On September 19, the Securities and Exchange Commission announced rule amendments to its exemptions from SEC disclosure and procedural requirements that apply to cross-border tender offers, exchange offers and other business combination transactions involving the securities of non- U.S. target companies.

The amendments build upon exemptions from provisions of the Exchange Act and the Securities Act and related SEC rules that were adopted by the SEC in 1999 to address conflicts between U.S. and foreign regulations. The revisions are intended to address various problems that have limited the usefulness of the 1999 exemptive rules and to enhance the ability of U.S. security holders to participate in cross-border transactions equally with non-U.S. security holders. The amendments are described in SEC Release No. 34-58597. The amendments will be effective 60 days after publication of the SEC’s adopting release in the Federal Register. The adopting release also contains interpretive guidance with respect to the prior exemptive rules and other tender offer regulation. The interpretive guidance will be effective upon publication of the release in the Federal Register. 

Background

Before 1999, U.S. security holders in non-U.S. companies often were excluded from participating in international cash tender offers, exchange offers and other business combinations for a variety of reasons. Acquirors were concerned about U.S. regulatory burdens associated with extending offers to U.S. investors, conflicts between procedures mandated by U.S. and foreign legal regimes, and the perceived risks of litigation associated with including U.S. investors. In response to some of these concerns, the SEC in 1999 adopted rules under the Exchange Act and the Securities Act providing exemptions for certain cross-border business combination transactions if specified conditions were met. Many companies and their counsel, however, felt that the 1999 rules did not adequately address conflicts between the U.S. and foreign regulatory systems, and the use of the exemptions was undermined by difficulties in complying with the some of the SEC’s conditions. As a result, despite the exemptions under the 1999 rules, U.S. security holders in non-U.S. companies have continued to be excluded from many cross-border transactions.

Overview of Exemptions for Cross-Border Transactions Under 1999 Rules

The exemptive rules for cross-border business combinations adopted in 1999 generally cover tender and exchange offers and statutory mergers and amalgamations in which the target company is a “foreign private issuer” under SEC rules. A foreign private issuer is a non-U.S. company that either has 50% or less of its outstanding voting securities held of record by U.S. residents or that has more than 50% of its outstanding voting securities held by U.S. residents and has no other specified connection with the United States. The acquiror relying on the exemptions, however, need not be a foreign private issuer, and may be a U.S. company.

The exemptive rules principally provide relief from some provisions of Sections 14(e) and 14(d) of the Exchange Act and Regulations 14E and 14D thereunder. Section 14(e) and Regulation 14E apply to tender offers for any security, whether equity or debt and whether issued by a U.S. or non- U.S. company, made directly or indirectly using U.S. jurisdictional means. In addition, Section 14(d) and Regulation 14D govern tender offers for a class of equity securities registered under Section 12 of the Exchange Act, which would include securities listed on U.S. securities exchanges, such as the New York Stock Exchange or the Nasdaq Stock Market, or unlisted equity securities that are “widely-held” by U.S.-resident investors.

The exemptions are structured as a two-tier system based on the level of interest of U.S. investors in the target company’s securities, as measured by the percentage of target securities of a foreign private issuer held by U.S. investors. The “Tier I” exemptions apply if no more than 10% of the target company’s securities are owned by U.S. persons. A Tier I cross-border transaction is exempt from most U.S. tender offer rules under the Exchange Act and (where the transaction consideration includes securities) from Securities Act registration requirements. The “Tier II” exemptions apply if U.S. holders own more than 10% but no more than 40% of the target company’s securities. The Tier II exemptions provide targeted relief from certain U.S. tender offer rules to reduce timing and logistical conflicts between U.S. and foreign regulatory regimes. The cross-border exemptions under both the Tier I and Tier II exemptions are conditioned on the observance by transaction participants of various requirements intended to protect the interests of U.S. investors.

2008 Amendments to Exemptions for Cross-Border Transactions

The amendments adopted by the SEC in September 2008 expand and refine the former exemptions for cross-border business combination transactions. In some cases, the amended rules codify interpretive positions and exemptive orders adopted by the SEC or its staff in individual transactions or on a class-wide basis.

