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Release No. 33-7760 Release PDF

Release No. 34-42055

Release No. IC-24107

Securities and Exchange Commission

Regulation of Takeovers and Security Holder Communications

Section II.F

Table of Contents

 

II. Discussion of New Regulatory Scheme

F. Disclosure Requirements for Tender Offers and Mergers

1. Schedules Combined and Disclosure Requirements Moved to Subpart 1000 of Regulation S-K ("Regulation M-A")

Currently, there are different disclosure schedules for issuer tender offers, third-party tender offers and going-private transactions.140 Since a given transaction may involve more than one of these regulatory schemes, a company may be required to file a separate disclosure document to satisfy each applicable disclosure regime. In addition, the disclosure requirements appearing in the rules and schedules can often lead to duplicative, and sometimes inconsistent, requirements. In light of the increased pressure to announce a business combination transaction soon after it is entered into and the attendant requirement to file mandated disclosure documents quickly, we proposed to integrate, simplify and update the disclosure requirements currently in the rules and schedules. Our basic approach was to combine all the disclosure requirements in one central location in a subpart of Regulation S-K, called Regulation M-A. The specific disclosure requirements in schedules were keyed to items under Regulation M-A in a manner consistent with the integrated disclosure system previously adopted for proxy and registration statements.

All commenters addressing the proposed changes in this area believed that it was time to update and simplify the disclosure requirements for business combination transactions.141 We are adopting Regulation M-A substantially as proposed. This series of disclosure items incorporates all the current disclosure requirements for issuer and third-party tender offers, tender offer recommendation statements and going-private transactions. The new regulation includes some disclosure items for cash merger proxy statements as well. We have made slight modifications, where necessary, to harmonize and clarify the requirements, as well as a few substantive changes that are discussed below in more detail. In some cases the disclosure requirements may appear different, but that is because we have made an effort to draft the items in Regulation M-A using clear, plain language. In the future, we expect to expand this new regulation to cover additional disclosure items as necessary.

We are combining current Schedules 13E-4 and 14D-1 (the schedules now used for issuer and third-party tender offers, respectively), into new Schedule TO, as proposed.142 In addition, we are changing the rules to allow one filing to satisfy both the tender offer and going-private disclosure requirements.143 As a result, the information required by Schedules 14D-1, 13E-4 and 13E-3 can be disclosed in one combined filing.144 We believe that these revisions will reduce the need to file two or more schedules for what is essentially the same transaction.145

We have included an instruction in new Schedule TO, as proposed, listing the specific line items that must be complied with for different types of transactions.146 In addition, we have revised the current instruction requiring information that is incorporated by reference to be filed as an exhibit. As revised, filers can incorporate information included in documents previously filed electronically on EDGAR without refiling that information as an exhibit to the schedule.147 To the extent that the existing schedules permit filers to include negative answers in the schedule, but not in the disclosure document sent to security holders, filers will continue to have the ability to omit that information from documents sent to security holders.148

At this time we are not extending the one filing satisfies all approach to encompass transactions involving the Securities Act and proxy rules as well as the tender offer and going-private rules. In the future, we may consider integrating the requirements further, to permit the satisfaction of the disclosure required under all four regulatory schemes with one filing.

We also are revising the rules that require filing persons to include a fair and adequate summary of the information required by the schedules in the disclosure document sent to security holders. Instead of specifying some items and excluding others, as the current rules do,149 the revised rules simply require that the document given to security holders summarize all items in the schedule (except for exhibits).150 As noted in the Proposing Release, this change is not intended to increase the amount of information that is given to security holders. Instead, it is intended to simplify the requirements. We expect filers to exercise their judgment in determining the specific information that must be included in the disclosure document sent to security holders to provide a fair and adequate summary. We are not, however, changing the current requirement that certain disclosure required in a going-private transaction be set forth in full in the disclosure document delivered to security holders.151

