Release No. 33-7607

Release No. 34-40633

Release No. IC-23520

63 Fed. Reg. 67331 - Dec. 4, 1998

Regulation of Takeovers and Security Holder Communications
Sections II.A. - II.C.

ACTION: Proposed Rules

Table of Contents

II. Discussion of Proposals

A. Overview of the Regulatory Schemes

It may be useful to discuss the regulatory schemes for different methods of business combination before addressing how our proposals would affect the current procedures. This release discusses two primary business combination methods: tender offers and mergers. ³¹ Tender offers may be made either by the issuer of the securities sought or by a third party. ³² The essence of a tender offer is that the offeror, or bidder, can go directly to security holders of the target company with an offer to buy their shares. Each security holder makes an individual decision whether or not to tender. A tender offer may or may not have the cooperation of the target companys board of directors. Even if the tender offer is successful, the bidder is unlikely to receive 100% of the shares. In contrast, a merger is a collective, voting decision. ³³ The acquiror acquires the entire company if security holders of the target company approve the merger. ³⁴ The acquiror generally needs the approval of the targets board of directors in order to present the transaction for a security holder vote.

In either a tender offer or a merger, the offeror may offer cash, securities, or a combination. If the consideration consists all or partly of securities, the offeror generally will have to register them under the Securities Act. ³⁵ The offeror will have to give more information to security holders of the target company than if it were offering cash, since the investment decision is more complex. Security holders of the target need information about the issuer whose securities they will receive if the transaction is consummated, which really means information about the surviving, combined entity (the issuer plus the acquired company).

The following summarizes the regulatory process for the four basic business combination methods. These examples assume that the tender offers and proxy solicitations discussed are subject to our filing and dissemination requirements:

1. Cash tender offer either issuer or third party.

The bidder commences the offer by disseminating tender offer material to security holders, including a request that they tender their shares. On the same day, the bidder files this material publicly with the Commission, along with a tender offer schedule that contains additional information. ³⁶ Unlike the other three transactions discussed below, the Commission staff does not have the opportunity to review the tender offer material until after the tender offer has begun. If the staff decides to review the filed material, and has comments, the staff gives comments to the bidder during the tender offer and the bidder addresses the comments appropriately. (For example, the bidder may need to send additional information to the security holders of the target and the offer may have to be extended.) The offer must remain open for at least 20 business days, and then the bidder can purchase the shares if all conditions to the offer have been satisfied or waived. ³⁷

2. Exchange offer (stock tender offer) either issuer or third party. ³⁸

The bidder files a Securities Act registration statement containing a preliminary prospectus covering the securities it is offering to security holders of the target in exchange for their shares. The prospectus also contains the information about the exchange offer required by the tender offer rules. This is a public document. The bidder may disseminate the preliminary prospectus to security holders of the target company, but it usually does not do so because it cannot request tenders or buy any shares until the registration statement is declared effective. If the staff decides to review the registration statement, it may give comments to the bidder. After these comments are resolved, the bidder requests that the staff declare the registration statement effective. Once the registration statement is effective, the tender offer may "commence" the bidder disseminates the combined final prospectus/tender offer document to security holders, and requests that they tender their shares. On the same day, the bidder files with the Commission the same tender offer schedule as for a cash tender offer. ³⁹ The offer must remain open for at least 20 business days from this point before the bidder can purchase any shares.

3. Cash merger.

The offeror files a preliminary proxy statement with the Commission that describes the transaction. This is usually a public document, but the offeror can request that the preliminary merger proxy statement be treated confidentially, with some exceptions. The offeror may mail the preliminary proxy statement to security holders, but often waits until the proxy statement is final, or "definitive." This is because the offeror can send the proxy card only with the definitive proxy statement. The offeror may mail the definitive proxy statement ten days after the preliminary proxy statement is filed. However, if the staff decides to review the proxy material, in most cases offerors wait to receive staff comments before mailing. Once all comments have been resolved, the offeror mails the definitive proxy statement along with a proxy card for security holders to mark and return. There is no federally mandated time period between the date the offeror mails the proxy material and the date of the security holder meeting, ⁴⁰ but state law generally requires security holder notice of the meeting a specified time before the meeting. If the vote at the meeting is to approve the merger and all conditions have been met, the merger can close.

4. Stock merger.

The offeror files a Securities Act registration statement with the Commission that contains a preliminary prospectus as well as the information required in a proxy statement. Registration statements are filed publicly, but the material may be filed as a confidential proxy statement if the offeror so chooses. The registration statement is then filed as a "wrap around" the proxy statement when the offeror is ready to make the information public. The offeror may disseminate the preliminary prospectus/proxy statement, but ordinarily will not do so because the offeror may not include the proxy card. If the staff decides to review the filing, it gives comments to the offeror. After comments are resolved, the offeror requests that the staff declare the registration statement effective. Once the registration statement is effective, the offeror can mail the combined final prospectus/definitive proxy statement along with a proxy card. The process then continues as it would for a cash merger.

Any of the above transactions also could be a "going-private" transaction if it meets the criteria set forth in the "going-private" rule. ⁴¹ In this case, the offeror and any other party engaging in the transaction must file another schedule and provide additional information to the Commission and security holders, in addition to complying with the other regulatory requirements discussed. Usually this information is combined into a single disclosure document with the proxy statement, tender offer material or prospectus.

B. Expand Communications Permitted In Tender Offers and Mergers

1. Overview and General Considerations

As discussed above, the fast pace of todays securities markets and the ready accessibility of information through electronic media have caused changes in the mergers and acquisitions environment. We understand that participants in many merger and acquisition transactions are providing extensive, deal-related information to the marketplace immediately following the execution of a definitive merger or purchase agreement. Frequently, parties to a merger or other similar transaction release information to the press containing pro forma financial information on the combined entity, as well as estimated cost savings or "synergies." The parties generally issue this type of information through press releases, analyst conferences, and meetings with institutional investors and the press. ⁴² The information provided to analysts often goes beyond the information disseminated to all security holders through press releases.

Parties to merger agreements have asserted several reasons for the need to disclose deal-related information at an early stage, including the duty to make "full disclosure" of material information under Rule 10b-5. ⁴³ Under Rule 10b-5, it is unlawful to make any misstatement or omission of material fact in connection with the purchase or sale of a security. The rule applies to mergers, exchange offers and other extraordinary transactions. The duty to disclose can be triggered by, among other things: (1) line-item disclosure requirements in filings with the Commission; (2) the issuer or insiders duty to "disclose or abstain" from trading while in possession of material, non-public information; ⁴⁴ (3) the duty to provide full and complete information when disclosing information to the markets; ⁴⁵ and (4) the duty to correct false or misleading statements made by the company. ⁴⁶ Companies also may be required by the particular rules of the stock exchange or inter-dealer quotation system upon which their securities trade to inform the marketplace in a timely manner of material corporate developments, including proposed mergers. ⁴⁷

We understand that parties involved in extraordinary transactions may have certain economic reasons as well for disclosing more information to the markets before a registration, proxy or tender offer statement is filed with the Commission. These reasons include: the need to maintain an orderly market for the securities to be offered as consideration; ⁴⁸ the need to satisfy the markets increased demand for information regarding a proposed transaction; ⁴⁹ and the need to inform customers, employees or other constituencies.

