no later than 30 days following the announcement, would undermine the proposal in the M&A Release to eliminate the five-business-day requirement for commencing a tender offer. In effect, the Tier II relief would replace the five-business-day rule with a 30-calendar-day rule, which is at odds with the elimination of any fixed-time-period requirement for commencing an offer. Therefore, if the Commission acts on the Release prior to taking action on the M&A Release, we suggest that at that time it act to harmonize the Tier II proposal with the proposal on commencement of an offer contained in the M&A Release.
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Set forth below are responses to the specific questions raised in the Release.
Q1. In proposing these exemptive rules, we are seeking comment on whether the underlying premise that this approach is in the interest of investors is still valid. For example, have the Commission rulemaking and informal initiatives in the last decade to facilitate cross-border offerings and acquisitions rendered the proposed exemptive relief unnecessary or inappropriate? Does the opportunity for U.S. security holders to participate in multinational tender offers justify the proposed use of the exemptive authority and possible diminished protection of the U.S. securities laws?
In general, we enthusiastically support the Commission’s prior rulemaking and informal initiatives, such as its exemptive and no-action practices, of the last decade in the area of cross-border offerings and acquisitions. The current proposals set forth in the Release are consistent with prior positive steps, help to codify prior action (especially the Tier II provisions) and establish additional guidance to facilitate the participation of U.S. investors in these transactions. Therefore, the proposals go a long way to facilitate cross-border tender offer, business combinations and rights offerings by non-U.S. issuers, and increase the likelihood that U.S. investors will not be excluded from participating in such transactions. We note that the proposed rules incorporate some of the comments and suggestions made in our September 20, 1990 comment letter on the Concept Release, and our September 9, 1991 comment letter on the 1991 Releases; those points generally will not be repeated in this letter. Since we believe that the basic framework of the proposed rules and procedures is sound, our comments are limited to certain specific items and to responses to the specific questions set forth in the Release.
Q2. We request comment on whether materials relating to offshore tender offers could be posted on the Internet without triggering U.S. tender offer requirements with respect to that offer. Would these postings be helpful in providing U.S. security holders with timely information concerning extraordinary transactions affecting their holdings? If so, what conditions should attach to dissemination of offshore tender offer materials over the Internet?
In Release No. 33-7516 (March 23, 1998) (the "Internet Release") the Commission published its views on the application of the registration obligations under the Securities Act to the use of Internet Web sites to disseminate offering and solicitation materials for offerings and sales of securities outside the United States. In the Internet Release the Commission announced its views as
. . . the application of the registration provisions of the U.S. securities laws depends on whether Internet offers, solicitations or other communications are targeted to the United States. We [the Commission] would not view issuers, broker-dealers, exchanges, and investment advisers that implement measures that are reasonably designed to guard against sales or the provision of services to U.S. persons to have targeted persons in the United States.
The same principles set forth in the Internet Release should be followed with respect to offshore tender offers and exchange offers. The policy and legal issues involved in publicizing offshore tender offers and other business combinations appear to be the same as the policy and legal issues involved in publicizing offshore offerings of securities.
The Commission should articulate its interpretive position on this topic in the release accompanying the adoption of the final rules. We recommend that the Commission take the position there should be no restrictions on the use of the Internet to publicize a tender offer that meets the criteria for a Tier I or Tier II exemption. The antifraud provisions of the federal securities laws would be applicable, as discussed above, to any such publicity. Similarly, there should be no restrictions on the use of the Internet to publicize any rights offer or exchange offer exempt from registration under the Securities Act by Rule 801 or 802. With respect to any tender offer, exchange offer or other similar transaction not exempt under those rules, we believe that posting information about the offer or business combination on a Web site would not invoke the application of the registration requirements of the Securities Act or the application of the provisions of Rules 13e-4, 14d-1 to l4d-10, 14e-1 and l4e-2 under the Exchange Act if procedures have been implemented that are reasonably designed to guard against sales of securities being targeted to persons in the United States, within the standards and guidelines set out in the Internet Release.
Q3. We seek comments on the appropriateness of the 10% limitation on U.S. ownership. Should the threshold be higher, for example 20 percent, or lower, such as 5 percent? If the threshold were higher, would the Tier II exemption be necessary?
Consistent with the recommendation in our September 9, 1991 letter on the 1991 Release, we believe that the Commission should adopt a 15% limitation for U.S. ownership, as opposed to the 10% limitation proposed in the Release, for defining the Tier I exemption. We agree that the relevant factors to consider in arriving at an appropriate U.S. ownership threshold should include the stated purpose of encouraging bidders to extend multinational offers to U.S. investors, the degree of U.S. interest warranting full application of the protections of the federal securities laws, and a balancing of the benefits and costs of compliance with such rules. However, the same policy considerations that justify a 10% limitation equally sustain a 15% limitation. U.S. contacts at this level are still sufficiently minimal to conclude that, on balance, it is better for U.S. investors to be able to participate in the offer than to be excluded. Moreover, raising the limitation to 15% would encourage the extension of more offers to U.S holders. Where the percentage of U.S. ownership is below 10%, many bidders may continue to exclude U.S. holders irrespective of the availability of the proposed exemption on the basis that the bid can succeed -- and can achieve a high enough level of ownership to permit a second-step compulsory acquisition of the remaining equity securities --without the participation of U.S. holders or compliance with U.S. requirements. Where the level of U.S. ownership is more than 10%, some bidders may be more likely to extend their offers to U.S. holders for strategic reasons, even absent an exemption. However, we believe encouragement to do so -- in the form of the Tier I exemption -- is still in the interest of U.S. investors in order to reduce the number of transactions from which they are excluded and thereafter forced to resort to what often becomes an illiquid market for the target’s securities. We do not believe the 5% differential in U.S. ownership is sufficiently material to justify full application of the federal securities laws. Indeed, we believe that the foregoing considerations may well justify a U.S. ownership limitation of 20%. Given the novel nature of the proposals, however, the Commission may wish to monitor transactions at the 15% level and revisit the issue of the appropriate threshold after experience with the operation of the new rules. We are concerned that if a 10% threshold is initially adopted, U.S. investors will suffer by being excluded from offers and data derived from transactions under the exemptions may be inadequate as a basis for appropriate policy determinations.
