Louis A. Goodman (Skadden Arps) (Jan. 07, 1987)INQUIRY LETTER
SKADDEN, ARPS, SLATE, MEAGHER & FLOM April 09, 1987
Re: Registration of Rights issuable pursuant to Stockholder Rights Plans Gentlemen: In the course of advising several of our clients regarding stockholder rights plans, "X6A1 questions have arisen regarding the obligation of an Issuer to register under the Securities Act of 1933, as amended (the "Act"), Rights issued together with Common Stock where the Common Stock has been registered pursuant to a registration statement meeting the requirements of Rule 415 under the Act or pursuant to a registration statement on Form S-8. We believe that there is a need for an interpretation from the Staff on this matter. Issuers typically initially distribute Rights as a dividend to all stockholders as of a specified record date. In such a situation, an Issuer has no obligation to register the distribution under the Act, since there is no investment decision and thus no sale or offer to sell for value. "X6A2 We are specifically concerned here, however, with the question of whether there is an obligation to register the subsequent distribution (before the so-called Distribution Date) of Rights attached to the Common Stock where the Common Stock has been registered by means of a shelf registration statement in accordance with Rule 415 under the Act or where the Common Stock is issuable upon exercise of stock options or stock purchase rights and the underlying Common Stock is registered on Form S-8 ("Stock Plans"). The Distribution Date in a typical Rights Agreement refers to a date, usually about ten days after a purchase by an acquiror of 20% of the Common Stock or the commencement of a tender offer for an amount of stock that will result in the offeror beneficially owning at least 30% of the Common Stock (a "Triggering Event"), on which the Rights first become exercisable and detach and trade separately from the Common Stock. In other words, until the Distribution Date, Rights are not exercisable at any price and cannot be the subject of any separate investment decision. We believe the Issuer should be able to file a report on Form 8-K or Form 10-Q reporting such distribution (which would be incorporated by reference into the registration statement on Form S-8 "X6A3, and supplement the Prospectus included in the shelf registration statement or delivered under the Stock Plan to provide disclosure of the existence of the Rights. "X6A4 We understand, however, that certain members of the Staff have expressed a view that a registration statement must be filed under the Act with respect to Rights attached to Common Stock which has been registered on a shelf registration statement or which is to be issued under Stock Plans. Our position that no such registration is necessary is based on (i) the view that for purposes of registration under the Act the Rights should not be treated as a security separate from the Common Stock prior to the Distribution Date since no separate investment decision can be made, (ii) the adequacy of the disclosure regarding the existence of Rights given to investors in the Common Stock by the filing of the Form 8-K or Form 10-Q and the supplementing of the Prospectus and (iii) an analogy to similar treatment given to stock option rights generally. DISCUSSION
The right to purchase a share of stock in a corporation can be a security. "X6A5 Such a right can be issued separately, as a warrant, or can be part of a security with an independent requirement for registration under the Act. For example, the conversion right bundled into convertible debt is not separately registered under the Act even though it is a right to purchase or subscribe for stock, because it cannot be acquired, traded or exercised separately from the debt and because the conversion feature should be described in any disclosure document describing the debt security. Rights issued under typical Rights Agreements are similar because although stockholders are informed of the existence of the Rights (by press release and by the filing of the Form 8-K or Form 10-Q), prior to the Distribution Date no investment in or disposition or exercise of the rights is possible other than in conjunction with the Common Stock to which the Rights are attached. "X6A6 Moreover, until the Distribution Date, the Rights have almost no economic value because whether the Rights ever become exercisable is within the sole control of the Issuer. (a) Until the Distribution Date, no separate investment in, disposition or exercise of Rights is possible. As noted above, stockholders are initially given Rights as a dividend on the Common Stock, a decision made by the Board of Directors of the Issuer. Rights are not exercisable at any price and no separate trading of Rights is possible until after a Triggering Event occurs. Until after the occurrence of a Triggering Event, Rights are evidenced by the certificates for the Common Stock and not by separate certificates and are only traded when the shares of Common Stock to which they are attached are traded. Not until at least ten days after a Triggering Event will the Rights detach from the Common Stock and separate certificates be issued. Moreover, in part because of New York Stock Exchange considerations. "X6A7 Rights Agreements typically provide that all shares of Common Stock issued by the Issuer