As a result of today's changes, filers no longer need to answer each item of the schedule with a statement that the required information is incorporated by reference from certain pages or sections of the primary disclosure document. Under the revised rules, it is sufficient to include a general statement in the schedule that all information in the disclosure document filed as an exhibit is incorporated by reference in answer to all or some of the items in the schedule. The revised schedules, as proposed, would include a cover page, any exhibits and the required signatures. Specific item numbers from the schedule must be included only to the extent necessary to provide information that is not in the disclosure document sent to security holders, but is required to be disclosed under an item in the schedule.152 This change is designed to make the schedules easier to prepare. Of course, filers still must provide all the required information.153

2. Streamline and Improve Required Disclosure

a. "Plain English" Summary Term Sheet

We proposed to require a plain English summary term sheet in all cash tender offers and all cash mergers, as well as going-private transactions. The disclosure documents in these transactions often can be difficult to understand, especially in the context of a business combination transaction where a vast amount of information may be available. We believe security holders should be provided with a concise, easy to read term sheet that highlights the most important and relevant information regarding an extraordinary transaction.

Accordingly, we are adopting the plain English summary term sheet requirement as proposed.154 We are not adopting a plain English summary term sheet for transactions involving the registration of securities155 because these transactions already are required to have a plain English summary, although the format may be somewhat different from the summary term sheet approach.156 The summary term sheet must begin on the first or second page of the disclosure document, and must highlight the most important or material features of a proposed transaction.157 This requirement applies to all issuer and third-party cash tender offers, cash mergers and going-private transactions. We believe the disclosure in these transactions can be improved through the use of a plain English summary term sheet.

In proposing this requirement, we did not mandate the specific items or questions that must be addressed in every case. Instead, we gave examples of information that most security holders would need when confronted with a tender offer or merger. Most commenters favored the proposed approach of keeping the requirement general and giving filers the flexibility to determine the issues that rise to the level of addressing in a plain English summary term sheet. We are adopting this approach.

As noted in the Proposing Release, in most cases, we believe bidders should address the following questions in the summary term sheet accompanying their cash tender offers:

  • Who is offering to buy my securities?

  • What are the classes and amounts of securities sought in the offer?

  • How much is the bidder offering to pay and what is the form of payment?

  • Does the bidder have the financial resources to make payment?

  • Is the bidder's financial condition relevant to my decision on whether to tender in the offer?

  • How long do I have to decide whether to tender in the offer?

  • Can the offer be extended, and under what circumstances?

  • How will I be notified if the offer is extended?

  • What are the most significant conditions to the offer?

  • How do I tender my shares?

  • Until what time can I withdraw previously tendered shares?

  • How do I withdraw previously tendered shares?

  • If the transaction is negotiated, what does my board of directors think of the offer?

  • Is this the first step in a going-private transaction?

  • Will the tender offer be followed by a merger if all the company's shares are not tendered in the offer?

  • If I decide not to tender, how will the offer affect my shares?

  • What is the market value (if traded) or the net asset or liquidation value (if not traded) of my shares as of a recent date?

  • Who can I talk to if I have questions about the tender offer?

As for merger proxy statements, we believe a summary term sheet should provide a brief outline of the particular matters proposed, the material terms of the proposals, including the parties to the proposed transaction, the consideration to be received by security holders, the board's recommendation on how to vote or their position regarding the transaction, the effect of a vote for and against each matter presented, including the effects of not voting, the procedures for voting and changing or revoking a vote, and the existence of appraisal rights.

Several commenters provided useful suggestions on other information that may assist security holders. We agree with these commenters that a plain English summary term sheet should address, to the extent applicable, the vote required to approve each matter presented, the number of votes, if any, already committed to vote in a particular way, any material interests of insiders or affiliates, as well as the accounting and federal income tax treatment of the transaction. In the context of a going-private transaction, we believe that the receipt of opinions, appraisals, or other similar reports158 regarding the fairness of a transaction would be of material interest to security holders. In addition, the identity of the filing persons, including the affiliates engaged in the transaction, a description of their affiliation or relationship with the issuer, and their role in the transaction may be important disclosure. Of course, we do not attempt to provide an exhaustive list in this release of all the matters or issues that may be material to security holders warranting inclusion in a plain English summary term sheet. We leave that determination for filers based on the particular facts and circumstances of their transaction.