Regardless of whether the Tier I threshold is set at 10%, 15% or 20%, the Tier II exemption appears to be necessary and useful. We strongly support the Commission’s proposal of a two-tiered approach: Tier I for a total exemption from the disclosure and procedural rules of the Williams Act and Tier II for more tailored relief.
Q4. Should Sections 13(d), 13(f) and 13(g) apply to non-U.S. persons owning securities in foreign private issuers? Should these rules apply only if U.S. record ownership exceeds a certain percentage, such as 5 or 10 percent?
These sections should continue to apply. We are not aware of general or widespread reluctance of non-U.S. persons to comply with these requirements, or that they have particular problems in complying, although in some cases they may not be aware of the requirements. We also do not believe that the application of these requirements presents a serious impediment to cross-border business combinations. We note that Item 4, Control of Registrant in Form 20-F, currently requires disclosure of the identity of persons that beneficially own more than 10% of the registrant’s outstanding stock. We agree with the Commission’s proposal in its February 2, 1999 release entitled "International Disclosure Standards" that this requirement be amended to require such disclosure of holders of 5% or more of a registrant’s stock, thus harmonizing this requirement with the Williams Act reporting requirements.
Q5. We request comments on whether the tender offer exemptive rules should permit U.S. security holders to be offered cash consideration only, even if securities are offered to non-U.S. security holders. If bidders can offer a cash-only alternative to U.S. security holders, should we impose protections to ensure that U.S. security holders are receiving equivalent value for their securities? Similarly, we are aware that as a practical matter, holders of American Depositary Shares ("ADSs") may have a shorter time period in which to tender. Would the requirement that the procedural terms of the tender offer be the same for all holders prevent reliance on the exemption when the subject securities are held in ADS form in the United States?
We agree that a condition of the Tier I exemption should be that U.S. security holders are treated as least as favorably as other security holders (subject to the cash-only feature mentioned below). This requirement should generally not create many issues or difficulties with respect to procedural terms of the offer, such as duration, withdrawal rights, announcement of amendments, prompt payment, etc. We believe that shorter time periods inherent as a result of the use of a facility for ADSs should not limit the availability of the Tier I exemption. Many investors who hold securities in ADS form are aware of shorter periods for the distribution of materials to security holders, the payment of dividends and the distribution of materials in connection with tender offers. To construe this requirement otherwise could result in the exclusion of U.S. security holders from many tender offers.
Bidders should be permitted to offer U.S. security holders a cash-only alternative. This flexibility is likely to be necessary in order to avoid the total exclusion of U.S. security holders from cross-border tender offers where the percentage ownership of U.S. security holders is relatively low, as in the case of Tier I offers. This will also be an important feature, as described below, if the percentage limitation for Rule 802 under the Securities Act is lower than that for Tier I. In such a case, a cash-only alternative would permit offers to proceed including U.S. investors that would otherwise exclude U.S. investors because of an inability or unwillingness to comply with Securities Act requirements.
The cash-only alternative should be equivalent to the amount of consideration being offered to other security holders. We recognize, however, that any suggestion that a bidder will need to obtain formal legal and financial opinions about the equivalence of the amount of the consideration is likely to raise significantly the cost to a bidder in establishing the Tier I exemption and consequently discourage bidders from including U.S. security holders in a tender offer. Therefore, we suggest that the Commission explain in the adopting release that this condition is satisfied if the bidder has a reasonable basis for believing, at the time of commencement of the offer, that the amount of the consideration in the cash-only alternative is substantially equivalent to the amount of consideration being offered to other security holders but that a fairness opinion is not required.
Q6. We request comments on the scope of the proposed relief and the conditions proposed in the Tier II exemption. Are there any other areas where relief should be granted? Are there areas of relief proposed that should not be granted? Should there be more conditions attached? For example, should a foreign bidder relying on the Tier II exemption be required, as proposed, to file a Form F-X appointing an agent for service of process in the United States?
The scope of the relief and conditions in the Tier II exemption are appropriate. The no-action letters of the past six years have clearly identified the specific areas of conflict between offers by foreign private bidders and the United States tender offer rules and reasonable solutions to such problems which enable U.S. security holders to participate in such offers. Also, we are of the view that filing of Form F-X is not necessary in connection with a Tier II exemption. Indeed, we question the necessity for a filing of Form F-X in connection with the Tier I exemption, particularly since Tier I companies, by definition, are overwhelmingly non-U.S. owned. We are concerned the Form may be unnecessary and the requirement of general consent could discourage foreign issuers and offerors from taking advantage of the new exemptions, to the overall detriment of U.S. investors. Should the Commission require the filing of Form F-X, it should not be a general consent but limited to the particular transaction. We note also that a U.S. shareholder harmed by a fraudulent offer made in the United States may well be able to seek redress in U.S. courts, subject to principles of comity, convenient forum and the constitutional reach of applicable long-arm statutes.
Q7. We request comments on whether the non-country specific exemption is appropriate.
The Tier II exemption should not be country specific. Our conclusion is buttressed by the fact that the relief is limited in nature. In addition, the proposed basis for the relief is not the adequacy of the regulation of the home jurisdiction (or principal market) of the issuer, but rather a balancing of the perceived benefits of increased participation by U.S. investors against the risks of not applying certain limited U.S. mandated procedural protection. The principal indication of where that balance is properly fixed should be the level of U.S. ownership and interest, as the Release proposes.
We note that the Commission suggests that, in some situations, a bidder should comply with the regulatory requirements of the target company’s principal foreign market for its securities in addition to the regulatory requirements of the target company’s jurisdiction of organization. We believe that the question of which non-U.S. regulatory regime or regimes must be satisfied should be determined solely by reference to those regimes, rather than by the U.S.
Q8. Is the Tier II exemption necessary at all since, based on transactions filed with us, it appears that there will be relatively few offers for the securities of foreign private issuers that will be ineligible for the Tier I exemption if the proposed 10 percent (or possibly higher) threshold is adopted? Instead, should we continue our current practice of granting relief on a case-by-case basis, but in an expedited manner pursuant to the proposed delegated authority provision?
