May 19, 2008
The Securities and Exchange Commission (the "Commission") recently issued a release proposing changes to the cross-border transaction rules adopted in 1999 (the "Proposing Release"), available at http://www.sec.gov/rules/proposed/2008/33-8917.pdf.
After eight years of experience with the existing cross-border transaction rules, the Commission has proposed changes which amend the rules to provide more flexibility, accommodate foreign regulatory schemes and give parties greater certainty when structuring their cross-border transactions. Many of the proposed changes codify interpretive positions and exemptive orders issued on an individual basis by the Staff. If the proposed changes are adopted, this individual relief will become available broadly and as a matter of right.
The Commission has requested public comments on the Proposing Release and has specified a number of questions and issues for comment. Comments must be submitted to the Commission by June 23, 2008.
Background: The Existing Cross-Border Rules
The Commission adopted the existing cross-border rules in 1999 with the goal of encouraging issuers and bidders to extend tender and exchange offers, rights offerings and business combinations to the U.S. security holders of foreign private issuers and to allow those U.S. holders to participate in such transactions on an equal footing with non-U.S. security holders. The existing rules provide qualifying cross-border transactions two "tiers" of exemptive relief from the full weight of the U.S. federal securities laws. These "tiers" are based on the level of subject securities held by U.S. persons.
"Tier I" — 10 percent or less U.S. ownership.
If ten percent or less of the subject securities are held by U.S. persons, a cross-border transaction is exempt from most tender offer rules under the Exchange Act and from the registration requirements of Section 5 of the Securities Act. Tier I provides a broad exemption from the filing, dissemination and procedural requirements of the tender offer rules and the heightened disclosure requirements that would otherwise be applicable to going-private transactions under Rule 13e-3. Tier I also exempts the company that is the subject of a tender offer from the obligation to take a position with respect to the offer. Additionally, if the U.S. ownership falls below the same ten percent threshold, Rules 801 and 802 provide relief from the registration requirements of Section 5 of the Securities Act for securities issued in rights offerings and business combination transactions.
"Tier II" — More than 10 percent but no more than 40 percent U.S. ownership.
If more than 10 percent but no more than 40 percent of the subject securities are held by U.S. persons, a cross-border transaction is exempt from a limited sub-set of the tender offer rules which the Commission has acknowledged as those that most frequently conflict with non-U.S. laws and typical transaction practices. Tier II provides narrowly tailored relief from certain U.S. tender offer rules such as the prompt payment, extension and notice of extension requirements of Regulation 14E. Tier II does not provide an exemption from the registration requirements of Section 5 of the Securities Act or the additional disclosure requirements applicable to going-private transactions by issuers or affiliates.
Proposed Changes to the Cross-Border Rules
Refinement of the tests for calculating ownership by U.S. persons.
The Commission proposes to change the measurement date of U.S. ownership for the purposes of determining eligibility for the exemptions available under the cross-border rules. Under the existing rules, U.S. ownership is required to be assessed on the 30th day prior to commencement. In practice, the precision of this measurement date has presented problems where market forces or a local regulatory process, as opposed to the discretion of the bidder, have driven the timing of a transaction. The proposed changes would allow U.S. ownership to be calculated at any point within a 60-day period prior to public announcement of the transaction. The Commission believes that this change will enable acquirors planning cross-border transactions to determine at an earlier point how they plan to address U.S. holders and permit acquirors to meet home country requirements which often mandate information about the treatment of U.S. holders in the initial transaction announcement or filing. It should be noted that the Commission does not propose to change the relevant date for calculation of U.S. ownership for rights offerings, which is required to be measured at the record date for the offering.
For non-negotiated transactions (hostile offers), the existing rules allow third-party bidders to assume that U.S. ownership in the target company is no more than the Tier I and Rule 802 (10%), and Tier II (40%) thresholds, respectively, if average daily trading volume in the U.S. does not exceed 10 percent or 40 percent of the average daily trading volume worldwide over a twelve-month period ending 30 days before commencement, and the bidder has no reason to know that actual U.S. ownership is inconsistent with the average daily trading volume figure. The proposed changes would require that the relevant 12-month period end no later than 60 days prior to announcement. Additionally, the proposed changes would specify that a party has "reason to know" information that is publicly available prior to announcement, including information filed with the Commission by third parties. These changes provide flexibility in the timing of ADTV calculation and additional certainty regarding the frequently voiced question of what constitutes "reason to know" in this context.
Expansion of Tier I exemption from Rule 13e-3 for affiliated transactions.
The existing cross-border rules only provide an exemption from the heightened disclosure requirements of Rule 13e-3 for certain cross-border transactions. The Commission proposes to expand the exemption to similar affiliated transactions, such as schemes of arrangement, cash mergers and compulsory acquisitions for cash. These types of transactions are frequently seen in the cross-border context. This change will reduce the number of Schedule 13E-3 filings, which have, in some cases, been particularly burdensome on non-U.S. filers who may not have equivalent filing obligations in their home jurisdiction and would not have otherwise been subject to similar fiduciary duty obligations. This change would represent the codification of exemptive relief that has regularly been granted on an individual basis by the Staff.
