On May 6, 2008, the Securities and Exchange Commission (the “SEC” or “Commission”) proposed various amendments to, and provided new clarifying guidance regarding, the rules governing cross-border transactions.
In 1999, the SEC adopted a series of exemptions from the rules governing tender offers, exchange offers and business combination transactions. Prior to that time, U.S. security holders were frequently excluded from cross-border business combination transactions due to conflicts between U.S. and foreign law. Foreign issuers often avoided extending offers into the United States because of a perceived risk of litigation or a desire to avoid burdensome regulations. In response to this problem, the SEC implemented cross-border exemptions intended to facilitate the inclusion of U.S. investors based on the percentage of target securities of a foreign private issuer held by such investors.
If no more than 10% of the securities are held in the U.S., the transaction qualifies for “Tier 1” exemption and is exempt from most filing, disclosure and procedural requirements of U.S. tender offer rules (including disclosure requirements applicable to “going private transactions) as well as the registration requirements of the U.S. Securities Act of 1933 (the “Securities Act”). If U.S. holders own more than 10% but no more than 40% of the target securities, then the transaction qualifies for “Tier II” exemption and is subject to limited relief from the filing, disclosure and procedural requirements of the U.S. tender offer rules, such as the prompt payment, extension of offers, subsequent offering periods and certain equal treatment requirements. However, no relief is provided for “Tier II” transactions from the registration requirements or from disclosure requirements applicable to “going private” transactions.
While the 1999 amendments solved many of the problems relating to cross-border tender offers, the Commission recognized that the current exemptions had certain unintended consequences. As a result, the Commission has proposed and is soliciting comments to various amendments with the aim of extending a greater number of offers into the United States. The proposed revisions are intended to expand the availability of cross-border exemptions and to reduce the related burden and costs for bidders and issuers. We have summarized below the most significant changes to the current regulatory regime reflected in the proposed amendments and related guidance.
1. Refined Test For Determining Tier I or Tier II Eligibility
The current standard for determining Tier I or Tier II eligibility is primarily based on the percentage of shares held by U.S. persons in the target company. For “friendly” or negotiated transactions, U.S ownership is determined as of the 30th day prior to the commencement of a tender offer and requires the bidder to “look through” record ownership to determine beneficial ownership by U.S. persons. Under the new proposed standard, bidders are allowed to calculate U.S. ownership as of any date within the 60-day period prior to the announcement of the offer. This change is intended to provide a more accurate assessment of the target’s shareholder base since ownership may change materially following the announcement of a tender or exchange offer. In addition, the change is intended to provide adequate time for bidders to complete the ownership assessment given that, in many foreign jurisdictions, the look-through analysis takes longer than 30 days to perform.
With respect to non-negotiated or “hostile” tender offers, the current regulatory framework allows bidders generally to rely on the average daily trading volume ("ADTV") of the target securities in the U.S. compared to the ADTV worldwide over a 12-month period ending no later than 30 days before commencement of the offer. This standard applies as long as the bidder does not have knowledge or "reason to know" that the level of U.S. ownership exceeds the relevant threshold for the relevant Tier I or Tier II exemption. Under the proposed changes, bidders are permitted to calculate U.S. ownership using the ADTV test over a 12-month period ending no later than 60 days prior to the announcement of the offer, thus making the hostile standards comparable to the negotiated standard.
The proposed amendments also clarify when a bidder would have a "reason to know" information about U.S. ownership that may affect its reliance of the ADTV tests referred to above. First, bidders are presumed to know information that is publicly available, including information appearing in SEC filings and reports compiled by independent information service providers that are generally available to the public. Acquirors will also be presumed to know any information about beneficial ownership reflected in filings by third parties with the Commission, as well as similar reports filed in the target’s home country. The key change is that this information must be available prior to the announcement. Information made available after the announcement of the offer does not affect the bidder’s ability to rely on the presumption of eligibility for hostile transactions, even if the subsequent information is conflicting.
2. Expanded Relief For Tier I Exemptions
Rule 13e-3 establishes specific filing and disclosure requirements for certain “going private” offer transactions due to, among other things, potential conflicts of interests. The current “Tier I” exemption from Rule 13e-3 does not apply to certain transaction structures that are commonly used abroad, including schemes of arrangement, cash mergers, and compulsory acquisitions for cash. Under the proposed amendments, the exemption would be expanded to remove any restrictions on the category of transactions covered as well as to tender offers.
