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Release No. 33-7760 
Release No. 34-42055
Release No. IC-24107
Securities and Exchange Commission
Regulation of Takeovers and Security Holder Communications
Section II.A.
Table of Contents
II. Discussion of New Regulatory Scheme
A. Overview
1. Increased Communications Permitted Before Filing Disclosure Document Today, merger and acquisition transactions are occurring at a faster
pace, due in part to the rapid development of new technologies and advancements
in communications. As a result of economic and regulatory pressures, many
companies are releasing more information to the market before a registration,
proxy or tender offer statement is filed publicly with us.21 In many cases, parties are releasing
information on proposed transactions including pro forma financial information
for the combined entity, estimated cost savings and synergies. As we noted
in the Proposing Release, parties to business combination transactions provide
several reasons for the need to disclose information early,22 including the duty under
Rule 10b-5 to disclose material information in a manner that is not misleading.23 We also recognize that parties
may be subject to other regulatory requirements to disclose information
to the markets early.24
Existing restrictions on communications result primarily from the broad
concepts of "offer"25
and "prospectus"26
under the Securities Act, "solicitation"27 under the Exchange Act proxy rules, and "commencement"28 under the Williams Act tender
offer rules.29 We
recognize that restricting communications to one document may actually impede,
rather than promote, informed investing and voting decisions.
We are adopting, as proposed, non-exclusive exemptions under the Securities
Act, proxy rules and tender offer rules that permit communications for an
unrestricted length of time without a cooling-off period between the end
of communications and filing. Written communications made in reliance on
the exemptions must be filed. In response to comments, we have modified
the exemptions slightly from those proposed, as discussed below.
One major benefit of permitting earlier communications is that more information
will be available generally to all security holders, not simply to a limited
audience of analysts and financially sophisticated market participants.
Because the new rules do not require oral communications to be reduced to
writing and filed, some selective disclosure may continue to occur.30 Nevertheless, the rules adopted
today are designed to reduce selective disclosure by permitting widespread
dissemination of information through a variety of media calculated to inform
all security holders about the terms, benefits and risks of a planned extraordinary
transaction. We believe that parties to business combination transactions
generally wish to inform the marketplace at large about their deals, and
will use the new rules to accomplish this end. The new regulatory scheme
is not intended to be used as a means to substitute selective oral disclosure
for written and oral disclosure that becomes public on a widespread basis.31 Although this release does not
impose new requirements on oral communications, we remain extremely troubled
by the selective disclosure of material information.32 The staff is considering broader
regulatory approaches to limit or inhibit written and oral selective disclosure
by issuers in all contexts, including those addressed in this release. If
we decide to pursue these approaches, we will issue a separate release seeking
public comment.33
The scheme we adopt today provides the maximum amount of flexibility
to disclose information to security holders and the markets.34 This new communications scheme,
however, does not change the current requirement that security holders receive
a mandated disclosure document before they are asked to make a voting or
investment decision (e.g., a prospectus, proxy statement, or tender
offer statement setting forth complete and balanced information).35 Of course, security holders
may buy or sell in the market before they receive the mandated disclosure
document. That is true under the current regulatory scheme as well as under
the new one. Under the new rules, security holders are likely to have information
about the transaction at an earlier point in time, and they can choose to
act on this information or wait for the complete disclosure document.
While it is possible under the new scheme to announce a proposed transaction
long before a mandated disclosure document is filed, we do not believe acquirors
will delay the filing of a mandated disclosure document unnecessarily because
the longer they wait the greater the risk that market forces will affect
the terms of the deal or another potential acquiror will announce a competing
transaction. We believe that companies announcing a transaction should,
and we encourage them to, file the mandated disclosure document as soon
as possible after announcing a proposed transaction.
Our long-held concern regarding communications that could condition the
market before dissemination of a mandated disclosure document is mitigated
by the continuing requirement to deliver a disclosure document before any
voting or investment decision can be made, and the attendant liability for
false or misleading statements. Communications made in reliance on the new
exemptions would, of course, be subject to Section 10(b) liability.36 We remind persons relying on
the exemptions that fraudulent statements in these communications could
not be cured by subsequent filings. In light of these considerations, we
believe that the benefits conferred on the marketplace by the disclosure
of more information on a timely basis outweigh the risks that the information
will be incomplete or potentially misleading.
2. Eligibility Our proposals did not make distinctions based on size and seasoned status.
Due to the extraordinary nature of business combination transactions, security
holders and the markets need full and timely information regarding those
transactions regardless of the size or seasoned status of the companies
involved. We recognized the inherent difficulties in selecting the appropriate
focus for purposes of applying an eligibility test (i.e., should
you look at the status of the acquiror, the target or the combined entity?).
All commenters who addressed the issue agreed with our view. Therefore,
the exemptions are adopted as proposed, without any eligibility requirements.