Extension of Tier II relief to tender offers not subject to Sections 13(e) or 14(d) of the Exchange Act.
Under the existing cross-border rules, the Tier II exemptions apply to tender offers conducted by third parties, issuers or affiliates, where those tender offers are subject to Rule 13e-4 or Regulation 14D. The Commission proposes that the availability of Tier II should be expanded to additionally cover cross-border tender offers subject only to Regulation 14E of the Exchange Act, such as offers for non-equity securities. This expansion of Tier II will allow more flexibility in structuring offers and, the Commission believes, encourage more acquirors to take advantage of the exemption. This proposed change represents another area where bidders have frequently sought individual no-action or exemptive relief from the Staff since the existing rules were adopted in 1999.
Expansion of Tier II to eliminate recurring conflicts with non-U.S. law and transaction practice.
The Commission has proposed a number of refinements and expansions of the Tier II exemptions to cover areas where individual no-action or exemptive relief has frequently been sought in order to address inconsistencies between the existing rules and non-U.S. law or typical transaction practice. These changes are intended to eliminate the cost and burden, to both the Staff and the relevant issuer or bidder, of the process of obtaining individual relief on an issue which the Staff has frequently and consistently addressed. In some cases, it is likely that the time required for and the cost of obtaining individual no-action or exemptive relief has been sufficient to convince a non-U.S. bidder to exclude U.S. persons from an offer. The relevant proposed changes to Tier II include the following:
Codify existing exemptive orders with respect to the application of Rule 14e-5 for Tier II tender offers.
The Commission proposes to extend the exemption from the prohibition on purchases outside of a current tender offer, currently available for Tier I transactions, to Tier II transactions that meet certain conditions. This proposed change would codify commonly granted individual and class exemptive relief.
Expansion of the availability of early commencement to offers not subject to Section 13(e) or 14(d) of the Exchange Act.
The Commission proposes to expand the ability to commence an exchange offer before there is an effective registration statement. The existing rules permit such early commencement only with respect to exchange offers which are subject to Rule 13e-4 or Regulation 14D. The Commission proposes that tender offers under Tier II will also qualify for early commencement if withdrawal rights are provided to the same extent as would be required under Rule 13e-4 or Regulation 14D. These changes are targeted at further harmonizing treatment of exchange offers and cash tender offers. As non-U.S. law may require that a tender offer for one class of securities will trigger an obligation to make a contemporaneous offer for a related class, this proposed change to the rules should enhance flexibility in the timing of the various steps in such a transaction. In a competitive situation, this proposed change also could allow combined or non-cash offers to compete on a more equal footing with all-cash bids, at least with respect to timing.
Certain changes to the format and content of certain Forms and Schedules.
The proposed changes also include a number of procedural changes to the manner in which certain forms and schedules are filed. Among other things, the Commission has proposed to require that all Form CBs and Form F-Xs be filed electronically. This represents yet another step in the Commission’s steady push to a fully electronic filing system. Another significant proposed change is the allowance of non-U.S. institutions to report on Schedule 13G without obtaining individual no-action relief to the same extent as their U.S. counterparts.
Significant Questions Identified for Public Comment
The Proposing Release solicits public comments on a broad array of questions and issues related to the proposed changes summarized above. Included among these are significant questions related to whether the 10 percent U.S. ownership threshold should be increased to 15 percent and whether the Commission’s focus on the percentage of U.S. ownership should be reconsidered as the basis for the available exemptions. Such questions suggest that the Commission is looking broadly at the basis for the overall scheme of cross-border exemptions as well as the specific incremental expansions and clarifications offered by the proposed changes. It is possible that the Commission may significantly expand or vary the proposed changes before any such changes are adopted or that we may see multiple rounds of changes to the cross-border rules. It should be expected that this area of regulation will continue to develop as the Commission assesses the existing rules against an ever increasing level of cross-border investment and transactional activity.
Gibson, Dunn & Crutcher LLP lawyers are available to assist in addressing any questions you may have about the SEC’s proposed changes to the cross-border transaction rules. Please contact the Gibson Dunn attorney with whom you work or
Alan Bannister – New York (212-351-2310, [email protected])
Amy L. Goodman – Washington, DC (202-955-8653, [email protected])
Kevin W. Kelley – New York (212-351-4022, [email protected])
Kenneth R. Lamb – London (+44 20 7071 4201, [email protected])
Brian Lane – Washington, DC (202-887-3646, [email protected])
David C. Lee – Orange County (949-451-4069, [email protected])
Justin McAnaney – London (+44 20 7071 4286, [email protected])
James J. Moloney – Orange County (949-451-4343, [email protected])
Ronald O. Mueller – Washington, DC (202-955-8671, [email protected])
John F. Olson – Washington, DC (202-955-8522, [email protected])
Selina Sagayam – London (+44 20 7071 4263, [email protected])
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