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.D

II. Discussion

D. Exemption from the Securities Act for Exchange Offers, Business Combinations, and Rights Offerings

1. Summary

The rules adopted today also provide exemptions from Securities Act registration requirements for securities issued to U.S. security holders of a foreign private issuer in exchange offers, business combinations, and rights offerings. These exemptions are being adopted as Rule 801 for rights offerings and Rule 802 for business combinations and exchange offers. Rule 800 provides common definitions for both rules. The exemptions are available only if the subject company (or the issuer in an issuer tender offer or rights offering) is a foreign private issuer and U.S. security holders hold no more than 10 percent of the subject securities.⁴⁹

The exemptions are not available for any transaction or series of transactions that technically complies with the exemptions but is part of a plan or scheme to evade the registration provisions of the Securities Act.⁵⁰ For example, if the exchange offer or rights offering is a sham conducted solely as a pretext for distributing securities in the United States, the exemptions would not be available.⁵¹

2. Eligibility Conditions

a. U.S. Ownership Limitation

As adopted, exchange offers, business combinations, and rights offerings will be exempt from registration under the Securities Act if U.S. security holders own 10 percent or less of the foreign private issuer's securities that are the subject of the offer. Based on the suggestions of commenters, we have increased the U.S. ownership limit from five to 10 percent. When U.S. security holders own 10 percent or less of the issuer, U.S. participation is generally not necessary for the success of the offering. Therefore, it is quite common for offerors to exclude U.S. security holders below this level.⁵² Commenters unanimously indicated that an increase was necessary to facilitate including U.S. persons in these transactions. Commenters' suggestions ranged from 10 to 30 percent.

We do not believe it is necessary to increase the level above 10 percent for exchange offers. It is common for offerors to include U.S. security holders above that level, since they are usually necessary for the success of the offer. ⁵³ Because a rights offering may be used as a financing device, we considered keeping the threshold for rights offerings at five percent. However, exclusion of U.S. holders in rights offerings is common even with much higher U.S. ownership levels.⁵⁴ U.S. participation is rarely viewed as necessary for the success of the offer, since from an issuer's viewpoint, the fewer shares sold to existing security holders at a discount, the better. For that reason, the goal of facilitating U.S. participation in foreign rights offerings would be significantly undermined by the proposed lower U.S. ownership ceiling of five percent. This is particularly true in light of our decision to modify the method for calculation of U.S. holdings to make the test reflect U.S. beneficial, rather than merely record, ownership. However, we do not believe that the ownership threshold should be increased above 10 percent for rights offerings because it is our view that the benefits obtained by providing U.S. security holders with the protections of the Securities Act at ownership levels above 10 percent outweigh the benefits that would be obtained by raising the ownership threshold in order to provide incentives for foreign private issuers to include U.S. security holders above the 10 percent level.

Some commenters suggested that we adopt an exemption from both the Securities Act and tender offer provisions if the subject company has less than 300 U.S. holders, regardless of the percentage of the foreign private issuer's securities owned by those investors. We do not believe that it is necessary or appropriate to exempt an offering of securities to up to 300 U.S. investors from the Securities Act registration requirements, in what may be a predominantly U.S. transaction, based solely on the foreign status of the subject company. U.S. investors in cross-border exchange offers should be provided with the protections of Securities Act registration, unless application of those provisions likely would result in the exclusion of U.S. holders from the transaction. Where U.S. participation is not incidental to the transaction, those requirements should continue to apply. With respect to the tender offer provisions, offers involving less than 300 U.S. holders are likely to be subject only to Regulation 14E, not the filing and procedural requirements of Regulation 14D, and thus will not need exemptive relief beyond that adopted today.

