Filers would no longer have to answer each item of the schedule with a statement that the information is incorporated by reference from specified pages or sections of the disclosure document. ¹⁷⁷ It would be sufficient to have a general statement incorporating the required information from the disclosure document into the schedule. The schedule, as filed, would consist primarily of a cover page, exhibits and signatures. The item numbers from the schedule would be included only to provide information not required to be in the disclosure document, such as negative or "not applicable" responses or information that goes beyond what is summarized in the disclosure document. This change is designed to make the schedules easier to prepare. It would still be necessary, of course, for filers to provide all the required information. ¹⁷⁸

The rest of this release discusses the most significant changes to the rules and schedules, many of which are incorporated into proposed Regulation M-A. In addition, we propose a number of less substantive changes to harmonize and update the requirements. For the complete text of all the technical, clarifying and conforming changes, including amendments to the tender offer and going-private rules, please see the text of the proposed rules at Part VII below. We request comment on these proposals as well.

2. Streamline Disclosure Requirements and Improve Disclosure

We believe that, in many cases, the current disclosure requirements can be simplified and clarified for filing persons. We also believe that disclosure to security holders can be improved. We discuss below several proposed amendments to the current rules and regulations that should help filing persons comply with their disclosure obligations and enhance security holders understanding of tender offers and mergers.

a. "Plain English" Summary Term Sheet

The disclosure in tender offer and merger proxy statements often is lengthy, difficult to understand and uninviting to the reader. In many instances important information is buried in boilerplate. Security holders often must make a voting or investment decision within a relatively short period of time. With the increasing complexity of the transactions, filing persons should provide security holders with clear, concise and understandable disclosure as required by the Commissions rules. ¹⁷⁹ Disclosure is not effective from an investors perspective unless it is understandable, complete and timely. ¹⁸⁰

We propose to require that issuer and third-party cash tender offer statements, cash merger proxy statements, and going-private disclosure documents begin with a short "plain English" summary term sheet highlighting the most important features of the transaction. ¹⁸¹ The summary term sheet would be required to begin on the first or second page of the disclosure document. Each item covered in the summary term sheet would be presented in bullet point format with a cross-reference to a more detailed discussion found elsewhere in the tender offer, going-private or proxy materials.

In preparing a summary term sheet, filing persons would need to determine how best to highlight the most significant aspects of the transaction in a clear, concise and understandable manner. As noted by the Task Force, the summary term sheet should be used to answer the most common or frequently asked questions. In a tender offer, for example, the bidder should answer questions such as the following:

• Who is offering to buy my securities?

   

• What are the classes and amounts of securities sought in the offer?

   

• How much is the bidder offering to pay and what is the form of payment?

   

• Does the bidder have the financial resources to make payment?

   

• Is the bidders financial condition relevant to my decision on whether to tender in the offer?

   

• How long do I have to decide whether to tender in the offer?

   

• Can the offer be extended, and under what circumstances?

   

• How will I be notified if the offer is extended?

   

• What are the most significant conditions to the offer?

   

• How do I tender my shares?

   

• Until what time can I withdraw previously tendered shares?

   

• How do I withdraw previously tendered shares?

   

• If the transaction is consensual, what does my board of directors think of the offer?

   

• Is this the first step in a going-private transaction?

   

• Will the tender offer be followed by a merger if all the companys shares are not tendered in the offer?

   

• If I decide not to tender, how will the offer affect my shares?

   

• What is the market value (if traded) or the net asset or liquidation value (if not traded) of my shares as of a recent date?

   

• Who can I talk to if I have questions about the tender offer?

In the case of a merger proxy statement, the summary term sheet should contain, among other things, a brief outline of the matters proposed, the material terms of the proposals including the parties to the proposed transaction, the consideration to be received by security holders, the boards recommendation on how to vote (if any), the effect of a vote for and against each proposal including the effects of not voting, the procedures for voting and changing or revoking a vote, and the existence of appraisal rights.

In going-private transactions, the summary term sheet would require a brief summary of the most material terms and consequences of the transaction. The summary term sheet should address, among other things, conflicts of interest, whether a fairness opinion was received, the identity, role and relationship of any affiliates involved in the transaction, the filing persons belief as to the fairness of the transaction to security holders, and any recommendations made to security holders regarding the transaction.

The proposed summary term sheet requirement would not specify the items to be addressed. Instead, the filing person would determine the most significant facts to highlight. We solicit comment, however, on whether the item should specify information that must be addressed in most situations. The information required could be specified in a manner similar to current Instruction 1 to Item 8 of Schedule 13E-3, which specifies factors that must normally be considered in determining the fairness of a going-private transaction to unaffiliated security holders. Other than the matters set forth above, what other information would rise to the level of requiring prominent disclosure in a summary term sheet?

Mergers or tender offers that involve the registration of securities are subject to the recently adopted "plain English" disclosure rules requiring issuers to write the cover page, summary, and risk factors section of their prospectuses in plain English. ¹⁸² In addition, Forms S-4 and F-4 currently require specified information about the transaction to appear in the front of the prospectus. This would be continued in proposed Forms C and SB-3. Therefore, we do not propose to require a summary term sheet for such transactions. Would a summary term sheet specifically adapted to these forms be useful?

b. Revise Item 14 of Schedule 14A to Clarify Requirements and Harmonize Cash Merger with Cash Tender Offer Disclosure

To help issuers prepare disclosure documents, we propose to clarify the disclosure required in proxy statements. Item 14 of Schedule 14A is triggered when a vote or consent is solicited on any of the following matters: (i) a merger; (ii) a consolidation; (iii) the acquisition of assets, a business or securities; (v) the sale or transfer of all or substantially all the assets of the registrant; (vi) a liquidation; or (vii) a dissolution. The Item calls for information about the transaction, as well as business and financial information about the companies involved. Item 14 information is similar to the information that would be required in a Form S-4 registration statement if registered securities were being offered.

