August 29, 2008
At a meeting on August 27, 2008, the Securities and Exchange Commission ("SEC") voted unanimously to approve changes to the Rule 12g3-2(b) exemption, amendments to its disclosure and reporting requirements for foreign private issuers, and amendments to the cross-border transaction exemptions. The SEC adopted the rules substantially as proposed, with a few significant exceptions. Specifically, the SEC did not adopt the proposal to require non-SEC registered foreign issuers to become automatically subject to U.S. reporting rules once the average daily U.S. trading volume for a class of securities exceeded 20 percent of their average daily worldwide trading volume for the most recently completed fiscal year. In addition, the SEC did not adopt the proposed requirement that financial statements of significant acquired companies be included in annual reports on Form 20-F. Further, the SEC modified the proposed deadlines for filing annual reports on Form 20-F as well as extended the transition period for compliance from two years to three years. The most significant change with respect to the cross-border rules concerns a change to the measurement date for calculating U.S. ownership for purposes of determining eligibility under the Tier 1 and Tier 2 exemptions – a component of the cross-border rules for business combinations adopted in 1999 that has been widely perceived as too rigid. The measurement date was amended to be any date up to 120 days before the announcement or 30 days after the announcement of the tender offer. The SEC also expanded the Tier 1 and Tier 2 exemptions to provide greater flexibility in structuring cross-border tender offers involving U.S. investors and agreed to publish interpretative guidance on commonly raised cross-border issues.
A summary of these final rules is set forth below. This summary is based on information provided at the SEC’s meeting, and therefore may not reflect nuances that appear in the SEC’s adopting releases.
Amendments to the Rule 12g3-2(b) Exemption
The SEC approved significant changes to SEC Rule 12g3-2(b) under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
As amended, Rule 12g3-2(b) automatically exempts a foreign private issuer, including such an issuer with equity securities traded in the U.S. over-the-counter (OTC) market, from the registration requirements of Section 12(g) upon satisfaction of certain conditions. Thus, foreign private issuers no longer will be required to apply for the exemption by paper submission. In order to benefit from this automatic exemption, the final rules require that a foreign private issuer:
Under the prior rule, foreign private issuers with fewer than 300 U.S. holders at the time of the application could apply by submitting a paper application for an exemption from the reporting requirements under Section 12(g) of the Exchange Act. In February 2008, the SEC proposed to replace the 300-holder ceiling with a requirement that the foreign private issuer’s average daily U.S. trading volume for a class of securities not exceed 20 percent of the average daily worldwide trading volume for the issuer’s most recently completed fiscal year.
After the proposal, commenters expressed significant concerns that the average daily trading volume test would discourage foreign private issuers from establishing or maintaining sponsored American Depositary Receipt ("ADR") facilities or making Rule 144A offerings and other private placements of their equity securities, which would be to the detriment of U.S. investors. In addition, the SEC staff informed the SEC of its view that adopting the amendments without the 20 percent average daily trading volume condition "is consistent with the protection of U.S. investors and [that they] expect that the primary trading market provision, which is trading volume based, will serve to protect U.S. investors by precluding a foreign private issuer from claiming the exemption when the U.S. market is a dominant market, and by making it more likely that foreign companies claiming the exemption will be subject to disclosure requirements in their principal non-U.S. market."
The SEC staff stated at the open meeting that the final rule defines "primary trading market" as one or two markets that represent at least 55 percent of an issuer’s worldwide trading volume during the issuer’s most recently completed fiscal year. At least one of these markets must have greater trading volume than the average trading volume in the United States for the same class of securities. In addition, the SEC adopted the proposed three-month transition period during which it will continue to accept paper submissions under Rule 12g3-2(b).
Chairman Cox noted that the amendments to Rule 12g3-2(b) "will make foreign companies’ disclosures available to U.S. investors more quickly and without cost – and in English." For most foreign private issuers, the amendments will provide a moderately simpler process and ease in qualifying for the exemption. Unlike the prior formulation, however, foreign private issuers who qualify for the amended Rule 12g3-2(b) exemption will no longer be able to rely on the exemption if – despite the absence of any registration of its equity securities under the Exchange Act – the U.S. becomes the largest trading market for its equity securities, but few current Rule 12g3-2(b) issuers will be adversely affected. The SEC staff estimated that there are approximately seven foreign private issuers that will no longer qualify for the Rule 12g3-2(b) exemption as a result of these amendments. The SEC approved a three-year transition period for currently exempt issuers that lose their exemption on the effective date of the revised rule, which means that such issuers must register with the SEC no later than three years from the effective date of the final rules.
