Company Name: Goldman, Sachs & Co.
Public Availability Date: December 20, 1999
Document Sections:LETTER OF INQUIRY
STAFF REPLY LETTER
[LETTER OF INQUIRY]
December 14, 1999 Michael Hyatte,
Office of the Chief Counsel,
Division of Corporation Finance,
Securities and Exchange Commission,
450 Fifth Street, N.W.,
Washington, D.C. 20549. Re: Rule 144(f) and (g) and Variable Share Pre-Paid Forward Contracts Dear Mr. Hyatte: We are writing to seek interpretive advice that the entering into of a pre-paid
variable share forward contract (a "Contract") by Goldman, Sachs & Co.
("GS&Co.") and the sale of the securities underlying the Contract by GS&Co.
under the circumstances described below will constitute a transaction complying
with manner of sale requirements of Rule 144(f) and (g) under the Securities Act
of 1933 (the "Securities Act"). I. Background A. Description of Contract Clients of GS&Co. ("sellers") hold "restricted securities,* "control
securities"** and securities eligible for resale pursuant to Rule 145(d)(1)
under the Securities Act (collectively, the "securities"). Rather than effect an
ordinary sale of these securities through GS&Co. under Rule 144, these clients
desire to effect the sale through the use of a Contract. Each Contract will
provide for the sale of securities at a fixed price determined in one of two
ways described below. The maturity or settlement of the Contract typically would
occur between two and four years after the date the Contract is entered into.
Subject to a minimum and maximum delivery obligation, the number of securities
deliverable under a Contract will typically depend upon the price of the
securities during an averaging period prior to the maturity of the Contract. A
typical Contract, for example, will provide for a minimum delivery obligation of
80x shares and a maximum delivery obligation of 100x shares with the ultimate
delivery obligation dependent upon the average price of the shares during a
five-trading day period prior to the Contract's maturity. GS&Co. will make payment (or deposit the money in escrow) in full at the time of
entering into the Contract. The seller will typically pledge the maximum number
of securities deliverable under the Contract to GS&Co. (or to a financial
institution for GS&Co.'s benefit) to secure his or her delivery obligation.
GS&Co. will receive customary assurances from the seller that the maximum number
of securities deliverable under the Contract falls within the volume limitation
of Rule 144 applicable to the seller. B. Pricing Mechanics The price of the securities under the Contract with a seller would be determined
in one of the two following ways. In the first case (the "Block Transaction"),
GS&Co. will enter into a "binding commitment"* to purchase the securities at a
fixed price. GS&Co. will then seek to sell the maximum number of securities
subject to the Contract as promptly as practicable consistent with market
conditions.* Further, with respect to the class of securities covered by the
Contract, GS&Co. will either be a "market maker" or "block positioner" as used
for purposes of Rule 144.** We have also been informed by GS&Co. that these
sales will occur in a manner similar to the those that it would make if it was
purchasing the securities as a market maker or block positioner in a traditional
Rule 144 block transaction. In the second case (the "Preliminary Sale Transaction"), GS&Co. and the seller
will enter into a written agreement (the "Preliminary Agreement") which will
provide that the seller and GS&Co. will enter into a Contract on up to a
specified maximum number of securities based upon the execution prices of the
sales effected by GS&Co. over a specified execution period (the "Execution
Period"). GS&Co. expects to effect the sales pursuant to the Preliminary
Agreement in unsolicited brokerage transactions. In the case of a security
listed on a national securities exchange, GS&Co. generally expects to make the
sales through the relevant exchange. In the case of a security listed on Nasdaq,
GS&Co. expects to make the sales to third-parties, including market makers and
block positioners. In either case, GS&Co. will not engage in any solicitation
during the Execution Period except to the extent permitted by Rule 144 and the
interpretations thereunder.* At the end of the Execution Period, GS&Co. will enter into a final written
agreement (the "Final Agreement") with the holder that will set forth the final
terms of the Contract based on the actual sales prices of the securities sold
(up to the maximum number specified in the Preliminary Agreement) by GS&Co.