3. Expanded Relief For Tier II Exemptions
Under the current standards, it is unclear whether the “Tier II” exemptions are available when a tender offer is not subject to Rule 13e-4 (self tender/exchange offers) and Regulation 14D (third party tender/exchange offers), i.e. it is governed by Regulation 14E only. Under the proposed amendment, the Tier II exemptions would apply to any qualifying tender offer, regardless of whether the target securities are subject to Rule 13e-4 or Regulation 14D.
4. Expanded Relief for Parallel Offers
Recognizing that a bidder should not be limited to two offers for target securities (e.g., in cases where the primary trading market for the target’s securities differs from the target’s country of incorporation), the Commission has proposed eliminating the restriction on the number of non-U.S. offers a bidder may make in a cross-border tender offer by changing the references to "dual offers" to refer instead to "multiple offers." Furthermore, while under the current standard existing “Tier II” exemptions provide that the U.S. offer can be open only to residents in the United States, under the proposed changes, U.S. offers may include non-U.S. persons and holders of American Depositary Receipts. Conversely, foreign offers may include U.S. persons.
5. Amendments to Rules on Subsequent Offering Periods
The Commission also proposed revisions governing subsequent offering periods to minimize conflicts between U.S rules and non-U.S. law. These changes include:
- allowing bidders to suspend back-end withdrawal rights while tendered securities are counted and before they are accepted for payment under certain circumstances;
- allowing subsequent offering periods to extend beyond the current 20 business day maximum;
- allowing securities tendered during the subsequent offering period to be bundled and purchased within 14 business days from the date of tender, rather than requiring prompt payment on a strictly rolling basis;
- allowing bidders to pay interest on securities tendered during a subsequent offering period; and
- allowing separate offset and proration pools for securities tendered during the initial and subsequent offering periods.
6. Guidance on Terminating Withdrawal Rights After Reduction or Waiver of Minimum Acceptance Conditions
The Commission limited its prior interpretive position that a bidder meeting the conditions of the “Tier II” exemptions may waive or reduce the minimum acceptance conditions without providing withdrawal rights under certain circumstances (rather than extending the offer period for an additional 10 days). Under the clarifying proposal, an offer may be closed immediately following a waiver or reduction of a minimum acceptance condition in a “Tier II”-eligible tender offer if (i) the specific features of the home country law make compliance with the extension requirements impossible or unnecessarily difficult, (ii) the initial offering materials or a supplement fully discuss the implications of the waiver or reduction and (iii) the bidder undertakes not to waive or reduce the minimum acceptance condition below a majority level.
7. Expansion of Exemptive Relief under Rule 14e-5 for “Tier II” Offers
Under current rules, “Tier I” offers are exempted from Rule 14e-5, thus allowing the bidder to purchase securities during, but outside of, a foreign tender offer. The Commission seeks to expand exemptive relief in the context of “Tier II” offers by permitting bidders to purchase the subject securities outside of the “Tier II” offers if, among other things, (i) the foreign offer is made concurrently or substantially concurrently with a U.S. offer and (ii) the purchases are allowed by the laws of the home jurisdiction and the offeror agrees to comply with certain conditions to ensure that U.S. holders are treated at least as favorably as foreign holders. The Commission also proposes that purchases may be made by a financial advisor or an affiliate of a financial advisor in the course of their normal business activities as long as such purchases are not intended to facilitate the tender offer.
8. Expanded Availability of Early Commencement for Exchange Offers
The current regulatory framework allows exchange offers to commence upon the filing, rather than the effectiveness, of the related Securities Act registration statement. However, this process is available only for exchange offers subject to Rule 13e-4 or Regulation 14D (and not, for example, in cases where non-U.S. tender offer rules may require offers for multiple classes of securities that may not all be subject to Rule 13e-4(e) or Rule 14d-4(b)). Recognizing that all exchange offers that are eligible for the “Tier II” cross-border exemptions should be eligible for the early commencement procedure, the proposed rules seek to allow early commencement for all exchange offers, as long as the bidder provides adequate withdrawal rights and other protections that would be required by Regulation 14D or Rule 13e-4.
Authored by Lucantonio N. Salvi and Joshua M. Blackman.
For further information, please contact Lucantonio N. Salvi at (202) 218-0004, or any other members of our Corporate Practice Group.