As with the tender offer exemptions, in order to provide a level playing field in the case of competing offers, the rules adopted today provide that if a bidder commences a tender offer or a business combination during an ongoing tender offer or business combination made pursuant to Rule 802 for securities of the same class subject to its offer, the second bidder will be eligible to use Rule 802 so long as all the conditions of the exemption, other than the limitation on U.S. ownership, are satisfied. Thus if the initial bidder relies on the Rule 802 exemption to make a tender offer, a subsequent competing bidder would not be subject to the 10 percent ownership limitation condition of the Rule 802 exemption. We do not believe it appropriate to provide, however, that if the initial bidder relied on the Tier I exemption but did not also rely on the Rule 802 exemption, a subsequent competing bidder may use the Rule 802 exemption without regard to the ownership limitation condition. As a policy matter, when relief is not necessary to ensure that competing offers are subject to the same regulatory requirements, we believe it is more important to limit relief from the Securities Act registration requirements to situations where it can be verified that U.S. security holders own 10 percent or less of the subject class of securities.⁵⁵

b. Equal Treatment

The terms and conditions of the offer must be at least as favorable for U.S. security holders as foreign holders. Rules 801 and 802 provide exceptions to the equal treatment requirement similar to the Tier I exemption with respect to state blue-sky requirements.

c. Transfer Restrictions

The new exemptions restrict the transferability of the securities acquired in an exempt transaction. To the extent that the subject securities are "restricted securities" under Rule 144 in the hands of a U.S. investor prior to the Rule 801 or 802 transaction, securities acquired by that investor in the Rule 801 or 802 transaction will be "restricted securities."⁵⁶ Conversely, if the securities that are the subject of the transaction made pursuant to Rule 801 or 802 are unrestricted, then securities acquired in the transaction will be unrestricted. In the latter case, the securities would be freely tradable by non-affiliate security holders, so long as they are not participating in the offer under circumstances in which they could be deemed statutory underwriters.⁵⁷

In the case of a rights offering under Rule 801, the proportion of restricted to unrestricted securities will be determined as of the record date that determines the allocation of rights among security holders. In the case of an exchange offer or business combination, the proportion will be based upon the securities tendered or exchanged by the holders.

We proposed this approach for transfer restrictions only with respect to Rule 802 for exchange offers. In contrast, the Rule 801 exemption for rights offerings proposed in 1998 would have required that all securities purchased upon the exercise of the rights be restricted within the meaning of Rule 144. We are persuaded by the large number of commenters who argued that it was not necessary to require unaffiliated U.S. security holders to accept restricted securities in rights offerings where they currently hold unrestricted securities. However, we think it is appropriate to require that security holders receive restricted securities in the transaction if they held restricted securities before the transaction. Otherwise, a rights offering or exchange offer could be used as a pretext for creating a large pool of freely tradable securities in the hands of investors who previously held only restricted securities. This restriction, along with the requirement that the offer be made to all holders on a pro rata basis, and that U.S. ownership in the subject company's securities be limited to 10 percent, should minimize the potential that Rules 801 and 802 will be misused as a means to conduct illegal distributions in the United States. Moreover, securities issued in a rights offering or exchange offer to affiliates of the issuer would not be freely tradable.⁵⁸

d. Additional Requirements for Rights Offerings

Rule 801, as adopted today, is available only for rights offerings of equity securities made on a pro rata basis to existing security holders of the same class, including holders of ADRs evidencing those securities. Under Rule 800, the term "equity security" does not include convertible securities, warrants, rights, or options.⁵⁹ Rule 801 is limited to the offer of securities of the same class of securities as those held by the offerees, because the offerees already have made the decision to invest in that class.

Rule 801 requires that the rights granted to U.S. security holders not be transferable except offshore in accordance with Regulation S.⁶⁰ Certain commenters believed that restricting the transferability of the rights would put U.S. security holders at a disadvantage to non-U.S. security holders who could transfer the rights. However, we believe this restriction is appropriate to assure that foreign private issuers do not extend the offerings to new investors in the United States and that a market not develop in the United States for the rights without adequate disclosure regarding the issuer.

e. Offeror Eligibility Requirements

As adopted, Rule 801 requires that the offeror be a foreign private issuer. It does not impose any other offeror eligibility requirements. Where U.S. participation is only incidental to the offering, no other offeror eligibility criteria are necessary. Investors are already familiar with the issuer and the security. The commenters concurred that imposition of additional criteria would only diminish the effectiveness of the exemption by narrowing its scope and causing U.S. security holders to continue to be excluded.

