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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.D
Table of Contents
II. Discussion of New Regulatory Scheme
D. Communications Under the Tender Offer Rules
1.
"Commencement," Communications, and Filing Requirements Currently, the tender offer rules restrict a third-party
bidder's communications regarding a proposed tender offer. The
restrictions on communications stem from the concept of "commencement,"
the five business day rule for cash tender offers,85
and the requirement that a registration statement be filed promptly for
registered exchange offers.86
A target's communications regarding a tender offer are similarly
restricted.87
To harmonize the treatment of communications regarding business
combination transactions under the three regulatory schemes, and to
promote the dissemination of information to all security holders on a
more timely basis, we are modifying the definition of "commencement" and
eliminating the five business day rule and the requirement to promptly
file a registration statement after announcing a registered exchange
offer.88
In place of these rules, we are adopting a filing
requirement for all written communications that relate to a tender offer
beginning with and including the first public announcement of the
transaction.89
As with communications subject to the Securities Act and the proxy
rules, written communications must be filed on the date that the
communication is made.90
In addition, written communications must contain a legend advising
security holders to read the full tender offer or recommendation
statement when it becomes available.
Under the revised rules, "commencement" is when the
bidder first publishes, sends or gives security holders the means to
tender securities in the offer.91
We believe that security holders need the information required by the
tender offer rules when they are either asked or able to tender their
securities in an offer.92
To minimize the potential for dissemination of false
offers into the marketplace in the absence of the five business day
rule, we are adopting new
Rule 14e-8. As proposed, this
rule prohibits bidders from announcing an offer: without an intent to
commence the offer within a reasonable time and complete the offer; with
the intent to manipulate the price of the bidder or the target's
securities; or without a reasonable belief that the person will have the
means to purchase the securities sought. We believe that a specific rule
prohibiting such conduct is appropriate. This antifraud rule is intended
as a means to prevent fraudulent and misleading communications regarding
proposed offers under the new communications scheme, in addition to the
existing antifraud provisions.
Two commenters expressed concern that the rule could
create new grounds for frivolous litigation, while others supported the
proposal. Of course, if a target or other party decided to litigate
under this new rule, the plaintiff would have the burden of showing that
the bidder either did not have an intent to commence and complete the
offer or did not reasonably believe it had the ability to purchase the
securities. Although not required, a commitment letter or other evidence
of financing ability (e.g., funds on hand or an existing credit
facility) would in most cases be adequate to satisfy the rule's
requirement that the bidder have a reasonable belief that it can
purchase the securities sought.93
Although we noted in the Proposing Release that
eliminating the current restrictions could have potentially
destabilizing effects on the securities markets,94
it is not clear that the market effects differ greatly from those caused
by merger announcements, which are not subject to the same constraints.
Based on our experience with tender offers95
and the factors discussed above influencing our decision to permit more
communications regarding business combination transactions, we believe
that the availability of more information on a timely basis will better
assist security holders in making well informed individual investment
decisions when confronted with news of a pending or proposed business
combination. Accordingly, we are adopting the changes to the tender
offer communications provisions substantially as proposed.
In reaching this conclusion, we note that
communications regarding issuer tender offers are not similarly
restrained.96
Also, it appears that some bidders do not use the term "tender offer" in
their public announcement of a proposed business combination transaction
in an attempt to avoid triggering application of
Rule 14d-2. Furthermore,
security holders today, upon hearing news of a proposed tender offer for
their securities (either directly by the formal notice published by the
bidder or indirectly through rumors in the marketplace), must decide
whether to: (i) retain their securities until a tender offer statement
is filed and disseminated so they can tender into the offer; or (ii)
sell into the market at prevailing prices based on the limited
information available.97
Under the new approach, more time may elapse between announcement and
the filing of the tender offer statement, but more information also may
be available during that period. We do not believe there is a
sufficiently compelling basis to continue treating third-party cash
offers, exchange offers, issuer tender offers and mergers differently.98
Most of the commenters that addressed the proposals
favored eliminating the five business day rule and the requirement to
promptly file a registration statement after announcement of an exchange
offer, as well as the revised definition of "commencement." A few
commenters, however, expressed concern that elimination of the five
business day rule could revive certain inconsistent state law
requirements. We do not believe that elimination of the five business
day rule will result in a resurgence of inconsistent state anti-takeover
statutes that impose disclosure or other requirements incompatible with
our new regulatory scheme.
We have long defined when a tender offer commences.
This definition served several purposes, including implementing a
uniform nationwide timetable for the tender offer process, regulating
the flow of information by identifying the date by which required
disclosure filings must be made with the Commission, and helping to
create a level playing field between bidders and targets. Under
well-established principles, any state law that conflicted with this
provision was preempted.