b. Item 14 of Schedule 14A Revised to Clarify Requirements and Harmonize Cash Merger and Cash Tender Offer Disclosure

Item 14 of Schedule 14A specifies the information required in proxy and information statements relating to extraordinary transactions.159 We are revising Item 14 substantially as proposed, except that the revised item refers filers to the applicable disclosure requirements in Forms S-4 and F-4, instead of Forms C and SB-3, which are not being adopted at this time. This approach should make the item easier to understand, and harmonize the proxy and registration statement disclosure requirements. Since the disclosure and incorporation by reference requirements in Forms S-4 and F-4 are essentially the same as in current Item 14, this streamlined approach will not greatly modify the disclosure required in a merger proxy statement. We are retaining in Item 14 the existing disclosure requirements applicable to investment companies.160

In addition, we are adopting several substantive changes regarding the information required for acquirors and targets under Item 14. All commenters that addressed the proposed changes to Item 14 believed they were appropriate. We continue to believe that in certain circumstances the disclosure requirements in Item 14 may be unnecessarily burdensome and inconsistent with the level of information that would be required if the same transaction was structured as an all-cash, all-share tender offer. Therefore, we are adopting the following proposed revisions:

  • Item 14 is revised to clarify that financial statement and other information about the acquiror is required in a cash merger only if that information is material to voting security holders' evaluation of the transaction.161 Similar to the need for a bidder's financial statements in a cash tender offer, information about the acquiror in a merger is generally not needed when target security holders are receiving cash and the acquiror has demonstrated its financial ability to satisfy the terms of the offer.162

  • In cases where financial statement information for the acquiror would be material to a security holder's voting decision, acquiror information is required for only two years and not three, consistent with the treatment of tender offers.163

  • The requirement to provide information about the target in a cash merger is eliminated when the acquiror's security holders are not voting on the transaction.164 Most likely, target security holders will have information about the securities they already hold. As a result, security holders can receive a shorter disclosure document that is focused on the terms and effects of the transaction. This revision harmonizes the disclosure required in cash merger transactions with that required in all-cash, all-share tender offers. 165

The changes adopted today do not change the current requirement to provide financial statements of the target and other company information when the acquiror's security holders are voting on the transaction, since those security holders may not know anything about the target. In addition, target information is required in merger proxies that are going-private or roll-up transactions. We believe that target security holders have a need for current financial statements of their company if it is subject to one of these types of transactions.

We are not adopting two proposed changes. Under the proposal, Item 14 would no longer permit information to be incorporated by reference from the "glossy" annual report sent to security holders. Further, we proposed to eliminate the instructions in Schedule 14A and Form S-4 that require filers to send the mandated disclosure document to security holders at least 20 business days before the meeting date or the expiration date of an exchange offer if information is incorporated by reference.166 At this time we believe there still may be a number of security holders that do not have the ability to access information electronically, so we are not eliminating the 20 business day incorporation by reference provision.167 We are retaining incorporation by reference from the glossy annual report because this information is delivered to security holders.168

c. Reduced Financial Statement Requirements for Mergers and Stock Tender Offers

The previous section addressed information requirements in cash mergers. We also have examined financial statement requirements in the context of stock mergers and stock tender offers. As we noted in the Proposing Release, financial statements of the target generally are required when registered securities are being offered. The rules currently provide special treatment when the target is not subject to the Commission's reporting requirements, but we believe these requirements can be further relaxed. Currently, the rules require the filing person (the acquiror) to provide financial statements of the non-reporting target going back three years.169 We noted that providing three years of financial statements prepared in accordance with Regulation S-X170 for a non-reporting company can be costly and burdensome to prepare. In some cases they may not be available. Therefore, we proposed to reduce the financial statements required for non-reporting targets when the acquiror's security holders are not being asked to vote on the transaction.