Calculation of U.S. Ownership of Target Company’s Securities

To assess whether the Tier I or Tier II exemptions may be available, the cross-border rules require an acquiror to determine the U.S. beneficial ownership of the target company’s securities. In making this determination, the acquiror is required to “look through” the record holdings of brokers and other nominees located in the United States, in the jurisdiction of incorporation of the target (and the jurisdiction of each other transaction participant in a business combination transaction), and the jurisdiction that is the primary trading market for the target company’s securities (if different than its jurisdiction of incorporation). Such an inquiry to determine whether the nominees hold securities on behalf of U.S. beneficial owners can involve several layers of investigation and may pose significant practical challenges.

Acquirors have advised the SEC staff that a variety of factors have precluded them in some cases from calculating the U.S. ownership of the target company’s securities within the times prescribed in the prior rules and therefore have limited their ability to rely on the cross-border exemptions. Those factors include the periodic unavailability of current shareholder lists in many overseas jurisdictions, foreign prohibitions on the disclosure by nominees of beneficial ownership information (or their unwillingness to provide the information), the inability of acquirors to verify the information, foreign regulatory review processes that make it difficult to determine in advance when the transaction will commence, and the risk that the acquiror’s inquiry could give rise to leaks of information about the proposed transaction.

The SEC has amended the 1999 rules to address some of these concerns by: 

  • Relaxing the time as of which prospective acquirors must undertake the U.S. ownership calculation for negotiated transactions; 
  • Providing an alternative test based on average daily trading volume, or ADTV, in the target’s securities for negotiated transactions where an acquiror is “unable” to conduct a U.S. holder analysis; and
  • Permitting large shareholders, which previously were excluded when calculating U.S. beneficial ownership, to be included in the ownership calculation.

Consistent with the prior rules, if an acquiror is unable to obtain information from a nominee after reasonable inquiry, the acquiror may assume that beneficial owners holding through the nominee reside in the jurisdiction in which the nominee maintains its principal place of business.

Time as of which calculation must be undertaken. Under the amended rules, U.S. ownership may be calculated in negotiated transactions as of any date that is no more than 60 days before and no more than 30 days after the public announcement of the tender offer or other business combination transaction, rather than as of 30 days before commencement of the transaction, as is the case under the prior rules. “Public announcement” continues to have the meaning used elsewhere in Regulation 14D and refers to any oral or written communication by an acquiror or any party acting on its behalf that is reasonably designed to inform, or has the effect of informing, the public or security holders in general about the transaction.

Alternative test for determining percentage of U.S. holders. The prior rules recognize that thirdparty bidders in non-negotiated tender or exchange offers may face difficulties in obtaining information about the U.S. beneficial ownership of target securities where the target is under no obligation to cooperate, and may not cooperate, with the acquiror in connection with its calculation of U.S. ownership. In circumstances where an acquiror that is unaffiliated with the target proposes to conduct a tender or exchange offer other than pursuant to a written agreement, the prior rules generally permit the bidder to assume that U.S. ownership in the target company is no more than the 10% or 40% threshold for the Tier I or Tier II exemptions if the ADTV in the target company’s securities in the United States does not exceed 10% or 40% of worldwide ADTV over a 12-month period ending 30 days before commencement of the transaction. The bidder may not make this assumption, however, if information contained in annual reports or other annual information provided to the SEC or the target’s home-country regulator indicates that U.S. holders hold more than 10% or 40% of the target’s shares, or if the bidder knows or has “reason to know” that the level of U.S. ownership exceeds the 10% or 40% threshold.

The amended rules preserve the alternative test for non-negotiated transactions and broaden the scope of the test in several ways. First, the 12-month period for assessing ADTV may be concluded as of any date up to and including the 60th day before (but not 30 days after) public announcement of the transaction, to conform more closely with changes made to the time permitted to assess U.S. owners where a look-through analysis is required. Second, the amended rules extend the alternative test to situations in which the bidder is “unable” to conduct the required look-through analysis as long as there is a “primary trading market” for the target company’s securities outside of the United States. For purposes of the alternative test, a “primary trading market” will exist if, over a period of 12 months, at least 55% of the trading volume in the target company’s securities takes place in no more than two foreign jurisdictions, so long as the trading volume associated with one such jurisdiction is greater than the trading volume in the United States over the same 12-month period.

