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.F

Table of Contents

II. Discussion of New Regulatory Scheme

G. Tender Offer Rules Updated

In addition to the changes discussed above, some of which affect tender offers, we proposed to update the tender offer rules, which have not been revised since 1986. For the most part, commenters favored our approach to updating the regulations. As a result, these changes are being adopted, substantially as proposed.¹⁸⁰ The significant changes are discussed below.

We also solicited comment on whether the Private Securities Litigation Reform Act of 1995 ("PSLRA") safe harbor for forward-looking statements should be extended to tender offers. We are not extending the PSLRA safe harbor to tender offers at this time. Given the relative infancy of the body of law interpreting the PSLRA generally and the safe harbor in particular, we do not believe that extending the reach of the safe harbor would be prudent. We note, for example, that we recently filed an amicus curiae brief out of concern about certain language in an appellate court decision regarding the application of the safe harbor.¹⁸¹

1. Bidders May Include a "Subsequent Offering Period" Without Withdrawal Rights

We are adopting the subsequent offering period rule with several modifications described below. Under the new rules third-party bidders may provide, at their election, a subsequent offering period during which security holders can tender securities into the offer without withdrawal rights. The purpose of the subsequent offering period is two-fold. First, the period will assist bidders in reaching the statutory state law minimum necessary to engage in a short-form, back-end merger with the target. Second, the period will provide security holders who remain after the offer one last opportunity to tender into an offer that is otherwise complete in order to avoid the delay and illiquid market that can result after a tender offer and before a back-end merger.

The subsequent offering period may be disclosed in the bidder's initial offering materials, or in a subsequent amendment to the tender offer materials that is disseminated to security holders. In either case, the bidder's determination to include a subsequent offering period must be disclosed sufficiently in advance of the expiration of the initial offering period.

Commenters generally were favorable to the proposal, but many commenters criticized the advance notice requirement. They expressed the view that advance notice would create a "hold-out" problem with security holders waiting until the subsequent offering period to tender shares. In response to these comments, we are not adopting a specific requirement in the rule that the determination to add a subsequent offering period must be disclosed before the end of the initial offering period. Nevertheless, we continue to believe at this time that the addition of a subsequent offering period once an offer has commenced would constitute a material change to the terms of that offer. Thus, bidders must disseminate the new information to security holders in a manner reasonably calculated to inform them of the change sufficiently in advance of the expiration of the initial offering period (generally five business days).¹⁸² After the Division of Corporation Finance gains practical experience with the operation of the subsequent offering period, the Division may decide, through staff interpretation, to shorten or possibly eliminate the requirement for advance notice.¹⁸³

In short, we are adopting new Rule 14d-11, which permits bidders to include a subsequent offering period in a third-party tender offer during which no withdrawal rights are available,¹⁸⁴ so long as:

• the offer is for all outstanding securities of the class sought;

• the initial offering period (with withdrawal rights) remains open for at least 20 business days;

• all conditions to the offer are deemed satisfied or waived by the bidder on or before the close of the initial offering period;¹⁸⁵

• the bidder accepts and promptly pays for all securities tendered during the initial offering period on the closing of the initial offering period;

• the bidder announces the approximate number and percentage of outstanding securities that were deposited by the close of the initial offering period no later than 9:00 a.m. Eastern time on the next business day after the scheduled expiration date of the initial offering period; and

• the bidder immediately accepts and promptly pays for all shares as they are tendered in the subsequent offering period. ¹⁸⁶

The rule, as proposed and adopted, permits bidders to use a subsequent offering period in both cash and stock tender offers.¹⁸⁷ Similarly, the rule permits bidders to offer either cash or stock in any planned back-end merger. There is no specific requirement that a minimum number of shares be tendered in the initial offering period. Of course, the same consideration must be paid in both the initial and subsequent offering periods.¹⁸⁸

The new rule includes a requirement that bidders announce the results of the initial offering period (including the number and percentage of securities tendered) before 9:00 a.m. on the next business day following the close of the initial offering period.¹⁸⁹ We believe an announcement is necessary to inform remaining security holders whether the offer was successful and whether or not a back-end merger is imminent. Because of this requirement to announce the results before 9:00 a.m. on the next business day, the subsequent offering period must begin on that day. This will avoid any delay in the offer between the initial offering period and the subsequent offering period. We believe that this will prevent any confusion in the market as to whether the offering period is still open.

