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
Section I.

ACTION: Proposed Rules

Table of Contents

SUMMARY: The Securities and Exchange Commission proposes to update and simplify the rules and regulations applicable to takeover transactions (including tender offers, mergers, acquisitions and similar extraordinary transactions). We propose to permit significantly more communications with security holders and the markets before the filing of a registration statement involving a takeover transaction, a proxy statement or tender offer statement. We also propose to put cash and stock tender offers on a more equal regulatory footing; integrate the forms and disclosure requirements in issuer tender offers, third-party tender offers and going private transactions and consolidate the disclosure requirements in one location; permit security holders to tender their securities during a limited period after the successful completion of a tender offer; more closely align merger and tender offer requirements; and update the tender offer rules to clarify certain requirements and reduce compliance burdens where consistent with investor protection. The proposals presented in this release should be considered together with the companion release issued today, the Securities Act Reform Release.

DATES: Comments should be submitted on or before April 5, 1999.

ADDRESSES: Comments concerning the proposed amendments should be submitted in triplicate to Jonathan G. Katz, Secretary, U.S. Securities and Exchange Commission, Mail Stop 6-9, 450 Fifth Street, N.W., Washington, D.C. 20549-6009. Comments also may be submitted electronically to the following e-mail address: rule-comments@sec.gov. All comment letters should refer to File Number S7-28-98. This file number should be included on the subject line if e-mail is used to submit comments. Comment letters will be available for inspection and copying in the public reference room at the same address. Electronically submitted comment letters will be posted on our Internet web site (http://www.sec.gov).

FOR FURTHER INFORMATION CONTACT: James J. Moloney, in the Office of Mergers and Acquisitions, or P.J. Himelfarb, in the Office of Chief Counsel, Division of Corporation Finance, at (202) 942-2920. For questions regarding proposed Rule 14e-5, please contact Irene A. Halpin or Michael R. Trocchio, in the Office of Risk Management and Control, Division of Market Regulation, at (202) 942-0772.

SUPPLEMENTARY INFORMATION: We propose amendments to Rules 13e-1, 13e-3,

13e-4, 14a-4,14a-6, 14a-11,14a-12, 14c-2,14c-5, 14d-1, 14d-2, 14d-3, 14d-4, 14d-5, 14d-6, 14d-7, 14d-9, 14e-1 ¹ and Schedules 14A, 14C, 13E-3, and 14D-9 ² under the Securities Exchange Act of 1934 ("Exchange Act"). ³ We also propose an amendment to Item 10 of Regulation S-K ⁴ and a new subpart of Regulation S-K, the 1000 series ("Regulation M-A"); a new tender offer schedule, Schedule TO, that would replace Schedules 13E-4 and 14D-1; ⁵ a new tender offer Rule 14e-5 that would replace Rule 10b-13; ⁶ and new tender offer Rules

14d-11 and 14e-8. Further, we propose to amend Rule 13(d) of Regulation S-T and Rules of Practice 30-1 and 30-3. ⁷ We also propose amendments to Rules 145 and 432, and new Rule 162, under the Securities Act of 1933 ("Securities Act"). ⁸ In addition, in the Securities Act Reform Release, ⁹ we propose new rules, forms and amendments under the Securities Act affecting the regulatory scheme for takeovers. Some of these proposals are republished in this release for the convenience of readers, as follows: portions of proposed new Forms C and

SB-3 and proposed new Rules 166, 167 and 425.

Table of Contents

I. Executive Summary and Background

Over the last several years, takeover activity has surpassed the extraordinary levels seen during the 1980s. ¹⁰ In 1996, there were over 7,000 merger and acquisition transactions completed in the U.S. valued at more than $650 billion. In 1997, U.S. merger and acquisition activity increased to approximately 7,800 transactions valued at over $790 billion. ¹¹ Global merger and acquisition activity totaled approximately (U.S.) $900 billion in 1996. ¹² In 1997, global merger and acquisition activity increased to (U.S.) $1.6 trillion. ¹³ This wave of takeovers has continued into 1998 with approximately $626 billion in domestic mergers and acquisitions announced as of June, 1998. ¹⁴

Three characteristics are common to many of todays takeover transactions. First, many acquirors are offering securities or a combination of securities and cash to the security holders of subject companies ("targets"). In 1996, almost half of the completed takeover transactions involved some form of stock as consideration, as opposed to cash only. ¹⁵ In 1997, the number of stock-based takeovers remained relatively constant at approximately half of all completed transactions. ¹⁶ During the first half of 1998, approximately 43% of the completed transactions involved securities as consideration. ¹⁷

Second, there has been an increase in the number of hostile transactions involving proxy or consent solicitations. This trend appears to be the result of the adoption of anti-takeover devices by many public companies and the development of more stringent state anti-takeover laws in reaction to the wave of takeovers in the 1980s. Todays proxy and consent solicitations are primarily aimed at unseating incumbent directors, dismantling anti-takeover devices, and generally facilitating transactions opposed by management.

