Securities and Exchange Commission
DIVISION OF CORPORATION FINANCE

CURRENT ISSUES AND RULEMAKING PROJECTS

II. MERGERS AND ACQUISITIONS

NOVEMBER 14, 2000

In addition to the matters in this section, see Section IX. I. below, "Financial Statements in Hostile Exchange Offers." Also, see the Third Supplement to our Manual of Publicly Available Telephone Interpretations.

A. Regulation of Takeovers and Security Holder Communications

On October 22, 1999, the Commission adopted a new regulatory scheme for business combination transactions and security holder communications (Securities Act Release No. 7760). The new rules and amendments became effective January 24, 2000. The amendments significantly update the existing regulations to meet the realities of today's markets while maintaining important investor protections. Specifically, the amendments reduce restrictions on communications, balance the regulatory treatment of cash and stock tender offers, and update, simplify and harmonize the disclosure requirements.

    1. Reduce Restrictions on Communications

The Securities Act, as well as the proxy and tender offer rules, restrict communications. The new rules and amendments relax these restrictions by permitting the dissemination of more information on a timely basis without triggering the need to file a mandated disclosure document. Under the new scheme, a complete disclosure document still must be provided before a security holder may vote or tender securities, but other communications regarding the transaction are permitted. This should permit more informed voting and tendering decisions. The content of communications is not restricted, but anyone relying on the new rules must file written communications relating to the transaction on the date of first use, so that all security holders have access to the information. In particular, the amendments permit more communications:

before the filing of a registration statement relating to either a stock merger or a stock tender offer transaction;

before the filing of a proxy statement (regardless of the subject matter or contested nature of the solicitation); and

regarding a proposed tender offer without "commencing" the offer and requiring the filing and dissemination of specified information.

The amendments also harmonize the various communications principles applicable to business combination transactions under the Securities Act, tender offer rules and proxy rules. Confidential treatment of merger proxy statements is retained, but only under limited circumstances. Under the new scheme, if parties to a transaction publicly disclose information beyond that specified in Rule 135, the proxy statement must be filed publicly. If a proxy statement is filed confidentially, but later the parties disclose information beyond Rule 135, then the proxy statement must be re-filed publicly.

    2. Balance the Regulatory Treatment of Cash and Stock Tender Offers

Registered stock tender offers (exchange offers) are subject to regulatory delays not imposed on cash tender offers. A cash tender offer may commence as soon as a tender offer schedule is filed and the information disseminated to security holders, while an exchange offer may not commence before a registration statement is filed and becomes effective. The delay associated with exchange offers may cause some bidders to favor cash over stock as consideration in a business combination transaction. In addition, the different regulatory treatment can give a bidder offering cash a timing advantage over a competing bidder offering stock. The amendments adopted balance the regulatory treatment of cash and stock tender offers to the extent practicable.

Under the new rules third-party or issuer exchange offers may commence as early as the filing of a registration statement, or on a later date selected by the bidder, before effectiveness of the registration statement. As a result, a bidder offering securities will not need to wait until effectiveness to commence an exchange offer. Early commencement is not mandatory, but rather at the election of the bidder. A bidder may file a registration statement, wait for staff comments, if any, and then decide to commence its offer. Any securities tendered in the offer could not be purchased until after the registration statement becomes effective, the minimum 20 business day tender offer period has expired, and all material changes are disseminated to security holders with adequate time remaining in the offer to review and act upon the information. A bidder need not deliver a final prospectus to security holders. Security holders may withdraw tendered securities at any time before they are purchased by the bidder.

    3. Updating, Simplifying and Harmonizing the Disclosure Requirements

The procedural and disclosure requirements for business combination transactions vary depending upon the form of the transaction. The amendments clarify and harmonize many of the requirements. The amendments also make the requirements easier to understand and facilitate compliance with the regulations.