While there may be certain regulatory and economic reasons for early disclosure of deal-related information, provisions of the Securities Act and Exchange Act, including the Williams Act, ⁵⁰ restrict the type of information that may be disseminated before the filing of a registration, proxy or tender offer statement. The flow of information to investors is constrained primarily by the concepts of "offer" ⁵¹ and "prospectus" ⁵² under the Securities Act, "solicitation" under the Exchange Act, and "commencement" under the Williams Act. ⁵³ Each of these concepts reflect a judgment that the information needed to make an informed voting or investment decision should be provided within the four corners of a prescribed disclosure document.

We believe that alleviation of these regulatory constraints may be appropriate in todays marketplace, particularly given technological advances in communications. Information regarding a planned extraordinary transaction can be provided to all security holders on a more equal and timely basis. Restricting communications to one document may in fact serve to impede, rather than promote, informed investing and voting decisions. Of course, any proposed safe harbors permitting increased communications must be balanced to assure investor protection. Modifications to the existing regulatory scheme include conditions designed to provide full and fair disclosure to all investors and the broader marketplace and not simply to a limited audience of analysts and financially sophisticated market participants. Todays proposals are designed to reduce selective disclosure by permitting the widespread dissemination of information through a variety of media calculated to inform all security holders about the terms, benefits and risks of a proposed extraordinary transaction.

It is important to note that the proposals do not change the current requirement that before security holders are asked to vote or tender their shares, they must receive a mandated disclosure document a prospectus, proxy statement, or tender offer statement that sets forth complete and balanced information. ⁵⁴ Our long-standing concern about communications conditioning the market before the dissemination of mandated disclosure documents (i.e., "gun-jumping") is alleviated by continuing to require this disclosure document before the investment decision, as well as by the liability that could attach to knowingly false offering materials.

2. Eliminate Restrictions on Pre-filing Communications

We propose to eliminate the current restrictions on communications about an upcoming merger, tender offer, or other business combination. Each of the regulatory schemes would provide for a safe harbor, as described below, for oral and written communications about the transaction before the registration, proxy or tender offer statement is filed. Recognizing that deal-related disclosure, including forward-looking information, is important to a complete understanding of a transaction, we do not propose any content limitation on the communications. However, we request comment on whether any content restrictions should be included in the proposed safe harbors. Of course, even without content restrictions, the antifraud rules will continue to apply.

We do not propose to limit eligibility for the proposed safe harbors to transactions involving large or seasoned issuers. We considered making distinctions by size and seasoned status along the same lines as in the Securities Act Reform Release (i.e., Form A and Form B), but believe that those distinctions are not as important as other considerations in the case of business combination transactions. In these transactions, the market does not need information about the offeror alone, but rather the combined entity, with which the market is unfamiliar in any case. Thus, the need for freer disclosure stems in large part from the fact that the offeror is, in essence, becoming a new company. Therefore, the market-driven disclosure is not company information but "synergies" and similar information about the combined entity. Further, we believe that regardless of seasoned status, the reasons for full and timely disclosure in a business combination still exist.

Nevertheless, we request comment as to whether the size and seasoned status of the parties to the transaction should determine the availability of the free communication safe harbors. Should the safe harbor be limited to Form B companies? ⁵⁵ If the safe harbor were based upon the size and seasoned status of the parties, should it be the status of the acquiror or the target that would govern, or both? If the status of the acquiror controlled, different acquirors for the same target could be subject to different rules. Would the lack of a level playing field for competing acquirors have adverse effects on competition or the targets security holders?

While we believe that the parties involved in a business combination transaction should be permitted to rely on the free communications safe harbors regardless of size, certain safeguards to protect investors are necessary. All written communications by those parties from the date of the first announcement of the transaction would be required to be filed with the Commission upon first use. ⁵⁶ Although there would be no requirement to deliver this information to security holders, written communications would have to be filed upon first use in order to assure that the information is available to all security holders not just analysts and institutional investors at the same time. Furthermore, written information about a proposed combined entity or the "synergies" that are expected to result from a proposed transaction could be verified or confirmed, and corrective disclosure could be required if needed.

Each communication would be required to include a prominent legend advising investors to read the registration, proxy or tender offer statement. ⁵⁷ We solicit comment on whether certain basic information, including the name and description of the acquiror, also should be required in each communication. ⁵⁸

We believe that bidders would welcome the opportunity to disclose deal information earlier in the process and that the filing on first use requirement would not "chill" disclosure of forward-looking information because of continuing market demands. We request comment, however, as to whether parties involved in tender offers would be reluctant, in light of the filing requirement, to disclose forward-looking information absent a safe harbor from liability for that information. The safe harbor established by the Private Securities Litigation Reform Act currently applies to merger transactions but does not apply to tender offers. We discuss below the possibility of expanding by rule the scope of that safe harbor to tender offers. ⁵⁹

Would parties to a transaction communicate more freely if the written communications could be filed at a later date, whether along with the mandated disclosure document ⁶⁰ or some other date, instead of filing upon first use? If so, should the communications required to be filed be limited to those made during a specified period of time, such as 30 calendar days or 30 business days before the disclosure document is filed? In addition to the filing requirement for written communications, would any market conditioning effect of the pre-filing communications be cured by the built-in time period between delivery of the disclosure document and the final voting or tendering decision? Would offerors tend to shorten this time period, to the extent permitted by law, if they could engage in more extensive communications at an earlier point? We also ask whether security holders would tend to sell into the market on the basis of pre-filing communications, rather than waiting for the disclosure document.

As noted, the proposed free communications safe harbors would apply to oral as well as written communications. We do not propose to require that oral communications be reduced to writing and filed. As one objective of the proposal is to reduce selective disclosure, we solicit comment on whether liberalizing oral communications would remove incentives for offerors to file information and disseminate it in a widespread manner. ⁶¹ Should the safe harbors be available to oral communications? ⁶² If so, would the need to provide information to the markets generally provide a sufficient incentive for offerors to disseminate full, fair and balanced information in a widespread manner? Should a "notice" filing be required when oral communications are made?

As proposed in the Securities Act Reform Release, business information that is factual in nature and relates solely to ordinary business matters, not to the pending transaction, would be exempt from the prohibition on offers and would not be required to be filed. This type of information generally does not have the potential for conditioning the market before an extraordinary transaction and, as the dissemination of such information is usually routine, we do not view it as specifically related to the transaction. ⁶³ The proxy and tender offer rules would provide the same exclusion. ⁶⁴

3. Waiting Period and Post-Effective Period Communications

In the Securities Act Reform Release, we propose to permit free oral and written communications during the period between filing and effectiveness of the registration statement, in order to provide an opportunity for open dialogue between the company and its potential investors. ⁶⁵ This Securities Act safe harbor also would apply to the period after effectiveness of the registration statement. ⁶⁶ The rule would be available for business combinations as well as for capital-raising transactions. We also would extend this safe harbor to the proxy and tender offer rules. ⁶⁷ Like pre-filing communications, written communications during these periods would be required to be filed upon first use. Free communications during the waiting period would be particularly important if our proposal to permit exchange offers to commence before effectiveness is adopted. ⁶⁸

4. Alternative Communications Proposals

We are considering alternatives to the free communications safe harbors that would provide more limited flexibility for pre-filing communications. In particular, we are considering whether to allow the companies conducting the transaction to make deal-related disclosure only during a 48-hour period following the public announcement of a definitive merger agreement or takeover plan. Similar to the "free communications" proposal, there would be no content restrictions on the companies communications during the proposed 48-hour period, other than the antifraud provisions. After the 48-hour period, the companies would be required to remain quiet regarding the transaction until a registration, proxy or tender offer statement is filed. If this alternative proposal is adopted, should the 48-hour time period be shorter or longer (e.g., 24 or 72 hours), or should it be based on a number of business days, such as one, three or five business days?