Foreign Issuer Disclosure and Reporting Enhancements
The SEC adopted, substantially as proposed, amendments to various rules and forms applicable to foreign issuers. However, the SEC did not adopt the proposed requirement that financial statements of significant acquired companies be included in annual reports on Form 20-F. In addition, the SEC modified the proposed deadlines for filing annual reports on Form 20-F and extended the transition period from two years to three years.
As adopted, the principal disclosure and reporting enhancements include amendments that:
Amendments to the Cross-Border Exemptions
The SEC also adopted significant changes to the cross-border rules to ensure greater U.S. investor participation in cross-border tender offers and rights offerings by increasing flexibility and providing greater certainty.
The most significant amendment to the cross-border rules is the change in the measurement date of U.S. ownership for purposes of determining eligibility for the Tier 1 and Tier 2 cross-border rule exemptions. Under the prior rule, U.S. ownership was assessed on the 30th day prior to commencement of the tender offer. The SEC staff has received feedback from investors that the 30-day look-through test was too rigid in application for the market and often conflicted with the local regulatory process. To address these concerns, the SEC amended the measurement date by allowing bidders to use any date 60 days before announcement or 30 days after announcement. The 30-day period following announcement was included to address confidentiality concerns of prematurely tipping off the market to the proposed tender offer by performing the look-through analysis prior to announcement.
The SEC also provided a modified test that allows bidders who are "unable" to use the 60-day-before-30-day-after test to use any date 120 days before announcement. The SEC noted that whether a bidder is "unable" to use the first look-through test will depend on the facts and circumstances, but not on cost and timing, and is meant to deal with local regulatory peculiarities (e.g., Japan’s prohibition on inquiring into ownership more than twice per year). A third alternate test is provided primarily for non-negotiated (hostile) offers where bidders are unable to use either the standard or modified look-through test due to the inherent difficulty third parties face in obtaining information about U.S. shareholders without the target’s cooperation. The alternate test for non-negotiated transactions is similar to the old non-negotiated transaction test that allows a bidder to rely on the average daily trading volume ("ADTV") of the subject security. However, the SEC has clarified when a bidder knows or has "reason to know" information about U.S. ownership that may affect the bidder’s ability to rely on the ADTV test. The SEC now requires the bidder to look at publicly available information before announcement, including information filed with the SEC, with the target’s home country and the country of its primary trading market, as well as other information the bidder knows or has reason to know from other sources.
In calculating U.S. ownership, the SEC will continue to exclude from the U.S. ownership calculation securities held by persons holding more than 10 percent of the subject securities as well as securities held by the bidder.
The SEC also amended the Tier 1 exemption by expanding the scope of cross-border transactions currently subject to Rule 13e-3 (going-private transactions) by eliminating the requirement that such transactions comply with Rule 802, 13e-4(h)(8) or 14d-1(c) to be eligible for the exemption. Tier 2 exemptions also have been expanded by extending the exemption to multiple foreign tender offers done contemporaneously with the U.S. offer and by relaxing the rules on who can participate in such offers. The SEC has also relaxed the withdrawal requirements, modified the rules for subsequent offering periods for a tender offer, and codified exemptive relief to permit purchases by the bidder to be made outside the tender offer while relying on the Tier 2 exemption. These changes are intended to encourage the inclusion of U.S. investors in primarily foreign transactions by eliminating the burden imposed on bidders by additional disclosure rules and allowing for greater flexibility in structuring tender offers relying on the Tier 1 and Tier 2 exemptions.
Other amendments approved by the SEC include eliminating the 20 business day limit on the length of a subsequent offering period, permitting certain kinds of foreign institutions to file on Schedule 13G to the same extent as permitted for their U.S. counterparts (so long as they certify that they are subject to a foreign securities regulatory scheme substantially similar to that in the U.S.) and corresponding changes to beneficial ownership reporting for Section 16 purposes. The SEC also approved issuing interpretative guidance providing bidders with the ability to:
Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have about the SEC’s amendments. Please contact the Gibson Dunn attorney with whom you work, or any of the following:
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