February 15, 2000
Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Re: File No. S7-31-99
Dear Mr. Katz:
We write to comment on one aspect of proposed Regulation FD that, unless corrected in any rule as finally adopted, could proscribe conduct we believe to be customary and appropriate in conjunction with mergers and acquisitions.
Proposed Regulation FD generally requires an issuer or a person acting on its behalf, whenever it discloses non-public information regarding itself or its securities to a person outside the issuer, to make public disclosure of that information. Under proposed rule 100(b), this would not be required if, among other things, the disclosure is made to a person who owes a duty of trust or confidence to the issuer or to a person who has expressly agreed to maintain such information in confidence.
As drafted, the proposed rule would give rise to substantial problems in negotiating a merger, in at least two contexts: preliminary merger negotiations and negotiations of stockholder support agreements.
With respect to preliminary merger negotiations, a transaction has to begin somewhere. The typical first step is that a potential merger partner contacts another company to explore whether the other company is interested in discussions. At that early time there is typically no confidentiality agreement. In many cases, there can be considerable initial exploration of the structure and regulatory aspects of a proposed transaction, without an exchange of confidential information or the need (under current practice) for a confidentiality agreement. Depending on the circumstances, such preliminary merger negotiations may be material, even though there has not yet been agreement on price and structure. See Basic v. Levinson, 485 U.S. 224 at 234-39 (1988).
The SEC has long recognized that to require premature public disclosure of initial merger negotiations would have a harmful chilling effect on transactions that can be beneficial to shareholders. For this reason, in Securities Act Rel. 6835 (May 18,1989), the SEC, noting the public interest in preserving the confidentiality of merger negotiations, made clear that it did not interpret Item 303 of Reg S-K to require disclosure of preliminary merger negotiations, if disclosure is not otherwise required. Yet, in the context just described, proposed Regulation FD could be read to require precisely such harmful public disclosure.
Similarly, in the course of negotiations, one merger partner or the other may wish to obtain from one or more large shareholders of its prospective merger partner commitments to support the transaction - to tender their shares, to vote in support of the transaction, to grant an option to purchase their shares. In practice, the large shareholder is typically told that the information about the proposed transaction is non- public and should be kept in confidence, but there has not been a practice of requiring written confidentiality agreements. The large shareholder may have a duty of trust or confidence to the company in which the shareholder has invested - for example, if the large shareholder is a director. In many cases, however, the large shareholder may not have a duty of trust or confidence to the other company. In that case, it would appear that under the proposed rule, in its present form, the discussion with the large shareholder of theproposed transaction, and of the request for a stockholder support agreement, would trigger a requirement for public disclosure by the other company. This would have a harmful effect on transactions.
To minimize or reduce the risks under the proposed rule, we suggest that the Commission make clear that the exception to required disclosure applies even if the recipient of the information has not signed a confidentiality agreement. It should be sufficient that the recipient of the information has agreed (orally or in writing) to maintain the confidentiality of the information, or (to paraphrase the language of proposed rule 10b-5-2(b)(2)), if the circumstances were such that the person communicating the material non-public information reasonably expected that the other person would maintain its confidentiality.
We appreciate the opportunity to comment on the proposed rule. If you have any question about our comments, please contact Meredith M. Brown at 212-909-6528 (e-mail address firstname.lastname@example.org).
Very truly yours,
Meredith M. Brown