Under this alternative proposal, the safe harbor would not be available to a company if it disclosed deal-related information after the 48-hour period without the relevant disclosure document on file. The company, however, could take steps to regain protection under the safe harbor by discontinuing communications related to the transaction for at least 30 calendar days (the "30-day quiet period") before a registration statement is filed. The 30-day quiet period would serve to cure any conditioning effect that the communications may have had on the market for the companies securities.

As a third alternative to the free communications proposal and the 48-hour model, we also solicit comment on whether to permit free communications for an unlimited period of time after the deal is announced, so long as the parties observe a 30-day quiet period before filing the registration statement, proxy statement or tender offer material. This would be similar to the treatment of Form A companies in capital-raising transactions, as proposed in the Securities Act Reform Release. We ask commenters whether it would be practicable in the business combination context to require a minimum of 30 days between announcing the deal and filing the registration statement, proxy statement or tender offer material.

We request comment on whether, under the alternative proposals, the 30-day quiet period would be sufficient to cure any conditioning effect that earlier communications may have on the market. Is a longer quiet period necessary (e.g., 45 days), or would a shorter period suffice (e.g., 15 or 20 days)? We also solicit comment on whether the time period for staff review should be included in the 30-day quiet period. Should companies be permitted to file the relevant disclosure document as soon as it is prepared despite disclosure of deal-related information outside the 48-hour period? How should the announcement of a hostile transaction affect the type of communications permitted during the 30-day quiet period? Should the type of communications permitted outside the 48-hour period be different for friendly and hostile transactions? Should the communications be filed on first use, or not filed until the mandated disclosure document is filed?

Finally, we request comment as to whether either of the alternative proposals is preferable to the free communications safe harbors. ⁶⁹ Commenters should keep in mind that we would conform the proxy rules and tender offer rules to whatever scheme we adopt under the Securities Act for business combinations.

5. Free Communications Under the Securities Act

To implement the overall scheme discussed above, we propose new Securities Act

Rule 166(b) to permit free communications in connection with any registration statement for a business combination. As discussed above, this rule would not contain any content restrictions so that deal-related information could be disclosed to analysts and security holders alike. Given the potential breadth of the communications, these communications still would be considered offers under the Securities Act.

As discussed above, Section 5(c) of the Securities Act prohibits offers unless a registration statement is on file. In 1996, the Commission was granted exemptive authority under Section 28 of the Securities Act. ⁷⁰ For the reasons stated above including the need to reduce selective disclosure and provide deal-related information to all security holders on an equal basis we believe that an exemption from Section 5(c) of the Securities Act for persons making offers in business combination transactions is in the public interest and is consistent with the protection of investors.

The proposed safe harbor under this exemption would be available to the acquiring company the offeror of the securities. The company to be acquired would not ordinarily be subject to restrictions on communications under the Securities Act, but under some circumstances it could be viewed as joining the acquiring company in making the offer. In this event, it also could avail itself of the safe harbor. In addition, we request comment as to whether any other parties should be exempted from Section 5(c) and eligible to rely on the proposed safe harbor for pre-filing communications. For example, should the parties affiliates, dealer-managers and others acting on behalf of the parties to the transaction be permitted to take advantage of the safe harbor? ⁷¹

In cases where deal-related information is disclosed before filing a registration statement, the current practice has been to file the communications on Form 8-K ⁷² and then incorporate these filings by reference into the registration statement. As a result, these communications are subject to Section 11 liability. ⁷³ As a condition to the proposed free communications safe harbor, written communications relating to the transaction would be filed upon first use as pre-filing prospectus supplements ⁷⁴ that are subject to Section 12(a)(2) liability. ⁷⁵ This is because we believe Section 12(a)(2) liability would adequately protect investors while not chilling parties willingness to make these communications. However, we request comment on whether all written communications related to the transaction should be incorporated into the registration statement and subject to Section 11 liability under the Securities Act. ⁷⁶ Would this encourage offerors to rely more on oral communications? We also ask whether it is necessary to condition the availability of the safe harbor on the timely filing of these communications, as proposed.

We note that relatively free written and oral pre-filing communications already are permitted under the current scheme for contested proxy solicitations. Such solicitations, if written, currently are not deemed offers under the Securities Act. ⁷⁷ Written communications must be filed in accordance with proxy Rule 14a-12(b), as discussed below.

To harmonize treatment of all merger transactions, whether contested or friendly, we propose to eliminate the provision that such communications are not offers under the Securities Act. ⁷⁸ Thus, pre-filing communications in contested transactions also would be considered offers and pre-filing supplements to the prospectus subject to liability under Section 12(a)(2) of the Securities Act. We do not believe that communications would be chilled by this modification because of the heightened need for communications in hostile or competing transactions. In addition, we note that such communications already are subject to antifraud liability. We request comment, however, as to whether treating this information as offers imposing Section 12(a)(2) liability under the Securities Act would chill communications in hostile transactions.

Rule 135 notices are not currently, and are not proposed to be, filed with the Commission. We solicit comment, however, on whether Rule 135 notices involving prospective business combinations should be filed, since they could contain the initial public announcement of the transaction. The filing would be made under Rule 425, but since these notices are not considered "offers" they would not have liability as such; Rule 425 would be modified to make this clear. ⁷⁹

In the Securities Act Reform Release, the proposed scheme for capital-raising transactions for Form A issuers contemplates that communications more than 30 days before the filing of a registration statement do not constitute offers. ⁸⁰ In contrast, the proposed scheme for business combinations treats all communications related to the transaction as offers, starting with the first communication relating to the transaction (except for communications among the participants in the transaction). ⁸¹ Thus, these communications would be subject to Section 12(a)(2) liability even if made more than 30 days before filing the registration statement. Should we treat business combinations the same as capital-raising transactions and apply the 30-day rule to both? ⁸² If we did this, we could still require communications before the 30-day window to be filed, but they would not have Securities Act liability as offers. We ask commenters to address whether the status of deal-related communications as offers should depend on how soon they are followed by the filing of a registration statement.

We also solicit comment on whether, if we do retain the first public announcement standard, we need to define "public announcement." We could define this as the first public communication about the transaction that gives more information than permitted by Rule 135. Alternatively, we could have a broader definition that includes any public communication identifying the offeror, the target company or class of securities, the number or percentage of securities sought, and the price or range of prices. Should the definition clarify what is meant by "public" (i.e., communications that go beyond the participants to the transaction)?