We propose to revise this Item to make it easier to understand and to adapt the disclosure scheme to Form A and B companies instead of Forms S-1, S-2 and S-3 companies. Instead of setting forth the detailed requirements for information about the acquired and acquiring companies, Item 14 would simply refer to the applicable requirements in Forms C and SB-3. ¹⁸³

The revised Item would modify financial statement requirements in three principal respects. First, we propose to clarify that financial statements and other information about the acquiror in a cash merger are necessary only if material to the voting security holders evaluation of the transaction. ¹⁸⁴ Just as for financial statements of the bidder in a cash tender offer, discussed below, information about the acquiror in a merger generally is not needed if the target security holders are receiving cash and the acquiror has demonstrated the financial ability to satisfy the terms of the offer. ¹⁸⁵

Second, we propose to reduce the financial statements required for the acquiror under Item 14 from three years to two, ¹⁸⁶ consistent with the proposed treatment of cash tender offers, as discussed below. ¹⁸⁷

Third, we propose to revise Item 14 with respect to when financial statements and other information about the target are required. Specifically, we propose to eliminate the requirement to provide information about the target in a cash merger when the acquirors security holders are not voting on the transaction. ¹⁸⁸ Security holders would receive a shorter document focusing on the terms and effect of the transaction. This revision would harmonize the disclosure required in cash merger transactions with that required in all-cash, all-share tender offers. Security holders are required to make substantially the same investment decision in both transactions.

Generally, financial statements of the target and other company information are not required in all-cash, all-share tender offers, although bidders sometimes provide this information in their tender offer materials on a voluntary basis. We do not believe the proxy rules should require disclosure of target information when the same transaction, structured as a cash tender offer, would not require disclosure of this information. In both types of transaction, security holders are asked to accept cash for their entire investment in the target, and most likely have received financial information previously with respect to the company whose security they already hold.

As proposed, we also would eliminate the requirement to provide information about the target when target security holders are voting on whether to approve a merger with the consideration consisting of acquiror securities exempt from Securities Act registration. This would be consistent with the requirements of the tender offer rules when exempt securities are being offered. Of course, information about the acquiring company would be material under these circumstances.

We do not propose to eliminate the requirement to provide financial statements of the target and other company information where the acquirors security holders are voting on the transaction, since those security holders may not know anything about the target. In addition, we would continue to require target information in cash merger proxies that are going-private or roll-up transactions. We believe that target security holders have a need for current financial statements of their company if it is subject to one of these transactions.

We request comment on whether target security holders in mergers need financial statements and other information about their own company to determine whether or not to exercise their dissenters or appraisal rights under state law. Are there circumstances under which the target security holders may have difficulty obtaining financial statements of the company whose securities they hold? Of course, if the proxy rules apply to the target, the target would be a reporting company. Does the liability imposed on financial statements filed under the proxy rules provide an added degree of protection to investors? If so, should the financial statements be incorporated by reference into the proxy material? Should we require the proxy statement to contain either summary financial statements, ¹⁸⁹ or an undertaking to provide financial statements to any requesting security holder?

c. Reduce Financial Statements Required for Non-Reporting

Target Companies

If our proposal to eliminate financial statements of the target in a cash merger when the acquirors security holders are not voting is adopted, there still will be circumstances under which target financial statements are required. In particular, financial statements are required when the transaction is a stock merger or stock tender offer.

The rules currently provide special treatment when the target is not subject to the Commissions reporting requirements. We believe the existing requirements can be further relaxed under certain circumstances. In many transactions involving the acquisition of a non-reporting company, the targets financial statements are not readily available or can be obtained only at great expense. In some cases, companies have chosen to structure acquisitions so an exception from registration was available rather than obtain the financial statements needed to register the transaction. We propose to reduce the costs of preparing proxy statements and registration statements for business combinations by reducing the financial statement requirements when the target is a non-reporting company and the acquirors security holders are not voting on the transaction.

Currently, the rules require the filing person (the acquiror) to provide financial statements "that would have been required to be included in an annual report to security holders" had the non-reporting company been required to furnish an annual report that complies with Rule 14a-3(b). ¹⁹⁰ Rule 14a-3(b) requires audited balance sheets for each of the two most recent fiscal years and audited statements of income and cash flows for each of the three most recent fiscal years prepared in accordance with Regulation S-X. ¹⁹¹ We no longer believe non-reporting target companies (or their acquirors) should have to generate financial statements for three years when security holders of the non-reporting target most likely made their initial investment decision based on less extensive or different financial statements. The requirement to provide financial statements prepared in accordance with Regulation S-X going back three years can be costly and burdensome.

Under the proposal, when the acquirors security holders are not voting on the acquisition, we would require financial statements of the target prepared in conformity with Generally Accepted Accounting Principles ("GAAP") for the latest fiscal year. ¹⁹² If the non-reporting target company previously provided its security holders with GAAP financial statements for either of the two fiscal years before the latest fiscal year (or both), GAAP financial statements also would be required for those years.

As is currently the case, the item would not require audited financial statements for years before the most recent fiscal year if the non-reporting targets financial statements were not audited previously. In addition, the financial statements for the latest fiscal year would have to be audited only to the extent practicable.

We would not change the existing requirement to provide pro forma financial information required by Article 11 of Regulation S-X. In addition, we are not changing the requirement to provide audited financial statements in accordance with Rule 3-05 of Regulation S-X if a registration statement is used for registering resales to the public by any person who, with regard to the securities being re-offered, is deemed an underwriter within the meaning of Rule 145(c). Further, the proposal would not change the financial statements currently required if the acquirors security holders are voting on the transaction. ¹⁹³ It should be noted that the Securities Act Reform Release includes a proposal to require certain additional non-financial information regarding non-reporting target companies.