during the Execution Period.** The Contracts covered by this letter will relate only to securities issued by
entities organized in the United States, and the purchaser of the securities
under the Contracts will be GS&Co., or an affiliate of GS&Co. that is registered
as a broker-dealer under the Exchange Act.* II. Analysis We believe, and understand that the staff of the Securities and Exchange
Commission agrees, that, for purposes of the registration requirements of
Section 5 of the Securities Act, the entering into of a Contract constitutes a
sale at that time of the maximum number of securities deliverable under the
Contract. Conversely, there is no sale for Section 5 purposes at the settlement
or maturity of the Contract. We believe that it follows analytically from this
position that the entering into of a Contract combined with the consequent sales
by GS&Co. into the market of the maximum number of securities deliverable under
the Contract constitutes a sale of those securities for purposes of Rule 144.*
In light of these positions, we believe, and we respectfully request the staff
to concur in our belief, that GS&Co. may effect Block and Preliminary Sale
Transactions consistent with the manner of sale requirements of Rule 144(f) and
(g). With respect to the Block Transactions, we believe that GS&Co. is acting in a
manner consistent with that of a "market maker" or "block positioner" as used
for purposes of Rule 144. In a Block Transaction, GS&Co. will enter into a
binding commitment to purchase the securities at a fixed price pursuant to a
Contract and will not engage in any impermissible solicitation of buy orders
prior to the entering into of the binding commitment.* Immediately thereafter
GS&Co. will seek to sell the maximum number of securities subject to the
Contract as promptly as practicable.** In all respects, GS&Co. is acting in the
same manner as it would if it was engaging in a traditional market marketing or
block positioning transaction. We do not believe that the use of a Contract to
effect the sale should affect this analysis for several reasons. First, as discussed above, the entering into of the Contract is a sale of the
maximum number of securities subject to the Contract for purposes of Section 5.
As a result, there would not appear to be any reason to treat the "sale" of the
securities pursuant to the Contract as different than any other transaction that
constitutes a sale for purposes of Section 5. To do otherwise would elevate form
over substance. It is a sale that is analogous for Section 5 purposes to other
block transactions under Rule 144. It is also no more a "private" transaction
than any other block transaction effected pursuant to Rule 144, and therefore,
the sale and GS&Co.'s subsequent activity in selling the maximum number of
securities should be evaluated under Rule 144. Second, the market activity of GS&Co. in connection with a Block Transaction is
identical to that which occurs in a typical Rule 144 transaction involving a
market maker or block positioner. In both cases, the securities subject to the
transaction are being sold to the public as promptly as practicable by the
market maker or block positioner. Accordingly, a Block Transaction is merely an
alternative method of effecting a Rule 144 sale of securities. Third, we have been informed by GS&Co. that the use of Contracts to effect sales
of securities has become common. In particular, we understand that transactions
similar to the Contracts are commonly entered into to effect sales of securities
that may be sold to the public without restriction under the Securities Act as
well as securities that are subject to resale restrictions under the Securities
Act. As a result, we believe that entering into a Contract should be treated as
a routine trading transaction for purposes of Rule 144. Last, GS&Co. is engaging only in activity in which it would be permitted to
engage in if it was acting as a market maker or block positioner in a
traditional Rule 144 block transaction. GS&Co. will not be permitted to solicit
any buy orders until after it has entered into a binding commitment with respect
to the Contract and will otherwise act only as would be permitted if it was
acting as a market maker or block positioner. For the foregoing reasons, we believe, and we respectfully request the staff to
concur with our belief, that a Block Transaction effected by GS&Co. as described
above complies with the manner of sale requirements of Rule 144(f). Consistent
with our view, we also believe, and we respectfully request the staff to concur
in our belief, that the maximum number of securities subject to a Contract
entered into in connection with a Block Transaction may be sold to the public
without registration under the Securities Act upon the entering into of the
binding commitment.* We believe that Preliminary Sale Transactions should also be deemed to meet the
manner of sale requirements of Rule 144(f) and (g). GS&Co.'s actions in
connection with entering into a Preliminary Sale Transaction are the same
actions it would take in effecting an ordinary sale pursuant to Rule 144. As a
result of the Contract, GS&Co. sells into the public market, in unsolicited
transactions, the maximum number of securities subject to the Contract. This is
the same number of securities that would be sold by the Counterparty in an
ordinary sale of those securities pursuant to Rule 144. (Although in our case
the Counterparty is best viewed as engaging in a long sale of the securities, we
also note that, in terms of market impact, the same number of securities would
be sold by a broker-dealer on behalf of the Counterparty if the Counterparty
were to effect a short sale against-the-box transaction* permitted by Rule 144
with respect to the maximum number of securities subject to the Contract.)