6. Free Communications Under the Proxy Rules

a. Expand Rule 14a-12 Safe Harbor

In 1992, we significantly enhanced security holders ability to communicate with one another regarding corporate matters without furnishing a proxy statement, so long as no proxy card or other authorization is furnished to or requested from security holders. ⁸³ The enhancements have worked well to improve the quality and amount of information flowing to and among security holders. Under the current regulatory scheme, however, there are still some restrictions on communications. For instance, management or security holders seeking proxy authority may not communicate without first furnishing a proxy statement, unless the solicitation is either in connection with an election contest under Rule 14a-11 ⁸⁴ or in opposition to an earlier solicitation, invitation for tenders, or certain other publicized activity under Rule 14a-12. ⁸⁵ Both rules permit solicitations before furnishing security holders with a written proxy statement, so long as: (i) no form of proxy (i.e., proxy card) is furnished until a written proxy statement is furnished; (ii) the identity of the participants in the solicitation and a description of their interests are included in any communication published, sent, or given to security holders; and (iii) a written proxy statement is provided to security holders at the earliest practicable date. The rules apply to both oral and written solicitations. ⁸⁶ Written soliciting material must be filed with, or mailed for filing to, the Commission no later than the date the material is first published, sent, or given to security holders. ⁸⁷

Despite the 1992 amendments, some have contended that the current rules may continue to unnecessarily restrict communications among security holders and/or between a company and its own security holders. Recent developments in information technology have enabled companies to engage in more frequent, direct and timely communications with their security holders about matters of particular interest. As the pace of the securities markets increases, there appears to be a greater need for some flexibility in the proxy rules to permit communications before filing and delivery of a written proxy statement. Accordingly, we propose to broaden the safe harbor in Rule 14a-12 to apply to all solicitations, not just to those involving opposed matters.

The other provisions in Rule 14a-12, including the condition that no form of proxy is furnished, the obligation to disclose participant information, and the delivery of a written proxy statement to all solicited security holders as soon as practicable, would be retained. We also would continue to require that written solicitations be filed upon first use. In addition, consistent with proposed changes to the Securities Act and tender offer rules, each communication would be required to prominently advise security holders to read the proxy statement. ⁸⁸ These requirements, together with the antifraud provisions in Rule 14a-9, appear sufficient to assure the integrity and adequacy of the information and protect against misleading solicitations. ⁸⁹

Filing of written communications upon first use also would assure consistency with the requirements we propose for extraordinary transactions under the Securities Act. We request comment, however, on whether the filing upon first use requirement should be modified if under the Securities Act we permit filing later than upon first use (i.e., when the disclosure document is filed). We also request comment on whether to retain the requirement to disclose the identity of participants and their interests if we do not adopt a corresponding requirement under the tender offer rules and the Securities Act requirements for tender offers. If we change either the filing requirement or the participant information requirement, should the change apply only to proxy statements relating to business combinations?

We proposed expanding Rule 14a-12 in 1992 to permit solicitations before filing and delivering a written proxy statement regardless of the existence of an opposing solicitation. ⁹⁰ We ultimately determined not to adopt the proposal because "the broad scope of current Rules 14a-11(d) (now Rule 14a-11) and 14a-12 reach virtually all contested and responsive solicitations." ⁹¹ We further noted that the need to extend Rule 14a-12 to all solicitations was mitigated by the proposal to allow registrants and other persons planning a solicitation to begin their solicitation on the basis of a publicly filed preliminary proxy statement. ⁹² However, given the pressures both regulatory and market-induced to disclose deal-related information immediately upon announcement, we now believe that the current rules may overly restrict communications among security holders and/or between a company and its own security holders. Based upon our experience with the 1992 liberalization of communications, we do not believe that further easing of restrictions would lead to abuse.

Under the proposed expansion of Rule 14a-12, management could engage more freely in communications regarding a prospective or pending acquisition. However, this proposal is not limited to takeover-related matters. For example, management could rely on the proposed safe harbor to obtain security holders views in connection with certain corporate governance items that may require a security holder vote, such as the adoption or amendment of executive and director compensation plans, an increase in the number of authorized shares that may be issued, and the adoption or redemption of a security holder rights plan. We believe that managements ability to disseminate information on a more timely basis may result in more informed voting decisions by security holders and may increase the amount and quality of information generally available to all security holders.

We request comment as to whether there are certain instances when the requirement to deliver a proxy statement as soon as practicable would be too burdensome. In addition, are there any circumstances under which management or other parties may want to communicate that should not trigger the obligation to deliver a proxy statement at the earliest practicable date? For example, if a merger transaction was only under consideration by management, and no formal agreements were entered into, should it be necessary to send a proxy statement to security holders if the transaction does not materialize? As another example, management might find the proposed safe harbor useful to "road-test" an executive compensation proposal with large security holders, but not present the matter for a security holder vote if the reaction was negative. What impact would this have on smaller security holders?

We invite comments on whether the expansion of Rule 14a-12 to non-contested situations would have the intended effect of permitting management to communicate more freely with security holders and whether this would enhance the timing or quality of information given to security holders. One effect of the proposed expansion of Rule 14a-12 may be to eliminate any need for Rule 14a-11. ⁹³ Would it be appropriate to eliminate Rule 14a-11 if we expanded Rule 14a-12 to cover all matters, whether or not they are contested?

As discussed above, one "check" on any conditioning effect that free communications might have on security holders is the fact that security holders will receive a mandated disclosure document in extraordinary transactions before making their tender or voting decision. In a tender offer, there is a mandated minimum 20-business day period between the time the disclosure document is disseminated and the expiration of the offer. As a general rule, however, there is no federally mandated time period for disseminating a proxy statement. ⁹⁴ Many state laws, however, dictate that there be at least 10 and no more than 60 days between notice of the meeting and the meeting date. Generally, the state law notice and the federally mandated proxy statement are mailed together to security holders. During this period, security holders are able to assess the relevance and credibility of all written communications in light of the mandated disclosure. In some cases, state law permits a period so short that security holders may not have enough time to consider the information.

We request comment as to whether there should be a federally mandated solicitation period for mergers and similar transactions, given the free communications proposals and the need to digest the mandated disclosure in light of earlier communications. This period also would assure that record holders and beneficial owners alike would have enough time to consider the proxy materials. If a federally mandated solicitation period is adopted, how long should it be? Would 20 business days make sense so that it is harmonized with the mandated tender offer time period? Should it be 20 calendar days to conform with the information statement requirement, or should the information statement requirement be changed to 20 business days? Should the solicitation period be required only as a condition of the free communications safe harbor? Should it apply only to votes on business combinations?

We are particularly concerned about giving security holders time to consider proxy material in the case of street name holders beneficial owners of securities who obtain their proxy material through banks, broker-dealers, or other nominees holding record title to the securities. Do street name holders receive correcting or updating material in a timely fashion? Would modifying the security holder communications provisions of the proxy rules to permit direct delivery of proxy statements and other soliciting materials to non-objecting beneficial owners facilitate more timely and fully informed voting decisions? ⁹⁵

b. "Test the Waters" Proxy Solicitations

We also are considering a broader exemption from the proxy rules that would not require delivery of a proxy statement after communicating with security holders. The only condition would be that no proxy card or other authorization be requested or sent. In effect, such a rule would permit both written and oral "test the waters" proxy solicitations. ⁹⁶ Such an exemption would be crafted as part of Rule 14a-2, ⁹⁷ which sets forth a number of solicitations that are exempt from the proxy statement disclosure and dissemination requirements. Would a broad exemption remove the need for any of the current exemptions in Rule 14a-2? ⁹⁸ Would it remove the need for Rules 14a-11 and 14a-12? Would the same purpose be accomplished by amending Rule 14a-2(b)(1) to eliminate the exceptions, so the rule could be used by the company itself and interested parties? ⁹⁹ Should the "test the waters" communication be required to include any minimal information?