If the non-reporting target is a foreign company, the proposed reduction in the required financial statements would operate in the same manner as for domestic companies. If the acquirors security holders are not voting on the transaction, and the targets financial statements are prepared on the basis of a comprehensive body of accounting principles other than U.S. GAAP ("foreign GAAP"), a reconciliation to U.S. GAAP would be required unless a reconciliation is unavailable or not otherwise obtainable without unreasonable cost or expense. ¹⁹⁴

The proposed change would not affect financial statements for a non-reporting target in roll-up transactions. ¹⁹⁵ We believe that the acquirors security holders have an independent need for financial statements of any non-reporting company that would be rolled-up into their company. We request comment on whether there are any other circumstances when this reduction in the target financial statements required should not apply. For example, should this reduction apply when the acquiror is a public shell company seeking to merge with or be acquired by a private company with substantial assets?

We invite comment on whether this proposal would provide sufficient regulatory relief to filers and still assure that target security holders have sufficient information. We also solicit comment on whether, if the acquirors security holders are voting on the transaction and it is significant to the acquiror at the 50% level, audited financial statements of the target should be required. ¹⁹⁶ Currently, if the target is a non-reporting company the rules provide for special treatment by permitting Rule 14a-3(b) financial statements, as described above. ¹⁹⁷ We invite comment on whether this special treatment provides any benefit to acquirors who eventually will have to provide audited financial statements of the target in a Form 8-K or in connection with other securities offerings.

d. Registration Statement Form for Business Combinations

In the Securities Act Reform Release, we propose to replace Forms S-4 and F-4 with Form C (and Form SB-3 for small business issuers). These forms would be the only ones available for registered exchange offers, mergers and other business combinations. ¹⁹⁸ Currently, Form S-1 is available for exchange offers and Form S-2 is available for issuer exchange offers. If these forms are rescinded, issuer exchange offers would be limited to Forms C and SB-3.

As discussed in more detail in the Securities Act Reform Release, Forms C and SB-3 would require basically the same information as the current forms about the transaction, the acquiror, the company to be acquired and the combined entity. ¹⁹⁹ In that release, we propose to treat Form B issuers differently from other issuers in a number of respects. No information would be required to be delivered to investors until shortly before the investment decision; no final prospectus would be required to be delivered; and the registration statement would become effective upon filing, or upon a date designated by the filer. For the reasons discussed in Part II.B and C of this release, we do not propose the same scheme for Form C registration statements, even when the issuer and/or the target would be eligible to use Form B. Instead, our proposed approach for business combinations permits free communications, so long as security holders ultimately receive a mandated disclosure document with specified information before they make their tender or voting decision. We do, however, solicit comment on the extent to which aspects of the Form B scheme could be adopted for business combinations.

Forms S-4 and F-4 currently require that the prospectus be delivered at least 20 business days before the date of the vote or the expiration of the exchange offer when incorporation by reference is used. The purpose is to assure that security holders have time to obtain the documents incorporated by reference and review their contents. The proxy rules impose a comparable provision for cash mergers. ²⁰⁰ We propose to eliminate these requirements because Commission filings incorporated by reference are now readily available from many sources, including our Internet web site, our public reference room, and presumably from brokers and investment advisers. We ask for comment as to whether security holders would still benefit from a mandated solicitation period when incorporation by reference is used.

E. Update the Tender Offer Rules

The tender offer rules have not been revised since 1986. ²⁰¹ We are attempting to update them to correspond to the need of todays markets. We have already discussed several proposals affecting tender offers. These proposals involve expanding permissible communications, changing the timing and methods of commencement, combining tender offer schedules, integrating disclosure requirements and including a summary term sheet. In addition, as discussed below, we have several proposals to provide new tender offer procedures, revise and clarify the financial statements requirements and clarify the rules. We also solicit comment on whether the tender offer rules should include a safe harbor from liability for forward-looking information.

1. Permit Securities to be Tendered During a "Subsequent Offering

Period" without Withdrawal Rights

We believe that there may be times when bidders should be able to accept shares in a tender offer after the tender offer is completed. ²⁰² We propose to permit security holders to tender securities during a limited time after the initial offer, including all extensions, is completed, referred to as the "subsequent offering period." ²⁰³ The proposed subsequent offering period would be similar to the extended offering period that sometimes applies to tender offers made in the United Kingdom subject to the City Code on Take-overs and Mergers. ²⁰⁴ No withdrawal rights would be available during this period. ²⁰⁵ Security holders would be able to tender securities in the subsequent offering period only after all conditions to the offer were satisfied or waived and the shares tendered to that point were accepted for purchase and promptly paid for. ²⁰⁶ The subsequent offering period would be optional at the bidders election.

We propose limiting the use of the subsequent offering period to third-party tender offers for all outstanding shares of the target. In addition, the bidder must intend to engage in a back-end merger with the target after the tender offer, either offering cash or securities. The bidders intent to merge with the target would have to be publicly disclosed in its offering materials.

Under our proposal, a bidder would have to disclose its intention to provide a subsequent offering period in the initial tender offer materials filed and disseminated to security holders. The tender offer materials would have to adequately disclose the use of a subsequent offering period and explain how it would operate. If the "plain English" summary term sheet proposal is adopted, the subsequent offering period would be disclosed in the summary term sheet. If a bidder decided to include a subsequent offering period after the initial offering materials were filed and disseminated, that would be treated as a material change in information, requiring dissemination of a supplement and possibly an extension of the offer by up to five business days. ²⁰⁷

The subsequent offering period would be strictly limited to offers for all outstanding shares. ²⁰⁸ The subsequent offering period would be a fixed ten business day period that would follow the date a bidder satisfied or waived all conditions to its offer and accepted for purchase any shares tendered to that point in time. The bidders prompt payment obligation would apply to all shares accepted in the initial offering period before the subsequent offering period began. During the subsequent offering period, the bidder could solicit remaining security holders to tender. The bidder would be obligated to "promptly" pay for the shares tendered, with prompt payment running from the date of each separate tender. ²⁰⁹

The subsequent offering period could not start until the offer was open at least 20 business days with withdrawal rights available to all tendering security holders. This would prevent bidders from offering withdrawal rights during the first ten business days of an offer but not the last ten business days.