Third, significant technological advances in communications permit more frequent, timely and direct communications with security holders. These developments in technology affect how acquirors, targets, and other market participants communicate with security holders and the securities markets regarding proposed mergers and other extraordinary corporate transactions. For example, many companies post detailed information regarding corporate developments on their Internet web sites. In addition, companies use the Internet as a means of communicating with security holders during proxy contests and in connection with tender offers and mergers. ¹⁸ These changes in how companies, security holders, and market participants communicate with one another prompted the Commission to issue several releases addressing the use of the Internet and other electronic media under the federal securities laws. ¹⁹

While the takeover market has evolved dramatically over the past 20 years, the applicable regulatory framework has remained substantially the same. ²⁰ As a result, the application of our existing rules to todays extraordinary transactions can often raise complex regulatory issues. These issues may, in some instances, cause unnecessary burdens for companies without corresponding benefits to security holders. Todays proposals are intended to reduce these costs while maintaining the same high level of investor protection.

In formulating the proposals, we have drawn on the staffs experience in reviewing takeover disclosure, the suggestions of practitioners, and the recommendations of the Task Force on Disclosure Simplification. ²¹ We have examined all of the regulations relating to tender offers as well as other forms of takeovers with a view toward improving the regulatory scheme.

We encourage readers to keep in mind that these proposals were drafted, and should be considered, with the proposals presented in the Securities Act Reform Release also issued today. The goal underlying the proposals described below is the same as that underpinning the Securities Act Reform Release making the regulatory scheme more workable for issuers and more effective for investors in todays capital markets. While we intend that both sets of proposals move towards adoption on the same track, we may adopt the proposals in either release without adopting those in the companion release.

The proposals vary in some respects from those in the Securities Act Reform Release because it is necessary to recognize the special nature of business combination transactions in contrast to capital-raising transactions. Specifically, we have considered that a security holders decision regarding a proposed business combination is not always volitional, and that a change in security ownership can arise as a result of the security holders inaction. ²² In addition, where the acquiror offers securities, the investment decision can be complex, requiring security holders to assess both the security of another company offered in exchange and the security they are asked to give up. They also must consider how the acquiror may change as a result of the acquisition, because they will receive securities in the combined entity. Therefore, it may be important for the companies involved to have the flexibility to announce and discuss the proposed acquisition, regardless of the size and seasoned status of the acquiror.²³ In addition, it is necessary for information about the transaction to be delivered timely to security holders who must evaluate the deal in order to protect their existing investment.²⁴

In some cases, we have proposed significant modifications to the entire regulatory approach to takeovers. In doing so, we have attempted to treat different acquisition methods in a similar manner to the extent the different methods merit similar treatment. In other cases, we have focused on areas where current practice could be improved. Our goals are to update the regulations in order to reduce unnecessary regulatory burdens on participants, while maintaining investor protection and improving the quality of information that investors receive about business combination transactions. ²⁵ We describe below three areas where the costs of compliance with the current rules applicable to takeovers may outweigh the benefits conferred upon security holders, and summarize the proposals in this release.

Restrictions on Communications to Security Holders and the Marketplace

A companys ability to communicate in a timely and effective manner with its security holders about a proposed takeover is limited by the Securities Act if the transaction involves an offering of securities. Although the impact of the Securities Act on capital formation has been the subject of great debate, ²⁶ commentators have given somewhat less attention to the permissibility of communications relating to business combinations involving the issuance of securities. Offerors often have a compelling reason, and may under certain circumstances have an obligation under Rule 10b-5, ²⁷ to disseminate promptly full, fair and accurate information regarding a planned extraordinary transaction to existing security holders as well as the securities markets. As a part of this release, we propose to increase significantly the ability of companies to communicate with security holders with respect to business combinations involving the registered offering of securities. In addition, many takeovers trigger the need for compliance with the tender offer and proxy rules, which also contain restrictions on the timing and content of communications. We propose to permit freer communications under the tender offer rules in connection with public announcements of tender offers. Similarly, we propose to permit freer communications under the proxy rules, whether or not the matter being voted on relates to a takeover.