The value of the Tier II exemption, though perhaps limited in application, is in setting a clear standard that is known in advance and generally considered consistent with needed investor protection. Tier II also permits easy advance identification of offers that may need additional no-action or exemptive relief to supplement the Tier II criteria. It will also reduce demands on the Staff’s time (as well as that of companies and their advisors).
Q9. Are there particular disclosure items under Schedule 14D-1 or other tender offer rules that should be the subject of exemptive relief? For example, should offers conducted pursuant to the Tier II exemption remain, as proposed, subject to the Commission’s going private disclosure requirements?
We do not believe there are any specific disclosure items that should be the subject of exemptive relief; any specific difficulties can be addressed with the Staff on a case-by-case basis. In particular, we believe the informative and clarifying disclosure requirements presently required to be included in going private disclosure documents should be retained. At the levels of U.S. investor ownership between the Tier I and Tier II limits, the U.S. disclosure requirements shall be applied, including going private requirements, and therefore this disclosure outweighs in significance the potential harm of excluding U.S. security holders from Tier II offers.
Q10. Are there aspects of the U.S. dissemination requirements that create conflicts with foreign requirements or practice or are otherwise unduly burdensome in the case of predominantly foreign offers?
Again, at Tier II levels the regulatory interest in following U.S. requirements for communications with investors (such as dissemination requirements) is reasonably high, and we have not identified any aspects of U.S. dissemination requirements which conflict with or, balanced against that U.S. regulatory interest, are unduly burdensome.
Q11.We request comments on whether the 40 percent threshold is appropriate. Is a 30 percent threshold more appropriate? Should an offer for any foreign private issuer be excluded from the Tier II exemption whenever the primary trading market for the subject security is in the United States?
The 40% threshold is appropriate for the protection of investors, particularly taking into account the limited nature and carefully crafted exemptions in Tier II. Additionally, further exemptions can be obtained by expedited relief under the proposed delegated authority.
While a provision limiting the applicability of the Tier II exemption where the United States is the principal trading market has an initial logical appeal, we oppose such a provision. First, the percentage ownership limitation already generally provides adequate protection against application of the exemption where the U.S. regulatory interest would clearly outweigh that of other jurisdictions. Second, the design and application of a "principal market" test would be complex and would not be justified by the increased regulatory protection, which would be marginal at most. Indeed, with global trading, the primary market may change or be difficult to define. Third, the limited nature of the Tier II exemptions and the continued application thereunder of the fundamental U.S. regulatory provisions provides adequate "fail-safe" protection.
Q12.We request comment on whether it is necessary to require that offers commence within 30 days of announcement. Is a different time period more appropriate? Further, would the proposed legend concerning the delay in commencement add meaningful protection for U.S. investors?
As discussed above, we suggest that the proposal in the M&A Release be adopted rather than the 30-day requirement. However, if the Commission prefers to proceed with a time period here and defer consideration of the proposal in the M&A Release, then commencement within 30 days of announcement is appropriate. No added protection is seen in a variation of 10 or 15 days. We also see no added protection in the proposed legend concerning the delay in commencement.
Q13.Should bidders be permitted to terminate withdrawal rights earlier than the satisfaction of certain conditions, such as before governmental regulatory approval? Should we consider requests for this relief on a case-by-case basis rather than incorporating it into the Tier II exemption?
As a policy matter, withdrawal rights were one of two key provisions of the original Williams Act. They have served investors by eliminating abuses prevalent in the mid-1960’s. The withdrawal rules have been adjusted from time to time to fit trends in domestic offers and now provide that equity securities may be withdrawn at any time during the period the offer is open. The modifications previously granted on a case-by-case basis and now proposed in the Release represent carefully considered adjustments. We believe any further departures from the withdrawal rights norm should not be included in Tier II but should only be provided on a case-by-case basis. However, if the M&A Release is adopted, these should be harmonized with the subsequent offering period without withdrawal rights.
Q14. We request comments on whether the Tier II exemption should include relief permitting a bidder to offer cash, rather than securities, to U.S. security holders. Would the need to treat U.S. security holders differently be greatly diminished if we adopt proposed Rule 802?
As discussed above, there is considerable value in permitting an offer pursuant to which U.S. security holders may receive only cash. Registration can be time-consuming and discourage foreign bidders from including U.S. shareholders in an offer. However, we recognize the need to afford protection with respect to the best price rule.
Consequently, we recommend an addition to Tier II which would permit an all cash bid to U.S. security holders in a bid for a foreign subject company including securities, or a package of cash and securities, to non-U.S. security holders. With regard to valuation and equal treatment of U.S. investors in other respects, we refer to our response to Question 5.
Q15.Is there a need for relief from the minimum offering and extension period requirements of the U.S. tender offer provisions?
The proposal with respect to extensions in Tier II is helpful and basically recognizes that minor procedural differences in various countries’ tender offer rules can be permanently resolved through a sensible rule-making process.
The various practices regarding settlement in European countries should be accommodated in order to permit U.S. shareholders of foreign companies to participate in tender offers. Settlement procedures are best reviewed and regulated by local authorities and little is gained by attempting to impose U.S. requirements on what can properly be viewed as a domestic home country practice.
We are alert to the concerns regarding the five-day rule in connection with the lowering of the minimum condition. However, Europe’s financial center, the City of London, has developed a different scheme for dealing with the adjustment of this condition. We cannot say this is an unreasonable mechanism where the goal is often to obtain at least 90% of the shares so as to be able to effect a second-step compulsory acquisition. Nor can we say the present five-day U.S. threshold represents such an important U.S. regulatory interest that it must be applied in these circumstances. However, it would seem logical to insert a three-day provision in Tier II as we understand this would accommodate the English procedures and still leave ample time for U.S. shareholders to review the situation.
1. Rule 10b-13
We applaud the Commission’s proposal to amend Rule 10b-13 to facilitate the inclusion of U.S. securityholders in tender offers for non-U.S. securities. Indeed, as discussed below, we believe that it would be appropriate and efficient for the Commission to codify by rules the circumstances under which exemptions from Rule 10b-13 are applicable where U.S. ownership exceeds Tier I limits.