after the Record Date but before the Distribution Date are issued with Rights attached, whereas generally no shares of Common Stock issued after the Distribution Date will have Rights attached. This ensures that all shares of Common Stock outstanding at any particular time are identical to all other shares of Common Stock then outstanding."X6A8 Thus, until the Distribution Date, whether an investor acquires the Common Stock on the market or from the Issuer, the investor exercises investment discretion only with respect to the Common Stock and Rights as a unit, not with respect to the Rights. Accordingly, the Rights need not be treated as a security separate from the Common Stock for purposes of registration under the Act. (b) Until the Distribution Date, Rights do not have significant economic value. Although literally caught within the wording of Section 2(1) of the Act, the Rights lack many of the basic attributes of a security. As noted in several Supreme Court cases construing Section 2(1), the literal terms of Section 2(1) are not necessarily conclusive, "X6A9 and under those cases, the Rights lack certain basic features of a security. Most significantly, the Rights have no significant economic value to the stockholders, except in certain limited circumstances under the control of the Issuer and not the stockholders. If no Triggering Event occurs before the Rights expire (typically ten years from initial issuance), the Rights never become exercisable, and holders of Common Stock receive no payment in respect of the Rights. If a Triggering Event occurs, Rights are usually redeemable until a specified period of time after the Distribution Date (which period may be extended) at the option of the Issuer, for a very small amount of money (ranging from $.50 to $.01, with a typical value of $.05 or $.10 per Right) in relation to the price of the share of Common Stock to which the Right attaches. The redemption amount could even be offset against a regular quarterly dividend. Thus, the Board of Directors, with its power to redeem, rather than the holder of the Common Stock (and thus the Rights), controls the value of the Rights. Accordingly, before the Distribution Date, the issuance of Rights need not be considered the sale of a security because (a) the issuance should not be viewed as a sale and (b) the Rights may be viewed not to be securities separate from the Common Stock for purposes of registration under the Act. 2. The proposed disclosure is adequate. Disclosure of the existence and terms of the Rights may be independently necessary as relevant to a purchase of Common Stock, even if the purchaser did not himself receive Rights. This disclosure is accomplished, as noted above, by filing a Form 8-K or Form 10-Q, which is incorporated into the Stock Plan or shelf registration statement, and the supplementing of the Prospectus. Moreover, to our knowledge, the Staff does not contemplate that any additional disclosure is necessary even in the case of a separate registration statement for the Rights. Before acquiring Common Stock, whether from the Issuer or on the market, an investor typically has multiple independent sources of information concerning the Rights."X6A10 The registration of Rights does not affect or improve disclosure. 3. Issuers registering stock option plans typically do not register the options, only the stock. By analogy, registration statements on Form S-8 only register the stock, not the option agreements, even though by the same arguments applicable to Rights, the option agreements could arguably be classified as independent securities under the Act. CONCLUSION
Very truly yours,
STAFF REPLY LETTERJanuary 7, 1987
Incoming letter dated April 9, 1986 On the basis of the facts presented, this Division will not recommend enforcement action to the Commission if issuers do not separately register Rights to be issued together with Common Stock previously registered under the Securities Act of 1933 (the "1933 Act") as described in your letter, provided that (1) an amendment to the registration statement for the Common Stock under the Securities Exchange Act of 1934, or a Form 8-K or Form 10-Q report under that Act, has been filed reflecting the adoption of the Rights Plan; and (2) that a post-effective amendment to the 1933 Act registration statement covering the Common Stock has been filed, or, in the case of a Form S-3 or Form S-8 registration statement, the prospectus has been supplemented, through the use of a prospectus filed pursuant to Rule 424(c), to reflect the existence of the Rights. Because this position is based on the conditions set forth in your letter, it should be noted that any different conditions might necessitate a different conclusion. Further, this letter represents the Divisions position as to enforcement action; it does not purport to represent a legal conclusion regarding the specific question presented. In addition to the above response relating to your specific inquiry, you should note the following matters in connection with the adoption of these plans. 