The substantive disclosure requirements for tender offers, going-private transactions and other extraordinary transactions remain substantially the same, but are moved to one central location within the rules, called "Regulation M-A." In some cases, harmonization reduces the disclosure requirements. The amendments also update the rules in several respects. The more significant amendments:

combine the existing schedules for issuer and third-party tender offers into one new schedule available for all tender offers, called "Schedule TO";

require a plain English summary term sheet in all tender offers, mergers and going-private transactions, except when the transaction is already subject to the plain English requirements of the Securities Act rules;

update and generally reduce the financial statements required for business combinations;

require pro forma and related financial information in negotiated cash tender offers when the bidder intends to engage in a back-end securities transaction;

permit an optional subsequent offering period after completion of a tender offer during which security holders can tender their shares without withdrawal rights;

revise Rule 13e-1, which requires issuers to report intended repurchases of their own securities once a third-party tender offer has commenced, so that the required information need not be disseminated to security holders and to provide an exclusion from the rule for certain periodic, routine purchases;

conform the current security holder list requirement in the tender offer rules with the comparable provision in the proxy rules so that the list will include non-objecting beneficial owners; and

clarify the rule that prohibits purchases outside a tender offer (Rule 10b-13), codify prior interpretations of and exemptions from the rule; add several new exceptions to the rule, and redesignate it as new Rule 14e-5.

B. Cross-Border Tender Offers, Rights Offers and Business Combinations

The Commission has adopted exemptive provisions to facilitate the inclusion of U. S. investors in tender and exchange offers, business combinations and rights offerings for the securities of foreign companies (Securities Act Release No. 7759 (October 22, 1999)).

    1. Reasons for the Exemptions

Although it is very common for U. S. persons to hold securities of foreign companies, they often are unable to participate fully in tender offers, rights offerings and business combinations involving those securities. Offerors often exclude U. S. security holders due to conflicts between U. S. regulation and the regulation of the home jurisdiction or the perceived burdens of complying with multiple regulatory regimes.

In tender offers where the bidder is offering its own securities and rights offers where existing shareholders are offered the opportunity to buy more stock, in the absence of an exemption (such as the new exemptions contained in the release), inclusion of U. S. holders would require registration under the Securities Act. Registration requires the issuer to provide to shareholders financial statements prepared in accordance with U. S. accounting standards. Also, the issuer would incur an ongoing reporting obligation in the United States.

    2. Harmful Effects of Excluding U. S. Investors

U. S. investors often are unable to receive the full benefits offered to other investors in these types of offshore transactions. When bidders exclude the U. S. security holders from tender or exchange offers, the U. S. investors are denied the opportunity to receive the full value of the premium offered for their shares. (In some cases, these holders may eventually have their securities acquired in a compulsory acquisition when the offeror completes the acquisition.) Similarly, when issuers exclude their U. S. security holders from participation in rights offerings, the U. S. investors lose the opportunity to retain their relative ownership position or possibly to purchase at a discount. (In some instances, they may be able to receive the cash value of their rights.)

These offshore transactions may affect the interests of the U. S. investors in the foreign securities, regardless of whether they receive information about the transaction or are able to participate directly in the offer. For example, market activity in the stock after announcement of a tender offer may affect the price of the stock. Even though U. S. investors cannot participate in the tender offer, they must react to the event by deciding whether to sell, hold, or buy additional securities. Offerors will often take affirmative steps to prevent their informational materials from being disseminated in the United States as a means to avoid triggering U. S. regulatory requirements. U. S. investors, therefore, must make this decision without the benefit of information required by either U. S. or foreign securities regulation.

    3. The Exemptions

The new exemptions balance the need to promote the inclusion of U. S. investors in these types of cross-border transactions against the need to provide U. S. investors with the protections of the U. S. securities laws. The U. S. anti-fraud and anti-manipulation rules and civil liability provisions will continue to apply to these transactions. The rule changes became effective January 24, 2000.

New provisions in the tender offer rules exempt:

tender offers for the securities of foreign private issuers from most provisions of the Exchange Act and rules governing tender offers when U. S. security holders hold 10 percent or less of the foreign company's securities that are subject to the offer (the "Tier I exemption").

tender offers from certain limited provisions of the Securities Exchange Act of 1934 and rules governing tender offers when U. S. security holders hold 40 percent or less of a foreign private issuer's securities that are subject to the offer (the "Tier II exemption"). The Tier II exemption represents a codification of current exemptive and interpretive positions that eliminate frequent areas of conflict between U. S. and foreign regulatory requirements.

tender offers for the securities of foreign private issuers from Rule 10b-13 of the Exchange Act (redesignated Rule 14e-5 in the Regulation M-A rulemaking), which will permit purchases outside the tender offer during the offer when U. S. security holders hold 10 percent or less of the subject securities.