Consistent with our treatment of the Preliminary Sale Transaction as a long sale
for purposes of Rule 144, from the time GS&Co. enters into the Preliminary
Agreement until the end of the Execution Period, GS&Co. will not engage in any
solicitation that would contravene Rule 144(f) or (g). As a result, the sales to
the public in a Preliminary Sale Transaction are identical to typical
unsolicited brokerage transactions effected pursuant to Rule 144. For the foregoing reasons, we believe, and we respectfully request the staff to
concur in our belief, that a Preliminary Sale Transaction effected by GS&Co. as
described above complies with the manner of sale requirements of Rule 144(f) and
(g). Consistent with this belief, it is also our view, and we respectfully
request the staff to concur in our view, that the maximum number of securities
subject to a Contract entered into in connection with a Preliminary Sale
Transaction may be sold to the public without registration under the Securities
Act upon the entering into of the Final Agreement.* If you have any questions concerning the foregoing or desire any additional
information, please do not hesitate to contact Bob Reeder at Sullivan & Cromwell
at (212) 558-3755 or Alan Beller at Cleary, Gottlieb, Steen & Hamilton at (212)
225-2450. Very truly yours, Robert W. Reeder
Alan L. Beller cc: Anthony J. Leitner
Susan E. Sidd
(Goldman, Sachs & Co.) -----FOOTNOTES----- * As used in this letter, "restricted securities" has the meaning specified in
Rule 144(a)(3). ** As used in this letter, "control securities" refer to securities held by an
"affiliate" as used for purposes of Section 2(a)(11) of the Securities Act. * As used in this letter, "binding commitment" has the meaning assigned to it in
Question 56 of Release No. 33-6099, 1 Fed. Sec. L. Rep. (CCH) 2705H (August 2,
1979) ("Release No. 33-6099"). Consistent with the treatment of market making
and block transactions, the seller would transmit the Form 144 for filing at the
time of the entering into of the binding commitment. * To the extent any of these sales constitute "short sales" (within the meaning
of Rule 3b-3 under the Securities Exchange Act of 1934 (the "Exchange Act")),
GS&Co. will comply with Rule 10a-1 under the Exchange Act. ** See Release No. 33-6099, at Questions 52-55. * In effecting any short sale, GS&Co. will comply with Rule 10a-1 under the
Exchange Act. ** With respect to the filing requirement of Rule 144(h), the seller would file
a Form 144 at the time he or she entered into the Preliminary Contract and
indicate that he or she intended to sell the maximum number of securities that
could be subject to the Contract. The seller would then amend the Form 144 to
include the final terms of the Contract upon the entering into of the Final
Agreement. * To the extent that GS&Co.'s activities described in this letter would
constitute a "distribution" for purposes of Rule 100 of Regulation M under the
Exchange Act, GS&Co. will take any necessary steps to comply with the applicable
requirements of Regulation M. In this regard, we note that if the securities are
"actively traded" within the meaning of Rule 101(c)(1) of Regulation M, GS&Co.
would not be prohibited from effecting purchases of securities of the same class
as those subject to the Contract (or any reference security) during the
applicable restricted period. * In particular in a case where a Contract is entered into with an affiliate on
a private placement basis, we believe, and understand that the staff agrees,
that the holding period under Rule 144(d) with respect to the maximum number of
securities deliverable under the Contract commences when the Contract is entered
into. * These are the same restraints placed on a sale to a block positioner under
Rule 144. See Release No. 33-6099, at Question 56. ** See Release No. 33-6099, Question 52 & n. 17 (indicating that a block
positioner must seek to sell the shares as rapidly as possible commensurate with
the circumstances). * If the seller is an affiliate of the issuer and if any securities are
reacquired by the seller, those securities would at that time again constitute
"control securities". The reacquired securities would not, however, constitute
"restricted securities," since, consistent with our analysis, the securities
would have been previously sold to the public in a transaction complying with
Rule 144. * See Release No. 33-6099, at Question 80. * If the seller is an affiliate of the issuer and if any securities are
reacquired by the seller, those securities would at that time again constitute
"control securities". The reacquired securities would not, however, constitute
"restricted securities" since, consistent with our analysis, the securities
would have been previously sold to the public in a transaction complying with
Rule 144. [STAFF REPLY LETTER]
December 20, 1999 RESPONSE OF THE OFFICE OF CHIEF COUNSEL
DIVISION OF CORPORATION FINANCE Re: Goldman, Sachs & Co. Incoming letter dated December 14, 1999 Based on the facts presented, the Division's views are as follows. Your letter
describes the use of restricted or control securities in transactions governed
by "pre-paid variable share forward contracts." Restricted or control securities
would be pledged to Goldman, Sachs in an amount equivalent to the maximum number
of shares deliverable on settlement of the contract. At the time the parties
enter into the contract, the holder of the restricted or control securities
would have been able to sell the securities in the quantity specified by the
contract outright in reliance on rule 144. Notice on form 144 will be filed when
the parties enter into the arrangement. Promptly, Goldman, Sachs will introduce
into the public market a quantity of securities of the same class equal to the
maximum number of shares deliverable on settlement in transactions conforming to
the manner-of-sale conditions described in rule 144(f) and (g). Under these circumstances, the Division agrees that the restricted or control
securities that are the subject of the pledge to Goldman, Sachs may be treated
as securities that are neither restricted nor control securities in transactions
for its own account. The Division also agrees that the securities returned to
the counterparty on settlement of the contract will not be restricted securities
within the meaning of rule 144(a)(3). If the counterparty is an affiliate of the
issuer, the exemptive disabilities that result from the relationship of control
would, of course, apply to the securities delivered on settlement. This position is based on the representations made to the Division in your
letter. Different facts or conditions might require another result. Sincerely, Michael Hyatte
Special Counsel
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