The final amendment to reflect the results of the tender offer ²¹⁰ would not be required until the end of the subsequent offering period. We solicit comment, however, on whether bidders should be required to issue a public announcement at the beginning of the subsequent offering period setting forth the number of shares tendered and accepted in the initial offering period.

The subsequent offering period would help security holders who do not tender into an offer, but then wish to participate in the offer after the bidder accepts shares and discloses the results. There may not be a very liquid trading market in the securities after the tender offer. As a result, security holders often are forced to either hold onto their shares until a back-end merger is completed or sell into the market below the offer price. Bidders may need to prepare and furnish a proxy statement or other disclosure documents before remaining security holders can obtain their final payment. We believe the subsequent offering period would minimize the delay in liquidating the investment of the relatively small number of security holders that do not tender in an offer, but later decide they want to tender and receive the offer price.

Comment is solicited on whether this procedure would be useful to bidders and security holders. Would there be any disadvantages for security holders? Should the subsequent offering period be mandatory? Should the subsequent offering period be longer or shorter (e.g., five, seven, 15 or 20 business days)? Should the bidder be allowed to extend the subsequent offering period for either a limited number of days (e.g., five or ten business days) or for whatever time period the bidder specifies? Would the subsequent offering period encourage security holders to delay tendering until the completion of the offer, and if so, how much of a disadvantage would this be to the bidder? Should the availability of the subsequent offering period be limited to circumstances where a substantial percentage of shares (such as 50%) has already been tendered? As proposed, the subsequent offering period would be available for both cash and stock tender offers, and the consideration offered in the back-end merger could be either cash or securities. Is there any reason to limit the proposal to cash tender offers or to situations where only cash is offered in the back-end merger? Should the subsequent offering period be limited to third-party offers, as proposed, or would it also be useful for issuer tender offers?

2. Clarify the Financial Information Required for Bidders in Cash Tender Offers

a. When the Bidders Financial Statements are Required in Cash Tender Offers

Under the current rules, the financial statements of a bidder in a cash tender offer must be disclosed if the information is "material." ²¹¹ There are several instructions in Schedule 14D-1 that help bidders determine the need for, and adequacy of financial statements. The first instruction states that materiality will depend on the facts and circumstances of the tender offer.

Once a bidder determines that financial statements are material, there is a provision in the instruction that details the type of financial statements deemed adequate for disclosure purposes. If a bidder provides financial statements that are prepared in compliance with Form 10, the financial statements requirement is deemed satisfied. ²¹² A second instruction permits incorporation by reference if the bidder is subject to the Exchange Act reporting requirements. A third instruction provides that non-reporting companies need not include audited financial statements if they are not available or obtainable without unreasonable cost or expense. Both third-party bidders and issuer offerors are required only to disseminate a fair and adequate summary of the financial information to security holders. ²¹³

In adopting the third-party tender offer rules, we identified four factors that should be considered when determining whether financial statements of the bidder are material in a cash tender offer:

• the terms of the tender offer, particularly those terms concerning the amount of securities sought, such as any-or-all, a fixed minimum with the right to accept additional shares tendered, all-or-none, and a fixed percentage of the outstanding;

   

• whether the purpose of the tender offer is for control of the subject company;

   

• the plans or proposals of the bidder; and

   

• the ability of the bidder to pay for the securities sought in the tender offer and/or to repay any loans made by the bidder or its affiliates in connection with the tender offer or otherwise. ²¹⁴

Under the staffs current interpretation, the above factors are not exclusive, and it is not necessary that all factors be present to meet the materiality test. Based on our experience with tender offers since 1977, we believe it would be more helpful to provide specific guidance to bidders as to when financial statements are not required. We propose to include an instruction in Schedule TO ²¹⁵ stating that a bidders financial statements are not material when:

• only cash is offered;

   

• there is no financing condition; and either:

   

• the bidder is a public reporting company under the Exchange Act; or

   

• the offer is for all outstanding securities of the target.

Under the above circumstances, we believe that the burden of providing the bidders financial statements may outweigh the usefulness of the information to security holders. ²¹⁶ Based on the information currently available on EDGAR (via the Internet and other sources), we believe there is less need to require financial statements for bidders that are public reporting companies than for non-reporting entities. ²¹⁷

When the bidder is not a public reporting company, we believe financial statements should be provided when the offer is not for all outstanding shares of the target. Financial statements can be material in a partial tender offer because security holders may need to evaluate the bidders financial condition in determining whether to tender into the offer or remain a security holder in a company in which the bidder will hold a substantial equity interest. ²¹⁸

We request comment on whether there are any other circumstances under which financial statements may not be material. Conversely, are there any circumstances under which we propose to exclude financial statements that the information would be material? For example, should we require financial statements of any non-reporting bidder unless the offer is for all shares and conditioned on acquiring a controlling interest in the target and the bidder intends a back-end merger? If an offer is not subject to a financing condition, could the bidders financial statements be material even under our proposed instruction? Should the proposed instruction hinge upon whether financing for the offer is in place, as opposed to whether the offer is subject to a financing condition? If the offer is self-financed, are the bidders financial statements needed even if there is no financing condition?

