Release No. 33-7759

Release No. 34-42054

Release No. 39-2378

International Series Rel. No. 1208

64 Fed. Reg. 61382 - Nov. 10, 1999

Securities and Exchange Commission

Cross-Border Tender and Exchange Offers, Business Combinations and Rights Offerings

Table of Contents

Section II.A

II. Discussion

A. The Tier I Exemption

Under the Tier I exemption adopted today, eligible issuer and third-party tender offers will not be subject to Rules 13e-3, 13e-4, Regulation 14D or Rules 14e-1 and 14e-2. These provisions contain disclosure, filing, dissemination, minimum offering period, withdrawal rights and proration requirements that are intended to provide security holders with equal treatment and adequate time and information to make a decision whether to tender into the offer. The Tier I exemption provides that tender offers for the securities of foreign private issuers are exempt from these U.S. tender offer requirements, so long as:

• U.S. security holders hold 10 percent or less of the class of securities sought in the tender offer;

• In the case of an offer that otherwise would be subject to Rule 13e-4 or Regulation 14D under the Exchange Act, bidders submit, rather than file, an English language translation of the offering materials to the Commission under cover of Form CB and, in the case of a foreign offeror, file a consent to service on Form F-X;

• U.S. security holders participate in the offer on terms at least as favorable as those offered to any other holders; and

• Bidders provide U.S. security holders with the tender offer circular or other offering documents, in English, on a comparable basis to that provided to other security holders.

The exemption is available to U.S. and foreign bidders. The domicile or reporting status of the bidder is not relevant. Instead of complying with the U.S. tender offer rules, a bidder taking advantage of the exemption will comply with any applicable rules of the foreign subject company's home jurisdiction or exchange.

1. U.S. Ownership Limitation

We are adopting, as proposed, 10 percent as the maximum level of ownership by U.S. security holders that a subject company can have and be eligible for the Tier I exemption.¹⁸ Under the proposals, we solicited comment on whether to increase the 10 percent limitation for U.S. ownership to 15 or 20 percent. Commenters on the proposals largely favored adopting a higher eligibility percentage. We have decided, however, that 10 percent is an appropriate level of U.S. ownership for exclusive reliance on home jurisdiction requirements. At and below that level of U.S. ownership, broad-based exemptions are necessary to encourage inclusion of U.S. security holders.¹⁹ We believe that U.S. holders' interests are best served by being able to participate in, rather than being excluded from, the tender offer, even though they do not receive the full protections of the U.S. tender offer rules. Above the 10 percent level of U.S. ownership, more tailored relief of the type permitted by the new Tier II exemption would address conflicting regulatory mandates and offering practices.

We also believe that it is appropriate to set the Tier I and Securities Act registration exemption limit on U.S. ownership at the same percentage to level the playing field for stock and cash tender offers. As discussed below, we have decided to raise the ownership level for the Securities Act exemption from five to 10 percent. As a result, an exchange offer would be exempt both from the tender offer and Securities Act registration requirements if U.S. security holders hold 10 percent or less of the subject company's securities.

In order to provide a level playing field in the case of competing offers, we also believe it is appropriate to provide that if a bidder commences a tender offer or a business combination during an ongoing tender offer or business combination for securities of the same class that is the subject of its offer, the second bidder will be eligible to use the same exemption (Tier I, Tier II, or Rule 802) as the prior offeror provided that all the conditions of the exemption, other than the limitation on U.S. ownership, are satisfied by the second bidder. Thus, if the initial bidder relies on the Tier I exemption to make a tender offer, a subsequent competing bidder would not be subject to the 10 percent ownership limitation condition of the Tier I exemption. As a result, the second bidder will not be disadvantaged by any movement of securities into the United States following the announcement of the initial offer.

Neither the Tier I nor the Tier II tender offer exemption is available for any transaction or series of transactions that technically complies with the exemption but is part of a plan or scheme to evade the tender offer provisions of the Exchange Act.²⁰ For example, if an initial offer is commenced solely as a pretext for making a subsequent offer automatically eligible for the exemption, the Tier I exemption would not be available.

2. Disclosure and Dissemination - Form CB

We are adopting, as proposed, the requirement that a bidder or issuer relying on the Tier I exemption submit any offering materials prepared under foreign law to the Commission for notice purposes only, under cover of Form CB.²¹

The requirement to submit a Form CB only applies if the tender offer would have been subject to Regulation 14D or Rule 13e-4, but for the Tier I exemption. If the tender offer would have been subject only to Section 14(e) and Regulation 14E, the offering document and any recommendation do not need to be submitted to the Commission because the current regulations do not require a filing in connection with those offers.²² The materials submitted under cover of Form CB will not be deemed filed with the Commission. Therefore, the person submitting the materials will not be subject to the express liability provisions of Section 18 of the Exchange Act.²³

Form CB must be received by the Commission no later than the next business day after the publication or dissemination of the offering circular or disclosure document being filed under cover of Form CB. Thus, filing persons will have one extra day from the date the offering circular or disclosure document is first published, sent or given to security holders to submit the offering circular or disclosure document to the Commission. If the bidder is a foreign company, it must also file a Form F-X with the Commission at the same time as the submission of the Form CB to appoint an agent for service in the United States. Form F-X, which was adopted in 1991, has been modified to reflect its use in connection with the submission of a Form CB.