Q16.We solicit comments on the proposed exemption for Tier I offers generally, and whether:
(1) as suggested in the 1991 proposal, relief from Rule 10b-13 should be granted only for purchases made outside the United States;
(2) the exemption should be subject to an express requirement that either the governing tender offer statute or rules contain, or the offer itself provides for, a provision that if the price paid to security holders outside the offer is higher than the tender offer price, the higher price will be offered to all security holders;
(3) the exemption should be limited to offers for all outstanding securities, on the basis that shares purchased outside a partial offer would not be subject to prorationing and therefore may be made on terms materially different from shares purchased in the offer;
(4) the exception should be limited to cash tender offers, on the basis that purchases outside an exchange offer would be made for a form of consideration that may be materially different from the offer’s consideration; and
(5) the exception should be limited to offers for the securities of foreign private issuers with no more than 10% U.S. holders of record, or permit a higher percentage of U.S. record holders, e.g., 20%, 30% or 40%. If the level of permissible U.S. ownership is increased, should the exception contain additional conditions, such as limiting its availability to all cash, any-and-all offers; requiring the offer to comply with foreign tender offer rules providing protections comparable to Rule 10b-13; and/or requiring that the principal market for the security be outside the United States?
(1) The exception from Rule 10b-13 should not be limited to purchases made outside the United States. If the home jurisdiction permits purchases outside of a tender offer, and if the company in question is owned primarily by non-U.S. shareholders, barring purchases in the United States could in fact disadvantage U.S. shareholders.
(2), (3) and (4). In the case of Tier I offers, the exception from Rule 10b-13 should not be conditioned on a requirement that the best price be paid to all, or that the exception be limited to offers for all outstanding shares, or that the exception be limited to cash tender offers. While equal treatment of shareholders, and proration in the case of partial offers, may be desirable objectives in U.S. regulation, and may be found in the takeover regulations of some other jurisdictions, the concept underlying the exemption from Rule 10b-13 is that the home jurisdiction’s rules should apply with respect to purchases of shares of target companies that are primarily non-U.S. owned -- even if the regulation of the home jurisdiction differs from that in the United States. Along the same reasoning, in a Tier I offer, we believe it is appropriate to permit a cash purchase outside of the offer if that is permissible under the rules of the home jurisdiction.
The applicable U.S. interest in an offer grows as the percentage of U.S. ownership increases. Accordingly, it would be appropriate, in the case of Tier II offers, to condition an exception from Rule 10b-13 on the requirement that the bidder must increase the price paid to all if it pays anyone more than the offer price. It may also be appropriate, in the Tier II zone, to limit the exception to offers for all outstanding shares and to offers that are entirely for cash (with exceptions, for instance, for loan notes).
(5) We note that the Commission proposes not to specify an exception by rule from Rule 10b-13 for Tier II offers. The Release suggests that the Commission intends to respond to requests for relief in this area on a case-by-case basis. We believe that approach would create unnecessary work for the Staff as well as for companies and their advisers. We believe it would be preferable to codify in a rule the requirements for Rule 10b-13 relief, as in the Tier I situation.
Q17. We solicit comments on the proposed exception for U.K. Eligible Traders, including whether this exception should be available during any offer for a U.K. target or limited, e.g., to Tier I offers.
We favor the proposed codification of the class exemption relating to U.S. market-making activities by "connected exempt market-makers" and "connected exempt principal traders". We would not limit the applicability of the exemption for such "Eligible Traders" to cases in which U.S. record ownership was below 10%. In our view, the concept of the Eligible Trader amendment is based on comity, on the U.K. requirements that market-makers continue their activities, and on the SEC’s review of and satisfaction with the information barrier and other requirements contained in the City Code -- not on whether the target company has a small U.S. ownership.
Q18. Is it necessary to include the condition requiring that U.S. holders be able to obtain information regarding Eligible Traders’ purchases to the extent such information is required to be made public in the United Kingdom?
Under proposed Rule 10b-13(e)(5), there is a requirement that the offer documents describe how U.S. holders can obtain information about purchases by Eligible Traders to the extent that information is required to be made public in the United Kingdom.
We believe that such a requirement, while possibly helpful, is not necessary, if U.K. practice is not to require disclosure as to where such information can be obtained.
Q19. Additionally, we seek comments on whether it is appropriate to exclude from Rule 10b-13’s application transactions by any market makers, including U.S. market makers, that are subject to restrictions similar to those imposed by the City Code. Should Rule 10b-13 incorporate the connected market maker concepts of the City Code and provide an exclusion where there is an information barrier between the dealer-manager and the affiliated market maker, and public disclosure is made during the offer of the total amount of shares purchased in market making transactions and of the highest price paid for those shares?
It may be appropriate in the future to exclude from the application of Rule 10b-13 transactions by market makers who are not subject to the restrictions of the City Code, including U.S. market makers, provided that there are appropriate safeguards (as there are in the City Code) to wall off information (perhaps by following the approach to the adoption and periodic audit of information barriers provided in Regulation M), and to be sure that the market maker is not acting in concert with the bidder.
We believe that the need for such an exclusion is less pressing than the need for an exclusion for transactions by Eligible Traders subject to the City Code in light of the U.K. requirements for continuous market making. We would not recommend delaying the proposed amendments to Rule 10b-13 while the Commission considers exactly what safeguards would be appropriate for market makers outside of those in the United Kingdom.
Q20. Are exemptions from various rules under Regulation M necessary to accommodate cross-border rights offerings or exchange offers conducted pursuant to proposed Rules 801 or 802? Commenters should provide reasons why such exemptions would be necessary and the scope of any conditions that should be imposed.
The ways in which Regulation M differ from Rule 10b-6 have helped to reduce the need for exemptions from the rules under Regulation M in order to accommodate cross-border rights offerings or exchange offerings conducted under proposed Rules 801 or 802.
One possible need for relief was already met when Regulation M eliminated from the categories of covered securities the concept of rights to purchase, so that securities of a target company are no longer typically subject to the provisions of Regulation M. The provision in Rule 101(c) of Regulation M exempting securities that have a specified average daily trading volume is also helpful.