Most commenters believed that the proposed reduction was appropriate and would facilitate acquisitions of non-reporting targets. We continue to believe that the requirement to provide target financial statements can be curtailed, particularly because in many cases target security holders likely made their initial investment decision in the non-reporting company based on less extensive information than what is currently required. In addition, security holders are being offered securities in a public company for which there should be significantly more information available and a more liquid market to sell into. Therefore, we are reducing the financial statement requirement substantially as proposed.171 In addition, where the non-reporting target is not significant to the acquiror and the acquiror's security holders are not voting on the transaction, we believe the financial statement requirements can be reduced even further.

Accordingly, we are eliminating the requirement to provide financial statements for the non-reporting target altogether when the acquiror's security holders are not voting on the transaction and the non-reporting target is not significant to the acquiror above the 20% level.172 The security holders that purchased securities in the non-reporting company generally would be aware that they invested in a company that is not subject to our reporting requirements and they would not expect to receive the same level of financial information that is required for a public reporting company. Moreover, if the non-reporting company is not significant to the acquiror, we believe security holders would likely rely on the financial statements of the acquiror in making their voting or investment decision. Because a combination of an insignificant non-reporting target company and a public acquiror should not materially alter the financial condition of the acquiror, we believe that non-reporting target security holders are likely to rely on the required acquiror financial information alone.173 In addition, the 20% threshold is the standard adopted in 1996 for the requirement of audited financial statements in filings made under the Securities Act and the Exchange Act for business acquisitions.174

Accordingly, we are revising the financial statement requirements for non-reporting targets when the acquiror's security holders are not voting on the transaction,175 as follows:

  • If a non-reporting company is being acquired in a business combination transaction, then financial statements for the latest fiscal year prepared in conformity with generally accepted accounting principles ("GAAP") must be provided.176

  • Also, if the non-reporting target security holders were previously provided with GAAP financial statements for either or both of the two fiscal years before the latest fiscal year, then GAAP financial statements must be provided for those years as well.

  • If the non-reporting target is not significant to the acquiror in excess of the 20% level, then no financial information is required for the target.177

These revisions apply equally to foreign and domestic non-reporting target companies. If the target's financial statements are prepared on the basis of a comprehensive body of accounting principles other than U.S. GAAP (foreign GAAP), a reconciliation to U.S. GAAP is required unless a reconciliation is unavailable or not otherwise obtainable without unreasonable cost or expense.178

The current requirement to provide "audited" financial statements for the non-reporting target remains the same. Financial statements for the latest fiscal year must be audited only to the extent practicable. Audited financial statements are not required for years before the most recent fiscal year if the target's financial statements were not previously audited.

We are not changing the current requirement that a resale registration statement include audited financial statements in accordance with Rule 3-05 of Regulation S-X.179 Also, to the extent that a transaction is significant to the acquiror, audited financial statements would ultimately need to be provided under Item 7 of Form 8-K. Of course, if the acquiror's security holders are voting on the transaction, then the current financial statement requirements apply.

Footnotes

140 Schedules 13E-4, 14D-1 and 13E-3, respectively.

141 One commenter urged us to codify the availability of a procedure for making acquisitions using securities registered on an acquisition shelf registration statement. While we are not codifying this procedure as part of this release, we remind offerors that the procedure continues to be available. See Form S-4, General Instruction H, and Service Corporation International (December 2, 1985).

142 The format and instructions for Schedules 13E-3 and 14D-9 are revised so that they are consistent with new Schedule TO. These schedules refer to Regulation M-A for all substantive disclosure requirements. We did not propose, and are not adopting, any changes to the schedules used in connection with the multijurisdictional disclosure system for Canadian issuers (Schedules 13E-4F, 14D-1F and 14D-9F) [17 CFR 240.13e-102; 17 CFR 240.14d-102; 17 CFR 240.14d-103].

143 New Schedule TO has boxes on the cover page to check to indicate whether the filing is an issuer tender offer, third-party tender offer, and/or going-private transaction. We are implementing conforming changes to the EDGAR filing tag system so that the type of transaction and filing persons are identified when viewing a document on EDGAR.