A number of commenters argued that Forms CB and F-X would be too burdensome and would discourage offerors from relying on the exemptions. We believe, however, that our interest in monitoring the availability of the exemptions and ensuring that U.S. security holders have access to these documents through their public availability and meaningful recourse for fraudulent statements in the documents justify the minimal burdens of preparing these forms. We will not require the payment of a filing fee with the submission of a Form CB or the filing of a Form F-X.

We are adopting, as proposed, the requirement that offerors disseminate any tender offer circular or other informational document to U.S. security holders in English on a comparable basis to that provided to security holders in the foreign subject company's home jurisdiction. If the foreign subject company's home jurisdiction permits dissemination solely by publication, the offeror likewise will publish the offering materials simultaneously in the United States, although it may in addition mail the materials directly to U.S. holders. If the materials are disseminated by publication, the offeror must publish the materials in a manner reasonably calculated to inform U.S. investors of the offer.²⁴

3. Equal Treatment

Offerors relying on the Tier I exemption must permit U.S. security holders to participate in the offer on terms at least as favorable as those offered to any other holders of the subject securities, subject to certain exceptions for exchange offers, as discussed below. In addition, equal treatment requires that the procedural terms of the tender offer, that is, duration, pro rationing, and withdrawal rights, must be the same for all security holders.²⁵

a. Cash Alternative

The proposals would have required as a condition to the Tier I exemption that U.S. security holders be offered the same amount and form of payment, including securities if offered elsewhere. We solicited comments on whether the exemption should permit U.S. security holders to be offered only cash, even if non-U.S. security holders are offered consideration consisting at least partly of securities. Commenters generally believed that we should permit cash-only consideration to be paid to U.S. security holders to avoid the exclusion of U.S. security holders from cross-border tender offers. We agree. As adopted, U.S. holders may be offered only cash, but the bidder must have a reasonable basis to believe that the cash is substantially equivalent to the value of the securities and any cash or other consideration offered to non-U.S. holders.²⁶

To assure that U.S. security holders receive substantially equivalent value for their securities, if the offered security is not a "margin security" within the meaning of Regulation T, ²⁷ the offeror must provide upon the request of the Commission or a U.S. security holder an opinion from an independent expert stating that the cash-only consideration is substantially equivalent to the securities and any cash offered outside the United States.²⁸ If the offered security is a "margin security" within the meaning of Regulation T, an opinion would not be required.²⁹ Instead, the offeror must undertake to provide any U.S. holder or the Commission staff upon request information on recent trading prices of the offeror's securities.

The American Bar Association objected to requiring a valuation opinion because it would raise significantly the cost to issuers and bidders and consequently discourage them from including U.S. security holders in a tender offer.³⁰ We believe, however, that an offeror seeking to use this exception to avoid issuing securities to U.S. holders would not find this requirement excessively burdensome, particularly when the opinion is required only when the offered security is not a "margin security" within the meaning of Regulation T. On the other hand, an independent opinion would provide reasonable assurance that U.S. security holders are receiving equivalent value to that offered to non-U.S. holders.

In many cases, foreign jurisdictions will not allow the bidder to offer U.S. holders cash when that option is not provided in all other jurisdictions. In addition, the bidder may not have sufficient cash to fund such an offer. Some bidders have used a "vendor placement," in which U.S. holders agree to appoint an independent agent to receive the securities offered in an exchange offer and sell them immediately into an existing offshore trading market for those securities. The agent would then remit the proceeds, minus expenses, to the U.S. holders. The staff has granted no-action relief under the Securities Act registration requirements and the equal treatment requirement of Rule 14d-10 to qualifying vendor placements. ³¹ That procedure will continue to be available under appropriate circumstances.

b. Blue Sky Exemption

If the offeror has determined to offer securities to all U.S. holders on the basis of the new Rule 802 exemption, the offeror may exclude subject company security holders residing in any state that does not provide an exemption from registration or qualification under the state blue sky law. Similarly, if the offeror registers securities under the Securities Act, the offeror may exclude subject company security holders residing in any state that refuses to register or qualify the offer and sale of securities in that state after a good faith effort by the offeror.

In both cases, however, the offeror must offer those security holders cash consideration instead of excluding them, if it has offered cash consideration to security holders in another state or in a jurisdiction outside the United States. The offeror must offer the cash consideration only if it is offering a cash-only alternative consideration not merely a partial cash/partial securities form of consideration.

c. Loan Notes

Finally, we are adopting, as proposed, the exception to the equal treatment requirement providing that the offeror does not need to offer a "loan note" alternative to U.S. security holders. Loan notes, common in the United Kingdom, are short-term notes that may be redeemed in whole or in part for cash at par on any interest date in the future. The purpose of the loan notes is the deferral of the recognition of income and capital gains on the sale of securities under foreign tax laws. Since this tax benefit is not available to U.S. security holders, a bidder would not need to offer loan notes to U.S. security holders.