Even with the advances under Regulation M, one area meriting additional exemptive relief in connection with rights offerings and exchange offers under Rules 801 and 802 continues to exist. Rule 102 under Regulation M does not include an exemption for issuers in respect of actively traded securities. Therefore, during the relatively lengthy period of a rights offering or exchange offer exempted under Rule 801 or 802, even large issuers would be precluded from making bids for or purchases of their own shares. This could result in interference with normal activities for many issuers and could be impracticable for larger non-U.S. financial institution issuers. We believe that it would be consistent with the philosophy behind proposed Rules 801 and 802 to include an exemption from Rule 102 for those offerings. A possible narrower approach would be to condition such an exemption from Rule 102 on the shares of the issuer meeting the "Average Daily Trading Volume" standard for exemption under Rule 101 of Regulation M.
Another area in which exemptive relief would be appropriate relates to exchange offers made in the United Kingdom by an issuer whose shares are traded in the United Kingdom. We believe that the prohibitions of Regulation M should not apply to purchases of the issuer’s shares by a market maker that is an Eligible Trader, subject to the same conditions as are contained in Rule 10b-13(e).
Q21. Comment is solicited as to whether these Securities Act exemptions are necessary and appropriate. Should the other proposals proceed without the proposed Securities Act exemptions?
We believe both the Williams Act and Securities Act exemptions are necessary and appropriate and should proceed together. In keeping with the "equal footing" policy goal of the M&A Release, we believe the form of consideration offered in a cross-border transaction should not effectively dictate whether or not U.S. investors have an opportunity to participate.
Q22. Comment is requested on whether five percent is the appropriate threshold. Would an exemption set at 10 percent or as low as one percent be appropriate and consistent with the protection of investors? Is the five- percent threshold too low for small businesses whose offerings are small? Is it too high for large companies, whose offerings are correspondingly large?
For the reasons discussed above concerning Tier I, we believe an exemption set at 15% would be appropriate and consistent with the protection of investors. Moreover, harmonizing the thresholds under Tier I, Rule 801 and 802 would further the Commission’s policy goal, espoused in the M&A Release, of leveling the playing field between cash and stock tender offers. If a 15% exemption for a Rule 801 or 802 transaction seems too ambitious at this stage, we strongly recommend setting that threshold at 10%. Finally, to the extent that the percentages under the Tier I exemption and Rule 802 are different, permitting a "cash-only" alternative becomes more important and should be at the Tier I level in a Rule 802 transaction.
Q23. Should Rules 801 and 802 be limited by a dollar ceiling of $5, $10, or $20 million? Should an issuer be allowed to issue up to, for example, $5, $10 or $15 million regardless of the amount of U.S. holdings? Should the test be in the alternative, for example, $10 million or five percent U.S. holdings, whichever is higher? Or lower?
We do not believe Rules 801 or 802 should be limited by any dollar ceiling, or the higher of a dollar limitation or share percentage limitation. A dollar limitation appears to be too arbitrary given the different sizes of companies and the fluctuating market value of securities being offered.
In the case of foreign private issuers with the limited U.S. percentage ownership under these exemptions, the principal trading market will generally be outside the United States, securities are more likely than not in most cases therefore to migrate after the exempted transactions into the liquid non-U.S. market, and a liquid public secondary trading market is unlikely to develop in the U.S., especially if the foreign private issuer is not already a reporting company under the Exchange Act. The benefits of designating such securities as restricted are therefore limited and do not justify the disadvantages and costs of requiring the cumbersome procedures that would be required.
Q24. We request comments on whether the potential for abuse, including an unregistered distribution of the acquiror’s securities, should require that all securities issued under Rule 802 be deemed restricted securities for purposes of Rule 144 under the Securities Act.
We do not believe there is any justification for a rule that all securities issued under Rule 802 be deemed restricted securities for purposes of Rule 144 under the Securities Act. The purpose of the proposed rule is to induce bidders to include U.S. security holders in offerings from which those holders might otherwise be excluded. If all securities issued pursuant to such proposed exemption are deemed restricted, we believe this would be viewed as burdensome by the bidder and a disincentive to such transactions in the U.S. It would impose obligations on bidders, as issuers of restricted securities, which we believe would make it less likely that they would include U.S. security holders in exchange offers. It would also put U.S. holders at a disadvantage and result in their receiving less value than non-U.S. holders. We also believe that U.S. security holders would be less willing to participate in the offer, but would, instead, simply sell their securities. The consequences of such a restriction would be that the exemption would lose much of its purpose and value.
It is highly unlikely that abuses associated with an unregistered distribution would result. First, and foremost, the anti-fraud rules would still be applicable to these distributions. Further, the disclosure and anti-fraud provisions of the home jurisdiction of the acquired company would also be applicable. Finally, it is highly unlikely an issuer will attempt to acquire a foreign corporation located in a jurisdiction with inadequate securities laws in order to distribute a relatively small percentage of its securities in the U.S. on an unregistered basis.
We also question whether it is necessary to require that security holders of the target company that hold restricted securities should receive restricted securities from the offeror in a Rule 802 transaction. If the security holder is an affiliate, we believe the current requirements for resale under Rules 144 and 145 (subject to repeal as the Commission has proposed in the case of Rule 145) should be applied and should be sufficient to protect investors. If the security holder is not an affiliate but holds restricted securities, such security holder might be encouraged to sell offshore rather than receive a restricted security in the offer. Accordingly, if Rule 802 is intended to provide an exemption from registration which both encourage bidders to extend offers into the United States and security holders to participate in such offers, unaffiliated security holders also should receive unrestricted securities in a Rule 802 transaction.
Q25. Will making Rule 801 securities restricted impose monitoring and other procedural obligations that will deter reliance on the rule? For example, will the fact that the foreign issuer may have to establish a separate restricted American Depositary Receipt ("ADR") facility and monitor withdrawals from that facility deter reliance on the exemption?
For the same reasons set forth in our response to Question 24, we believe that making Rule 801 securities restricted securities would impose monitoring and other procedural obligations that would deter reliance on the rule. Securities received would need to be legended and a separate restricted ADR facility would likely be established. U.S. security holders, including beneficial owners of ADRs, would be at a disadvantage in reselling securities compared to non-U.S. security holders. The additional monitoring and procedural obligations required to ensure compliance with resale restrictions would, we believe, deter issuers from extending the offer into the United States. Both issuers and U.S. security holders would have an incentive to continue current practices with respect to rights offerings and defeat the purpose of the rule. For the reasons stated above with respect to securities issued pursuant to rule 802, if the share ownership limitation for the exemption is set at 15% or less, we do not believe there should be a concern that foreign companies would use a rights offering as a means to create a market in the United States. Consequently, the imposition of resale restrictions should not be necessary.