The new definition continues to serve these sorts of
purposes - it establishes a uniform time at which a tender offer is
deemed to commence, it continues to balance the rights and obligations
of bidders and targets, and it facilitates the free flow of information
from both bidders and targets before that date (subject to the antifraud
provisions), based on our judgment that this flow of information is in
the best interests of the holders of securities. The elimination of the
five business day rule and the other changes in the rule are intended to
provide security holders with the broadest possible disclosure of
information at the earliest date possible.
We believe that courts would hold that any state law
that conflicted with the new rule by attempting to establish a different
commencement date or otherwise frustrating operation of the rule would
be preempted.99
For instance, we believe that any state provision that made it
impossible to comply with both state and federal requirements or that
created obstacles to the accomplishment and execution of the full
purposes and objectives of the new rule would continue to be preempted.100
Security holders ultimately have the choice to sell
into the market based on information disclosed early or wait until a
complete, mandated disclosure document is sent to them before making an
investment decision. The ability of security holders to sell into the
market before a complete disclosure document is filed and disseminated
is no different from their current position between the time a
transaction is announced and the time a mandated disclosure document is
filed and disseminated. However, we believe that liberalizing early
communications will better serve investors and the markets by providing
them with more information at an earlier date. The bidder continues to
have the flexibility to commence promptly after the first public
announcement. We encourage bidders to commence their offers as soon as
they are able to do so, since security holders and other market
participants will benefit from the complete information in the mandated
tender offer materials. To the extent, however, that there are delays
between announcement and commencement, we believe that investors will
benefit from the free flow of information provided by the new regulatory
scheme. Therefore, we are changing the current regulatory scheme, and in
doing so we are clearly expressing our intent that these new rules
serve, as an integrated whole, to regulate the various communications
that persons may make regarding a potential or proposed business
combination transaction.
Two commenters favored retaining the five business day
rule for hostile offers, but eliminating it for negotiated transactions.
We believe, however, that applying the rule only to hostile offers could
present problems when the same target is the subject of both a
negotiated transaction and a hostile offer, or when a negotiated
transaction becomes hostile as a result of changed circumstances or
another offer. Further, in light of the communications scheme we adopt
today, it does not appear that security holders' best interests would be
served by permitting expanded communications only with respect to
negotiated transactions.
One commenter believed that the five business day rule
provides investors and the markets with a degree of certainty regarding
proposed offers and results in the dissemination of better information
in a relatively short time. We believe that our requirements to file all
written communications relating to a proposed transaction on first use
will result in more information on a timely basis. As noted above, we do
not believe bidders will have an incentive to unnecessarily delay
commencing their offers because of the risk that market forces may
affect the terms of the offer or a competing bidder will emerge.
Under these new and revised rules, bidders and targets
alike have an increased ability to communicate with security holders
along with the requirement to file all written communications related to
an offer. Under the new scheme, the target must file all written
communications relating to the transaction on the date the communication
is made.101
Targets need not file a formal recommendation statement until after the
offer is formally commenced and a recommendation is made. The target
remains obligated, however, to take a position with respect to the offer
no later than 10 business days after the offer commences under Rule 14d-2.102
If the target makes a recommendation after commencement, but before the
tenth business day, then it must file a recommendation/solicitation
statement on
Schedule 14D-9on or before the
time the recommendation is first made.
These rules apply to issuer and third-party tender
offers alike. In addition, the new rules make no distinction based on
the form of consideration offered to security holders (e.g., cash
or stock). We do not believe that there is sufficient justification to
treat tender offer communications differently based on either the nature
of the bidder or the consideration offered. Security holders ultimately
face the same investment decision -- whether or not to tender in the
offer.
2.
Dissemination Requirements We also reviewed the various methods to commence a tender offer
in the Proposing Release.103
In reviewing these methods, we noted that long form publication104
is rarely used by bidders due to the cost associated with publishing
extensive information about the offer in a newspaper.105
We proposed to eliminate long form publication.
Several commenters agreed that long form publication
is rarely used, but urged us to retain the method, citing the lack of
any abuse under the rule. In addition, these commenters noted that, in
the future, long form publication may become a viable means of
disseminating an offer using the Internet or another electronic delivery
system. At this time, we do not believe that technology has developed to
the point where bidders can rely solely on electronic media to
disseminate information about a tender offer to security holders. In
particular, posting the information on a web site alone would not be
adequate dissemination.106
Nevertheless, in response to commenters' requests that we retain long
form publication as a means of commencement, we have decided not to
eliminate it.