Unlike Rule 14a-12, the "test the waters" proxy rule would not require that written communications be filed with the Commission. ¹⁰⁰ However, we are considering requiring communications to be filed in order to harmonize with the treatment of written communications under the Securities Act and the Williams Act. Commenters should address whether the need to file material would reduce the usefulness of the "test the waters" proxy exemption. Would a filing requirement provide benefits to security holders by assuring that information is available on a widespread basis? If we do require filing of material under this exemption, should it be a "notice" filing only as opposed to requiring the communication itself to be filed? Should the filing requirement be limited to the business combination context? Or should the "test the waters" proxy solicitation be unavailable for business combination communications, leaving Rule 14a-12 as the sole safe harbor for these communications?

We request comment on whether a "test the waters" proxy rule would benefit security holders. This change would be consistent with the general theme of easing restrictions on communications under the Securities Act as expressed in this release and the Securities Act Reform Release. On the other hand, does the current requirement to follow up communications with delivery of a proxy statement impose a beneficial discipline on the solicitation process by discouraging premature insupportable communications? Should we require a "cooling-off period" (e.g., 20 or 30 days) between the "test the waters" solicitation and a request for a proxy card? Commenters should advise whether they think the "test the waters" rule would work, not just in the context of takeover-related matters, but also in the context of any corporate governance matters or other topics that are likely to be the subject of a proxy solicitation.

c. Eliminate Confidential Treatment of Merger Proxies

Currently, preliminary proxy material relating to certain reclassifications and business combinations, other than going-private or roll-up transactions, ¹⁰¹ may be filed confidentially with the Commission. ¹⁰² In that case the proxy material is not filed on EDGAR and is not available for public inspection. ¹⁰³ Due to the changing realities of todays markets, and the expressed need by many companies for an expanded safe harbor permitting early disclosure of information before a registration statement is on file, we propose to eliminate confidential treatment for merger proxy statements. ¹⁰⁴ Often companies that invoke confidential treatment for their merger proxy statements already have made extensive pre-filing disclosure of information beyond what is permitted by current Securities Act Rule 145(b) and the proxy rules. It is unclear to us why a company that broadcasts extensive deal-related information to the securities markets soon after a definitive merger agreement is executed needs confidential treatment for the same information contained in its proxy materials. In some instances, the information disclosed to the market is more extensive than the information disclosed in the preliminary proxy statement filed confidentially.

We previously proposed to eliminate confidential treatment for all preliminary proxy statements, including those relating to mergers, in 1992. ¹⁰⁵ The Commission ultimately decided to preserve confidential treatment for merger transactions in light of commenters concerns that the inability to file documents relating to business combinations or acquisitions on a non-public basis would cause premature disclosure of information. The concern articulated was that merger negotiations might not be ripe at the time of filing and public disclosure "would adversely affect the timing of such transactions and thereby their costs, since they could not obtain Commission review of the offering documents while the participants were preparing for the public announcement of the transaction." ¹⁰⁶ In light of the current practice of disclosing extensive deal-related information before the filing of a proxy statement, we do not believe that preliminary merger proxy materials continue to merit confidential treatment.

The elimination of confidential treatment of merger proxy statements would harmonize the treatment of preliminary proxy statements with preliminary prospectuses and tender offer materials, which are publicly available when filed. In addition, security holders would obtain faster access to information concerning extraordinary transactions. Without confidential treatment, security holders also would have more time to consider and respond to proposed mergers and acquisitions.

We request comment on whether confidential treatment should be retained under any limited circumstances. Should confidential treatment be available if the parties to the merger transaction do not rely on the new safe harbors permitting increased communications?

Some have expressed the view that confidential treatment makes registrants more comfortable with amending their materials to comply with staff comments, as the marketplace is not aware of the nature of the changes. If a proxy statement is filed publicly, the trading markets may act on the information disclosed and there may be liability concerns if the information disclosed is revised. Do commenters believe that these concerns outweigh the benefits of public filing? If so, how are merger proxies different from exchange offers and other types of filings that are not accorded confidential treatment?

We note that when the wrap-around procedure is used, registration statement exhibits are filed on a delayed basis. Would registrants be put at a significant disadvantage if they were required to file all exhibits when they filed their registration statements publicly, or would they continue the practice of filing exhibits when available? Should we continue to permit the filing of a proxy statement before the wrap-around registration statement, even though the proxy statement would be public?

d. Timing of Filings

In addition to the substantive changes to the proxy rules proposed above, we propose procedural amendments to the proxy filing requirements. Rule 14a-6(b) requires definitive material to be "filed with, or mailed for filing to, the Commission not later than the date such material is first sent or given to any security holders." Several other proxy and information statement filing rules contain similar language. ¹⁰⁷ The option to mail proxy materials to the Commission is no longer relevant because companies that are subject to the proxy rules are now required to file electronically. ¹⁰⁸ We propose to update these filing rules to eliminate the "mailed for filing" language in the rules. Filers would be required to file definitive material with the Commission no later than the date they send or give proxy materials to security holders.

We believe that making definitive material available to security holders, the market and the staff as promptly as possible is important. EDGAR, and other sources of electronic filings, including the Internet, have become essential in supplying the investment community with public information. Any discrepancy between the time information is first disseminated and the time it is filed with the Commission could place those who rely on our filings for public information at a disadvantage.

Filers (particularly those in time zones later than the Commissions) have argued that filing proxy materials on the same day is a hardship. It is not clear why this is the case, in view of the treatment of tender offer materials. Such materials must be filed "as soon as practicable" on the date the tender offer commences, and filers comply with that requirement without any apparent difficulty. ¹⁰⁹ While the proposed electronic filing rule acknowledges that some information may be released when it is not possible to file it with the Commission, we believe that material distributed during Commission business hours should be available at that time to the public through our filing system. ¹¹⁰

In connection with this change to the proxy filing rules, we propose to update our electronic filing rules to provide guidance to filers as to when to file material that is disseminated outside normal Commission business hours. The issue of when to file this type of material arises most often in the context of proxy soliciting material, although it may, on occasion, arise for tender offer filings. Our electronic filing rule already requires material that may be "mailed for filing" to be filed on or before publication or distribution; in the event of publication or distribution on a non-business day, the rule permits filing "as soon as practicable on the next business day." ¹¹¹ We propose to modify this rule to eliminate "mailed for filing" and refer to material that is required to be filed on the same day it is disseminated. The revised rule would continue to permit filing as soon as practicable on the next business day if the material was disseminated on a non-business day, but would make it clear that dissemination after the Commissions business hours is treated the same as dissemination on a non-business day. The revised rule would apply to tender offer filings as well as proxy filings.