Q26. We request comments on whether this limitation on transferability is appropriate.
We do not believe that the limitation on transferability of rights granted to U.S. security holders is appropriate. By permitting U.S. holders to transfer rights only in offshore transactions in accordance with Regulation S, the Rule would be imposing a limitation on U.S. holders that may not be imposed on non-U.S. holders by the issuer’s home jurisdiction. As a consequence, the proposal would continue the distinction between U.S. and non-U.S. holders that it is attempting to remove. The issuer would be obligated under proposed Rule 801 to submit any informational document in connection with the rights offering on Form CB. U.S. holders and potential purchasers of rights would, therefore, have access to the same information sent to security holders in the issuer’s home jurisdiction. A potential investor who wishes to purchase rights should be able to do so based on the home country disclosure documents of the foreign issuer. The required legend on the offering document would make clear that the rights offering is subject to the disclosure requirements of a foreign country that are different from those of the United States. If a potential investor wanted to buy the security of the issuer, that investor would do so based on the same information available to the current investor to whom the rights were issued. Accordingly, U.S. holders should have the same opportunity to transfer rights that may be afforded to non-U.S. holders.
Q27. Is it appropriate or necessary to allow U.S. companies, including reporting companies eligible to use the Form S-3 short form registration statement to rely on the exemption? Should Rule 802 be available to a domestic company only when there is a competing bid for the target’s securities?
It is appropriate to allow U.S. companies, including reporting companies eligible to use the Form S-3 short form registration statement, to rely on the exemption afforded by Rule 802 in all situations, not only in cases where there is a competing bid for the target’s securities. If the proposed Tier I exemption from certain tender offer requirements under the Exchange Act is available to both U.S. and foreign bidders, then, similarly, the Rule 802 exemption should be available to both U.S. and foreign bidders. There is no discernible reason why it would be appropriate to be exempt from Exchange Act disclosure obligations but necessary for the same bidder to comply with Securities Act disclosure obligations.
We also believe that limiting the availability of U.S. bidders in the context of contested offers inappropriately deprives U.S. companies of a "level playing field" in global markets with no accompanying significant gain in investor protection. A U.S. bidder could also be disadvantaged if it made, or was considering but was prevented by Securities Act requirements from making, a first bid for a non-U.S. target. It would be an anomalous result if the U.S. bidder was not so constrained if a non-U.S. bidder acted first and the offer was contested.
Q28. Should an offeror seeking to rely on Rule 802 have to be a reporting company under Section 13(a) or 15(d) of the Exchange Act at the time the exchange offer or business combination is first offered to U.S. security holders?
We do not believe that an offeror seeking to rely on Rule 802 should have to be a reporting company under the Exchange Act at the time the exchange offer or business combination is first offered to U.S. security holders. If the purpose of Rule 802 is to encourage foreign issuers to extend offers to U.S. security holders, conditioning the exemption on their being reporting companies under the Exchange Act would not facilitate the inclusion of U.S. security holders in such offers. Compliance by the foreign issuer with home jurisdiction requirements should be sufficient. Since the exemption would be available where the percentage U.S. ownership is at or under the designated threshold, the concern that issuers would use the exemption to issue a significant amount of securities in the United States should be minimized.
A U.S. issuer availing itself of Rule 802 should not be required to be a reporting company. It will also be subject to home jurisdiction reporting requirements with respect to the offer, and, consequently, information about it will be available. For reasons stated above with respect to a foreign bidder, it is unlikely that a U.S. company would perceive Rule 802 as a means to create a market for its securities in the U.S.
Q29. Should we impose a minimum reporting history, either as an Exchange Act reporting company or as a listed company on a recognized foreign securities exchange or market?
For the same reasons set forth in the above response to Question 28, we do not believe that a minimum reporting history, either as an Exchange Act reporting company or as a listed company on a recognized foreign securities exchange or market, should be imposed.
Q30. Should we require that either the target security, the security to be issued, or both, be listed on an established U.S. or foreign securities exchange and have a minimum public float such as $50 million, $100 million or $150 million? This may ensure U.S. security holders a degree of liquidity if they are unwilling to accept the consideration offered in the exchange offer or business combination and would prefer to sell the investment into the public markets.
Neither the target security nor the security to be issued should be required to be listed on an established U.S. or foreign securities exchange or have a minimum public float. With respect to availability of information, the protections afforded to security holders in the target company’s home jurisdiction should be sufficient for the protection of U.S. security holders. It is not necessary to impose a requirement that the target security be listed or have a minimum public float to provide U.S. security holders with a degree of liquidity. Such security holders have already made a decision to invest in the security. Requiring the bidder’s securities to be listed or have a minimum public float also is unnecessary because it could deter bidders from extending the offer into the United States. That would create the odd result that a security holder would have to sell a security in order to get the benefit of an offer rather than having the choice of accepting the offer. We also believe that, as a practical matter, most bidders engaged in cross-border transactions are large corporations whose securities are already listed, so that liquidity of the issuer’s securities in most cases should not be an issue.
Q31. We solicit comments on whether it is appropriate or necessary to retain any or all of the offeror eligibility requirements that the Commission originally proposed in 1991 in connection with Rule 801. If so, is it appropriate to provide for a size-of-issuer test as an alternative to requiring a three-year listing history on a designated foreign market for determining the eligibility of non-reporting issuers?
Q32. Should the alternative test be based on the offeror’s public float, as previously proposed, or on its net assets, net worth, or on average daily trading volume?
Q33. Should the previously proposed minimum public float of $75 million be reduced, for instance, to $50 million, or be raised to $100 million or $150 million?
Q34. Is it appropriate or necessary to limit the exemption to reporting companies?
It is not appropriate or necessary to impose offeror eligibility requirements with respect to the use of proposed Rule 801 other than that the issuer be a foreign private issuer. If the purpose of the proposed rule is to facilitate the participation of U.S. security holders in rights offerings of foreign private issuers, eligibility requirements are unnecessary. The securities are being offered to investors who are already familiar with the issuer and are protected by the anti-fraud rules.