We solicited comment on whether the rules should
continue to permit an offer to be commenced and disseminated by summary
advertisement alone.107
Currently, bidders that rely on the summary advertisement method to
disseminate an offer tend also to mail their offering documents to
security holders using a security holder list under Rule 14d-5. We asked whether
bidders should always be required to use security holder lists when
disseminating an offer. Two commenters favored retaining summary
publication without the use of security holder lists. Both cited the
lack of any abuse with the rule and the possibility that its elimination
could force bidders to tip their hand when requesting a security holder
list from the target in hostile transactions. Accordingly, we are not
changing this aspect of the summary advertisement rule.108
However, in keeping with the expansion of permissible communications, we
are eliminating, as proposed, the current restriction on the information
that may be included in a summary advertisement.109
Currently, bidders must hand deliver a copy of their
tender offer statement and any additional tender offer materials to the
target company as well as any other bidder that has made an offer for
the same class of securities.110
We proposed a similar delivery requirement for the first written
communication disclosing a proposed offer. Under the new communications
scheme for tender offers, bidders are able to disclose information about
a proposed offer without commencing the offer.111
In light of the many different communications media available to
bidders, we believe targets need a reliable way to learn about proposed
offers for their securities so they can respond in a timely manner.
Therefore, we are adopting a requirement that the bidder deliver to the
target and any other bidder the first written communication relating to
the transaction that is filed, or required to be filed, with the
Commission.112
This material must be delivered on the date of the communication.113
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Footnotes
85 Currently, an offer is
deemed to "commence" on public announcement of the following limited information:
the identity of the bidder, the identity of the subject company, the amount
and class of securities sought and the price or range of prices offered,
unless a tender offer statement is filed within five business days of the
announcement and disseminated to security holders or the bidder makes a
subsequent public announcement withdrawing the offer. See
Rule 14d-2(b)
and (c) [17 CFR 240.14d-2(b) and (c)]. We refer to this as the "five business
day rule."
86 Although third-party bidders
offering cash or exempt securities must file a tender offer statement within
five business days, bidders offering registered securities are not bound
by the same rule. They must file a registration statement relating to the
securities offered "promptly" after announcing the limited information specified
in
Rule 135. See Rule 14d-2(e) 17 CFR 240.14d-2(e)].
87 If the target company
comments on the merits of an offer or otherwise makes a recommendation with
respect to an offer, it may be required to file a disclosure document.
See
Rule 14d-9(a) [17 CFR 240.14d-9(a)].
88 Revised Rule 14d-2(c).
Rule 13e-4 has no comparable communications restrictions, but we are adopting
changes to this rule to conform it to the new communications scheme.
89 The public announcement
also triggers the
Rule 14e-5 restrictions on purchasing outside the tender
offer, as discussed in Part II.G.5 below.
90 Revised
Rule 14d-2(b)(2).
These communications will be filed under cover of Schedule TO or 14D-9,
as appropriate. Both schedules have a box to check indicating that these
are pre-commencement communications. No signature is required. See
General Instruction D to Schedule TO and
General Instruction B to Schedule 14D-9. If the transaction also is subject to the Securities Act, then communications
must be filed under
Rule 425 only, and those communications will be deemed
filed under the tender offer rules.
91 Generally, this will occur
if the bidder provides security holders with a transmittal form to use to
tender securities or if the bidder publishes an advertisement advising security
holders how to tender in the offer or to contact the bidder for more information
on how to tender securities in the offer. This also would occur if by some
other means persons are able to tender securities to the bidder. At that
time, the bidder must file and disseminate the tender offer schedule, and
the required 20 business day period that all tender offers must remain open
will begin to run. Revised
Rule 14d-2(a).
92 Although we are changing
how a tender offer is commenced for purposes of the tender offer rules,
we are not defining the term "tender offer" or changing our position on
what activities may be deemed to constitute a tender offer. The tender offer
rules still may apply to activities that function as unconventional tender
offers. We maintain our position that the term "tender offer" should be
interpreted flexibly in accordance with the intended purposes of Sections
14(d) and 14(e). A determination of whether a particular transaction or
series of transactions constitutes a tender offer will, of course, depend
on the particular facts and circumstances and is not limited to "conventional"
tender offers. See Release No. 34-15548 (Feb. 5, 1979) [44 FR 9956].
93 This is not intended to
change how bidders legitimately finance their offers today. Bidders may
have sufficient funds on hand to complete the offer or they may arrange
to borrow funds from an outside source. In most cases when the bidder expects
to obtain funds from another source, financing is arranged in advance or
immediately after announcing an offer. Bidders typically get a commitment
letter from their lenders.
94 See Part
II.B.7.a of the Proposing Release and Release No. 34-15548 (February 5,
1979) [44 FR 9956].