As adopted, Rule 802 does not contain any limitations based on the domicile or reporting status of the offeror. Any offeror can use Rule 802 regardless of whether it is a U.S. company or a foreign private issuer and regardless of whether it is a reporting company. The subject company, however, must be a foreign private issuer. Requiring a U.S. bidder for the securities of a foreign subject company to register the U.S. portion of an exchange offer would place the U.S. bidder, particularly a non-reporting U.S. company, at a competitive disadvantage to a foreign bidder for the same company. In the case of a business combination where there is no surviving acquiror and the issuer is the successor company to all participating companies, all participants in the business combination must be foreign private issuers.

Finally, neither Rule 801 nor 802 impose a dollar limitation on the value of securities that may be sold to U.S. investors in an exempt transaction. The American Bar Association commented that a dollar limitation appears to be too arbitrary given the different sizes of companies and the fluctuating market value of securities being offered.⁶¹ We agree.

f. Informational Requirements

Rules 801 and 802 do not mandate that specific information be sent to U.S. security holders. Instead, when any document, notice or other information is provided to offerees, copies (translated into English) must be provided to U.S. security holders in a similar manner. The documents must include a legend regarding the foreign nature of the transaction and the issuer's disclosure practices. The legend also must state that investors may have difficulty in enforcing rights against the issuer and its officers and directors. Some commenters noted that imposing a requirement for a legend on the cover page was unnecessarily burdensome and could discourage offerors from extending offers to U.S. security holders.⁶² To address these concerns, the legend need not be placed on the cover page; rather, it need only be placed in a prominent position in the document.

Rules 801 and 802 both require that the offeror provide the notice or offering document to U.S. security holders in English at the same time it provides the information to offshore offerees. We proposed that offerors be required to deliver rights offering materials to U.S. investors, even if those materials were only published overseas. In contrast, exchange offer materials would not be required to be delivered if not delivered in the home jurisdiction. We are persuaded by those commenters who indicated that offerors will not be inclined to avail themselves of Rules 801 or 802 if burdensome documentation and dissemination requirements are imposed by the U.S. rules and who were of the view that U.S. security holders should be provided with information on the same basis as that provided to offerees in other jurisdictions. As noted above, exclusion of U.S. holders in rights offerings is common even at high U.S. ownership levels. U.S. participation is rarely viewed as necessary for the success of the offer, and U.S. investors may thereby be deprived of the opportunity to acquire shares at attractive prices, resulting in their positions being diluted. Requiring the offeror to mail rights offering materials to U.S. security holders might create an additional incentive for offerors to exclude U.S. security holders from participating in the rights offering. In order to encourage foreign private issuers to include U.S. security holders in rights offerings, the rules adopted today provide that for both rights offerings and exchange offers, the offeror must disseminate any informational documents to U.S. holders, in English, on at least a comparable basis to that provided to security holders in the offeror's home jurisdiction. If the offeror disseminates by publication in its home jurisdiction, the offeror must publish the information in the United States in a manner reasonably calculated to inform U.S. holders of the offer. Of course, the offeror may mail to U.S. security holders in any event.

We are adopting, as proposed, the requirement that an offeror submit a notification to the Commission on new Form CB. A foreign company also must file a Form F-X at the same time it submits the Form CB to appoint an agent for service of process in the United States. The new form will include as an attachment a copy of any document, notice or other information disseminated to U.S. offerees.

g. Trust Indenture Act Exemption

We are adopting, as proposed, a new rule under Section 304(d) of the Trust Indenture Act that would exempt any debt security issued pursuant to Rule 802 under the Securities Act from having to comply with the provisions of the Trust Indenture Act. Therefore, the rules adopted today will permit offerors to offer debt securities in an exchange offer or business combination without complying with the provisions of the Trust Indenture Act. As one commenter noted, a failure to provide relief under the Trust Indenture Act would essentially undermine the usefulness of the other relief in the case of debt securities.⁶³ Accordingly, we believe that the benefits to be obtained by U.S. investors by providing exemptions under the Trust Indenture Act when debt securities are issued pursuant to a Rule 802 exemption justify not providing U.S. investors with the protections of the Trust Indenture Act in these types of transactions.