144 For example, an affiliate engaged in a tender offer having a going-private effect can now file a Schedule TO that also serves as a Schedule 13E-3. All filing persons and applicable schedules must be identified on the cover page. Separate cover pages are not required. Of course, a Schedule 13E-3 must be filed independently when the underlying transaction is not a tender offer.

145 Schedule TO also may be combined with an amendment to a previously filed Schedule 13D. See General Instruction G to Schedule TO. The ability to file a joint 13D amendment and tender offer statement is the same as currently permitted. See General Instruction E to Schedule 14D-1.

146 General Instruction J to new Schedule TO.

147 Documents filed electronically on EDGAR are readily available to security holders and the public (e.g., through the Internet, our public reference room, brokers and investment advisors). This change also applies to going-private statements.

148 General Instruction E to new Schedules TO and revised Schedule 13E-3 and General Instruction C to revised Schedule 14D-9.

149 See current Rules 14d-6(e), 14d-9(c), 13e-3(e) and 13e-4(d) specifying the information that must be summarized or included in the disclosure document sent to security holders.

150 Revised Rules 14d-6(d), 14d-9(d), 13e-3(e) and 13e-4(d).

151 Items 7, 8 and 9 of current and revised Schedule 13E-3.

152 For example, negative or "not applicable" responses or information that goes beyond what is summarized in the disclosure document must be disclosed under the appropriate item number in the schedule if not included in the disclosure document sent to security holders.

153 See General Instructions E and F to new Schedule TO and revised Schedule 13E-3 and General Instructions C and D to revised Schedule 14D-9. We are eliminating the requirement in General Instruction F of current Schedule 13E-3 to provide a cross-reference sheet showing where the responses are located.

154 Item 1001 of Regulation M-A. For purposes of this requirement, plain English has the same meaning as in Rule 421(b) and (d).

155 If a transaction is subject both to the registration requirements of the Securities Act and either Rule 13e-3 or the tender offer rules, a plain English summary term sheet is not required. See Item 1 of revised Schedule 13E-3 [17 CFR 240.13e-100] and new Schedule TO [17 CFR 240.14d-100].

156 See Item 3 of Forms S-4 and F-4 and Rule 421(d) of Regulation C [17 CFR 230.421(d)]. Effectiveness of a registration statement may be denied or a stop order issued when there has not been a bona fide effort to present information in a reasonably clear, concise and readable manner. See Rule 461(b)(1) of Regulation C [17 CFR 230.461(b)(1)]; see also, In the Matter of Franchard Corporation, 42 S.E.C. 163 (1964).

157 The required summary term sheet should present information in bullet-point format and may include cross-references to more detailed information found elsewhere in the disclosure documents provided to security holders, consistent with plain English principles.

158 See current and revised Item 9 to Schedule 13E-3.

159 17 CFR 240.14a-101. Item 14 disclosure is required when a vote or consent is solicited on: (i) a merger; (ii) a consolidation; (iii) the acquisition of assets, a business or securities; (v) the sale or transfer of all or substantially all the assets of the registrant; (vi) a liquidation; or (vii) a dissolution. This item requires information about the transaction and each party to the transaction (i.e., the acquiror and the target). The information specified in Item 14 may be incorporated by reference or physically included in the disclosure document depending on the extent to which the acquiror or target is eligible to use Form S-2 or S-3.

160 New Item 14(d) of Schedule 14A. We believe that this will be simpler for investment companies than referring to Forms S-4 and F-4, which generally are inapplicable to investment companies. We also have consolidated and conformed current Instructions 6 and 8 to Item 14 for investment companies. Instruction to paragraph (d) of Item 14 of Schedule 14A. The requirements that we are retaining for investment companies were not specifically tailored for investment companies, and we believe that it would be appropriate to reconsider these requirements in a future rulemaking project focused on the registration and disclosure requirements applicable to investment company business combination transactions.

161 Revised Instruction 2(a) to Item 14 of Schedule 14A. Pro forma information about the transaction is not generally required in a cash merger where only the target's security holders are voting on the transaction.