We also asked whether the exemptions should be limited to the parties
to the transaction or available to others who may be acting on behalf of
the parties to the transaction. In particular, we noted that in a third-party
stock offer the company to be acquired would not ordinarily be subject to
the Securities Act restrictions on communications, but under certain circumstances,
it could be viewed as joining with the acquiror in making the offer. In
that case, the exemptions would need to extend to additional parties. In
addition, we asked whether the parties' affiliates, dealer-managers, and
others acting on behalf of the parties to the transaction should be permitted
to rely on the exemption. Again, most commenters were consistent in recommending
that we expand the exemptions to these persons. While we realize that in
many circumstances the exemptions would not be necessary for persons other
than the parties to the transaction or the party making the offer, we want
to encourage full, complete and continuous communications with security
holders.
Therefore, we are adopting the exemptions to cover all persons acting on
the parties' behalf.
3. Written Communications with Legend Filed on Date of First Use We are adopting, as proposed, a condition to the communications exemptions
that all written communications in connection with or relating to a business
combination transaction be filed on or before the date of first use.37 In addition, all written communications
must include a prominent legend advising investors to read the registration,
proxy or tender offer statement, as applicable.38 We believe that a prompt filing
requirement is necessary to protect security holders and assure that these
communications are available to all investors on a timely basis.39 In most cases, this information
will need to be filed electronically via the EDGAR System, and thus will
be rapidly disseminated to the marketplace.40
In the Proposing Release, we asked whether parties relying on the exemptions
should be permitted to file written communications on a later date (e.g.,
when the mandated disclosure document is filed or some other date). While
several commenters viewed the requirement as reasonable, a few believed
it would be burdensome. The latter group of commenters stated that a same-day
filing requirement could cause parties to delay the release of information.
These commenters believed that communications that would otherwise be made
late in the day will be postponed until the materials can be filed on the
same day. We believe, however, that in most cases parties to business combination
transactions will be able to time their communications so that it is possible
to file them on the same day they are made. Also,
Rule 13(d) of Regulation
S-T permits communications that are made outside of the Commission's business
hours to be filed electronically as soon as practicable on the next business
day.41 Further, we
have clarified that an immaterial or unintentional delay in filing will
not preclude reliance on the Securities Act exemption.42
The filing requirement applies to written communications that are made
public or are otherwise provided to persons that are not a party to the
transaction.43 As
a general matter, this would include, for example, scripts used by parties
to the transaction to communicate information to the public and other written
material (e.g., slides) relating to the transaction that is shown
to investors.44 In
contrast, internal written communications provided solely to parties to
the transaction, legal counsel, financial advisors, and similar persons
authorized to act on behalf of the parties to the transaction would not
need to be filed. Also, as explained in the Proposing Release, business
information that is factual in nature and relates solely to ordinary business
matters, and not the pending transaction, would not need to be filed. We
expect that filing persons will apply traditional legal principles in determining
whether a particular written communication is made in connection with or
relates to a proposed business combination transaction.45
Several commenters criticized the proposed filing requirement because
it could result in the filing of duplicative or substantially similar information
when similar communications are made over time. In response to this concern,
we are clarifying that any republication or redissemination of the same
information would not need to be filed again to comply with the exemptions.
If, however, information is either added to or changed from the content
of an earlier communication, then the revised written communication must
be filed.46
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21 Companies may disclose
information in response to the market's demand for information regarding
proposed transactions and the need to keep customers, employees and other
constituencies adequately informed.
22 See Part II.B.1
of the Proposing Release.
23
17 CFR 240.10b-5. We have
long recognized the needs of issuers to communicate with security holders
regarding important business and financial developments. See Releases
No. 33-4697 (May 28, 1964) [29 FR 7317] and
33-5180 (August 16, 1971) [36
FR 16506]. In addition, the Division of Corporation Finance has previously
recognized the needs of bidders to disclose information regarding a contemplated
"back-end" transaction (i.e., a subsequent transaction in which the
bidder acquires any remaining securities outstanding). Disclosure of information
required by Schedule 14D-1 regarding a "back-end" transaction generally
will not result in "gun jumping" because the information is not designed
to prime the market for a subsequent registered offering of securities.
Instead, the information aids investors in evaluating the terms of a tender
offer and deciding whether to tender for cash or wait for securities in
a back-end transaction. See Release No.
33-5927 (April 24, 1978)
[42 FR 18163].
24 Companies may be required
to disclose information under the particular rules of the stock exchange
or inter-dealer quotation system upon which their securities are traded.
25 Section 2(a)(3) of the
Securities Act [15 U.S.C. 77b] broadly defines "offer" as including every
attempt or offer to dispose of, or solicitation of an offer to buy, a security
or interest in a security, for value. Offers are currently prohibited during
the pre-filing period and restricted during the waiting period.
26 The term "prospectus"
is defined in Section 2(a)(10) [15 U.S.C. 77b] to include any prospectus,
notice, circular, advertisement, letter of communication, written or by
radio or television, that offers any security for sale or confirms the sale
of the security, except for communications that are preceded or accompanied
by a statutory prospectus.
27 "Solicitation" is broadly
defined to include "the furnishing of a form of proxy or other communication
to security holders under circumstances reasonably calculated to result
in the procurement, withholding or revocation of a proxy." See
Rule 14a-1(l) [17 CFR 240.14a-1(l)].