The amended rules also contain a number of clarifications in the context of the alternative test. In particular, the amended rules provide that the “reason to know” provision relates to knowledge and circumstances as of the announcement date for the transaction, and permit an acquiror to ignore conflicting information received after the announcement date. The amended rules also clarify that an acquiror will be presumed to know information about U.S. beneficial ownership that (1) is publicly available and appears in any filing with the SEC or in reports filed by third parties in the target’s home country or (if different) in the country the target’s principal trading market, (2) is available from the target, or (3) is available or readily obtained from any other reliable source, such as persons retained by the acquiror to advise it about the transaction.

In the adopting release, the SEC noted that whether an offeror is unable to conduct a look-through analysis “will depend on the facts and circumstances of the particular analysis,” that “the need to dedicate time and resources to the look-through analysis alone will not support a finding that an acquiror is unable to conduct the analysis” and that, in any case, a “bidder must make a good faith effort to conduct a reasonable inquiry.” It would appear that, without guidance from the SEC staff on a case-by-case basis, an acquiror’s ability to rely on the alternative test in a negotiated transaction may be substantially limited to the circumstances discussed in the adopting release, such as where provision to the bidder of beneficial ownership information about target security holders is unavailable as a matter of law.

Inclusion of large shareholders. Under the prior cross-border rules, individual holders of more than 10% of the target company’s securities, whether U.S. or foreign, have been excluded when calculating the percentage of U.S. ownership of the securities. In some cases, such as where the target has a number of large shareholders located outside of the United States, this has had the effect of skewing upwards the percentage of U.S. ownership of the target, preventing an acquiror that otherwise would have been able to rely on the cross-border exemptions from doing so. The amended rules permit 10% shareholders to be included in the ownership calculation. Although the effect of this amendment for an acquiror will depend on the nature of the target’s shareholders, as most significant shareholders of many non-U.S. companies are located outside of the United States, the amendment should enhance the availability of the cross-border exemptions for some transactions.

Tier I Exemptions for Affiliated Transactions

The amended rules expand relief under the Tier I exemptions to affiliated transactions subject to Rule 13e-3 under the Exchange Act. Rule 13e-3 applies to transactions by issuers or their affiliates that have a “going private” effect and prescribes specific filing and heightened disclosure requirements because of the inherent conflicts of interest that affiliated transactions may involve. The prior cross-border rules afford an exemption from the provisions of Rule 13e-3 where a transaction is a Tier I-eligible tender offer or a business combination transaction conducted pursuant to Rule 802 under the Exchange Act. The amended rules extend Tier I relief to other transaction structures, such as schemes of arrangement, cash mergers and compulsory acquisitions for cash, that otherwise meet the requirements for a Tier I tender offer or a business combination conducted pursuant to Rule 802. To the extent that a company seeks to rely on the exemption for other transaction structures and publishes or otherwise disseminates informational documents to holders of the target’s securities, it must furnish an English translation of the documents to the SEC under cover of Form CB.

Tier II Relief for Tender Offers Not Subject to Rule 13e-4 or Regulation 14D

The SEC staff informally has taken the position for a number of years that the Tier II exemptions should be available for tender offers that otherwise would qualify for the exemptions, but for the fact that the transaction is not subject to Rule 13e-4 or Regulation 14D (which would be the case if the target company securities are not equity securities registered pursuant to Section 12 of the Exchange Act or if the issuer of such securities is not required to file periodic reports pursuant to Section 15(d) of the Exchange Act). The staff has reasoned that it would be inconsistent not to permit bidders in tender offers subject solely to Regulation 14E to rely on the Tier II exemptions that apply to transactions governed by the more extensive provisions of Regulation 14D. The amended rules expressly extend the Tier II exemptions to transactions subject solely to Regulation 14E, so long as the tender offer complies with the requirements of Regulation 14E and otherwise meets the requirements of the Tier II exemptions under Rule 13e-4 or Regulation 14D.