Q35. Should issuers relying on Rules 801 and 802 be required to prepare and physically deliver some form of prospectus or offering circular? In the absence of such a document, should the issuer be required to deliver its latest annual report containing audited financial statements?
Issuers relying on Rules 801 and 802 should not be required to prepare and physically deliver a prospectus or offering circular. It is appropriate and sufficient that U.S. security holders be provided with the same information provided to offerees in other jurisdictions. The submission on Form CB of whatever is available in the principal market also assumes availability in the United States. The applicability of home jurisdiction disclosure requirements, together with the applicability of the anti-fraud rules, should be sufficient for investor protection. An issuer will be inclined not to avail itself of Rules 801 or 802 if burdensome documentation requirements are imposed by U.S. rules.
Q36. Is this notification submission necessary, and, if so, should the notification, as proposed attach a copy of any disclosure documents required to be filed or delivered pursuant to the home jurisdiction regulatory requirements?
It is not appropriate to require an offeror to submit the notification contemplated by the proposed Form CB together with any information mailed to U.S. security holders. This is similar to submissions currently being made by companies availing themselves of the "information-supplying exemption" from Exchange Act registration under Rule 12g3-2(b).
Q37. Should bidders relying on the Tier I exemption for cash tender offers be required to include a legend on the offering materials similar to the legend proposed for rights offerings and exchange offers?
In general, we do not believe that whether or not a legend is required on a particular document is an issue of great concern. However, we do believe that the proposed rules should be as user friendly as possible if the purpose is to encourage their use and extend offers to U.S. security holders which might not have been extended to them in the past. Consequently, we would encourage the Commission not to impose requirements which may seem burdensome or of limited significance, especially to foreign issuers, and do not meaningfully add to the mix of information available to security holders or otherwise provide clear demonstrable investor protection benefits.
Q38. Is the proposed unconditional exemption from the requirements of the Trust Indenture Act for any debt security issued pursuant to Rule 802 necessary or appropriate in the public interest and consistent with investor protection and the purposes of that Act? Would it be more appropriate to exempt transactions from the procedural requirements of the Trust Indenture Act, such as filing the Form T-1, but still require that the debt securities be issued pursuant to an indenture containing some or all of the mandatory protective covenants discussed above? If so, which protective covenants should be preserved?
We agree with the proposal that any debt security issued pursuant to proposed Rule 802 be exempt from the Trust Indenture Act. All the reasons as to the appropriateness of the Rule 802 exemption are equally applicable to the Trust Indenture Act.
We agree with the Commission’s position in general note 5 to Rules 800-803 that an issuer making an offer under Rules 801 or 802 may also rely on any other applicable exemption from registration under the Securities Act.
Q39. We request comment on whether a foreign private issuer should be precluded from relying on the Rule 12g3-2(b) exemption following an offering under Rule 801 or 802, given that the Rule 12g3-2(b) exemption is intended for issuers that do not access the U.S. capital markets in any significant fashion. Should the issuer become ineligible for the Rule 12g3-2(b) exemption if the Rule 801 or 802 offering exceeds $10 million or some other dollar threshold? Should the same ineligibility result if the foreign private issuer has more than 500 holders of record in the United States after the Rule 801 or 802 offering is completed?
A foreign private issuer should not be precluded from relying on the Rule 12g3-2(b) exemption following an offering under Rule 801 or 802.
It is true that an issuer that has made an offering under those rules will have sold securities to U.S. investors. However, that would have happened as part of an offering that is predominantly to non-U.S. holders. This is not the sort of voluntary reaching out to raise funds in the U.S. capital markets or to create a public trading market that should disqualify a foreign issuer from relying on Rule 12g3-2(b).
Q40. Should Rule 802 be available to a closed-end investment company that is registered under the Investment Company Act?
General Note 7 to Rules 800-802 states that proposed Rule 801 does not apply to a rights offering, and that proposed Rule 802 does not apply to an exchange offer or business combination, by an investment company that is registered or required to be registered under the Investment Company Act.
We recognize there are not many non-U.S. registered investment companies, given the prohibition in Section 7(d) of the Investment Company Act against public offerings by a non-U.S. investment company, absent an applicable exemptive order or rule. However, there are some non-U.S. investment companies that have been permitted to offer shares in the United States, either under an exemptive order under Section 6(c) of the Investment Company Act or under Rule 7d-1. We do not see why the proposed rule should be per se inapplicable to such companies. We note that proposed Rules 801 and 802 are exemptions from Section 5 of the Securities Act. The non-U.S. investment companies that have conducted public offerings in the United States presumably would be subject to restrictions similar to those contained in Section 23 of the Investment Company Act relating to the terms of rights offerings. See Rule 7d-1(8)(i) (a Canadian investment company, under Section 7(d) must include numerous provisions in its charter and by-laws containing the substance of, among other things, Section 23 of the Investment Company Act).
Q41. Should these exemptions be available when the target company is a foreign investment company?
The Commission’s proposed tender offer exemptions for cross-border transactions require the subject company not to be "an investment company registered or required to be registered under the Investment Company Act." The only reason stated in the Release is that the Commission "has not received a request for relief in connection with a tender offer for a foreign investment company," and the Commission wishes "to keep the proposed exemptions as narrow as possible to address conflicts between U.S. and foreign law."
While we recognize that there are relatively few non-U.S. registered investment companies, we do not believe the mere fact that a non-U.S. company happens to be an investment company should prevent the applicability of the tender offer exemptions. If, for example, a Canadian investment company that has been permitted by the SEC to offer its shares publicly in the United States, under Investment Company Act Rule 7d-1, has only 7% of its shares owned by U.S. holders, we believe that Canadian rules should apply to a tender offer for the company.
We suggest a corresponding deletion from General Instruction I(C) of Schedule 14D-1F, providing that the schedule cannot be used if the subject company is an investment company registered or required to be registered under the Investment Company Act.
