SEC Adopts Amendments to Cross-Border Tender Offer, Exchange Offer and Business Combination Rules
October 10, 2008
On September 19, 2008, the Securities and Exchange Commission issued its adopting release to amend the rules exempting certain cross-border tender offers, exchange offers and business combinations from certain U.S. tender offer rules and registration requirements.1
The amendments address some of the practical problems with the existing exemptions that may have caused continued exclusion of U.S. investors from transactions where the target or issuer was a non-U.S. entity with limited U.S. ownership and compliance with the U.S. regulatory framework was problematic as a result, for example, of conflicts or inconsistencies with foreign regulations or market practice. Like the existing exemptions, the SEC’s stated goal “continues to be to encourage offerors and issuers in cross-border business combinations, and rights offerings by foreign private issuers, to permit U.S. security holders to participate in these transactions in the same manner as other holders.”2 The amendments do not change the basic regulatory framework for these types of transactions; in many cases, they simply codify prior SEC no action, interpretive and exemptive positions.
To put the new amendments in context, the SEC’s rules governing cross-border transactions currently provide certain exceptions from the application of U.S. federal securities laws based on the level of U.S. ownership of the securities involved in a tender offer, exchange offer or business combination where the target company is a foreign private issuer:
- Tier I transactions (U.S. persons hold no more than 10% of the subject securities) are exempt from:
- almost all of the disclosure, filing, dissemination and procedural requirements of the U.S. tender offer rules under the Securities Exchange Act of 1934.
- the registration requirements under Section 5 of the Securities Act of 1933.
- the additional disclosure requirements for so-called “going private” transactions under SEC rules.
- Tier II transactions (U.S. persons hold more than 10% but no more than 40% of the subject securities) are exempt from specified U.S. tender offer rules that often conflict with applicable home country and other foreign law and market practice such as:
- prompt payment.
- withdrawal rights.
- subsequent offering periods.
- extension of offers.
- certain equal treatment requirements.
Cross-border transactions not eligible under Tier I or Tier II -- where U.S. persons hold more than 40% of the subject securities -- are generally subject to the full application of U.S. federal securities laws, as if the transaction involves a domestic company.
Cross-border transactions are not exempt from any anti-fraud, anti-manipulation or civil liability provisions of the U.S. federal securities laws, without regard to levels of U.S. ownership.
Eligibility Threshold -- Calculating U.S. Ownership
The amendments change the methodology used to calculate the percentage of subject securities owned by U.S. persons for purposes of determining eligibility for the Tier I or Tier II exemptions. The principal changes are that:
- the reference dates for calculating U.S. ownership are:
- any date no more than 60 days before and no more than 30 days after the public announcement of the transaction, rather than as of the thirtieth day before commencement OR
- any date no more than 120 days before public announcement for acquirors unable to complete the analysis of U.S. ownership within the standard 90-day period discussed above.
- individual holders of more than 10% of the subject securities will no longer be excluded from calculation of U.S. ownership.
- an alternate test may be used to determine eligibility in non-negotiated transactions and in transactions where the look-through analysis cannot be conducted. The alternate test is similar to and replaces the "hostile presumption." As set forth in the adopting release:
- the first prong of the alternate test is satisfied when the average daily trading volume (ADTV) for the subject securities in the U.S. is not more than 10% for Tier I or 40% for Tier II of worldwide ADTV over a 12-month period ending no more than 60 days before the announcement of the transaction.
- the second prong of the alternate test requires the acquiror to consider information about U.S. ownership levels that appear in annual reports or other annual information filed by the issuer with the Commission or with the regulator in its home jurisdiction. Ownership levels must not exceed applicable limits for the relevant exemption, and only information filed before public announcement of the transaction need be considered.
- the third prong of the alternate test provides that the exemption is not available if the acquiror knows or has reason to know that U.S. ownership levels exceed the applicable limits for the relevant exemption, notwithstanding that all other elements of the alternate test are satisfied. The amendments make clear that “knowledge” or “reason to know” is determined as of the date of announcement, and bidders can disregard all conflicting information after that date. Some non-exclusive examples of publicly available information that the acquiror knows or has reason to know are:
- information in any filing with the SEC (such as beneficial ownership reports on Schedule 13D, 13F, or 13G).