Should the criteria for determining when financial statements are required be applied differently when the bidder is a foreign company whose financial information may not be readily available? ²¹⁹ To the extent that the financial statements of a foreign bidder are required and are prepared under foreign GAAP, a reconciliation to U.S. GAAP would be required unless a reconciliation is unavailable or not otherwise obtainable without unreasonable cost or expense. ²²⁰ Finally, we note that, although Item 9 does not require financial statements of bidders who are natural persons, financial information concerning such bidders may be material under the circumstances of the offer. ²²¹ The practice has developed of including disclosure regarding the net worth of a bidder who is a natural person. We think such information is useful and therefore propose to codify this practice with an instruction to Schedule TO.

b. Content of Bidders Financial Statements in Cash Tender Offers; Financial Statements in Going-Private Transactions

When financial statements of the bidder are material, the rules currently require three years of historical financial statements for a third-party tender offer. In contrast, only two years of financial statements of the issuer are required in an issuer tender offer or going-private transaction. We propose to harmonize these requirements by reducing the financial statements requirement for third-party tender offers to two years. ²²² Currently, Instruction 1 to Item 9 of Schedule 14D-1 provides that financial statements prepared in compliance with Form 10 for a domestic bidder or Item 17 of Form 20-F for a foreign bidder will be deemed adequate for purposes of the disclosure requirement. We would eliminate this instruction and require the financial information specified in proposed Item 1010(a) and (b) of Regulation M-A, if material.

We solicit comment, however, on whether two years of financial statements are necessary to informed investor decisions. Should it matter if the bidder is offering securities that are exempt from registration rather than cash? Would one year of financial statements be adequate for third-party and issuer tender offers? Would one year of financial statements be adequate for a going-private transaction that is not subject to the more stringent registration or proxy statement requirements?

The current financial disclosure requirements in issuer tender offers and going-private transactions call for information regarding book value per share, as well as the pro forma effect of the transaction on the companys balance sheet and book value per share, as of the most recent fiscal year end and the latest interim balance sheet date. ²²³ In reviewing the disclosure items, we believe that it may be unnecessary to provide this data for both the latest fiscal year end and latest interim period, and propose to reduce the requirement to only the most recent balance sheet date. ²²⁴ This proposed change also would apply to third-party tender offers.

The current rules require that full financial statements of the bidder in a third-party tender offer and of the issuer in an issuer tender offer or going-private transaction be included in Schedule 14D-1, 13E-4 and 13E-3, respectively. Filers are permitted, however, to provide summary financial information instead of the full financial statements in the disclosure document sent to security holders. We believe the current requirements regarding summary financial information ²²⁵ are outdated and potentially confusing. ²²⁶ Therefore, we propose to revise the rules regarding summary information in all of these schedules to specifically require the information set forth in Rule 1-02(bb) of Regulation S-X. ²²⁷ The summary information would continue to be required for the same periods as the full financial statements. Rule

1-02(bb), however, calls for some information that is not currently required, specifically redeemable preferred stock, minority interests, and summarized financial information for unconsolidated subsidiaries and 50 percent or less owned persons. We solicit comment on whether this information is useful to investors.

The rules regarding summary financial information in issuer tender offers and going-private transactions currently require ratio of earnings to fixed charges, book value per share and, if material, pro forma data. These items are not specifically covered by Rule 1-02(bb). As proposed, Schedules TO and 13E-3 would call for these additional items as well as the information specified in Rule 1-02(bb). The current rule regarding summary financial information in third-party tender offers does not require book value per share information. As proposed, Schedule TO would call for this information, if material.

We also propose to clarify the reconciliation required for a foreign bidders summary financial information if the financial statements are prepared on the basis of foreign GAAP. ²²⁸ A reconciliation to U.S. GAAP would be required to the same extent that a reconciliation or narrative is required for the full financial statements, as discussed above.

Finally, we are considering whether, in light of the proposals to reduce the number of years for which financial statements are required, security holders should receive the full financial statements whenever they are required, rather than summary financial information. Should we eliminate the provisions in Rules 13e-3, 13e-4 and 14d-1 that permit the substitution of summary financial information for the full financial statements in the disclosure document sent to security holders?

c. Bidders Source of Funds

Regardless of the level of financial information security holders receive, we believe that a bidders ability to pay for securities in an offer is a material disclosure item. The disclosure appearing in many tender offers relating to a bidders ability to finance the offer has been meager at best, even when financial statements are provided. Therefore, we intend to clarify the information that is required in order to fully inform security holders of the bidders ability to finance the offer. We propose to expand the "Source of Funds" item requirement in the tender offer and going-private rules ²²⁹ to require the specific source(s) of financing, any condition(s) to the financing, and the bidders ability to finance the offer if the primary source of financing falls through. ²³⁰

d. Pro Forma Financial Information in Two-Tier Transactions

A "two-tier" transaction is one in which the bidder first offers to acquire shares of the target in a cash tender offer with any securities remaining outstanding acquired in a back-end merger where securities are offered as consideration. In two-tier transactions, security holders are essentially asked to make an investment decision of whether to tender for cash in the front-end tender offer (to the extent pro ration allows their shares to be accepted), or hold on to their securities to receive securities of the bidder in the back-end. We believe security holders need pro forma financial information regarding the combined entity at the first tier so they can evaluate the second tier of the transaction when deciding whether to tender. ²³¹

In addition to the general need for the information, disclosure of pro forma financial information would be in keeping with the general theme of free communications expressed in this release and the Securities Act Reform Release. Also, as discussed in Part II.B.1 above, many bidders currently disclose pro forma information in order to satisfy the markets demand for information on a proposed transaction and to effectively sell the transaction to the market. Thus, we propose to require pro forma and related financial information in the first tier when a second tier is contemplated.

The requirement to provide financial information would be based on the bidders intent to engage in a back-end merger with target security holders receiving securities of the bidder. Under the proposal, bidders would be required to provide the financial information specified by Item 3(f), (g) and (h) and Item 5 of proposed Forms C or SB-3,²³² as appropriate. This information would be required to be included in the tender offer materials for the cash tender offer. ²³³ We believe that this information, which would be required in any Form C or Form SB-3 filed when the securities are offered to security holders in the back-end, is necessary for security holders to make an informed investment decision. Consistent with the summary information provisions discussed above,²³⁴ the proposed instruction for two-tier transactions would permit third-party bidders to provide only the financial information specified in Item 3(f), (g) and (h) of proposed Forms C or SB-3 in the disclosure document sent to security holders so long as the Schedule TO filed with the Commission included the information specified by Item 5.