We solicit comment on the nature and extent of problems encountered with the timing requirement for filing proxy and tender offer material. Commenters should consider whether the proposed rule provides adequate guidance to filers disseminating materials outside of our business hours. Alternatively, the rule could be amended to require filing within one business day of dissemination instead of "as soon as practicable on the next business day," or by a certain time on the next business day (e.g., 9:00 a.m. or 12:00 noon). We believe security holders and the public in general should be able to access public filings at the earliest possible time. Currently, filings are accepted on EDGAR as late as 10:00 p.m., although filings submitted after 5:30 p.m. receive a filing date of the next business day and are not available to the public until the next business day. We could amend Rule 13(d) of Regulation S-T to require submission of proxy material by 10:00 p.m. on the same day it is disseminated to security holders, unless dissemination occurs on a day that the Commission is not open.

7. Free Communications Under the Tender Offer Rules

A bidders ability to communicate with security holders and the markets in general regarding a proposed offer is limited by the concept of "commencement" in the tender offer rules. A bidder is required to file and disseminate information regarding its offer upon "commencement." Commencement is the date an offer starts for purposes of the tender offer rules. A bidders public announcement of certain minimal information about an offer may trigger commencement and can result in certain filing and disclosure obligations for the bidder, depending upon whether cash or stock is offered. ¹¹² Similarly, the target cannot make a recommendation regarding the offer without triggering filing and disclosure obligations.

a. Disclosure Triggering Commencement

Currently, a third-party cash tender offer is deemed to commence on the date the bidder discloses certain information ("announcement"), ¹¹³ unless the bidder does one of two things within five business days of the announcement date. If the bidder files a tender offer statement with the Commission, and disseminates specified information to security holders, the offer is deemed to commence on the date of filing and dissemination, not on the date of announcement. ¹¹⁴ If the bidder makes a subsequent public announcement that it has determined not to proceed with the offer, the initial announcement will not be deemed to commence an offer. ¹¹⁵ If the bidder neither complies with the tender offer rules nor withdraws the offer, the offer is deemed to commence upon public announcement, resulting in filing and disclosure violations. We refer to this requirement as the "five business day rule."

Stock tender offers are not subject to the same five business day rule. Instead, stock offers are deemed to commence when a final prospectus is first disseminated to security holders. ¹¹⁶ A bidder can publicly announce its intention to make a stock offer, so long as the announcement contains only the limited information permitted by the Securities Act.¹¹⁷ This announcement will not constitute commencement of the offer if the bidder promptly files a registration statement relating to the securities offered. ¹¹⁸

In 1979, we recognized the "unsettling and disruptive effects" that cash tender offers can have on the trading markets when we proposed the five business day rule. ¹¹⁹ In adopting the rule, we noted it was common practice for bidders to publicly announce the material terms of their cash offers in advance of formal commencement. ¹²⁰ We observed that pre-commencement public announcements regarding cash tender offers can trigger market mechanisms, such as arbitrageur activity, and cause security holders to make investment decisions with respect to a tender offer on the basis of incomplete information. The five business day rule was designed to prevent bidders from publicly announcing the material terms of an offer before formally commencing the offer.

Based on our experience with tender offers and the factors influencing the treatment of communications discussed earlier, we now believe that the communications restrictions imposed on bidders in both cash and stock tender offers may unnecessarily restrict communications with security holders. We believe that the reasoning behind easing restrictions on communications for other types of business combinations applies equally to tender offers. Unrestricted communications should result in the availability of more information to security holders on a timely basis. As a result, security holders should have a greater opportunity to inform themselves and assess the specific terms of a proposed offer. In light of the fact that tender offers generally remain open for a short period of time, usually 20 business days, advance notice of an offer should benefit security holders.

In an effort to increase bidders ability to communicate with security holders, we propose to amend the provisions relating to commencement. Specifically, we propose to eliminate the obligation to commence or withdraw a cash offer within five business days of making a public announcement. We also propose to eliminate the requirement to promptly file a registration statement after public announcement of a stock offer. The revised rule would permit bidders to engage in free communications before commencement. ¹²¹ The communications permitted under the safe harbor, however, would not include a transmittal form or instructions on how to tender into the offer.

In place of the five business day rule and the requirement to promptly file a registration statement, we propose to require bidders to file and disseminate the required information when tenders are first requested. The Williams Act and the tender offer rules were designed to assure that there is adequate information available to security holders so that they can make an informed investment decision before tendering into an offer. The public announcement of an offer should not trigger the need to file or disseminate information. Instead, the focus should be on when security holders are provided the means to tender their shares into the offer. That is the time when information required by the tender offer rules must be available to security holders. ¹²²

Under the proposal, we would require bidders in both stock and cash tender offers to satisfy the filing and dissemination requirements upon first disseminating transmittal forms (the tender offer equivalent of a proxy card) or disclosing to security holders instructions on how to tender into an offer. For example, if a bidder published an advertisement that instructed security holders how to contact the bidder and receive information on tendering securities in the offer (e.g., by publishing a telephone number for security holders to call to receive more information on how to tender), then the bidder would be required to comply with the filing and dissemination requirements at that time. The 20 business day period would begin to run at this time.

The five business day rule and the requirement to file a registration statement promptly may serve as a protection against bidders making tender offer announcements without the intent or ability to follow through. In order to prevent the development of such practices if these requirements are eliminated, we propose a new rule to make it clear that such conduct would be prohibited as fraudulent under the tender offer rules. ¹²³ The rule would prohibit a person from announcing a tender offer: without the intent to commence and complete the offer; with the intent to manipulate the price of either the bidders or the targets securities; or without a reasonable belief that the person will have the means to purchase the securities sought. Are there other provisions that should be included to prevent inappropriate use of the free communications safe harbor, while not deterring legitimate communications?

We solicit comment on whether the five business day rule or the requirement to file a registration statement promptly provide investors, bidders, targets or security holders with any benefits that the proposed rule would not provide. Do these requirements cause bidders to provide security holders with needed information sooner?

We also ask whether the proposed rules increase the risk that investors will make investment decisions based solely on a bidders pre-commencement communications without adequate information. Security holders might sell into the market based on a bidders pre-filing communications. This risk, however, exists today under the current rules, although for a more limited time. Should the tender offer rules focus on this risk? Is the risk of market activity, based on incomplete information, greater for cash offers than it is for stock offers? If so, is it more important to maintain the five business day rule than to harmonize cash tender offers with other types of business combinations? Would the proposed obligation to file and disseminate information when security holders are first solicited to tender using a transmittal form adequately protect security holders? Is there less of a need to permit bidders to provide information to the marketplace before filing than there is for other types of business communications because cash tender offer material may be prepared and disseminated so quickly?

Currently, bidders are required to hand deliver a copy of the tender offer statement and additional tender offer materials to the target company and any other bidder for the same class of securities. ¹²⁴ In addition, we propose to require delivery to the same parties of the first written communication a bidder makes that sets forth its identity, that of the target company, the amount and class of securities sought, and the price or range of prices offered. ¹²⁵ Is this needed, or would the fact that the communication must be filed with the Commission provide adequate notice to the target company and any other bidders?