4. Rule 13e-3 Exemption

We are adopting, as proposed, the exemption from the Commission's going private disclosure requirements under Rule 13e-3 for transactions eligible for the Tier I exemption. Rule 13e-3 mandates the filing of a Schedule 13E-3. Schedule 13E-3 requires disclosure about the fairness to unaffiliated security holders of the transaction that may cause an equity security to lose its public trading market. As we noted in the proposing release, we believe this exemption is appropriate because it may not be practical to impose Rule 13e-3 procedural, disclosure and filing requirements when there are no other U.S. requirements, including dissemination and disclosure requirements. Rule 13e-3 will continue to apply to offers subject to the Tier II exemptions.

5. Sections 13(d), 13(f) and 13(g)

The rules adopted today would not affect the beneficial ownership reporting requirements of Sections 13(d), 13(f) and 13(g) of the Exchange Act.³² We solicited comment on whether those provisions should apply to non-U.S. persons owning securities in foreign private issuers. We also solicited comment on whether these rules should apply only if U.S. ownership exceeded a certain percentage. Two commenters believed that these rules should not apply where the security holder bought the shares of a foreign private issuer on a foreign market. These commenters pointed to evidence of uneven compliance with those requirements in that situation as evidence that the scope of the Exchange Act's beneficial ownership disclosure requirements are not widely understood outside the United States. The American Bar Association, on the other hand, submitted a comment letter that urged that the beneficial ownership reporting requirements continue to apply. The ABA did not believe that the application of these requirements to offshore purchases of foreign securities presents a serious compliance problem or that the current approach is an impediment to cross-border transactions.³³

We believe that the need for disclosure of the ownership and control of reporting companies trading in our markets, domestic and foreign, justifies any burdens related to filing reports under those rules.

Footnotes

¹⁸ See Section II.F. infra for a discussion of how U.S. ownership is determined.

¹⁹ See the proposing release, supra note 8, at note 15.

²⁰ See Instruction 4 to paragraphs (h)(8) and (i) to revised Rule 13e-4 and Instruction 5 to paragraphs (c) and (d) of revised Rule 14d-1.

²¹ The subject company, or any officer, director or other person who otherwise would have an obligation to file a Schedule 14D-9, may satisfy that obligation by submitting the recommendation to the Commission on Form CB.

²² Financial statements submitted under cover of new Form CB that comply with the accounting requirements of the filer's home jurisdiction need not be reconciled to U.S. generally accepted accounting principles, regardless of whether the Form CB is submitted in connection with a Tier I exempt offer or under new Rules 801 or 802.

²³ 15 U.S.C. 78r.

²⁴ Cf. Exchange Act Rule 14d-4(b) [17 CFR 240.14d-4(b)].

²⁵ The fact that a foreign security trades in the United States in the form of an American Depositary Receipt (ADR), and the ADR depositary requires holders to provide it with instructions to tender into the offer a reasonable time before the close of the offer, or imposes fees in connection with the tender, would not contravene this condition.

²⁶ Revised Rules 13e-4(h)(8)(ii)(C) and 14d-1(c)(2)(iii). The determination should be made at the commencement of the offer. The amount of cash consideration must be adjusted during the term of the offer only if the bidder no longer has a reasonable basis to believe the cash is substantially equivalent to the value of the securities offered to non-U.S. holders, for example, if the bidder increases the offer price.

²⁷ [12 CFR 220.2]. The definition of a "margin security" in Regulation T, which is issued by the Board of Governors of the Federal Reserve System pursuant to the Exchange Act, includes "foreign margin stock." "Foreign margin stock" comprises both securities on the Federal Reserve Board's List of Foreign Margin Stocks and those deemed to have a "ready market" for net capital purposes under Rule 15c3-1 (17 CFR 240.15c3-1) under the Exchange Act. All stocks that appear on the Financial Times/Standard & Poor's World Actuaries Indices (FT/S&P Indices) are effectively treated as having a "ready market" for net capital purposes. See Securities Credit Transactions; Borrowing by Brokers and Dealers, 63 FR 2806 (January 16, 1998) at II.B.2.

²⁸ The opinion would address only the relative values of the cash and non-cash consideration offered to investors for the subject securities. The opinion would not need to address the fairness of either form of consideration in relation to the value of the subject securities.

²⁹ We believe that securities that are "margin securities" under Regulation T would be sufficiently liquid so that a U.S. investor should be able to ascertain the market value of the offered securities.

³⁰ See comment letter dated March 2, 1999, supra note 15.

³¹ See the staff no-action letters TABCORP Holdings Limited (Aug. 27, 1999), Durban Roodepoort Deep, Limited (Feb. 23, 1999), and AMP Limited (Sept. 17, 1998).

³² 15 U.S.C. 78m(d), 78m(g), and 78m(f).

³³ Supra note 30.