Regulatory Disadvantage of Exchange Offers

Tender offers where the bidder is offering securities generally cannot commence until the Securities Act registration statement for the securities being offered becomes effective. In some cases, where the staff undertakes to review and comment during the waiting period, ²⁸ the delay of effectiveness can be quite lengthy. This delay is particularly troublesome for bidders ²⁹ in exchange offers. ³⁰ In contrast, cash offers, which may compete with exchange offers, can commence as soon as the required information is filed with the Commission and disseminated to security holders. The delay in commencing an exchange offer can place the bidder at risk that a competing all-cash bid will commence and close before the exchange offer can even commence. As a result, bidders that offer securities in takeover transactions may not be as successful in acquiring targets as cash bidders, even when the value of the stock offered is equal to or greater than the value of the cash offered in a competing offer. In response to the disparities in regulatory treatment, we propose to permit exchange offers to commence on a similar time frame to cash tender offers.

Costs of Compliance with Multiple Regulatory Schemes

Many of todays takeover transactions involve a combination of tender offer, proxy solicitation and Securities Act registration issues. As a result, participants in a merger or acquisition may be required to comply with several distinct regulatory schemes. Companies can incur additional costs analyzing and complying with the multiple filing and disclosure regimes that may apply to a transaction. For example, when a company conducts an exchange offer for all outstanding securities of an affiliated company, three regulatory schemes may be involved, including the tender offer rules, the "going-private" rule, and the provisions of the Securities Act relating to the registration of securities. The proxy rules also can apply if the transaction involves a solicitation of votes or consents. We recognize that the application of multiple regulatory regimes to a single transaction can significantly increase the burdens and costs of compliance without necessarily benefiting investors. We propose to simplify the regulatory structure for takeovers by using combined forms and a uniform disclosure regulation.

In summary, we propose numerous revisions to the regulations to conform them to the realities of todays environment surrounding takeover transactions, while maintaining high quality investor protection and enhancing the timing and quality of information available to investors. The proposed revisions address changes in deal structure and advances in technology. Our principal proposals are to:

• relax the current restrictions on communications with security holders to provide the market with more information on a timely basis; in particular,

  • permit free communications before the filing of a registration statement in connection with either a stock tender offer or a stock merger transaction;

     

  • permit free communications before the filing of a proxy statement (whether or not a takeover transaction is involved);

     

  • permit free communications about a planned tender offer without triggering the "commencement" of the offer, requiring the filing and dissemination of information;

     

  • harmonize the various communications principles applicable to business combinations under the Securities Act, tender offer rules and proxy rules;

     

  • eliminate the confidential treatment now available for merger proxy statements;

   

• reduce the disparate treatment of stock and cash tender offers by permitting stock tender offers to commence upon the filing of a Securities Act registration statement;

   

• simplify the regulatory scheme by integrating the disclosure requirements for tender offers, going-private transactions, and other extraordinary transactions into a new 1000 series of Regulation S-K, referred to as "Regulation M-A";

   

• combine the current schedules for issuer and third-party tender offers into a single schedule available for all tender offers, entitled "Schedule TO";

   

• require a "plain English" summary term sheet in all cash tender offer, cash merger and going-private transactions;

   

• update the financial statement requirements for takeover transactions; in particular,

  • eliminate the need to file financial statements for target companies in most cash mergers, to harmonize with the treatment of cash tender offers;

     

  • clarify when financial statements of the acquiring company are not required in cash mergers, and when financial statements are required, reduce the financial statements required for the acquiror from three years to two;

     

  • clarify when the bidders financial statements are not required in cash tender offers, and when financial statements are required in third-party offers, reduce the requirement from three years to two;

     

  • require pro forma and related financial information in cash tender offers where the bidder intends to engage in a back-end stock merger;

     

  • reduce the financial statements required for non-reporting target companies in stock mergers;

   

• permit a subsequent offering period, similar to that available in many United Kingdom tender offers, during which security holders can tender their shares for a limited period after completion of a tender offer;

   

• clarify the rule that requires issuers to report any intended repurchases of their securities after a third-party tender offer has commenced (Rule 13e-1), and require information to be disseminated on a timely basis; and

   

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

  At this time we are not proposing, but are considering, whether we should:

   

• impose a federally mandated proxy solicitation period in merger transactions comparable to the current minimum tender offer period, to allow security holders at least a minimum time to consider the proxy statement disclosure;

   

• modify the proxy rules to permit direct delivery of proxy materials to non-objecting beneficial owners;

   

• create a broad safe harbor under the proxy rules that would permit "test the waters" communications with security holders without requiring the filing or delivery of a proxy statement, so long as no proxy card is delivered to security holders;

   

• require delivery of a disclosure document to security holders in cash tender offers, instead of permitting dissemination by summary advertisement alone, to conform the dissemination required in tender offers with that in proxy solicitations and securities offerings;

   

• permit proxy cards to be sent to security holders before a registration statement for a stock merger is effective; and

   

• expand by rule the coverage of the Private Securities Litigation Reform Act safe harbor from liability to include forward-looking statements made in connection with tender offers.