Each communication made in reliance on the safe harbor would be required to prominently advise security holders to read the complete tender offer material, consistent with the Securities Act and proxy rule proposals. ¹²⁶ Should we require any additional information in these communications? For example, should a bidder be required to disclose information such as its identity, the targets identity, the form and amount of consideration offered, any conditions to the offer, and the bidders interest(s) in the target, including security ownership? This would be similar to the current requirement in Rule 14a-12 that specified information be contained in any communications made before the filing of a proxy statement.

Currently, the tender offer rules require specified information to be included in any communications made after the bidder has commenced the offer and disseminated the complete tender offer disclosure document. These "additional tender offer materials" must include basic information about the identity of the bidder and subject company, the terms and the expiration date.¹²⁷ We propose to retain this requirement. Does the requirement serve a useful purpose in preventing confusion, particularly where there are competing offers? Would it be more important to require specific information in pre-commencement communications than in post-commencement additional material?

We also propose to revise the rules to permit targets the same freedom to make pre-commencement communications as bidders. A target (or other person who makes any solicitation or recommendation to security holders regarding the offer) must provide specified information to security holders and file a Schedule 14D-9 with the Commission on the same date that it makes a recommendation regarding the offer. ¹²⁸ This obligation is triggered by the targets communications even if the bidder has not yet commenced the tender offer. We propose to amend the rule so this obligation is not triggered by communications made by the target before the bidder has filed its tender offer statement and commenced the offer. Targets would be required to file pre-commencement communications on first use. This would put the bidder and target in an equal position to engage in free pre-commencement communications. We solicit comment on whether there is any reason to treat bidders and targets differently. We also ask whether the targets communications should be required to contain a statement advising security holders to read the complete recommendation when it is available.

b. Methods to Disseminate an Offer

The tender offer rules currently provide for several non-exclusive methods to "commence" an offer. If one or more of the specified methods are followed, ¹²⁹ the tender offer will be deemed "published, sent or given to security holders" for purposes of Section 14(d)(1) of the Exchange Act. The methods of disseminating information that will commence an offer include: (i) long form publication; ¹³⁰ (ii) summary advertisement; ¹³¹ (iii) summary advertisement or long form publication using stockholder lists and security position listings; ¹³² and (iv) if securities are to be offered as consideration, publishing, sending, or giving copies of a final prospectus to security holders. ¹³³ While a tender offer can be commenced in other ways, ¹³⁴ the methods listed above are generally regarded as safe harbors and will give the bidder comfort that the offer has commenced under the tender offer rules. Commencement is important because if an offer is not deemed to commence, the required 20 business day period will not begin to run. ¹³⁵

Long form publication requires the bidder to publish extensive information regarding the tender offer in a newspaper. ¹³⁶ Before we adopted the summary advertisement method in 1979, ¹³⁷ long form publication was the accepted means of dissemination. Due to escalating costs and scheduling problems associated with long form publication, summary publication has replaced long form publication as the common means of disseminating a tender offer. Given that long form publication is not viewed as cost-effective and is rarely used by bidders, we propose to eliminate it as a means of disseminating information about a tender offer. ¹³⁸ We solicit comment, however, on whether the method should be retained, perhaps in connection with publication on the Internet in combination with other methods of dissemination.

Under the summary publication method, a bidder must publish an advertisement in a newspaper and furnish its tender offer materials with reasonable promptness to any security holder who requests a copy. The advertisement must contain, and is limited to, certain specified information. ¹³⁹ Bidders are not permitted to include a transmittal form with the summary advertisement. ¹⁴⁰ Security holders therefore must request and receive complete information from the bidder before they can tender into the offer.

Summary advertisements alone usually are not sufficient to prompt a large number of security holders to request a copy of the tender offer materials. Therefore, bidders generally will supplement their solicitation of tenders with a request for a stockholder list under Rule 14d-5, in addition to publishing a summary advertisement. Under this rule bidders can request a stockholder list from the target. The target has the option of either mailing the offering materials to security holders at the bidders expense, or providing the bidder with a stockholder list of record holders prepared as of the most recent practicable date. ¹⁴¹

We solicit comment on whether we should eliminate dissemination by summary advertisement alone (without the use of stockholder lists) to make the cash tender offer regulations more comparable to other business combination methods. Should the stockholder list requirement apply to amendments disclosing material changes as well as to initial tender offer material? We note that delivery is required if registered securities are offered, given that prospectuses must be delivered as required by the Securities Act. Similarly, delivery of a disclosure document would be necessary if security holder approval was solicited under the proxy rules. ¹⁴² While we note that bidders typically use stockholder lists, we solicit comment on whether there are circumstances when the use of stockholder lists is impracticable.

In addition, we solicit comment on whether to retain the current requirement that bidders using stockholder lists also publish summary advertisements. The summary advertisement serves as an additional means of publicizing tender offer information while it is in the process of being mailed to security holders. This may be particularly useful in the short time frame of a cash tender offer.

Finally, we request commenters views on whether we should permit means of disseminating tender offer material other than those described. The increasing use of electronic media, particularly the Internet, provides an avenue for widespread access to information. On the other hand, many security holders rely on more traditional sources of information, such as newspapers and the mail. We do not want to put these security holders at a disadvantage in obtaining tender offer information. Therefore, we are not proposing that electronic media be permitted as a sole means of dissemination. We are, however, interested in comment as to how electronic media are currently used in the tender offer area and whether there are electronic sources of information that are as commonly available and widely followed as the newspapers of general circulation used for summary advertisements. ¹⁴³

C. Permit Exchange Offers to Commence On Filing

1. Early Commencement

The Commission first adopted the requirement for an effective registration statement before commencing an exchange offer in 1979. ¹⁴⁴ In proposing the requirement, we noted that we intended to codify "the current practice of commencing the bidder's offer when its registration statement under the Securities Act becomes effective." ¹⁴⁵ In 1983, a Commission Advisory Committee ¹⁴⁶ noted the regulatory disincentives to offering securities as consideration ¹⁴⁷ in a tender offer and recommended that exchange offers be permitted to commence as soon as the registration statement is filed. ¹⁴⁸

In order to put cash and stock tender offers on a more level playing field, we propose to permit "early commencement" of third-party exchange offers. Currently, stock tender offers commence on the date the related registration statement becomes effective. Under todays proposal, exchange offers could commence upon the filing of a registration statement, or on a later date selected by the bidder. ¹⁴⁹ As a result, the regulatory bias against stock offers would be reduced. We request comment as to whether the current regulatory scheme is a significant factor in deciding how offers are structured. Is it important to harmonize the regulatory treatment of cash and stock offers? If so, does the proposal accomplish this goal while continuing to protect investors?

Under the proposal, a bidder that wished to "commence" an exchange offer by requesting tenders would have to satisfy several requirements. First, the bidder would have to file a registration statement relating to the securities offered. The preliminary prospectus would need to include all information, including pricing information, necessary to allow security holders to make an informed investment decision. Information could not be omitted under Rule 430 or Rule 430A of the Securities Act. ¹⁵⁰ Second, the prospectus would have to be disseminated to all security holders. Third, a tender offer statement would have to be filed with the Commission. The filing of a registration statement alone would not suffice. The bidder would have to file both a registration statement and a tender offer statement ¹⁵¹ and furnish a preliminary or final prospectus to security holders. ¹⁵² Security holders would have the right to withdraw shares tendered at any time until they were purchased, and bidders could not purchase shares until after the registration statement was effective. ¹⁵³

The "early commencement" proposal is limited to third-party exchange offers because the need to put cash and stock offers on a more level playing field appears to arise most often in that context. We ask for comment, however, on whether issuer exchange offers present the same timing and competitive concerns. Should the proposal be expanded to issuer exchange offers?