In addition, two new exemptions from the Securities Act registration and Trust Indenture Act provisions exempt:

under new Rule 801, rights offerings of equity securities by foreign private issuers from the registration requirements of the Securities Act when U. S. security holders hold 10 percent or less of the securities.

under new Rule 802, securities issued in an exchange offer, merger or similar transaction for a foreign private issuer from the registration requirements of the Securities Act and the qualification requirements of the Trust Indenture Act when U. S. security holders hold 10 percent or less of the subject class of securities.

Some of the more significant changes from the November 1998 proposals include:

The U. S. ownership thresholds for the Rule 801 and Rule 802 registration exemptions have been increased from five to 10 percent.

Under a "cash-only alternative" for Tier I tender offers, bidders will be permitted to offer cash in the United States while offering securities offshore without violating the equal treatment requirements of the tender offer rules. The bidder must have a reasonable basis to believe that the cash being offered to U. S. security holders is substantially equivalent to the value of the consideration being offered to non-U. S. holders.

Holders in both rights offerings and exchange offers would receive restricted stock under Rule 144 only to the extent their existing holdings were restricted. We had proposed treating all securities issued in rights offerings as restricted.

In determining U. S. ownership, an offeror would be required to "look through" the record ownership of certain brokers, dealers, banks or nominees holding securities for the accounts of their customers. Ten percent holders, foreign or domestic, are excluded from the calculation, rather than just foreign 10 percent holders as had been proposed. Securities held by the bidder also are excluded from the calculation.

 

C. Mini-Tender Offers and Tender Offers for Limited Partnership Units

The Commission issued an interpretive release on July 24, 2000 (Exchange Act Release No. 43069) that provides guidance on:

the disclosure and dissemination of tender offers that result in the bidder holding five percent or less of the outstanding securities of a company (" mini-tender offers"); and

the disclosure in tender offers for limited partnership units.

    1. Mini-Tender Offers

        a. Background

"Mini-tender offers" are tender offers that would result in the bidder holding not more than five percent of a company's securities, and are generally structured to avoid the filing, disclosure and procedural requirements of Section 14(d) of the Exchange Act and Regulation 14D. Mini-tender offers, however, remain subject to the antifraud provisions of Section 14(e) and the substantive and procedural requirements of Regulation 14E. These requirements provide that a tender offer be open for at least 20 business days, that the offer remain open for 10 business days following a change in the offering price or the percentage of securities being sought, and that the bidder promptly pay for or return securities when the tender offer expires.

Because mini-tender offers are not subject to Section 14(d) and Regulation 14D, offerors are able to design the offer as a first-come, first-served offer without withdrawal rights and prorationing. This structure pressures security holders into tendering quickly. Permanently locked into their decision, security holders are then unable to take advantage of new information or opportunities that may become available during the course of the offer. Disclosure in mini-tender offers is usually deficient, and ordinarily does not communicate the absence of these procedural protections to security holders.

Because of inadequate disclosure, some bidders have also been able to devise schemes to confuse security holders about the actual offer price. In some cases, the offer is for less than the market price. In other cases, a premium is offered initially offered but bidders never intend to pay a premium for the securities they wait and do not pay for the securities tendered until the market price rises above the offer price. They then sell the securities in the market and pay tendering security holders with the proceeds. The Commission believes these practices are "fraudulent practices" within the meaning of Section 14(e).

b. Disclosure Guidelines

The interpretive release sets out specific disclosure guidelines for bidders in mini-tender offers in order to avoid "fraudulent, deceptive or manipulative practices" within the meaning of Section 14(e). Bidders should provide clear disclosures concerning the offer price, price changes, ability to finance the offer, identity of the bidder, plans or proposals, conditions to the offer, possible extension of the offer, pro rata acceptance, withdrawal rights, and the forthcoming target recommendation.