1933 Act Registration of Securities to be Acquired Upon Exercise of Rights The staff has received a number of inquiries regarding the need for, and the timing of, 1933 Act registration of the securities to be issued upon the exercise of Rights. Absent an exemption from the registration requirements of the 1933 Act, the securities underlying Rights must be registered. Since an "offer to sell" the securities underlying Rights is made at the time the Rights first become exercisable, a 1933 Act registration statement for such securities must be on file with the Commission at that time, and must be effective before any sales are made pursuant to the exercise of Rights. The staff recognizes that there may be little likelihood that Rights will be exercised during the period following the date the Rights become exercisable and prior to the date of an event that triggers the "flip-in" or "flip-over" provision. During that period, the exercise price of the Rights is likely to be substantially "out-of-the-money". Under such circumstances, the staff will consider requests for formal no-action positions with respect to compliance with the requirements of Section 5 of the 1933 Act. All such requests should include representations that the exercise price is substantially "out-of-the-money" and that it is extremely unlikely that any Rights will be exercised, as well as an undertaking that no sales of securities pursuant to the exercise of Rights will be consummated before a 1933 Act registration statement for such securities is effective. Tender Offer Issues Since the adoption of the all-holders rule, "X6A1 the staff has received several inquiries regarding the applicability of that rule to certain discriminatory Rights Plans. Because the all-holders rule applies only in the context of a "tender offer" subject to either Regulation 14D or Rule 13e-4, only those Rights Plans that constitute tender offers pursuant to those rules will be affected by the all-holders rule. The Commission recently has expressed the view that a "back-end" Rights Plan "X6A2 does constitute a tender offer, the commencement of which will occur on the date the Rights first become exercisable. Accordingly, the exchange offer conducted pursuant to such a Rights Plan had to be made in compliance with the requirements of Sections 13(e), 14(d) and 14(e) of the 1934 Act and the rules promulgated thereunder. Since Rule 13e-4(f)(8)(i) requires a tender offer to be made to all holders of the securities subject to the offer, any Rights Plan that excludes certain shareholders from participation in an exchange offer subject to the rule would be prohibited. The staff is also of the view that certain Rights Plans which allow holders of Rights to use the issuers securities as consideration in payment of the exercise price also may raise similar concerns under the tender offer rules. Opinions of Counsel Because of the uncertainties that continue to surround the question of the legality of Rights Plans under state law, the staff of the Division, prior to acting on any request for acceleration of a Form 8-A registration statement for Rights, is requesting that counsel provide an opinion as to the legality of the Rights Plan under state law. The courts that have considered the legality of Rights Plans have focused on two questions. "X6A3 The first question is whether the board of directors had the legal authority to adopt and implement the Rights Plan. The second question is whether the actions taken by the board of directors in considering and adopting the Rights Plan were in accordance with the directors fiduciary duties to the company and its shareholders. The opinion of counsel provided to the staff should address each of these questions. With respect to the boards legal authority, counsel should provide an analysis of the relevant state statutes and case law, including a detailed discussion of authority for any discriminatory features or provisions of the Rights Plan. The opinion of counsel may be provided as supplemental information and is not required to be filed as an exhibit to the Form 8-A. The staff will accept an opinion of counsel prepared for and addressed to the board of directors if such opinion addresses each of the questions discussed above. Sincerely,
Chief, Office of Tender Offers "X6A1Rights plans referred to herein involve Rights issued pursuant to a Rights Agreement by an Issuer to purchase Common Stock or a fractional share of Preferred Stock intended to be a Common Stock equivalent at some fixed price in excess of the current market value of the Common Stock of the Issuer. The Rights generally do not become exercisable until after a purchase by an acquiror of 20% of the Common Stock or the commencement of a tender offer for an amount of stock that will result in the offeror beneficially owning at least 30% of the Common Stock. Upon the occurrence of certain events, such as self-dealing transactions which have the potential for abuse by a large stockholder, the Rights become exercisable for Common Stock at half its market value. Upon a merger or sale of substantial assets of the Issuer, the Rights are converted into the right to purchase common stock of the surviving or transferee corporation, at half the market value of such common stock. Over 130 public corporations have adopted such plans, spurred in part by the decision in Moran v. Household International, Inc., No. 37 (Del. Sup. Ct. Nov. 19, 1985), in which the Delaware Supreme Court found the adoption of a rights plan to be a valid exercise of the directors business judgment.
"X6A1Rules 13e-4(f)(8)(i) and 14d-10(a)(1).
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