We proposed conditioning the subsequent offering period on the bidder stating its intention to engage in a back-end merger with the target. Commenters addressing this issue did not believe that this requirement was necessary. We are not adopting this requirement because we believe security holders may benefit from a subsequent offering period whether or not the bidder intends a back-end merger transaction.

As proposed, Rule 14d-1(e)(8) would have defined the subsequent offering period as a ten business day period following the initial offering period. Several commenters, however, recommended that bidders be permitted to determine the duration of the subsequent offering period. In response to these comments, we have decided to adopt a more flexible approach to the subsequent offering period. New Rule 14d-11 will allow the subsequent offering period to be a minimum of three business days and a maximum of 20 business days. Bidders could opt for a relatively short subsequent offering period and later extend the period if necessary. Any extension of the subsequent offering period must be made in accordance with Rule 14e-1(d).¹⁹⁰

2. Bidder Financial Information Clarified for Cash Tender Offers

a. When a Bidder's Financial Statements Are Not Required; Source of Funds

We are clarifying when financial statement information of the bidder must be disclosed in a cash tender offer.¹⁹¹ Currently, this information is required in a cash tender offer when the information is material to a security holder's decision whether to tender, sell or hold.¹⁹² The instructions in Schedule 14D-1 provide some guidance on when financial statement information is material.¹⁹³ These instructions also specify the type of information that will satisfy the financial statement disclosure requirement.¹⁹⁴

We noted in the Proposing Release that generally there are several factors that should be considered in determining whether financial statements of the bidder are material. Those factors are as follows:

• the terms of the tender offer, particularly terms concerning the amount of securities sought, such as any-or-all, a fixed minimum with the right to accept additional shares tendered, all-or-none, and a fixed percentage of the outstanding;

• whether the purpose of the tender offer is for control of the subject company;¹⁹⁵

• the plans or proposals of the bidder; and

• the ability of the bidder to pay for the securities sought in the tender offer and/or to repay any loans made by the bidder or its affiliates in connection with the tender offer or otherwise. ¹⁹⁶

We also noted that these factors are not exclusive, and not all factors are necessary to meet the materiality test. In order to provide more guidance to bidders, we are adopting a new instruction to Schedule TO specifying when the financial statements of a bidder are not material and do not have to be provided. Commenters generally supported the proposal, offering some suggestions on how to modify the instruction so that it achieves its intended purpose. We are, therefore, adopting the instruction with some minor changes. We believe that under the circumstances specified in the new instruction, the burden of providing the bidder's financial information in tender offer materials may outweigh the usefulness of the information to security holders.¹⁹⁷

As adopted, Item 10 to new Schedule TO¹⁹⁸ includes an instruction stating that a bidder's financial statement information is not material when:

• only cash consideration is offered;

• the offer is not subject to any financing condition; and either:

• the bidder is a public reporting company that files reports electronically on EDGAR; or

• the offer is for all outstanding securities of the target. ¹⁹⁹

Several commenters addressed the financing condition element to the instruction. Most of these commenters indicated that the status of a bidder's financing arrangements (e.g., commitment letter, definitive financing in place, or sufficient funds on hand) is not determinative so long as the offer is not subject to a financing condition. We agree. We believe security holders may need financial information for the bidder when an offer is subject to a financing condition so they can evaluate the terms of the offer, gauge the likelihood of the offer's success and make an informed investment decision. Whether an offer is conditioned on obtaining satisfactory financing arrangements (e.g., receipt of a commitment letter or execution of other definitive financing documents) or the actual receipt of funds from a lender,²⁰⁰ the offer is considered subject to a financing condition and the bidder may not omit financial information in reliance on the instruction.

We also asked whether foreign companies whose financial statement information may not be readily available should be treated any differently. Foreign companies are permitted to file reports in paper and are not required to file electronically.²⁰¹ As a result, security holders may have more difficulty obtaining information for foreign bidders. Two commenters indicated that foreign bidders that file reports (e.g., Form 20-F)²⁰² in paper should not be able to satisfy the third prong of the instruction. We agree that the instruction should take into account the availability of financial statement information for foreign bidders. If information is available on EDGAR (via the Internet and other sources), we believe there is less need to require disclosure of the bidder's financial statements in its tender offer materials. Therefore, we have revised this condition to state that the bidder must be a reporting company that files reports electronically on EDGAR.²⁰³ Of course, foreign bidders that choose to file reports electronically on EDGAR can rely fully on this new instruction. Alternatively, a bidder that is non-reporting or files reports in paper may rely on the instruction if the offer is for all outstanding securities of the target.²⁰⁴

