On August 27, 2008, the U.S. Securities and Exchange Commission (SEC) voted unanimously to adopt revisions to its cross-border tender offer, exchange offer and business combination rules. The final rule will become effective on December 8, 2008.
The amended rules are designed to expand and enhance the utility of the cross-border exemptions for business combination transactions and rights offerings and to encourage offerors and issuers to permit U.S. security holders to participate in these transactions on the same terms as other target security holders. The exemptions help bridge conflicts and inconsistencies between U.S. and foreign regulations and facilitate the inclusion of U.S. investors in cross-border transactions. Many of the rule changes the SEC adopted codify existing SEC interpretive positions and exemption orders in the cross-border area.
After considering comments, the SEC adopted the amendments to the cross-border exemptions and beneficial ownership rules substantially as proposed in May 2008, but with certain modifications. The SEC also adopted two changes to rules applicable to all tender offers, including those for U.S. target companies, where the SEC determined that the rule modifications proposed in the cross-border context would be useful and beneficial if applied to all tender offers.
The key rule changes resulting from the newly adopted rules include the following.
Modifications to the Look-Through Rules
When the SEC first adopted the cross-border exemptions in 1999, it established a threshold eligibility test for the use of the exemptions based on the percentage of target shares beneficially owned by U.S. persons. Under existing rules, the look-through analysis requires the acquiror to “look through” securities held of record by nominees in (i) the United States, (ii) the subject company’s jurisdiction of incorporation and that of each participant in the business combination transaction, and (iii) the primary trading market, to identify those held for the accounts of beneficial owners located in the United States. If, after “reasonable inquiry” the acquiror is unable to obtain information about the location of the beneficial owners, the rules allow the acquiror to assume that the customers are residents of the jurisdiction in which the nominee has its principal place of business. Currently, acquirors are required to calculate U.S. ownership as of the 30th day before the commencement of a tender offer or solicitation for a business combination. In its new rulemaking, the SEC acknowledged the practical limitations and challenges posed by the current look-through analysis, especially in the case of non-negotiated (e.g., “hostile”) transactions.
While the revised rule adopted by the SEC does not change the threshold percentages of U.S. ownership for exemption eligibility, it fixes the reference date to the “public announcement” of the tender offer or business combination. Under the revised rules, to avail itself of the cross-border exemptions, an acquiror may calculate U.S. ownership of the subject securities as of any date no more than 60 days before and no more than 30 days after the public announcement of the cross-border transaction. In instances where the 90-day period may not provide sufficient time in some foreign jurisdictions for an acquiror to complete the look-through analysis, the revised rules allow such an acquiror to use a date within 120 days before the public announcement.
As a result of the early starting point, parties to a business combination will be able to make a U.S. ownership determination and inform the markets of the treatment of U.S. security holders at an earlier stage in the process. Moreover, the U.S. ownership calculation can be made before the target security holder base is affected by the public announcement. By creating a 30-day post-announcement window, the rule also helps address concerns that where an analysis must be conducted before announcement, it may compromise the confidentiality of the transaction.
In addition to modifying the timeline for calculating U.S. ownership, the SEC modified the look-through rules for calculating U.S. ownership. The revised rules no longer require that individual holders of more than 10 percent of the subject securities be excluded from the calculation of U.S. ownership. The SEC expects that this change will significantly expand the number of cross-border business combinations eligible for exemptions while still providing appropriate investor protection.
Alternate Test for Determining Exemption Eligibility
Recognizing that circumstances exist in which acquirors are unable to conduct the look-through analysis, the SEC adopted an alternate test for determining eligibility to rely on the cross-border exemptions. Acquirors or bidders in all non-negotiated transactions will be able to rely on the alternate test. In certain (limited) circumstances, even acquirors or bidders (or issuers in self-tenders) in negotiated transactions will be able to rely on the alternate test when it is simply impractical or impossible to conduct a look-through analysis (e.g., target securities held in bearer form). The SEC emphasizes in the adopting release that bidders must make a good faith effort to conduct a reasonable inquiry into ascertaining the level of U.S. beneficial ownership; however, the need to dedicate time and resources to the look-through analysis will not itself excuse conducting the analysis. Additionally, concerns about the completeness and accuracy of the information obtained from the look-through analysis will not necessarily justify the use of the alternate test.
