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.F

II. Discussion

F. Determination of U.S. Ownership

1. Definition of U.S. Holder

Today's amendments revise the method for determining the amount of securities held by U.S. holders from that included in the 1998 proposals. The amount owned by U.S. holders is important under both the Tier I and II tender offer exemptions. It is also important in determining the availability of the Securities Act exemptions under Rules 801 and 802. Relief in each case is conditioned, at least in part, on the percentage of the subject company's securities held by U.S. security holders not exceeding a specified threshold.

The proposed approach was based on the definition of "foreign private issuer,"⁷⁰ which at the time was based solely on record, not beneficial ownership. We recently amended that definition to require companies claiming foreign private issuer status to look through certain bank, broker-dealer and other nominees to determine the residence of the nominee's client accounts.⁷¹ We likewise are adopting that modified approach for the purpose of determining the amount of securities held by U.S. holders under the new exemptive rules. Like the revised foreign private issuer definition, the starting point is Rule 12g3-2(a) under the Exchange Act.⁷² Rule 12g3-2(a) follows the definition of "securities held of record" in Rule 12g5-1, but requires the offeror to "look through" the record ownership of brokers, dealers, banks or nominees appearing on the issuers' books or those of transfer agents, depositaries, or others acting on the issuer's behalf. If those record owners hold securities for the accounts of customers, the issuer must determine the residency of those customers. This method of calculation more closely reflects the beneficial ownership of the issuer's securities.

We have limited the application of the "look through" provisions of Rule 12g3-2(a) to securities held of record (1) in the United States, (2) in the issuer's home jurisdiction, and (3) in the primary trading market for the issuer's securities if different from the issuer's home jurisdiction. These jurisdictions should cover most of the trading volume for the issuer's securities, and searches in these jurisdictions are likely to yield the greatest number of U.S. beneficial owners. This modification to the Rule 12g3-2(a) approach should reduce the burden on foreign companies while still producing a reasonably accurate picture of the size of the U.S. ownership of the foreign issuer.⁷³

Some commenters pointed out that it is not always possible for issuers to obtain information about separate customer accounts, as required by Rule 12g3-2(a). Brokers, dealers, banks or other nominees may be unwilling or unable to provide information about their customer accounts. We note, however, that the duty to inquire about separate customer accounts already exists for issuers deciding whether the reporting exemption in Rule 12g3-2(a) is available. In addition, the offeror would not be asking nominees to provide the number of U.S. security holders or the names of those security holders, but only the aggregate amount of the nominee's holdings that are represented by U.S. accounts. Thus, the offeror would not have to ask the nominees for information regarding possible 10 percent holders. If after reasonable inquiry, however, the offeror is unable to obtain information about the nominee's customer accounts, including cases where the nominee's charge for supplying this information would be unreasonable, the offeror may rely on a presumption that the customer accounts are held in the nominee's principal place of business. ⁷⁴

Also similar to the revised approach under the foreign private issuer definition, issuers and offerors must take into account information regarding U.S. ownership derived from beneficial ownership reports that are provided to the issuer or filed publicly in the United States or in the home jurisdiction, as well as beneficial ownership information that otherwise is provided to the issuer or offeror.

We recognize that by focusing on beneficial ownership rather than record ownership, we have made it more difficult to stay below the relevant ownership ceilings and thus have limited the applicability of the exemptive rules. Indeed, that is one reason why we increased the U.S. ownership threshold under Rules 801 and 802 to 10 percent. Nevertheless, we believe that it is critical that the exemptive rules function based upon a fair assessment of the U.S. participation in the offering. Reliance on record ownership would result in applicability of the exemption when actual U.S. investor interest, and therefore their importance to the success of the transaction, far exceeds the stated ceilings.

We are not adopting as part of the final rules a proposed rebuttable presumption (also proposed for the purposes of the foreign private issuer definition) that if a foreign private issuer's securities trade in the U.S. markets in the form of ADRs, the securities deposited in the ADR program are held solely by U.S. residents. Commenters on the foreign private issuer proposal pointed out that, for a number of reasons, non-U.S. security holders may choose to hold securities in ADR form. It appears that issuers will not rely on the presumption and will feel the need to query ADR depositaries regarding the owners of ADRs. Therefore, we have eliminated the presumption from these rule revisions as well. ⁷⁵ Issuers will thus have to examine the participant lists of ADR depositaries and query home country or U.S. broker-dealer or bank nominees appearing on those lists to ascertain the amount of ADRs held by U.S. investors.

We have revised the time period for calculating the percentage of U.S. ownership from the proposal. As proposed, the calculation would have been made at the commencement of the offer. Based on commenters' suggestions, we revised the proposal to include a 30 day "look back" period to accommodate the offeror's or issuer's planning process. As revised, the offeror would make the calculation of U.S. ownership 30 days before the commencement of the tender offer. Or, in the case of a business combination such as a merger where the securities are issued by the acquiring company, the calculation will be based on U.S. ownership of the company to be acquired 30 days before the commencement of the solicitation for the merger. In business combinations such as an amalgamation, where the securities are issued by a successor company to all participating companies, the calculation would be made based on U.S. holder information available 30 days before commencement, but applied on a pro forma basis as if measured immediately after completion of the business combination.

We are not adopting the proposal that if a bidder commences an offer during an ongoing tender or exchange offer for securities of the same class subject to its offer, the bidder could calculate the percentage of subject securities held by U.S. holders as of the same date used by the initial bidder. We believe that this proposal is unnecessary because 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 for securities of the same class subject to its offer, the second bidder will be eligible to use the same exemption as the prior bidder (Tier I, Tier II, or Rule 802) so long as all the conditions of the exemption, other than the limitation on U.S. ownership, are satisfied by the second bidder. In addition, if the bidder chooses to rely on a different exemption from the initial bidder, the bidder will be entitled to calculate the percentage of U.S. ownership 30 days before commencement of its tender offer or commencement of the solicitation for the merger. Accordingly, the subsequent bidder should not be disadvantaged by any movement of securities into the United States following the announcement of the initial bid.⁷⁶

The issuer must include securities underlying ADRs in determining the amount of securities outstanding of the class that is the subject of the offer, as well as the amount of the subject class of securities held by U.S. holders. On the other hand, other types of securities that are convertible into or exchangeable for subject securities, such as warrants, options, and convertible securities, would not be taken into account in calculating U.S. ownership.

2. Exclusion of Holdings of More Than 10 Percent

We proposed that offerors exclude securities held by non-U.S. security holders of more that 10 percent of the class from the calculation of the U.S. ownership percentage. We requested comment regarding whether it would be appropriate to exclude securities held by affiliates, whether held outside the United States or in the United States, from both elements of the calculation, thus focusing only on the percent of the company's total world-wide non-affiliated float held in the United States. Many commenters objected to excluding only non-U.S. 10 percent holders. Commenters argued that since many foreign private issuers have one or more significant security holders indeed, many are controlled by founding families their exclusion from the calculation could severely limit the availability of the exemptions.

Several commenters suggested that a better approach would be to exclude large or institutional U.S. security holders, as well as foreign 10 percent holders. One commenter suggested excluding the securities of the bidder, regardless of the amount. Commenters argued that large U.S. security holders do not need the protections of the securities laws and could easily go overseas to participate in the transaction or participate on a private placement basis. Absent exemptive relief, bidders would extend the offer only to the larger, and exclude the smaller, U.S. security holders (assuming U.S. institutional investor participation would not trigger U.S. all-holders requirements).

For these reasons, we are persuaded by the commenters that large U.S. holders likewise should be excluded from the calculation of U.S. ownership. Similarly, exclusion of securities held by a bidder or bidding group will provide greater assurance of an accurate assessment of the significance to the offer of the participation by U.S. public investors.

Because the 10 percent holders are viewed as affiliates for purposes of calculating U.S. ownership, they presumably would be treated as affiliates for purposes of Rule 144 ⁷⁷ as well . They would therefore be subject to limitations on the amount of securities received in the offer that they could resell. Treating these securities as control shares should minimize the potential that, in cases where there are a significant number of shares held by a relatively few U.S. holders, the Securities Act exemptions for cross-border rights offerings and exchange offers under Rules 801 and 802 will be misused as a means to conduct illegal distributions in the United States.

3. Determination of Eligibility by Persons Other Than the Issuer

As we noted in the November 1998 release, the principal disadvantage of using a U.S. ownership threshold as a condition for the applicability of the exemptions is that it will be difficult for third-party offerors to ascertain whether the exemption is available without information on the subject company's U.S. ownership.⁷⁸ It will be even more difficult for persons other than the issuer to obtain information from nominees, including information on 10% holders, as required under the modified approach adopted today.⁷⁹ We are adopting, with minor changes, the proposal that a third-party bidder in an unsolicited or "hostile"⁸⁰ tender offer may rely upon a presumption that the U.S. ownership percentage limitations of the Tier I⁸¹, Tier II⁸² and Rule

802 exemptions are not exceeded unless:

(1) the aggregate trading volume of the subject class of securities on all national securities exchanges in the United States, on the Nasdaq market or on the OTC market, as reported to the NASD, over the 12-calendar-month period ending 30 days before commencement of the offer, exceeds 10 percent in the case of Tier I offers and Rule 802, and 40 percent in the case of Tier II offers, of the worldwide aggregate trading volume of that class of securities over the same period;

(2) the most recent annual report or other informational form filed or submitted by the issuer or security holders to securities regulators in its home jurisdiction or elsewhere (including with the Commission) indicates that U.S. holdings exceed the applicable threshold;⁸³ or

(3) the bidder knows or has reason to know from other sources that the level of U.S. ownership of the subject class exceeds the thresholds.

As to whether the foreign subject company is a foreign private issuer, the bidder can rely on the exemptions if the issuer of the subject securities files reports with the Commission under the foreign integrated disclosure system⁸⁴ or has claimed an exemption from reporting under Exchange Act Rule 12g3-2(b),⁸⁵ unless the bidder knows the foreign subject company is not a foreign private issuer.

One commenter believed that the presumption should be available for both hostile and negotiated transactions. The commenter was concerned that takeover situations are often fluid and that hostile offers often turn friendly shortly after commencement of the tender offer. We believe, however, that application of the exemption should turn on an accurate assessment of U.S. ownership whenever possible. A bidder in a negotiated transaction would be able to arrange to get this information from the subject company as part of the acquisition agreement. We believe that the presumption should be available only when there is no assurance that the issuer will obtain and provide the offeror with current information about U.S. ownership. If information on U.S. ownership can be obtained, that information should determine whether the exemptions are available, rather than a presumption based on trading activity. For this reason, notwithstanding the views of some commenters, an issuer, affiliate, or friendly bidder could not rely upon the presumption.

Even if the above presumption is not available, the bidder may nevertheless rely on the exemption if it can demonstrate that U.S. ownership is in fact less than the relevant threshold or, in the case of competing bids, if the bidder chooses to rely on the same exemption (Tier I, Tier II, or Rule 802) as that used by a prior offeror.⁸⁶

Footnotes

⁷⁰ Exchange Act Rule 3b-4 [17 CFR 240.3b-4].

⁷¹ International Disclosure Standards, Exchange Act Release No. 41936 (September 28, 1999), 64 FR 53900.

⁷² 17 CFR 240.12g3-2(a).

⁷³ For example, a German foreign private issuer traded solely on the Frankfurt Stock Exchange would have to query banks and broker-dealers that are either registered owners with the company or appear on participant lists of depositaries and that are based in Germany or the United States. The issuer would request information on the number of shares held by customer accounts that reflect a U.S. address for the customer.

⁷⁴ Because it will be difficult for third-party offerors in an unsolicited or "hostile" tender offer to ascertain whether the exemption is available without information on the subject company's U.S. ownership, we are adopting the proposed presumption that the U.S. ownership percentage limitations are not exceeded based on the relative level of trading volume in the United States. See Section II.F.3. infra.

⁷⁵ The revisions from the proposal do not affect the treatment of bearer securities in determining U.S. ownership. Since neither a U.S. residence nor the name of an offshore nominee will appear on the records of the issuer for the holder of the bearer securities, these securities will not be treated as being held by U.S. residents, unless the offeror knows or has reason to know that these securities are held by U.S. residents.

⁷⁶ See note 55, supra.

⁷⁷ 17 CFR 230.144.

⁷⁸ Exemptions for transactions like issuer tender offers or rights offerings do not pose this problem. An issuer can and must examine its own records and those of transfer agents and depositaries acting on its behalf to obtain the necessary information regarding U.S. ownership of its own securities.

⁷⁹ This concern is eliminated if the hostile bidder commences its offer after a prior competing tender offer or a business combination for securities of the same class subject to its offer and chooses to rely on the same exemption as the prior offeror because, as previously noted, 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. A presumption remains necessary, however, when the hostile bidder either makes the initial offer or is the subsequent bidder but chooses to rely on a different exemption from that used by a prior offeror.

⁸⁰ New Rule 802(c)(1) and Instruction 3.i. to revised Rules 14d-1(c) and (d) make the presumption inapplicable to offers "made pursuant to an agreement" with the issuer. The agreement need not be written.

⁸¹ See revised Rules 13e-4(h)(8) and Rule 14d-1(c).

⁸² See revised Rules 13e-4(i) and 14d-1(d).

⁸³ If U.S. ownership of more than 10 percent is reported in public filings with the Commission or a foreign regulator, such as Schedule 13D or 13G, we would take the position that the bidder has reason to know the level of U.S. ownership exceeds 10 percent.

⁸⁴ This includes Form 20-F and 6-K, which are available only to foreign private issuers.

⁸⁵ 17 CFR 240.12g3-2(b).

⁸⁶ For example, if a hostile bidder makes a tender offer in reliance on the Tier I exemption, the hostile bidder may rely on the presumption. If the hostile bid is then followed by a subsequent bid, whether by the issuer, an affiliate, or a hostile or friendly third-party bidder, the subsequent bidder also may use the Tier I exemption so long as the subsequent bidder satisfies all of the conditions of the Tier I exemption other than the ownership limitation condition. If, however, the subsequent bidder wishes to rely upon new Rule 802 to make an exchange offer or business combination, the subsequent bidder will have to satisfy the ownership limitation condition of Rule 802 as well as its other conditions even though both Rule 802 and the Tier I exemption each use a 10% ownership threshold. In this situation, if the subsequent bidder is a hostile bidder, it may use the presumption discussed above if all of the conditions of the presumption are satisfied to commence a Rule 802 offer in response to the initial Tier I or Tier II offer. Even if the above presumption is not available, the bidder may nevertheless rely on the Rule 802 exemption if it can demonstrate that U.S. ownership is in fact less than the relevant threshold. The bidder will be entitled to calculate the percentage of U.S. ownership 30 days before commencement of its exchange offer or commencement of the solicitation for the merger.

Another example would be where a third-party bidder in a negotiated transaction desires to make an exchange offer or business combination in reliance on the Section 802 exemption. The third party bidder would not be entitled to rely on the presumption because it is not a hostile party. If, after calculating the percentage of the issuer's securities held by U.S. holders, the friendly party commences an exchange offer or business combination in reliance on the Section 802 exemption, then a subsequent offeror also may rely on the Section 802 exemption so long as all of the conditions of such exemption, other than the ownership limitation condition, are satisfied.