For example, bidders should disclose clearly if the offer price is below the market price. Bidders who make mini-tender offers at, or slightly above, the market price of the security should communicate whether they only intend to purchase the shares if the market price rises above the offer price. Because security holders generally are not permitted to withdraw their securities from the offer once the securities have been tendered, failing to disclose the bidder's actual intentions may be deemed a "fraudulent, deceptive or manipulative practice" within the meaning of Section 14(e).

Similarly, bidders who do not have the financing necessary to purchase the shares in the offer, and merely expect to sell tendered shares in the market at a higher price and then use the proceeds to pay the security holders who tendered at a lower price, would be under the same obligation to disclose their plan in the tender offer materials. Rule 14e-8(c) also expressly prohibits a person from publicly announcing a tender offer if that person "does not have the reasonable belief that the person will have the means to purchase the securities to complete the offer."

c. Dissemination Guidelines

The bidder in a tender offer must make reasonable efforts to disseminate material information about the tender offer to security holders. The failure to disseminate the disclosure frustrates the purpose of the tender offer rules. The Commission believes dissemination of material information using mechanisms the bidder knows or is reckless in not knowing are inadequate would be a "fraudulent, deceptive or manipulative" practice within the meaning of Section 14(e) and Rule 14e-1. It is the bidder's obligation to assure that security holders get material information about the tender offer, including material changes. Posting the information on a web site would not, by itself, be adequate dissemination. Not all security holders have access to the Internet. Further, merely sending the offering documents to DTC is not an adequate means of communicating the information to security holders.

d. Prompt Payment

Rule 14e-1(c) requires bidders to pay the consideration offered or return the tendered securities promptly after the termination or withdrawal of the tender offer. The rule does not define "promptly." The Commission believes payment is prompt if made according to current settlement practices (within three business days). Bidders who delay payment because they expect to pay security holders with sales proceeds of shares sold in the market at a price higher than the offer price risk violating Section 14(e) and Rule14e-1(c).

If the target is a limited partnership, and its securities are not listed on an exchange or quoted on an interdealer quotation system, it may not be possible to pay within three days due to delays in transferring the limited partnership interests. When the bidder is a third party and cannot control the transfer and settlement process, we would consider a reasonable extension of the three-day period to be in compliance with Rule 14e-1(c). If the bidder is an affiliate, however, and is able to control the settlement process, payment should not be delayed for these reasons and should be made as soon as possible.

2. Tender Offers For Limited Partnership Units

        a. Background

Tender offers for limited partnership units, whether or not the bidder is affiliated with the target, raise significant disclosure issues due to the nature of limited partnership investments and offers. Limited partnership units may be difficult to sell, and general partners face conflicts of interest in deciding when and whether to liquidate the partnership.

b. Disclosure Guidelines for Limited Partnership Tender Offers

i. Bidder Disclosure Guidelines

In preparing disclosure documents for these transactions, bidders are advised to remember that the 1991 release adopting the roll-up provisions (Securities Act Release No. 6922 (October 30, 1991)) specifically addresses transactions, which, although by definition not roll-ups, raise similar concerns. To avoid misleading security holders, and to help investors make an informed investment decision, the interpretive release states that bidders should disclose known risks, conflicts of interest, market prices, methods of determining the offer price, third party reports, valuations by the general partner, offer purpose and plans, property/ business disclosure, financial information, tax consequences, transfer or processing fees, and anticipated price reductions due to distributions.

When determining the adequacy of disclosure, bidders should focus on the materiality of the information to security holders (Securities Act Release No. 6900 (June 17, 1991)). For example, bidders should disclose any valuation analysis that is materially related to the transaction or used in determining offer price, and whether transfer fees may reduce the amount of consideration received on a per unit or per investor basis. If the bidder is affiliated with the target, it should disclose the benefits of the transaction to the bidder and the reasons for conducting the tender offer versus liquidating the partnership.

ii. Target Disclosure Guidelines

Rule 14e-2 requires the general partner to respond within 10 days of commencement of an offer by publicly stating the reasons for a position with respect to the offer. To avoid misleading security holders, and in order to assist investors in making an informed investment decision, we recommend that targets disclose third party reports, valuations by the general partner, and any conflicts of interest that arise when making a recommendation. For example, disclose, if true, why the partnership is not being liquidated in accordance with the terms in the original offering document.