- information in any filing with any regulatory body in the target's home country or (if different) in the jurisdiction in which its primary trading market is located.
- third-party information providers or other advisors engaged by the parties to the transaction that may have provided information about U.S. ownership.
- satisfaction of the alternate test in a negotiated transaction requires a "primary trading market" for the subject securities. "Primary trading market" means that at least 55% of the trading volume in the subject securities takes place in a single, or no more than two, foreign jurisdiction(s) during a recent 12-month period. If the trading of the subject securities occurs in two foreign markets, the trading in at least one of the two markets must be larger than the trading in the U.S. for that class.
The changes for calculating U.S. ownership discussed above also apply to rights offerings under the new amendments. U.S. ownership may be calculated as of a date no more than 60 days before and no more than 30 days after the record date for the rights offering. The alternate test for calculating U.S. ownership is also available to those issuers unable to conduct the look-through analysis in a rights offering.
Expansion of Tier I and Tier II Exemptions
Tier I Exemptions
The amendments extend the Tier I exemptions from the "going private” requirements of Rule 13e-3 to other transaction structures commonly used in non-U.S. jurisdictions, such as schemes of arrangement, cash mergers, and compulsory acquisitions for cash, by removing any restrictions on how a transaction is structured.
Tier II Exemptions
The amendments change Tier II exemptions to codify various SEC interpretive positions and ameliorate certain conflicts between U.S. and non-U.S. laws and practices. The amendments allow:
- the Tier II exemptions to apply to tender offers governed by Regulation 14E only (i.e., tender offers for non-equity securities), regardless of whether the target securities are subject to Rule 13e-4 or Regulation 14D.
- bidders to make multiple offers outside the U.S. to non-U.S. investors in conjunction with a single offer to U.S. investors (including all holders of ADRs, U.S. and non-U.S. holders alike).
- U.S. investors to participate in non-U.S. offers where required under foreign law, provided that U.S. investors receive disclosure materials detailing the risks related to participation in a non-U.S. offer not subject to U.S. rules.
- the suspension of back-end withdrawal rights for tendered securities after the close of the initial offering period in order to facilitate the counting of tendered securities by the bidder, so long as:
- there is an offer period (including withdrawal rights) of at least 20 U.S. business days;
- at the time withdrawal rights are suspended, all offer conditions other than the minimum acceptance condition have been satisfied or waived; and
- withdrawal rights are suspended only until tendered securities are counted and are reinstated immediately thereafter, unless withdrawal rights are terminated by the acceptance of tendered securities.
- subsequent offering periods to extend beyond 20 U.S. business days for both foreign and domestic tender offers.
- bidders to pay for securities tendered during a subsequent offering period on a modified rolling basis, allowing bidders to "bundle" and pay for securities within 20 business days from the date of tender, where a business day is determined by reference to the relevant foreign jurisdiction.
- bidders to pay interest on securities tendered during a subsequent offering period where required under foreign law.
- separate offset and proration pools for securities tendered during initial and subsequent offering periods.
- elimination of the prohibition on a "ceiling" for the form of consideration offered in a subsequent offering period (where target security holders are able to elect between two or more forms of consideration), thereby allowing bidders to make "mix and match offers."
- bidders and their financial advisors (including affiliates of each) to make purchases outside of, but during, the tender offer, provided that certain requirements are satisfied, including that the tender offer price be raised to match the purchase price of any target securities purchased outside the tender offer.
- early commencement upon the filing of the registration statement for exchange offers subject to Regulation 14E only, provided that:
- the bidder provides withdrawal rights;
- if there is a material change in the information provided to target security holders, the bidder must disseminate revised materials and hold the offer open with withdrawal rights for the applicable minimum time periods; and
- no securities may be purchased until the registration is declared effective.
Note that the Proposed Release provided early commencement for Tier II offers only; the revised rule applies to all exchange offers, including domestic.
The SEC reiterated that all rule changes to the Tier II exemption are not intended to allow a bidder to make an offer open only to ADR holders. This is prohibited where the target securities are registered under the Exchange Act and the U.S. all-holders provision of tender offer rules apply.