28 The Williams Act provides
that only very limited information can be announced without either commencing
a cash tender offer or requiring the filing of a registration statement
in a stock offer. See
Rule 14d-2(c) and (d) [17 CFR 240.14d-2(c)
and (d)].
29 The Williams Act was enacted
in 1968 as an amendment to the Exchange Act (Sections 13(d)-(e) and 14(d)-(f)).
The Williams Act regulates tender offers and imposes beneficial ownership
reporting requirements. 15 U.S.C. 78m(d)-(e) and 15 U.S.C. 78n(d)-(f).
30 Our exemptions permitting
earlier communications do not in any way alter the liability traditionally
imposed on insider trading. See
Rules 10b-5 and
14e-3 [17 CFR
240.14e-3]. Rule 14e-3 applies when a person "has taken a substantial step or steps
to commence, or has commenced, a tender offer," so the timing of this rule
is not affected by the new regulatory scheme.
31 The new rules only provide
an exemption from Section 5 (and comparable restrictions on communications
under the proxy and tender offer rules). Oral communications under the new
rules, like written communications, will have liability under the applicable
regulatory scheme. See Part II.B.2 below.
32 Chairman Levitt has expressed
concerns about the selective disclosure of material information to analysts
and institutional investors. See "A Question of Integrity: Promoting
Investor Confidence by Fighting Insider Trading," speech given Feb. 27,
1998,
available on our web site (www.sec.gov).
33 See "Quality Information: The Lifeblood of Our Markets" speech given by Chairman Levitt on Oct. 18,
1999,
available on our web site (www.sec.gov). "The behind-the-scenes feeding
of material non-public information from companies to analysts is a stain
on our markets. This selectiveness is a disservice to investors and it undermines
the fundamental principle of fairness. In a time when instantaneous and
free flowing information is the norm, these sort of whispers are an insult
to fair and public disclosure. . . . [T]he Commission is planning to take
action where it can. Within the next few months, we will consider proposing
rules to close the gap between those in the so-called 'know' and the rest
of us in the public."
34 We solicited comment on
two alternatives to our primary communications proposal that were not favored
by commenters and are not being adopted.
35 The exemptions also apply
to communications made after the mandated disclosure document is filed,
so long as written communications are filed. They do not, however, alter
the disclosure, filing and delivery requirements for the mandated disclosure
documents.
36 15 U.S.C. 78j(b). The
communications permitted under the exemptions adopted would be subject to
liability under the particular regulatory scheme (the Securities Act, proxy
or tender offer rules) as well as
Rule 10b-5 and the other antifraud rules.
37 Written communications
include all information disseminated otherwise than orally, including electronic
communications and other future applications of changing technology. Videos
and CD-ROMs, for example, should be filed on EDGAR by means of a transcript.
See Rule 304 of Regulation S-T [17 CFR 232.304].
38 The legend also would
advise investors that they can obtain copies of the filed documents for
free at the Commission's web site and explain which documents are available
for free from the issuer or filing person, as applicable. See new
Rule 165(c)(1) and revised
Rules 14a-12(a)(1)(ii),
13e-4(c),
14d-2(b)(2),
and 14d-9(a).
39 We did not propose, and
are not adopting, a requirement to deliver written communications to security
holders.
40 These communications must
be filed on EDGAR to the same extent that the related prospectus, proxy
statement or tender offer statement must be filed on EDGAR.
41 17 CFR 232.13(d). See Part II.C.3 below.
42 See Part II.B.2
below.
43 Oral communications are
covered by the exemptions, but they do not need to be reduced to writing
or filed. Oral communications, as proposed, will be subject to liability
under the applicable regulatory scheme. For example, pre-filing oral communications
regarding a proposed offering of securities in connection with a business
combination transaction will be subject to Section 12(a)(2) liability.
See Part II.B.2 below.
44 Cf.Rule 14a-6(c)
[17 CFR 240.14a-6(c)] and
Item 1016(g) of Regulation M-A.
45 At this time we are not
adopting proposed Rules 168 and 169, the exemptions for regularly released
forward-looking information and factual business communications from the
filing requirements. See Part VII.A.1.c.ii.(A) and (B) of the Securities
Act Reform Release and Release No. 33-5009 (Oct. 7, 1969) [34 FR 16870].
Although we are not adopting these rules, we do not expect parties to file
ordinary or routine business communications that refer to the transaction
in a non-substantive way.
46 If the same written communication
is redisseminated or contains only minimal changes (e.g., correction
of minor typographical errors, an update regarding a contact person, or
stylistic changes including a change in the format, type-size, letterhead,
addressee, etc.) without any change to the content of the information, the
written communication would not need to be refiled. In addition, we do not
expect persons to file responses to specific unsolicited inquiries if the
responses are not disseminated to others. Of course, if a response to an
unsolicited inquiry contained material information not otherwise available
to the investing public (e.g., projections), the communication would
need to be filed.
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