The alternate test takes a three-pronged approach:
- Average Daily Trading Volume. The first prong is based on a comparison of average daily trading volume (ADTV) of the subject securities in the United States, as compared to worldwide ADTV, and is satisfied where the ADTV for the subject securities in the United States over a 12-month period ending no more than 60 days before the announcement of the transaction is not more than 10 percent (40 percent for Tier II) of ADTV on a worldwide basis. The test provides acquirors with a range of dates by which they may do the comparison of U.S. and worldwide trading volumes. The timetable, like the look-through test, is aimed at providing an appropriate level of flexibility for acquirors and is tied to the public announcement of the transaction—it must stretch over a 12-month period ending no more than 60 days before the public announcement of the transaction. As ADTV is an objective measure, the SEC did not believe there should be any concerns about compromising confidentiality by doing the calculation prior to the announcement of the transaction. As a result, there was no need to extend the calculation timetable beyond the date of the public announcement. In order for the acquiror in a negotiated transaction to be able to rely on the alternate test, the rule also requires that there be a “primary trading market” for the subject securities. The SEC viewed the existence of a primary trading market as important because it is designed to ensure that there is a primary foreign regulator with oversight over the transaction.
- Annual Reports and Other Annual Information. The test’s second prong is that the acquiror must consider information about U.S. ownership levels that appear in annual reports or other annual information filed by the issuer with the SEC or with the regulator in its home jurisdiction. Since the transaction planning process may be disrupted by filings made at a late stage, only annual reports or other annual information filed before the public announcement must be taken into consideration.
- “Reason to Know.” The third and final prong of the test—the “reason to know” element—provides that an applicable cross-border exemption which otherwise might be available will not be available if the acquiror “knows or has reason to know” that U.S. beneficial ownership levels exceed the limits for the exemption. An offeror is deemed to have reason to know the U.S. ownership of the subject securities that appears in any filing with the SEC, the home country regulator or the regulator in the primary trading market. The revised rule provides additional specific sources of information which will also be attributed to the acquiror, including information about U.S. ownership available from the issuer or readily available from reasonably reliable sources.
The modifications to the calculation eligibility test—both the look-through rules and the alternate test—also apply to rights offerings.
Expanded Relief Under Tier I for Affiliated Transactions
Exchange Act Rule 13e-3 establishes specific filing and disclosure requirements for certain kinds of affiliated transactions. However, as the SEC noted in its proposing release, the scope of the current Tier I exemption from Rule 13e-3 does not apply to some transaction structures commonly used abroad (e.g., schemes of arrangement, cash mergers and compulsory acquisitions for cash). The SEC acknowledged that the form of the transaction structure should not prevent an otherwise-eligible issuer or affiliate from relying on the Tier I exemption from Rule 13e-3. In the revised rules, the SEC expanded the scope of the Tier I exemption from Exchange Act Rule 13e-3 to include these different transaction structures.
Changes to Tier II Exemptions
The SEC adopted a number of rule changes to the Tier II exemptions in an effort to alleviate practical difficulties that often resulted in the need for companies to request specific exemptive or no-action relief. The Tier II exemptions represent targeted modifications to U.S. tender offer rules with the purpose of bridging differences between U.S. and foreign practice in cross-border tender offers. The revisions to the Tier II exemptions include the following.
Expansion of the Tier II Exemption
The SEC clarified that the Tier II exemptions are available for tender offers subject only to Section 14(e), in addition to transactions subject to Rule 13e-4 or Regulation 14D.
Multiple Foreign Tender Offers
The Tier II cross-border exemptions currently in place allow a bidder to conduct two separate but concurrent tender offers if one is made only to U.S. target security holders and another open only to foreign holders of the target securities. The revised rules permit the use of more than one offer outside of the United States for tender offers conducted under Tier II. The SEC also amended the rule to allow a bidder in a cross-border tender offer conducted under Tier II to make the U.S. offer available to all holders of American Depositary Receipts (ADRs) (including non-U.S. holders of ADRs) and to enable the inclusion of U.S. target security holders in a foreign offer conducted under Tier II. The adopting release states that these amendments are not intended to permit the use of separate proration pools where a multiple offer structure is used in the context of a partial cross-border tender offer.
Termination of Withdrawal Rights While Tendered Securities Are Counted
The Exchange Act requirement that bidders provide back-end withdrawal rights if tendered securities have not been accepted for payment within a certain date after the commencement of a tender offer has created problems in cross-border tender offers because of the differences in the manner in which securities are tendered in many non-U.S. jurisdictions and the process for counting those securities. In recognition of these difficulties, the SEC adopted a revision that, if certain conditions are met, will allow a bidder in a cross-border tender offer conducted under Tier II to suspend withdrawal rights after the expiration of an offer during the counting of tendered securities and until those securities are accepted for payment.