Going-private and roll-up transactions involving exchange offers would not be permitted to commence before the effectiveness of a related registration statement. These types of transactions often involve material disclosure issues. We continue to believe that the staff should have a full opportunity to review and comment upon the documents filed in connection with these transactions before commencement of an exchange offer in order to ensure that the rules are complied with and the appropriate level of disclosure is made to security holders.

Under the proposal, early commencement would be at the option of the bidder. The filing of a tender offer statement would serve as notice to the Commission and the public that the offer commenced and a prospectus was disseminated to security holders. A bidder could commence upon filing the registration statement, or wait for staff comments or effectiveness before actually commencing its offer.

We request comment on whether a bidder should be required to commence its offer as soon as it files a registration statement. Alternatively, should bidders be free, as the rule proposes, to determine when a stock offer commences? If we do not require bidders to commence on filing the registration statement, should there be an outside date on which the exchange offer must commence (e.g., no later than effectiveness of the related registration statement or no later than five or ten business days after effectiveness)?

The early commencement proposal is intended, in part, to provide bidders with an incentive to disseminate their offering materials broadly to all security holders at the earliest practicable date. The proposal would not prohibit bidders from making selective communications in addition to or instead of using the early commencement procedure to disseminate material to all security holders. When combined with the proposals above regarding communications, however, the availability of early commencement should encourage full and fair disclosure to all security holders. We request comment as to whether bidders would continue to communicate with large institutional investors to the exclusion of small retail investors. Is it necessary to require bidders to disseminate a prospectus to all security holders as soon as it is filed with the Commission? If we require delivery, however, the preliminary prospectus might include certain information that is not complete or accurate. In light of the inherent limitations on the information available to bidders that could be included in a preliminary prospectus, would mandatory dissemination to all security holders benefit or harm small retail investors?

The ability to commence upon filing may not be sufficient to level the playing field if bidders are not assured of having an effective registration statement within a reasonable period of time. While cash offers can expire after a minimum of 20 business days, stock offers could not expire under the proposal until the related registration statement became effective. Therefore, we solicit comment on whether expedited staff review is necessary to effectively harmonize the regulatory treatment of cash and stock tender offers. If so, how short would the Commission staffs review and comment period need to be in order to assure timely completion of a stock tender offer? Would it be helpful if the staff committed to an expedited review of stock tender offers whenever a competing cash tender offer emerges? Would it be necessary to provide for some form of accelerated effectiveness for stock offers to fully balance the treatment of cash and stock offers?

One way to achieve this balance would be to allow or require some or all exchange offers registered on Form C and Form SB-3 ¹⁵⁴ to become effective on filing, ¹⁵⁵ or allow the bidder to specify the date after filing on which the registration statement would become effective. ¹⁵⁶ This approach would provide bidders with greater certainty as to when their offer could close and shares could be accepted in the offer. "Early commencement" would then be unnecessary. This approach would allow bidders to freely decide between offering cash or stock without concern for regulatory delay. Of course, the staff would not have an opportunity to review the information before it is disseminated to security holders, but could review it after effectiveness just as it now reviews cash tender offer materials after they are mailed to security holders. We would not extend this approach to going-private or roll-up transactions. If this approach were permitted, should it be limited to third-party tender offers or also extend to issuer tender offers? Do the same timing concerns apply to mergers? If so, and this approach is adopted, should it apply to mergers as well? Should automatic effectiveness be limited to bidders entitled to use Form B?

We also are considering whether to harmonize the proxy rules with the tender offer rules by providing a proxy analogue to the "early commencement" proposal. If we did this, we would permit proxy cards in connection with mergers and similar business combinations to be sent with a preliminary proxy statement/prospectus, rather than requiring that they accompany only a definitive proxy statement/final prospectus. Proxies may be revoked at any time before the vote, just as tenders may be withdrawn before the offer expires. The vote could not take place until after the proxy statement was definitive or the registration statement was effective, and security holders would have to be given information about material changes in sufficient time to act on it, as discussed below in connection with exchange offers. Would this procedure be useful in mergers? Is the merger situation different from the tender offer situation; would there be greater risk that security holders would vote on the basis of premature or incomplete information and not receive updating or corrective information in a timely fashion? In particular, would street name holders receive this information in sufficient time to make an informed voting decision?

We have considered how the "early commencement" proposal interacts with our rules regarding stock purchases outside a tender offer. Regulation M ¹⁵⁷ prohibits purchases of the bidders securities during an exchange offers restricted period, while Rule 10b-13 ¹⁵⁸ prohibits purchases of the targets securities once the offer is publicly announced. The Regulation M restricted period begins as of the date that the exchange offer is commenced, i.e., when the bidder has first published, sent or given security holders the means to tender. In contrast, the restrictions of Rule 10b-13 start as of the time the offer is first publicly announced to security holders, which can be before the offer commences. We believe these rules would operate appropriately in the "early commencement" context, but solicit commenters views.

2. Dissemination of a Supplement and Extension of the Offer

The Division of Corporation Finance staff decides whether to review a registration statement after it is filed, along with a related tender offer statement, based upon its selective review criteria. Under the "early commencement" proposal, the bidder already may have disseminated the combined prospectus/tender offer before staff comments are received. If the staff had material comments, the bidder would be required to file and disseminate a prospectus supplement, or possibly a post-effective amendment to the registration statement.

We propose to require bidders using "early commencement" to disseminate supplements to disclose any material changes, whether as a result of staff review, or due to any other material changes in the information previously disclosed. If a supplement contained material information, the exchange offer would need to remain open for a minimum period of time after a supplement was sent, as discussed below. The proposed rule would require a bidder to provide sufficient time for security holders to reconsider their investment decision (i.e., by withdrawing previously tendered shares or tendering shares not yet tendered) based upon the additional information.

The tender offer rules do not currently establish a specific minimum time period with respect to the disclosure and dissemination of material changes, except for those relating to price or the amount of securities sought. ¹⁵⁹ In an interpretive release relating to the tender offer rules, however, the Commission provided the following guidelines:

As a general rule, the Commission is of the view that to allow dissemination to shareholders in a manner reasonably designed to inform (them) of such change (17 CFR 240.14d-4(c)), the offer should remain open for a minimum of five business days from the date that the material change is first published, sent or given to security holders. If material changes are made with respect to information that approaches the significance of price and share levels, a minimum period of ten business days may be required to allow for adequate dissemination and investor response. Moreover, the five business day period may not be sufficient where revised or additional materials are required because disclosure disseminated to security holders is found to be materially deficient. Similarly, a particular form of dissemination may be required. For example, amended disclosure material designed to correct materially deficient material previously delivered to security holders would have to be delivered rather than disseminated by publication. ¹⁶⁰

Under the "early commencement" proposal, if the bidder had to send a supplement containing material changes either before or after effectiveness of the registration statement, the offer would need to remain open for at least a specified minimum period. ¹⁶¹ The original expiration date would have to be extended if necessary. The offer would need to remain open at least: