Release No. 33-7760

Release No. 34-42055

Release No. IC-24107

[File No. S7-28-98] RIN 3235-AG84

Table of Contents

Regulation of Takeovers and Security Holder Communications

AGENCY: Securities and Exchange Commission

ACTION: Final Rule

SUMMARY: We are adopting comprehensive revisions to the rules and regulations applicable to takeover transactions (including tender offers, mergers, acquisitions and similar extraordinary transactions). The revised rules will permit increased communications with security holders and the markets. The amendments also will: balance the treatment of cash and stock tender offers; simplify and centralize the disclosure requirements; and eliminate regulatory inconsistencies in mergers and tender offers. In addition, we are updating the tender offer rules by providing for a subsequent offering period, clarifying certain filing and disclosure requirements and reducing compliance burdens where consistent with investor protection. We believe these revisions will lead to a more well informed and efficient market.

EFFECTIVE DATE: The rules and amendments will become effective
January 24, 2000.

FOR MORE INFORMATION CONTACT: Dennis O. Garris, Chief, or James J. Moloney, Special Counsel, in the Office of Mergers & Acquisitions, Division of Corporation Finance, at (202) 942-2920. For questions on new Rule 14e-5, contact James A. Brigagliano, Assistant Director, Irene Halpin, Florence Harmon or Michael Trocchio, Special Counsels, in the Office of Risk Management and Control, Division of Market Regulation, at (202) 942-0772. For questions on investment companies, contact Martha B. Peterson, Special Counsel, in the Office of Disclosure Regulation, Division of Investment Management, at (202) 942-0721.

SUPPLEMENTARY INFORMATION: We are adopting amendments to Rules 13e-1, 13e-3, 13e-4, 14a-4, 14a-6, 14a-12, 14c-5, 14d-1, 14d-2, 14d-3, 14d-4, 14d-5, 14d-6, 14d-7, 14d-9, 14e-1¹ and Schedules 14A, 13E-3, and 14D-9² under the Securities Exchange Act of 1934 ("Exchange Act").³ We are rescinding Exchange Act Rule 14a-11.⁴ We are adopting: amendments to Item 10 of Regulation S-K;⁵ a new subpart of Regulation S-K, the 1000 series ("Regulation M-A"); a new tender offer schedule, Schedule TO, to replace Schedules 13E-4 and 14D-1;⁶ new tender offer Rule 14e-5 to replace Rule 10b-13;⁷ and new tender offer Rules 14d-11 and 14e-8. We also are adopting amendments to Rule 13(d) of Regulation S-T and Rule of Practice 30-3.⁸ Lastly, we are adopting amendments to Rules 135, 145 and 432, Forms S-4 and F-4, and new Rules 162, 165, 166 and 425 under the Securities Act of 1933 ("Securities Act").⁹

I. Executive Summary and Background

Last fall, we proposed comprehensive changes to the various regulatory schemes applicable to issuer and third-party tender offers, mergers, going-private transactions and security holder communications.¹⁰ The proposed changes were prompted by an increase in the number of transactions where securities are offered as consideration; an increase in the number of hostile transactions involving proxy or consent solicitations; and significant technological advances that have resulted in more and faster communications with security holders and the markets. Because these trends have continued since we issued the Proposing Release and commenters, for the most part, viewed the proposals as favorable,¹¹ we are adopting the proposals, with some modification.

As we noted in the Proposing Release, the existing regulatory framework imposes a number of restrictions on communications with security holders and the marketplace. In addition, the disparate regulatory treatment of cash and stock tender offers¹² may unduly influence a bidder's¹³ choice of offering cash or securities in a takeover transaction. We also noted unnecessary differences in regulatory requirements between tender offers and other types of extraordinary transactions, such as mergers.¹⁴ Finally, we noted that the multiple regulatory schemes that can apply to a transaction may impose additional compliance costs without necessarily providing a sufficient marginal benefit to security holders. Our goals in proposing and adopting these changes are to promote communications with security holders and the markets, minimize selective disclosure, harmonize inconsistent disclosure requirements and alleviate unnecessary burdens associated with the compliance process, without a reduction in investor protection.¹⁵

We also proposed broad changes to the regulation of securities offerings in a companion release.¹⁶ Our proposed treatment of communications in the Securities Act Reform Release differs from our approach in the Proposing Release. The differences were due to the special nature of business combination transactions¹⁷ in contrast to capital-raising transactions. At this time we are not adopting the Securities Act Reform proposals that are unrelated to business combination transactions. We are continuing to evaluate commenters' responses to the Securities Act Reform proposals and in the future we may take action on these proposals. We are adopting, however, several proposals in the Securities Act Reform Release that relate to business combination transactions. As a result, some proposals or concepts previously presented in the Securities Act Reform Release are incorporated into this release. Where we proposed changes that would appear in new forms included in the Securities Act Reform Release (Forms C and SB-3), those changes have been implemented in existing forms (Forms S-4 and F-4). In a separate release, we also are adopting significant changes to the regulatory scheme for cross-border tender offers, exchange offers and rights offerings.¹⁸

We believe these new rules and revisions should provide participants in the securities markets sufficient flexibility to accommodate changes in deal structure and advances in technology that continue to occur in today's markets. Briefly, the new rules and amendments adopted today will:

• relax existing restrictions on oral and written communications with security holders by permitting the dissemination of more information on a timely basis, so long as the written communications are filed on the date of first use; in particular,

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

  • permit more communications before the filing of a proxy statement (whether or not a business combination transaction is involved);

  • permit more communications regarding a proposed tender offer without "commencing" the offer and requiring the filing and dissemination of specified information;

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

  • eliminate the confidential treatment currently available for merger proxy statements, except when communications made outside the proxy statement are limited to those specified in Rule 135;

• balance the treatment of stock and cash tender offers by permitting both issuer and third-party stock tender offers to commence as early as the filing of a registration statement;

• simplify and integrate the various disclosure requirements for tender offers, going-private transactions, and other extraordinary transactions in a new series of rules within Regulation S-K, called "Regulation M-A";

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

• require a "plain English" summary term sheet in all tender offers, mergers and going-private transactions, except when the transaction is already subject to the Securities Act plain English rules;

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

  • eliminate the requirement to file financial statements for target companies¹⁹ in most cash mergers, consistent 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 for the acquiror from three years to two;

  • clarify when the bidder's 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 negotiated cash tender offers where the bidder intends to engage in a back-end securities transaction;

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

• permit an optional subsequent offering period after completion of a tender offer, during which security holders can tender shares without withdrawal rights;

• clarify Rule 13e-1, which requires issuers to report intended repurchases of their own securities once a third-party tender offer has commenced;

• conform the security holder list requirement in the tender offer rules with the comparable provision in the proxy rules so that the list will include non-objecting beneficial owners; 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.

In several respects the rules adopted today differ from the proposed rule changes. The primary differences are as follows:

• the Securities Act exemption for communications is extended to all parties to the transaction and any persons acting on their behalf;

• the Securities Act exemption also is revised to clarify that an unintentional or immaterial breach of the filing requirement will not result in a loss of the exemption so long as a good faith and reasonable attempt was made to file and the material is filed as soon as practicable after discovery of the failure to file;

• a definition of "public announcement" is provided so that parties know when they need to begin filing written communications relating to the transaction and when the prohibition against making purchases outside the tender offer begins;

• a written communication relating to a proposed transaction that is a Rule 135 notice must be filed unless the notice only contains information that has already been filed;

• the confidential treatment currently available for preliminary merger proxy statements is retained under limited circumstances;

• the requirement in expanded Rule 14a-12 to furnish a proxy statement as soon as practicable is revised so that a proxy statement must be furnished at the time a form of proxy is given to or requested from security holders;

• written communications permitted under expanded Rule 14a-12 must include either full participant information, as currently required, or a legend directing security holders where they can obtain participant information;

• long form publication is retained as a means to commence a tender offer, rather than being eliminated as proposed;

• the provision permitting commencement of exchange offers as early as the filing of a registration statement is extended to issuer exchange offers, not limited to third-party offers as proposed;

• a bidder that commences an exchange offer early may not be required to deliver a final prospectus to security holders;

• an acquiror in a stock merger or stock tender offer need not provide any financial statements for a non-reporting target if the acquiror's security holders are not voting on the transaction and the acquisition is not significant to the acquiror at the 20% level;

• subsequent offering period changes: this period can be between three and 20 business days, and is not fixed at ten business days as initially proposed; a bidder is not required to disclose an intent to engage in a back-end merger; and a bidder must announce the results of the initial offering period before beginning the subsequent offering period;

• a bidder must disclose pro forma financial information in the first tier of a two-tier transaction for negotiated transactions only, not for transactions where access to the target's financial information is limited;

• the information required by Rule 13e-1 regarding issuer repurchases of securities need not be disseminated to security holders; in addition, an exclusion from this rule is provided for certain periodic, routine repurchases; and

• several additional exceptions are added to new Rule 14e-5.

At this time we are not adopting several concepts that we solicited comment on, including:

• a modification to the proxy rules that would permit the direct delivery of proxy materials to non-objecting beneficial owners;

• a federally-mandated proxy solicitation period;

• a "test the waters" provision for proxy solicitations;

• a requirement that bidders commencing a tender offer by summary advertisement mail their tender offer materials to security holders;

• a proxy analogue to the early commencement provision in exchange offers that would permit the sending of proxy cards with "preliminary" proxy materials; and

• an expansion of the Private Securities Litigation Reform Act of 1995²⁰ safe harbor from liability to cover forward-looking statements made in connection with tender offers.

In the future, depending on the effects of today's rule changes, we may consider proposing additional changes to further harmonize the regulatory requirements.