Other Tier II Exemptions

The amended rules further expand the Tier II exemptions to eliminate some recurring conflicts between U.S. and foreign law and practice in various areas.

Multiple Foreign Offers. The prior rules provide an exemption from the requirement that an acquiror’s offer be open to all target security holders. Specifically, the rules permit a bidder to make one offer to U.S. security holders and a second offer to foreign security holders to facilitate an acquiror’s compliance with the regulations of two jurisdictions and to reduce procedural and technical conflicts. Recognizing that an acquiror may be subject to more than one regulatory regime outside of the United States, the amended rules provide that a foreign private issuer in a Tier II transaction may make more than one non-U.S. offer in conjunction with a U.S. tender offer.

Participation in U.S. and Foreign Offers. Where an acquiror conducts a cross-border tender offer pursuant to separate U.S. and foreign offers, the prior rules require that the U.S. offer be open only to U.S. holders and that the foreign offer be open only to non-U.S. holders. As a practical matter, acquirors typically wish to include in the U.S. offer holders of American Depositary Receipts, or ADRs, wherever they reside, and the SEC staff has granted relief to permit this on a case-bycase basis. The SEC staff also has granted acquirors relief where foreign legal requirements mandate the inclusion of all target security holders in the foreign offer.

The amended rules expressly permit the inclusion of all ADR holders in the U.S. offer. Where the laws of the jurisdiction governing the foreign offer expressly preclude the exclusion of U.S. holders, the amendments permit the inclusion of U.S. holders in the foreign offer if offer materials distributed to U.S. holders fully and adequately disclose the risks to U.S. holders of participating in the foreign offer.

Back-End Withdrawal Rights. The Exchange Act and related SEC rules currently provide target security holders with “back-end” withdrawal rights to permit the holders to withdraw tendered securities if the offer remains open 60 days after its commencement. Such withdrawal rights, however, may interfere with a bidder’s ability to centralize and tally tenders received in accordance with foreign law and practice if this process is being undertaken at the time back-end withdrawal rights arise. The SEC has granted relief permitting bidders to suspend back-end withdrawal rights on a case-by-case basis.

The amended rules allow bidders to suspend back-end withdrawal rights for tender offers conducted under the Tier II exemptions. A suspension of these rights is permitted after the initial offering period, while tendered securities are being counted and before the securities are accepted for payment, provided that at such time all offer conditions (other than the minimum acceptance condition) are satisfied. The amendments apply both to third-party bidders for securities of a foreign private issuer and to foreign private issuers purchasing their own securities.

Elimination of Maximum Time Limit in a Subsequent Offering Period. The SEC’s current tender offer rules permit a bidder in a third-party tender offer to provide a subsequent offering period of between three and 20 U.S. business days to afford target security holders that have not tendered their shares an opportunity to do so. The use of a subsequent offering period is customary in various foreign jurisdictions, and in many cases the subsequent offering period would have a significantly longer duration than 20 U.S. business days. To address timing conflicts between U.S. and foreign rules, the SEC has granted relief on an individual basis to extend the length of the subsequent offering period beyond 20 U.S. business days.

The amended rules eliminate the maximum time a subsequent offering period may remain open for all tender offers, including domestic tender offers. A subsequent offering period, however, must continue to have a minimum duration of three U.S. business days.

Purchases of Tendered Securities Tendered During Subsequent Offering Period. The prior rules require that securities tendered during a subsequent offering period be paid for as they are tendered on a “rolling basis,” since withdrawal rights typically do not apply in a subsequent offering period. Foreign rules often permit a bidder a longer period in which to pay for tendered securities, and foreign law and practice may permit the “bundling” of tendered securities, with payment being made only on periodic “take-up” dates. The SEC historically has granted relief on a case-by-case basis to address conflicts between U.S. and foreign payment requirements.