D. Current Issues

    1. Investment Banking Firm Disclaimers

Boards of directors of companies soliciting shareholder voting and/ or investment decisions in connection with mergers and other extraordinary transactions often retain investment banking firms as financial advisors, in many cases to render an opinion on the financial fairness of the transaction. In connection with its review of proxy statements, Securities Act registration statements and other Commission filings made in this context, the staff increasingly has observed the appearance of disclaimers by or on behalf of the financial advisor regarding shareholders' right to rely on a fairness opinion that the advisor has furnished to the registrant's board, a special committee of the board, and/ or the registrant. Examples of such disclaimers include the following:

"No one other than the Board of Directors [or the Special Committee and/ or the Company] has the right to rely on this opinion;"

"This opinion is provided solely/ only to the Board of Directors [or the Special Committee and/ or the Company]:"

"This opinion is solely/ only for the benefit of the Board of Directors [or the Special Committee and/ or the Company];"

"No one may rely on this opinion without the prior consent of the Financial Advisor;" and

"This opinion is addressed [solely/ only] to the Board of Directors [Special Committee and/ or the Company] and is not intended to be relied upon by any shareholder."

During the review and comment process, the staff has objected to such statements as inconsistent with the balance of the registrant's disclosure addressing the fairness to shareholders of the proposed transaction from a financial perspective. Specifically, the staff has requested that any such direct or indirect disclaimer of responsibility to shareholders, whether made by or on behalf of the financial advisor, be deleted from any portion of the disclosure document in which it appears (including exhibits). Alternatively, the registrant may add an explanation that clarifies:

the basis for the advisor's belief that shareholders cannot rely on its opinion, including (but not limited to) whether the advisor intends to assert the substance of the disclaimer as a defense to shareholder claims that might be brought against it under applicable state law;

whether the governing state law has addressed the availability of such a defense to the advisor in connection with any such shareholder claim; if not, a statement must be added that the issue necessarily would have to be resolved by a court of competent jurisdiction; and

that the availability or non-availability of such a defense will have no effect on the rights and responsibilities of the board of directors under governing state law, or the rights and responsibilities of the board or the advisor under the federal securities laws.

    2. Identifying the Bidder in a Tender Offer

Rule 14d-1(c)(1) of Regulation 14D defines "bidder" in a tender offer as "any person who makes a tender offer or on whose behalf a tender offer is made." The term bidder, for Regulation 14D purposes, does not include an issuer that makes a tender offer for its own securities. Each bidder in a tender offer subject to Regulation 14D must file a Schedule TO and disseminate the information required by that schedule.

The determination of who is the bidder does not necessarily stop at the entity used to make the offer and purchase the securities. Rule 14d-1(c)(1) also requires persons "on whose behalf" the tender offer is being made to be included as bidders. For instance, where a parent company forms an acquisition entity for the purpose of making the tender offer, both the acquisition entity and the parent company are bidders even though the acquisition entity will purchase all securities tendered. The staff views the acquisition entity as the nominal bidder and the parent company as the real bidder. They both should be named bidders in the Schedule TO. Each offer must have at least one real bidder, and there can be co-bidders as well.

The fact that the parent company or other persons control the purchaser through share ownership does not mean that the entity is automatically viewed as a bidder. Instead, we look at the parent's or control person's role in the tender offer. Bidder status is a question that is determined by the particular facts and circumstances of each transaction. A similar analysis of bidder status is made in a tender offer subject only to Regulation 14E. When we analyze who is the bidder, some relevant factors include:

Did the person play a significant role in initiating, structuring, and negotiating the tender offer?

Is the person acting together with the named bidder?

To what extent did or does the person control the terms of the offer?

Is the person providing financing for the tender offer, or playing a primary role in obtaining financing?

Does the person control the named bidder, directly or indirectly?

Did the person form the nominal bidder, or cause it to be formed?, and

Would the person beneficially own the securities purchased by the named bidder in the tender offer or the assets of the target company?

One or two of these factors may control the determination, depending on the circumstances. These factors are not exclusive.