The proposal is consistent with an interpretive position published in 1978 that the inclusion of certain information would not be considered an "offer to sell" under the Securities Act. In the interpretive release, the Division of Corporation Finance stated that the "gun jumping" doctrine, which is designed to prevent an issuer from conditioning the market by arousing investor interest before a registration statement has been filed, does not prevent bidders from providing material information regarding a planned back-end merger. The Division explained:

The bidders concern is purchasing the subject companys securities for cash, not priming the market for a subsequent registered offering of securities. Regardless of the bidders intent, Schedule 14D-1 for compelling policy reasons reflected by the Williams Act requires (information regarding any negotiations, agreement in principle, or definitive merger agreement with the subject company) in order to provide full disclosure to investors confronted with an investment decision in the context of a tender offer. ²³⁵

Of course, under the proposals to permit free communications in this release and the Securities Act Reform Release, disclosure of pro forma financial information at any stage would not result in "gun jumping" under the Securities Act.

We request comment on whether this could create practical difficulties for bidders by causing delays in disseminating the cash tender offer material, and if so, whether this would be offset by benefits to security holders receiving the information. Also, if commenters believe the proposed requirement is too extensive, should we require some other level of information? For example, would the pro forma information specified in proposed Item 1010(b) of Regulation M-A be adequate? ²³⁶ Alternatively, would the pro forma information required by Article 11 of Regulation S-X be a sufficient basis for an investment decision regarding the cash tender offer?

We also request comment on whether, even if a transaction is intended, there could be reasons why the disclosure of pro forma information could be premature or unwarranted. Conversely, are there circumstances where pro forma financial information should be permitted or required if a back-end merger is not "intended"? In addition, we invite comment on whether the requirement to provide pro forma financial information needs to be modified to minimize difficulties for bidders in hostile transactions.

3. Clarify the Requirement that a Target Report Purchases of its Own Securities After a Third-Party Tender Offer is Commenced

Rule 13e-1 prohibits an issuer whose securities are the subject of a third-party tender offer from repurchasing any of its equity securities until information about the issuers acquisition is filed with the Commission and is sent or given to security holders. We propose to update the rule, which was adopted in 1968, ²³⁷ and clarify its operation.

Once the required information is filed and sent to security holders, the issuer is free to repurchase its securities. ²³⁸ Under the current rule, an issuer can disseminate the required information to its security holders as early as six months before making any repurchases. As a result, issuers can send information regarding repurchases to security holders long before they become the target of a tender offer, diminishing the usefulness of this rule. We propose to revise the rule so that its purpose is to notify security holders that the issuer is purchasing its securities during a third-party tender offer for the securities. Therefore, the issuers disclosure should be made only after a tender offer is made.

We also propose to rewrite the rule in plain English so that the rule is more understandable. It would call for the same information as the current rule, including the amount of securities to be purchased, identification of the sellers or market, purpose of the purchases, how the securities will be used, and the source of funds for the purchases. The revised rule would clarify that disclosure is required only when an issuer wants to repurchase its securities after a tender offer is made. The restriction on repurchases only applies during the term of the tender offer.

We invite comment on the timeliness of the information currently received under Rule 13e-1. Do security holders receive information either too early or too late to be of any use? We also solicit comment on whether the requirement to file and disseminate information during the limited time after a tender offer is made and before purchasing securities would impose an unreasonable burden on companies. How would this change affect companies with periodic stock repurchase plans? Should the rule not apply to routine purchases for employee benefit plans as to which the issuer has little or no discretion? If the issuer commences an issuer tender offer in response to the third-party tender offer, should the filing of the issuers tender offer schedule satisfy the requirements of Rule 13e-1? Further, we request comment on the specific information that is required under the rule. Is there any information that either should or should not be required disclosure? Generally, the statement required by the rule consists of one or two pages of information.

We note that a limited number of statements are filed under the rule. ²³⁹ Given the relatively low number of filings, we question whether the rule provides any benefits to security holders and the market. Issuers may not be disclosing the required information, or they may not be triggering the reporting obligation. We invite comment on the usefulness of and the need for the information disclosed under the rule. Should we eliminate the rule entirely? If the information is beneficial, should issuers be required merely to make the filing with the Commission, and not disseminate the information to security holders?

4. Harmonize the Tender Offer and Proxy Rules Relating to the Delivery of a Stockholder List and Security Position Listing

We propose to revise Rule 14d-5, the rule relating to dissemination of certain tender offers by use of stockholder lists and security position listings, to more closely align it with the 1992 amendments to Rule 14a-7 (the parallel rule relating to proxy materials). ²⁴⁰

Both Rule 14d-5 and Rule 14a-7 currently allow the "requesting party" (the bidder under Rule 14d-5 and the security holder soliciting in opposition under Rule 14a-7), to ask the company either to provide a stockholder list or to mail the requesting partys materials. Until 1992, both rules required that the list provided by the company identify no more than record holders. In 1992, the Commission amended Rule 14a-7 to require a stockholder list that includes a reasonably current list of non-objecting beneficial owners, as well as record holders, if the company has obtained or obtains a list of beneficial owners for its own use before the meeting or security holder action. ²⁴¹ In contested situations, both the company and parties soliciting in opposition could use the list to engage in personal solicitation of non-objecting beneficial owners.

If the free communications proposals in this release are adopted, security holders may ultimately receive final disclosure documents closer to the time they are asked to make an investment decision. As a result, it may become more important for bidders to have access to stockholder lists that include non-objecting beneficial owners as well as record holders, particularly because of the time it takes for disclosure documents to be forwarded through street name holders to beneficial owners.