The amended rules permit bidders in Tier II tender offers to pay for securities tendered during a subsequent offering period within 20 local business days of the date of tender in circumstances where payment may not be made, or on a more expedited basis if required by applicable foreign law or practice.

Payment of Interest on Tendered Securities During Subsequent Offering Period. Under the laws of some foreign jurisdictions, bidders are required to pay interest on securities tendered during the subsequent offering period. These payments, however, conflict with U.S. rules that mandate that consideration paid to any tendering security holder be the highest consideration paid to any other security holder and that security holders that tender during the subsequent offering receive the same form and amount of consideration as security holders tendering into the initial offering period. The SEC has granted relief to bidders to address this conflict on an individual basis.

The amended rules permit bidders in a Tier II cross-border tender offer to pay interest for securities tendered during a subsequent offering period where such payment is required by foreign law.

Prompt Payment in Mix and Match Offers. In a mix and match offer, bidders offer a set mix of cash and securities in exchange for each target security, but permit tendering security holders to request a different allocation of cash and securities. These elections are satisfied to the extent that other security holders make offsetting elections. To facilitate the timely payment of consideration to tendering security holders, bidders typically provide for two separate pools of cash and securities to be used to accommodate target shareholders’ mix and match elections, one for the initial offering period and another for the subsequent offering period. Mix and match offers may violate U.S. rules requiring that security holders who tender into the subsequent offering receive the same form and amount of consideration as those who tender into the initial offering period, as well as rules that prohibit the imposition of a ceiling on any form of alternative consideration offered during the subsequent offering period. The SEC has granted relief to bidders to permit them to use offset pools and pro-rate individual security holders’ elections.

The amended rules expressly permit a Tier-II eligible bidder that has established a pool of consideration in a subsequent offering (which effectively would constitute a ceiling on the form of consideration offered) to offset elections of tendering security holders against one another and to pro-rate the consideration to the extent that the elections cannot be satisfied in full. The amended rules also permit a bidder to establish offset and pro-rate separately securities tendered during the initial and subsequent offering periods.

Early Termination of Offer. Under U.S. tender offer rules, a bidder may amend the expiration date of its offer only by providing notice to target security holders before the initial offering period closes and withdrawal rights terminate. This extension requirement may conflict with the law or practice of some foreign jurisdictions that require the initial offering period to terminate as soon as all offer conditions to the offer have been satisfied. Bidders affected by this law or practice have obtained relief from the SEC allowing them to terminate early their offers (and thereby withdrawal rights) upon satisfaction of all offer conditions.

The amended rules permit a bidder eligible to rely on the Tier II exemptions to terminate the initial offering period before its scheduled expiration (including where the initial offering period was voluntarily extended), at which point withdrawal rights will no longer apply, if at the time of termination: 

  • The initial offering period has been open for at least 20 U.S. business days; 
  • The bidder has adequately discussed in the original offer materials the possibility and the impact of early termination; 
  • The bidder provides a subsequent offering period after termination of the initial offering period; 
  • All offer conditions are satisfied at the time of early termination of the initial offering period; and 
  • The bidder does not terminate the initial offering period during any mandatory extension required under U.S. tender offer rules.

Purchases Outside of Tender Offers. Rule 14e-5 under the Exchange Act prohibits a bidder, its affiliates and certain transaction participants from purchasing or arranging to purchase securities that are the subject of a tender offer or any related security, except as part of the tender offer. These restrictions apply from the time of the public announcement of the offer until the offer expires. The restrictions may conflict with foreign law or practice where open market purchases and privately negotiated transactions may be customary during the pendency of a tender offer.

Under the prior rules, an exception to the Rule 14e-5 prohibition exists for purchases or arrangements to purchase made outside of, but during, Tier I tender offers. The SEC indicated in its release adopting the cross-border rules in 1999 that it would review requests for relief by bidders that were not eligible to rely on the Tier I exemptions, including bidders conducting tender offers in reliance on the Tier II exemptions. Since 1999, the SEC frequently has granted relief in Tier II transactions to permit purchases or arrangements to purchase securities of a foreign target, in particular to accommodate (1) purchases by the bidder pursuant to separate U.S. and foreign offers, (2) purchases by bidders and their affiliates outside of the tender offer, such as open market purchases and purchases in privately negotiated transactions, and (3) similar transactions undertaken by affiliates of the bidder’s financial adviser. In 2006 and 2007, the SEC granted three class exemptive letters extending the scope of this relief. 