95 We have not observed any
disruptive or destabilizing effects in cases where pre-commencement publicity
is currently permitted, such as where
Rule 135 information is disclosed
regarding a proposed exchange offer more than five business days before
a registration statement is filed.
96 Issuer tender offers are
subject to Rule 13e-4, which does not contain a comparable provision to
the five business day rule or a requirement to file a registration statement
promptly after announcing limited information about a registered exchange
offer.
97 Bidders often wait until
the fifth business day following public announcement before filing a full
tender offer statement in accordance with
Rule 14d-3(a) [17 CFR 14d-3(a)].
In addition, it can take several days before mailed copies of the tender
offer statement are received by beneficial owners. Bidders offering registered
securities must promptly file the registration statement after announcement,
which in most cases is more than five business days after the announcement.
98
All tender offers must remain open for at least 20 business days. See
Rule 14e-1(a) [17 CFR 240.14e-1(a)].
If security holders are willing to wait to receive the tender offer statement
containing the required information, they can consider the disclosure document
in light of all earlier communications relating to the transactions before
making an investment decision with respect to the offer. We have no reason
to believe that the current minimum time period for tender offers is inadequate.
99 See Dynamics Corp. of
America v. CTS Corp.,
481 U.S. 69, 79 (1987).
100 See, e.g.,
Barnett Bank of Marion County v. Nelson,
517 U.S. 25 (1996) (summarizing
preemption principles); see also Fidelity Fed. Sav. & Loan Assoc. v.
de la Cuesta,
458 U.S. 141, 154 (1982).
101 Revised
Rule 14d-9. These
communications must include a legend similar to the one required on the
bidder's pre-commencement communications, advising security holders to read
the complete recommendation when it is available. Although we did not propose
such a legend, we solicited comment on it, and the commenters who addressed
the issue supported a legend requirement.
102 See
Rule 14e-2(a)
[17 CFR 240.14e-2(a)].
103 See Part II.B.7.b
of the Proposing Release.
104
Rule 14d-2(a)(1) [17 CFR 240.14d-2(a)(2)].
105 A bidder must publish
the information specified in Rule 14d-6(e)(1) [17 CFR 240.14d-6(e)(1)].
106 Not all security holders
have access to the Internet. Even those that do have access would not have
notice that a tender offer for their company's securities was posted on
a web site. All commenters who addressed the question opposed electronic
dissemination as the sole means to disseminate an offer, noting that there
are no electronic sources of information as commonly available and widely
followed as newspapers. Of course, it is permissible to post tender offer
materials on a web site in addition to using other methods of dissemination.
Electronic media also may be used to satisfy requirements to deliver tender
offer material in accordance with our guidelines for electronic delivery.
See Release No. 33-7233 (October 6, 1995) [60 FR 53458]. For example,
a summary advertisement for a tender offer could contain a consent form
for security holders to indicate their willingness to receive the complete
tender offer materials by means of a specified electronic medium.
107
Rule 14d-6(a)(2) [17 CFR 240.14d-6(a)(2)].
108 Similarly, we are retaining
the current requirement that bidders using stockholder lists also publish
summary advertisements.
109 We are amending
Rule 14d-6(a)(2) to delete the language limiting the information that can appear
in a summary advertisement. We are retaining the prohibition against including
a transmittal form with the summary advertisement. A summary advertisement
may (and must, if it is designed to commence the offer) include the means
to tender, e.g., a telephone number to call to obtain the complete
tender offer materials, including the transmittal form.
110
Rule 14d-3(a)(2). The
current rule also requires telephonic notice and mailing of tender offer
material to any securities exchange or the NASD on which the securities
are listed or traded. We are not extending this delivery requirement to
pre-commencement communications because the exchanges and the NASD are relying
less on paper filings and more on electronic databases to obtain EDGAR filings.
111 Communications regarding
offers can be made without a summary advertisement of the offer appearing
in newspapers.
112 As proposed, this requirement
would have been triggered by the first communication setting forth specified
information. We believe, however, that it will be simpler for bidders to
know that this obligation will attach at the same time the first pre-commencement
communication is filed. Once target companies and other bidders receive
notice of the transaction, they can monitor the Commission's filings for
subsequent pre-commencement materials.
113 Revised
Rule 14d-2(b)(2).
Instead of hand delivery, the rule only requires "delivery," so the bidder
may use any other means of delivery that is equally prompt and equally likely
to receive the attention of the target company (e.g., an e-mail to
the corporate secretary, chief executive officer and other persons of similar
authority at the target company, where the target company uses these e-mail
addresses for public communications). We have similarly modified the bidder's
current obligation to hand deliver a copy of the mandated disclosure document.
See revised
Rule 14d-3(a)(2).
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