We propose to revise Rule 14d-5 to incorporate a stockholder list requirement in tender offers similar to that provided by Rule 14a-7 in proxy solicitations. Under the revised rule, a company that elects to provide a bidder with a stockholder list instead of mailing the bidders materials would need to disclose the most recent list of names, addresses and security positions of non-objecting beneficial owners (as well as record holders) it has in its possession, or subsequently obtains. The list must be in the format requested by the bidder if this can be provided without undue burden or expense. The proposed amendment would give bidders the same ability as target companies to communicate directly with the non-objecting beneficial owners of securities.

This proposal would conform the stockholder list requirements so that the list required is the same whether security holders are solicited for proxies or for tenders. This should enhance a bidders ability to timely communicate with non-objecting security holders of the target regarding the terms of its tender offer. Bidders would continue to be required to disseminate tender offer material to record holders (providing sufficient copies for the record holders to send to beneficial owners), but they would have the option also to send the material to non-objecting beneficial owners on the list. Would bidders find this useful? Should the rule permit bidders to send tender offer material to non-objecting beneficial owners instead of to record holders of those securities, and if so, should the issuer tender offer rule be revised the same way? ²⁴² Would sending material, including transmittal forms, to beneficial owners unduly complicate the ability to keep track of tenders and count them accurately? Would beneficial owners receive tender offer material in a more timely manner than under the current system of dissemination through record holders?

5. Revise and Redesignate the Rule Prohibiting Purchases Outside an Offer

We propose to amend Exchange Act Rule 10b-13 and redesignate it as Rule 14e-5. The proposals would clarify the rules text and codify several interpretations and exemptions.

Rule 10b-13 prohibits a person who is making a cash tender offer or exchange offer from purchasing or arranging to purchase, directly or indirectly, the security that is the subject of the offer (or any security that is immediately convertible into or exchangeable for the subject security) otherwise than as part of the offer. ²⁴³ The rules prohibitions apply from the time the offer is publicly announced or otherwise made known to security holders until the time the bidder is required, by the offers terms, either to accept or reject the tendered securities. Rule 10b-13 protects investors by preventing a bidder from extending greater or different consideration to some security holders by offering to purchase their securities outside the offer, while other security holders are limited to the offers terms. ²⁴⁴ The rule applies to the bidder, whether the issuer or a third party, the bidders affiliates, and the offers dealer-manager. ²⁴⁵

a. Proposed Amendments Redesignating and Clarifying the Rule

The Commission originally promulgated Rule 10b-13 under the provisions of Sections 10, 13 and 14 of the Exchange Act ²⁴⁶ to safeguard the interests of persons who sell their securities in response to a tender offer. ²⁴⁷ The dangers posed by a bidders purchases outside an offer may involve fraud, deception and manipulation. Because the rule addresses conduct during tender offers, we believe it belongs with the other rules under Regulation 14E under the Exchange Act that directly address improper activities in the context of tender offers. ²⁴⁸

The proposed amendments do not alter the rules basic terms. Instead, they modify the rules text to more clearly set forth the covered activities. New Rule 14e-5 would prohibit, in connection with a tender offer for equity securities, a covered person from purchasing or arranging to purchase any subject securities or any related securities otherwise than as part of the offer. As used in Regulation 14E, the term "tender offer" includes offers to exchange securities for cash and/or securities. ²⁴⁹

We also propose to simplify the language describing the period during which the prohibition on purchases applies. Under proposed Rule 14e-5, this prohibition still would commence at the time the offer is first publicly announced or otherwise made known ²⁵⁰ to holders of subject securities and end with the offers expiration. Under proposed Rule 14d-11, a tender offer could be extended under specific circumstances without offering withdrawal rights. ²⁵¹ This gives security holders an additional opportunity to tender into the offer. We believe bidder purchases outside the offer during this subsequent offering period present the same concerns as during the initial offering period. Therefore, the proposed Rule 14e-5 restrictions would cover any subsequent offering period provided under proposed Rule 14d-11.

The rule applies from the time the offer is first publicly announced or otherwise made known to holders of subject securities. Should the rule apply if the bidder advises some but not all security holders that it intends to conduct a tender offer for the subject securities?

b. Persons and Securities Subject to the Rule Scope of Persons Subject to the Rule

Rule 10b-13 applies to the person who makes the offer, which has been interpreted to cover the bidder, the bidders affiliates, and the offers dealer-manager. ²⁵² Under proposed Rule 14e-5, the term "person" is replaced by "covered person" to codify this interpretation. Covered person is defined as: the offeror and its affiliates; the offerors dealer-manager(s) and other advisors; and any person acting, directly or indirectly, in concert with them. The term "affiliate" is defined in proposed Rule 14e-5 as any person that "directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the offeror." ²⁵³

Scope of Securities Subject to the Rule

Proposed Rule 14e-5 would apply only to offers for equity securities, just as Rule

10b-13 currently does. Moreover, Rule 10b-13 and proposed Rule 14e-5 prohibit purchases outside the offer of not only the target security, but also related securities. We propose several changes from Rule 10b-13 regarding the scope and treatment of related securities.