Subsequent Offering Period Changes
The SEC adopted several changes to the rules applicable to subsequent offering periods:
- Elimination of 20-Business Day Time Limit. Current tender offer rules allow a third-party bidder in a tender offer for all of the subject class of securities to include a subsequent offering period during which securities may be tendered and purchased on a rolling or “as tendered” basis if certain conditions are met. The U.S. time limit of 20 business days on the length of a subsequent offering period has often been a source of conflict with non-U.S. regulations because many jurisdictions have subsequent offering periods that extend beyond that timeframe. As a result, the SEC has eliminated the 20 business day time limit. Although not initially proposed, the SEC extended this relief to domestic tender offers as well.
- Changes to Prompt Payment Rules. The revised rules also allow a bidder in a cross-border tender offer conducted under the Tier II exemptions to “bundle” and pay for securities tendered in the subsequent offering period within 20 business days of the date of tender. However, where local law and practice require a period shorter than 20 business days, payment must be made more quickly than 20 business from the date of tender in order to satisfy U.S. prompt payment requirements.
- Payment of Interest on Tendered Securities. In some non-U.S. jurisdictions, bidders are legally obligated to pay interest on securities tendered during a subsequent offering period. As the rules currently stand, paying interest on securities tendered during a subsequent offering period would violate U.S. rules. The SEC’s revised rules allow for the payment of interest on securities tendered during a subsequent offering period where such payment is mandated by the law of the relevant foreign jurisdiction.
- Changes to Rules Relating to “Mix and Match” Offers. The cross-border tender offer rules have also been revised to facilitate “mix and match” cross-border tender offers, where bidders offer a fixed mix of cash and securities in exchange for each target security but permit tendering holders to request a different portion of cash or securities. The revised rules permit the use of separate offset “pools” for securities tendered during initial and subsequent offering periods for cross-border tender offers conducted under Tier II. The amended rules also eliminate the prohibition on a ceiling for the form of consideration offered in a subsequent offering period in a mix and match Tier II offer structure where target security holders are able to elect to receive alternate forms of consideration in the offer.
Terminating Withdrawal Rights
Under U.S. tender offer rules, bidders must ensure that a tender offer remains open and includes withdrawal rights for a prescribed period after a material change in the terms of the offer. Waiving or reducing the minimum acceptance condition is usually considered a material change in the terms of the offer that triggers this requirement. This requirement has come into conflict with laws or practices in certain foreign jurisdictions. The adopting release affirms the SEC’s interpretive position, albeit in modified form, of permitting flexibility for bidders in Tier II cross-border tender offers to waive or reduce a minimum tender condition without providing withdrawal rights if certain conditions are met. The SEC states in the adopting release that the interpretive guidance, as modified in the adopting release, may not be relied upon unless the bidder undertakes not to waive below a simple majority or the percentage threshold required to control the target company under applicable foreign law, if it is greater.
Early Termination or Voluntary Extension of an Initial Offering Period
Changing the expiration date of a tender offer which has previously been set by the bidder requires notice to target security holders before the initial offering period closes and withdrawal rights terminate. This extension requirement conflicts with the law or practice of some foreign jurisdictions. The SEC has amended the cross-border tender offer rules to codify guidelines set forth in existing staff guidance to permit early termination, subject to specific conditions specified in the rules.
Expanded Availability of Early Commencement
Under existing rules, the ability of a bidder to “early commence” an exchange offer is available only when an exchange offer is subject to Rule 13e-4 or Regulation 14D. The revised rules extend the early commencement option to domestic and foreign exchange offers not subject to Rule 13e-4 or Regulation 14D. These exchange offers may now commence upon the filing of the registration statement registering the offer, subject to certain conditions. Early commencement will be available for Regulation 14E-only offers so long as no securities are purchased until the registration statement is declared effective. The amended rules require offerors to provide withdrawal rights in early commencement offers not subject to Rule 13e-4 or Regulation 14D to the same extent as would otherwise be required.
Beneficial Ownership Reporting by Foreign Institutions
Sections 13(d) and 13(g) of the Exchange Act provide investors and the issuer with beneficial ownership reporting information about accumulations of securities that may have the potential to change or influence the control of the issuer. Forms filed pursuant to these sections are part of the reporting system in place for gathering and disseminating information about the ownership of equity securities. Under the rule revisions adopted by the SEC, certain foreign institutions will be allowed to comply with beneficial ownership reporting requirements by filing on the short-form Schedule 13G, as opposed to Schedule 13D. As would be required of a domestic institution, a foreign institution seeking to file the short-form Schedule 13G at the time it exceeds the beneficial ownership threshold will need to determine its eligibility. The initial eligibility assessment will require a foreign institution to determine whether it is subject to a foreign regulatory scheme that is substantially comparable to the regulatory scheme applicable to the corresponding category of U.S. institutional investor.