162 Even if the acquiror's security holders are voting, acquiror information may be omitted because the acquiror's security holders are presumed to have access to information about their own company. In this case, pro forma information about the transaction will still be required in accordance with Article 11 of Regulation S-X [17 CFR 210.11-01 through 17 CFR 210.11-03].

163 Revised Item 14(c)(1) to Schedule 14A. If financial statements of the target are required, then three years of financial statements must be provided, consistent with the other requirements for financial statements of acquired companies.

164 Revised Instruction 2(b) to Item 14 of Schedule 14A.

165 No target information is required if target security holders are voting on a merger in which the consideration offered consists of acquiror securities that are exempt from Securities Act registration. Revised Instruction 3 to Item 14 of Schedule 14A.

166 See Note D.3 to Schedule 14A; General Instruction A.2 to Form S-4; and General Instruction A.2 to Form F-4.

167 We have stated that the 20 business day period must be complied with even if the documents incorporated by reference are delivered along with the disclosure document. See Release No. 33-6578 (April 23, 1985) [50 FR 18990] (Form S-4 adopting release). We are changing this interpretation. If filers furnish the information that is incorporated by reference with the disclosure document that is sent to security holders, they do not have to comply with the 20 business day requirement.

168 Revised Item 14(e) to Schedule 14A [17 CFR 240.14a-101].

169 See Item 17(b)(7) of Form S-4, Item 17(b)(5) of Form F-4 and Item 14(b)(3)(ii)(A) of Schedule 14A. These items specify the information required for non-reporting target companies in a business combination transaction. An acquiror must provide financial statements "that would have been required to be included in an annual report to security holders" had the non-reporting company been required to furnish an annual report that complies with Rule 14a-3(b) [17 CFR 240.14a-3(b)]. This rule requires audited balance sheets for each of the two most recent fiscal years and audited statements of income and cash flows for each of the three most recent fiscal years prepared in accordance with Regulation S-X.

170 The required balance sheet for the year preceding the latest full fiscal year and the income statements for the two years preceding the latest full fiscal year need not be audited if they have not previously been audited. The required financial statements must be audited to the extent practicable.

171 Since we are not adopting Forms C and SB-3, these changes are implemented in amendments to Forms S-4 and F-4.

172 Determination of the significance of an acquisition to the acquiror is made in accordance with Rule 3-05 of Regulation S-X [17 CFR 210.3-05]. See Release No. 33-7355 (October 10, 1996) [61 FR 54509] and Rule 1-02(w) of Regulation S-X [17 CFR 210.1-02(w)].

173 This change is consonant with our revisions to Item 14 to eliminate the requirement to provide target financial statements in cash mergers when the acquiror's security holders are not voting on the transaction and the information is not material to the target security holders' voting decision.

174 In Release No. 33-7355, we streamlined the requirements with respect to financial statements for business acquisitions. Among other things, the amended rules raised the thresholds of significance that determine whether financial statements of an acquired business must be provided in filings. These rule changes were intended to reduce impediments to registered offerings that may have caused companies to undertake private or offshore offerings instead. We believe the significance threshold for non-reporting targets should be the same in Forms S-4 and F-4 as under our other financial statement requirements. We may, however, consider revisiting this issue in a broader context in a future rulemaking proposal that addresses what the significance thresholds should be in light of the current accounting environment.

175 These changes do not affect the financial statements required in roll-up transactions.

176 Revised Items 17(b)(7) of Form S-4 and 17(b)(5) of Form F-4.

177 Under these facts pro forma and comparative per share information is not required. See Rule 11-01(c) of Regulation S-X [17 CFR 210.11-01(c)].

178 At a minimum, however, a narrative description of the material variations in accounting principles, practices and methods used in preparing the foreign GAAP financial statements from those accepted in the U.S. is required.

179 A resale registration statement is used to register the resale of securities to the public by anyone who is deemed an underwriter within the meaning of Rule 145(c) with respect to the securities being re-offered.

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