Proposed Rule 14e-5 would define "related securities" as "securities that are immediately convertible into, exchangeable for, or exercisable for subject securities." By covering securities that are immediately "exercisable for" subject securities, we are clarifying that securities, such as options, that can be exercised to receive target securities are included in the class of securities that a covered person cannot purchase outside the offer.

c. Excepted Transactions

Exercise of Related Securities

Rule 10b-13 specifies that if the person making the offer "is the owner of another security which is immediately convertible into or exchangeable for the security which is the subject of the offer, his subsequent exercise of his right of conversion or exchange with respect to such other security shall not be prohibited by this rule." We are amending this provision and relocating it in the part of proposed Rule 14e-5 covering excepted activities. When Rule 10b-13 was adopted, options were not nearly as common as they are today, and the text of this exception did not explicitly include the exercise of options. We believe the exercise of stock options is no more likely to lead to undesirable effects than the exchange or conversion of other related securities, so we want to make it clear that the exercise of options is included in this exception. Thus, we propose to permit a covered person to convert, exchange, or exercise related securities, as long as the covered person owned the related securities before the offer was publicly announced or otherwise made known to security holders. ²⁵⁴

Purchases by or for Plans

Since the adoption of Rule 10b-13, there has been an exception for purchases of the target security (or a related security) by the issuer, by participating employees of the issuer or the employees of its subsidiaries, or by the trustee or other person acquiring the security for the account of the employees, under certain types of plans. ²⁵⁵ For example, issuers conducting tender offers for their equity securities may purchase subject securities on behalf of an employee plan. Rule 10b-13 partly incorporates outdated Internal Revenue Code provisions to define these excepted plans.

We propose to eliminate references to Internal Revenue Code provisions to define permissible plan purchases and rely instead on the more expansive plan provisions contained in the Commissions Regulation M. The exception would permit purchases of subject securities or related securities for any "plan" if the purchases are made by an "agent independent of the issuer" as these terms are defined in Regulation M. ²⁵⁶ This exception would recognize the phenomenal growth in variety of employee, security holder, and affinity group plans in recent years. Moreover, requiring that these purchases be made by an "agent independent of the issuer" should help assure that such purchases do not lead to the abuses that proposed Rule 14e-5 is designed to prevent.

Does the proposal regarding plans adequately address circumstances when a bidder may need to purchase shares during an offer on behalf of a plan? Are there situations when it would be appropriate for the bidder to buy shares directly on behalf of the plan? Should the rule expressly prevent a bidder from establishing a plan around the time of an offer and then purchasing shares on behalf of that plan through an independent agent or otherwise?

Purchases during Odd-Lot Offers

We propose to add a new exception that permits purchases during an issuer odd-lot tender offer conducted in compliance with the provisions of Rule 13e-4(h)(5) under the Exchange Act. ²⁵⁷ Under Rule 13e-4(h)(5), an issuer tender offer is excepted from application of Rule 13e-4 if the offer is directed solely to odd-lot security holders and provides "all holders" and "best price" protections to tendering security holders. This proposal codifies a class exemption from Rule 10b-13 issued by the Commission in connection with a recent revision to Rule 13e-4(h)(5). ²⁵⁸

Unsolicited Purchases by a Dealer-Manager

We propose to except unsolicited purchases by a dealer-manager that are made on an agency basis. This exception, which codifies a prior exemption, ²⁵⁹ would allow a dealer-manager to continue to conduct its customary brokerage activities during a tender offer. Those activities generally do not raise the concerns that proposed Rule 14e-5 is intended to address. Of course, the unsolicited orders must be from a person other than a covered person and must be made in the ordinary course of business.

Should the exception permit riskless principal transactions by dealer-managers as well? Is it necessary to define the term "dealer-manager?"

d. Solicitation of Comments on Proposed Rule 14e-5

We solicit comment on all aspects of proposed Rule 14e-5. Are the current exceptions appropriate? Aside from plan transactions and purchases during an odd-lot offer, are there other circumstances when it would be appropriate to permit the bidder to purchase subject or related securities outside the offer? For example, should the bidder be permitted to purchase shares outside the offer if a purchase contract was entered into before public announcement of the offer and the per share purchase price is no higher than the offer consideration? Should any such exception be limited to cash tender offers for all outstanding shares?

In addition, we invite commenters to address whether a rule prohibiting purchases outside of a tender offer continues to be appropriate. Should we consider implementing a rule like that in the City Code, which permits purchases outside the offer if, among other things, the bidder increases the tender offer consideration to the highest price paid for any shares so acquired? ²⁶⁰

Under what circumstances would it be appropriate not to apply Rule 14e-5 to the offers dealer-managers and advisors? Should we consider provisions like those contained in the City Code that permit market makers affiliated with the offerors advisors to continue their market making functions when the market maker is sufficiently independent from the advisor and other protections are present? ²⁶¹

6. Safe Harbor for Forward-Looking Statements

In permitting substantially greater communications before the filing of a tender offer statement and the commencement of an offer, we recognize that bidders may be unwilling to communicate freely about an offer absent a safe harbor from liability for forward-looking communications. Currently, the safe harbor provisions in the Private Securities Litigation Reform Act of 1995 ("PSLRA") for forward-looking statements do not apply to statements made in connection with a tender offer, ²⁶² although they do apply to statements made in connection with mergers. ²⁶³ We solicit comment on whether we should extend the provisions of the PSLRA to forward-looking statements issued in connection with a tender offer. Just as with mergers, there are other policing mechanisms to protect against false and misleading forward-looking statements in the tender offer context.

Of course, under any extension of the PSLRA safe harbor, bidders would have to identify their forward-looking statements as "forward-looking" and the statements would need to be accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ significantly from those disclosed. In addition, bidders still may be subject to liability in any proceeding brought by the Commission. In order to promote balanced disclosure, we also would extend the safe harbor to statements made by targets as well as bidders.

We invite comment on whether the statutory safe harbor for forward-looking statements is necessary or appropriate to encourage bidders and targets to communicate fully and freely with security holders regarding proposed tender offers. What types of forward-looking information do bidders typically provide, or need to provide, before commencing a tender offer that merit safe harbor protection from private litigation? Could a safe harbor be abused in the fast-moving tender offer context? Are there any circumstances when a forward-looking information safe harbor should not be available? For example, should we limit our extension of the PSLRA safe harbor to only those communications made in reliance on the proposed free communications safe harbor?

FOOTNOTES
 

SEC_CODE_REF_0090001192884