Terminating Withdrawal Rights
A bidder in a transaction qualifying for a Tier II exemption may waive or reduce the minimum acceptance condition without providing withdrawal rights after the reduction or waiver, subject to certain conditions. The SEC clarified that, in addition to satisfaction of the conditions, a bidder may suspend such withdrawal rights only where home country law or practice makes compliance with U.S. requirements impracticable and so long as the waiver or reduction of the minimum acceptance condition is not below a majority of the target securities or the percentage required for the bidder to control the target company under applicable foreign law.
Early Termination and Voluntary Extension of an Initial Offering Period
The SEC codified prior no action guidance with respect to early termination or voluntary extension of an initial offering period. The revised rules do not permit early termination upon the waiver, in contrast to the satisfaction, of an offer condition.
Cross-Border Schedules and Forms
The amendments require that:
- Forms CB and F-X be filed electronically.
- the cover pages of Schedule TO, Form F-4 and Form S-4 be modified so as to require that a filer indicate reliance on a cross-border exemption.
Beneficial Ownership Reporting
The amendments allow certain foreign institutions to report their beneficial ownership of securities on Schedule 13G, instead of having to comply with the more burdensome requirements of Schedule 13D. To be eligible to file on Schedule 13G, the foreign institution would have to:
- be of a type substantially comparable to the types of U.S. institutions currently eligible to file on Schedule 13G, such as brokers, dealers, investment companies and investment advisors registered with the SEC;
- certify on Schedule 13G that it is subject to a regulatory scheme comparable to the regulation scheme applicable to its U.S. counterparts; and
- undertake to furnish to the SEC staff, upon request, the information it otherwise would be required to provide in a Schedule 13D.
As with domestic institutions, filing on Schedule 13G is only available to foreign institutions so long as the subject securities are held in the ordinary course of business and not with the purpose or effect of influencing or changing control of the issuer.
The SEC also adopted a corresponding change to Exchange Act Rule 16a-1(a)(1) to expand the definition of beneficial ownership to include those foreign institutions.
In addition to adopting the amendments described above, the SEC has provided interpretive guidance on the following matters addressed in the Proposing Release:
- The SEC has reiterated that tender offers subject to the provisions of Sections 13(e) or 14(d) of the Exchange Act must be open to all target security holders, including foreign persons. Although foreign target holders may not be excluded from U.S. tender offers under these provisions, the U.S. rules do not require dissemination of offer materials outside the U.S. The SEC declined to adopt a de minimis or other exception to the U.S. “all-holders rule.”
- The SEC seeks to encourage bidders in cross-border business combination transactions to include U.S. holders in those transactions and advised that special precautions must be taken in tender offers intended to exclude U.S. investors from participation in order to avoid the application of U.S. law. The SEC generally advised that bidders must take adequate measures reasonably designed to guard against purchases from and sales to U.S. investors. The SEC noted that the use of a legend or disclaimer is generally advisable but insufficient alone to avoid the application of U.S. law. Bidders may require representations or certifications from tendering security holders that they are not U.S. persons. Furthermore, the SEC stated that exclusionary offers for securities of foreign private issuers that trade on a U.S. exchange will be viewed with skepticism where the participation of U.S. holders is necessary to meet the minimum acceptance condition in the offer.
- The SEC reiterated previous guidance relating to the use of vendor placements in cross-border tender offers. The SEC advised that Tier I has provided a method by which bidders in cross-border exchange offers may issue cash to U.S. target holders, and therefore the SEC no longer intends to issue vendor placement no action letters regarding the registration requirements of the Securities Act. Bidders intending to employ the vendor placement procedure should do so in accordance with the guidelines set forth in the adopting release. Additionally, in tender offers subject to the equal treatment provisions of U.S. tender offer rules, bidders must seek an exemption from those provisions in order to offer U.S. security holders a different form of consideration from that which is provided to foreign target holders. Such relief would only be granted in situations where it is in the best interests of U.S. investors.
Our client alerts are for general informational purposes and should not be regarded as legal advice.
1. See SEC Release No. 33-8957; 34-58597; File No. S7-10-08. A copy of the Release is available on the SEC’s website at www.sec.gov/rules/final/2008/33-8957.pdf. The final rules are effective 60 days from the date of publication in the Federal Register.
2. See SEC Release No. 33-8917; 34-57781; File No. S7-10-08. A copy of the Release is available on the SEC’s website at www.sec.gov/rules/proposed/2008/33-8917.pdf.