Footnotes

⁴⁹ As we stated in the proposing release, the exemptions adopted today under new Rules 801 and 802 are non-exclusive. An issuer making an offering in reliance on either of the rules may claim any other available exemption under the Securities Act. Securities issued under new Rules 801 or 802 would not be integrated with any other exempt offerings by the issuer. General Notes 5-7 to new Rules 800, 801, and 802.

⁵⁰ See General Note 2 to new Rules 800, 801, and 802.

⁵¹ Therefore, a foreign company could not, for example, conduct a rights offering under Rule 801 that is targeted at the U.S. holders. If the offeror does not have a bona fide expectation that non-U.S. holders would participate in the offering to a similar extent as U.S. holders, the pro rata nature of the offering would be a sham. Another example would be when an initial offer is commenced solely as a pretext for making a subsequent offer automatically eligible for the exemptions.

⁵² See note 8, supra.

⁵³ Although comprehensive statistics on transactions that exclude U.S. investors is not available, a significant number of transactions with greater than 10 percent U.S. ownership are extended to U.S. holders. For example, U.S. holders owned more than ten percent of the subject class of securities in 31 of the 54 requests for exemptive relief received by the Commission between 1990 and 1998.

⁵⁴ Between 1994 and 1998, 78 rights offerings were made to U.S. shareholders holding American or Global depositary receipts held by the Bank of New York. In 30 of the rights offerings (39%), U.S. shareholders were excluded entirely. In the remaining 48 offerings (61%), the Bank of New York sold the rights and provided shareholders with the cash, after costs. A significant number of these offerings had U.S. holders who held more than five percent of the securities at issue. See the letter from Emmet, Marvin & Martin, LLP dated February 17, 1999, supra note 15. Costs borne by U.S. shareholders in these cases include transaction fees, ADR cash distribution or issuance fees, and potential liquidity costs if the foreign market is small.

⁵⁵ In this situation, the subsequent bidder commencing an exchange offer or business combination will be entitled to calculate the percentage of U.S. ownership 30 days before commencement of its offer. See Section II.F.1. infra. Assuming that the subsequent offer is commenced within 30 days of the announcement of the initial Tier I offer, the subsequent bidder would not be disadvantaged by any movement of securities into the United States following that announcement when calculating the percentage of U.S. ownership of the subject securities for purposes of eligibility under new Rule 802.

⁵⁶ See General Note 8 to new Rules 800-802. Under Securities Act Rule 144(d), the holding period for the restricted securities issued in the Rule 801 or 802 transaction will depend on the nature of the transaction. Investors in issuer exchange offers not involving an additional cash investment will be able to "tack" the holding period for the tendered restricted security to the holding period for the new security, and thus would calculate the holding period from the time it originally acquired the tendered security from the issuer or an affiliate. The holding periods for restricted securities received in a rights offering or third-party exchange offer, however, would begin with the issuance of those securities in the Rule 801 or 802 transaction.

⁵⁷ See Section 2(a)(11) of the Securities Act, 15 U.S.C. 77b(11).

⁵⁸ Under Rule 144(e)(1) [17 CFR 230.144(e)(1)], affiliates of the issuer are subject to volume restrictions on the resale of their securities.

⁵⁹ New Rule 800(b).

⁶⁰ 17 CFR 230.901 through 230.905.

⁶¹ Supra note 30.

⁶² See letter from Sullivan & Cromwell dated February 12, 1999, supra note 15 and the letter from the American Bar Association dated March 2, 1999, supra note 30.

⁶³ Id.