1. Definition of U.S. Holder
The Release says that the calculation of U.S. holders is to be made at the commencement of the tender offer, rights offering or exchange offer. We agree it is appropriate to fix a time for the determination that is no later than commencement, so that companies can know where they stand at the beginning of a proposed transaction, without being concerned about the effect of shifts in ownership during the course of the transaction. To further accommodate the cross-border offeror’s or issuer’s planning process, which is often not inconsiderable, we suggest a reasonable "look-back" period of up to 30 days. We also note that Rules 801 and 802 specify the time for determination of the extent of U.S. ownership, while the time for determination is not spelled out in the tender offer exemptive rules -- only in the Release. It would be helpful if the text of the tender offer exemptive rules themselves referred to the time of determination -- for example, by inserting after "held of record by U.S. holders" the words "at the time the tender offer is commenced" or, if the Commission accepts our suggestion, "within 30 days before the date the tender offer is commenced." See proposed rules 13e-4(8), 14d-1(c) and 14d-1(d)(1)(ii).
Q42. Given the potential significance of U.S. beneficial ownership, we solicit comments on whether a beneficial holder test should be included if the bidder or issuer knows the percentage of U.S. beneficial owners or can access that information without unreasonable effort or expense. For example, should an issuer be required to determine the amount held by a foreign broker-dealer as nominee for U.S. accounts?
We agree with the proposed Rules that, as contemplated by General Note 4 to proposed rule 14d-1(c) and (d), "U.S. holders" should be determined by reference to addresses on the records of the company, or of any depositary or transfer agent of the company. It would introduce undesirable indeterminacy if the test were to turn on beneficial ownership.
Q43. Should we treat all holders of ADRs as U.S. residents of the underlying foreign securities only when the ADR facility is unsponsored?
We believe it is appropriate to treat all holders of ADRs as U.S. residents, whether the ADR facility is sponsored or unsponsored, unless information provided by the depositary demonstrates otherwise.
We also agree with the position taken in the Release that holders of bearer shares should be treated as not held by U.S. residents, unless the offeror knows or has reason to know that they are held by U.S. residents.
Q44. Would it be appropriate to exclude affiliated shares, whether held outside the United States or in the United States, from both elements of the calculation, thus focusing only on the percent of the company’s total world-wide non-affiliated float held in the United States? Is 10 percent the appropriate level of ownership for excluding a holder’s shares from the calculation? Should shares held by an acquiror or by the issuer’s management also be excluded? Are foreign companies with significant U.S. ownership by affiliates as likely to exclude U.S. holders from participation in exchange and rights offerings?
In determining the percentage of outstanding securities held by U.S. holders, the proposed rules would exclude from the calculation shares held by "non-U.S. affiliates who hold more than 10% of the subject securities". The drafters’ concept appears to be that the relevant universe is of the "non-affiliated public float".
We note that this test is quite different than the test contemplated by the 1991 Release, under which U.S. holders of more than 10% of the class would be excluded from the calculation of the amount held by U.S. holders, but large non-U.S. holders would not be excluded from the relevant universe.
We believe that it is inappropriate to exclude shareholdings by large non-U.S. shareholders from the calculation. To us, the relevant concept is the percentage owned by non-U.S. holders. In our view, a company that is incorporated in country X, which has 80% of its shares owned by one or two large holders who are residents of country X, is as much primarily a country X company as a company that has 80% of its shares owned by a large number of citizens of country X. Because many foreign companies have one or more significant shareholders, their exclusion from the calculation could severely limit the availability of the exemptions by artificially creating a high percentage of U.S. ownership.
Indeed, we also believe it may well be appropriate (as in the 1991 Release) to exclude from the calculation shares owned by large U.S. strategic investors in a non-U.S. company. For example, if a major U.S. telecommunications company has a 12% strategic stake in a European telecommunications company, and other U.S. investors own, in the aggregate, 4% of the shares of the company, it might well be appropriate to exclude the shareholdings of the U.S. investor and to treat the company as a Tier 1 company.
We also note that a test based simply on the percentage of ownership, without excluding shares held by large non-U.S. investors who are "affiliates", would avoid the undesirable difficulties of determining that holders of more than 10% are "affiliates".
Q45. Should the presumption be available in negotiated transactions? Should a bidder that has entered into a negotiated transaction with the issuer after a prior hostile bidder has commenced a tender offer be able to use the presumption?
We believe the proposals contain appropriate presumptions for determining the percentage threshold requirements in the case of hostile tender offers.
We think that it is appropriate that the presumption as to non-U.S. ownership should not be available in negotiated transactions since the bidder will have an opportunity to get the necessary information from the subject company. On the other hand, we believe that it would be appropriate for a bidder that enters into a negotiated transaction with an issuer after a prior hostile bidder to rely on the same presumptions. To do otherwise could well create a competitive disadvantage for the subsequent bidder.
* * * * *
We appreciate the opportunity to submit comments. We are available to meet with the Commission or the Staff and to respond to any questions.
Respectfully submitted,
/s/John M. Liftin
JOHN M. LIFTIN, Chair
Committee on Federal Regulation
of Securities
/s/Alan L. Beller
ALAN L. BELLER, Co-Chair
Special Committee
/s/ Robert Todd Lang
ROBERT TODD LANG, Co-Chair
Special Committee
/s/Bruce Alan Mann
BRUCE ALAN MANN, Co-Chair
Special Committee
Special Committee:
Ronald R. Adee
Alan L. Beller
Meredith M. Brown
Joseph D. Hansen
Robert Todd Lang
Bruce Alan Mann
Ellen J. Odoner
Morton A. Pierce
cc: Hon. Arthur Levitt
Chairman of the Securities and Exchange Commission
Hon. Paul R. Carey
Commissioner
Hon. Isaac C. Hunt, Jr.
Commissioner
Hon. Norman S. Johnson
Commissioner
Hon. Laura S. Unger
Commissioner
Brian J. Lane, Esq.
Director of Division of Corporation Finance
Richard R. Lindsey
Director of Division of Market Regulation
Robert L.D. Colby, Esq.
Deputy Director of Division of Market Regulation
Richard H. Walker, Esq.
Director of Division of Enforcement
Harvey Goldschmid
General Counsel
Laurie L. Green
Special Counsel, Office of Mergers and Acquisitions
Christina Chalk
Special Counsel, Office of Mergers and Acquisitions
Nancy J. Sanow
Senior Special Counsel, Office of Risk Management and Control
Margaret A. Smith
Attorney-Advisor, Office of Risk Management and Control