The amended rules in effect codify the class exemptive relief granted by the SEC in 2006 and 2007, conditioning the availability of the relief on the existence of specified safeguards to protect U.S. security holders. The exception related to purchases pursuant to a foreign tender offer will be available if: 

  • The transaction meets the requirements for reliance on the Tier II exemptions; 
  • The economic terms and consideration in the U.S. and foreign offers are the same; 
  • The procedural terms of the U.S. tender offer are at least as favorable as the procedural terms of the foreign tender offer; 
  • The bidder discloses its intention to make purchases pursuant to the foreign tender offer; and 
  • Purchases in the foreign offer are made solely pursuant to the foreign offer and not in open market purchases, privately negotiated transactions or similar transactions.

The exception related to purchases by a bidder, its affiliates and affiliates of the bidder’s financial adviser conducted in accordance with the target’s home-country laws is subject to compliance with the following conditions: 

  • The subject company is a foreign private issuer; 
  • The person making the purchase has a reasonable expectation that the tender offer meets the requirements for the Tier II exemptions; 
  • No purchases or arrangements to purchase are made in the United States; 
  • U.S. offering materials prominently disclose the possibility of, or the intention to make, such purchases or arrangements and, if there will be public disclosure of such purchases, the manner of disclosure; 
  • There is public disclosure in the United States, to the extent that such information is made public in the target company’s home jurisdiction, of information regarding all purchases of target securities and related securities other than pursuant to the tender offer from the time of announcement; and 
  • The purchase price for the target’s securities in the tender offer is increased to match any higher consideration paid in any purchase outside of the tender offer.

If the purchaser is an affiliate of the financial adviser, the financial adviser, in addition, must maintain and enforce written policies designed to prevent the transfer of information between the financial adviser and its affiliate that might result in a violation of U.S. federal securities laws; the financial adviser must have an affiliate that is registered as a broker-dealer under the Exchange Act; the affiliate may have no officers or employees (with certain exceptions) in common with the financial adviser that direct, effect or recommend transactions in the target company’s securities that also will be involved in providing the bidder or the target company with financial advisory or dealer-manager services; and the purchases or arrangements to purchase may not be made to facilitate the tender offer.

Changes to Filing Requirements

Electronic Filing; Disclosure of Exemption. The SEC has amended its rules to require various forms associated with the cross-border exemptions to be filed electronically via the SEC’s EDGAR system. These include Form CB, which is most commonly used to file an English translation of offering materials distributed in connection with Tier I transactions, and Form F-X, which is used for the appointment of an agent in the United States for service of process. The SEC also has amended Schedule TO and Forms S-4 and F-4 to require disclosure on the cover page to indicate a bidder’s reliance on one or more applicable cross-border exemptions.

Schedule 13G Filings by Foreign Institutions. Under Section 13(d) of the Exchange Act and related SEC rules, a person that acquires more than 5% of a class of equity securities registered under Section 12 of the Exchange Act must report such holdings on Schedule 13D within 10 days of the acquisition. Certain classes of U.S. institutional investors, however, are permitted instead to file a short-form Schedule 13G within 45 days of the end of the calendar year in which they acquired the reportable holding. Under the prior rules, foreign institutions are not eligible to report their holders on Schedule 13G without express exemptive relief. The SEC has now amended its rules to permit the same classes of foreign institutions to report their beneficial ownership of securities on Schedule 13G without obtaining this relief. To be eligible to file on Schedule 13G, a foreign institution must certify on Schedule 13G that it is subject to a regulatory scheme substantially comparable to the regulatory scheme applicable to its U.S. counterparts and must undertake to deliver to the SEC upon request the information that it otherwise would be required to file with the SEC on Schedule 13D. As is the case for U.S. institutional investors, filing on Schedule 13G will be available only to foreign institutions that acquire and hold securities in the ordinary course of business and not with the purpose or effect of influencing or changing control of the company whose securities they hold.