We also consider whether adding the person as a named bidder means shareholders will receive material information that is not otherwise required under the control person instruction, Instruction C to Schedule TO. However, this issue is not dispositive of bidder status. A person who qualifies as a bidder under Rule 14d-1(c)(1) must be included as a bidder on the Schedule TO even if the disclosure in the Schedule TO will not change as a result. Instruction C elicits information about the control persons of the bidder. Merely disclosing the Instruction C information does not eliminate the requirement that the real bidder sign the Schedule TO and take direct responsibility for the disclosure. Where the real bidder does not sign the Schedule TO and does not provide the required disclosure, the parties run the risk of having to extend the offer to provide a full 20 business day period for shareholders to consider the new information.

If a named bidder is an established entity with substantive operations and assets apart from those related to the offer, the staff ordinarily will not go further up the chain of ownership to analyze whether that entity's control persons are bidders. However, it still would be possible for other parties involved with the offer to be co-bidders. The factors listed above would be used in the analysis. In addition, we would consider the degree to which the other party acted with the named bidder, and the extent to which the other party benefits from the transaction.

3. Schedule 13E-3 Filing Obligations of Issuers or Affiliates Engaged in a Going-Private Transaction

Generally, Exchange Act Rule 13e-3 requires that each issuer and affiliate engaged, directly or indirectly, in a going-private transaction file a Schedule 13E-3 with the Commission and furnish the required disclosures (e. g., the statement of "reasonable belief" as to the fairness or unfairness of the proposed transaction) directly to the holders of the class of equity securities that is the subject of the transaction. A joint filing may be permissible in this situation, provided each filing person individually makes the required disclosures and signs the Schedule 13E-3.

Two separate but related issues may be raised with respect to the determination of "filing-person" status in situations where a third party proposes a transaction with an issuer that has at least one of the requisite "going-private" effects: first, what entities or persons are "affiliates" of the issuer within the scope of Rule 13e-3(a)(1) and, second, when should those affiliates be deemed to be engaged, either directly or indirectly, in the going-private transaction. While resolution of both issues necessarily turns on all relevant facts and circumstances of a particular transaction, you should note the following.

First, the staff consistently has taken the position that members of senior management of the issuer that is going private are affiliates of that issuer. Depending on the particular facts and circumstances of the transaction, such management also might be deemed to be engaged in the transaction. As a result, such management-affiliates may incur a Schedule 13E-3 filing obligation separate from that of the issuer. For example, the staff has taken the position that members of senior management of an issuer that will be going private are required to file a Schedule 13E-3 where the transaction will be effected through merger of the issuer into the purchaser or that purchaser's acquisition subsidiary, even though:

such management's involvement in the issuer's negotiations with the purchaser is limited to the terms of each manager's future employment with and/ or equity participation in the surviving company; and

the issuer's board of directors appointed a special committee of outside directors to negotiate all other terms of the transaction except management's role in the surviving entity.

An important aspect of the staff's analysis was the fact that the issuer's management ultimately would hold a material amount of the surviving company's outstanding equity securities, occupy seats on the board of this company in addition to senior management positions, and otherwise be in a position to "control" the surviving company within the meaning of Exchange Act Rule 12b-2 (i. e., "possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.").

Second, questions have arisen regarding the nature and scope of the Schedule 13E-3 filing obligation of an acquiring person, or "purchaser," in a merger or other going-private transaction. In the situation described in above, where management of the issuer-seller that will be going private is essentially "on both sides" of the transaction, the purchaser also may be deemed to be an affiliate of the issuer engaged in the transaction and, as a consequence, required to file on Schedule 13E-3. See Exchange Act Release No. 16075 (August 2, 1979) (noting that "affiliates of the seller often become affiliates of the purchaser through means other than equity ownership, and thereby are in control of the seller's business both before and after the transaction. In such cases the sale, in substance and effect, is being made to an affiliate of the issuer..."). Accordingly, the issuer-seller, its senior management and the purchaser may be deemed Schedule 13E-3 filing persons in connection with the going-private transaction. Where the purchaser has created a merger subsidiary or other acquisition vehicle to effect the transaction, moreover, the staff will "look through" the acquisition vehicle and treat as a separate, affiliated purchaser the intermediate or ultimate parent of that acquisition vehicle. Accordingly, both the acquisition vehicle and the entity or person who formed it to acquire the issuer would have separate filing obligations (although, as noted, a joint filing may be permitted by the staff).

MARCH 31, 2001