Early Commencement of Exchange Offers

In 1999, the SEC amended its rules to permit a bidder in an exchange offer to commence its tender offer on the date on which it files a registration statement relating to the securities offered as consideration. This change eliminated a disparity in the regulatory process between cash tender offers, which could commence immediately, and exchange offers, which could not commence until the SEC had declared effective the bidder’s registration statement. As adopted, however, the early commencement rules applied only to exchange offers subject to Rule 13e-4 or Regulation 14D. In some foreign jurisdictions, a bidder must make an offer for all classes of securities, if it makes a bid for any class of securities. In many cases, only one class of the target’s equity securities will constitute securities registered pursuant to Section 12 of the Exchange Act and thus subject to Regulation 14D. If any class of securities is not subject to Regulation 14D, the bidder effectively would lose its ability under the prior rules to commence its exchange offer early.

The amended rules extend the right to commence an exchange offer early subject only to the bidder’s compliance with Regulation 14E. The bidder will have to provide withdrawal rights to the same extent as would be required under Rule 13e-4 and Regulation 14D and, if there is a material change in the information provided to target security holders, disseminate revised materials and hold the offer open for withdrawals, as required under Regulation 14D.

Interpretive Guidance

Withdrawal Rights After Reducing Minimum Condition. Under current tender offer rules, bidders must keep an offer open (during which time withdrawal rights apply) after making a material change to the terms of its offer. Waiving or reducing the minimum acceptance condition to an offer generally would be considered a material change requiring an extension of the offer accompanied by withdrawal rights. The requirement to maintain withdrawal rights after a reduction or waiver of the minimum acceptance condition, however, conflicts with law or practice in a number of foreign jurisdictions, including, in particular, the United Kingdom, where certain institutional investors are prohibited from tendering into an offer before it is wholly unconditional and withdrawal rights do not apply. In adopting its cross-border rules in 1999, the SEC articulated an interpretive position that permits bidders eligible to rely on the Tier II exemptions to waive or reduce the minimum acceptance condition without extending withdrawal rights as long as specified conditions are satisfied.

In the September 2008 adopting release, the SEC confirmed its prior interpretive position, but limited its scope by requiring, in addition to the conditions it announced in 1999, that all offer conditions be satisfied at the time that withdrawal rights are terminated, that the bidder not waive or reduce the minimum acceptance condition below the percentage required for the bidder to control the target under applicable foreign law (which, in any case, may not be reduced or waived below a minimum acceptance condition of less than 50%), and that the bidder’s offer materials discuss fully the impact of any waiver or reduction.

Other Interpretive Guidance. In the adopting release, the SEC also provided interpretive guidance on additional topics, including guidance clarifying the application of its rules to (1) the exclusion of foreign security holders in tenders for U.S. companies, (2) the exclusion of U.S. target security holders from cross-border tender offers and (3) the use of vendor placements in exchange offers.

Conclusion

The amendments to the SEC’s exemptions for cross-border transactions address a number of regulatory conflicts and logistical difficulties that have limited the ability of bidders and other participants in business combinations to rely on the existing rules. Some of the amendments codify interpretive positions and exemptive orders adopted by the SEC or its staff in recent years and therefore should eliminate in many cases the need for transaction participants to seek SEC relief for particular business combinations. The revised rules also provide significant additional flexibility for acquirors in connection with the look-through analysis of U.S. beneficial ownership of target company securities that is required to ascertain the availability of a Tier I or Tier II exemption. Acquirors, however, will continue to face legal and practical difficulties in connection with the conduct of the look-through analysis. In particular, because of the apparently limited scope of the exception that would permit an acquiror to refer to ADTV data in non-negotiated transactions, the use of the exemptions in such transactions may continue to be more limited than is warranted to protect the interests of U.S. investors.