We also proposed to codify the current practice of providing net worth information when the bidder is a natural person. The one commenter that addressed this proposal supported it, but believed the requirement to provide "appropriate disclosure" when a bidder's net worth is derived from material amounts of assets that are not readily marketable or there are material guarantees and contingencies was too vague. Therefore, we are adopting this instruction, substantially as proposed, but with a clarification that the bidder must disclose the nature and approximate amount of the individual's net worth consisting of illiquid assets and the magnitude of any guarantees or contingencies that may negatively affect the natural person's net worth.²⁰⁵ We believe this information is useful to security holders in evaluating a tender offer made by a natural person.

Regardless of the level of financial information that security holders receive, a bidder's ability to pay for the securities is a material disclosure item. We believe the disclosure that security holders currently receive in this area can be improved by clarifying the "Source of Funds" item requirement for tender offers and going-private transactions. As proposed, we are revising this item to require disclosure of information regarding the specific sources of financing, any conditions to the financing, and the filing person's ability to finance the transaction through alternative means if the primary source of financing should fall through.²⁰⁶

b. Content of Bidder's Financial Statements in Cash Tender Offers; Financial Statements in Going-Private Transactions

In the Proposing Release we noted the disparity in the financial statements required in third-party tender offers, issuer tender offers, and going-private transactions. We are reducing the financial statement information required in third-party tender offers as proposed. This change harmonizes the requirements with those for issuer tender offers and going-private transactions.²⁰⁷ The commenters that addressed this proposal supported it. We believe that the burden of providing three years of historical financial statements in a third-party cash tender offer outweighs the benefit to security holders.²⁰⁸

We also proposed to update the disclosure requirements for tender offers and going-private transactions. Currently, information regarding book value per share and the pro forma effect of the transaction on the company's balance sheet and book value per share (as of the most recent fiscal year end and the latest interim balance sheet period) may be required. We are reducing the required information, as proposed, to only the most recent balance sheet date.²⁰⁹

In addition, when financial statement information is required in tender offer and going-private transactions, the current rules permit filers to include summary financial information,²¹⁰ instead of full financial statements, in the disclosure documents sent to security holders. We proposed to update the summary information requirements to consist of the summarized financial information specified in Rule 1-02(bb) of Regulation S-X²¹¹ as well as ratio of earnings to fixed charges, book value per share and pro forma data. The two commenters that addressed this proposal indicated that the additional information (redeemable preferred stock, minority interests, unconsolidated subsidiaries and 50 percent or less owned persons) called for by Rule 1-02(bb) is not relevant or useful to security holders, especially in cash tender offers.

In response to their concern, we have revised the summary requirement so that information regarding unconsolidated subsidiaries and 50 percent or less owned persons is not required. We continue to believe, however, that the information specified in Rule 1-02(bb)(1) (redeemable preferred stock and minority interests) may be relevant when the bidder's financial information is material²¹² and the bidder elects to provide summary instead of full financial statements in the disclosure document sent to security holders. Under the current rules a fair and adequate summary includes "shareholders' equity." The additional specificity provided by Rule 1-02(bb)(1) is not inconsistent with the current requirements. Also, information regarding the existence of minority interests may be material to security holders if the filing person (bidder) holds substantial assets or derives substantial revenues from a consolidated subsidiary that is not wholly-owned. Accordingly, we do not believe that updating the disclosure requirements to reference the information specified in Rule 1-02(bb)(1) will result in the disclosure of irrelevant information. As this information may be material to security holders, we adopt an updated definition of summary financial information that is substantially as proposed.²¹³ These revisions also extend to third-party tender offers the requirement to disclose book value information when that information is material.²¹⁴

We also proposed to clarify the reconciliation required when non-U.S. GAAP financial statement information is summarized in a foreign bidder's disclosure document. We believe that summary financial information must include a reconciliation to the same extent full financial statements must include a reconciliation to U.S. GAAP.²¹⁵ This reconciliation requirement is consistent with that required for the acquisition of a foreign non-reporting target company with foreign GAAP financial statements.²¹⁶

c. Pro Forma Financial Information Required in Two-Tier Transactions

We believe security holders need pro forma financial information for a bidder and target on a combined basis when deciding whether or not to tender in the first tier of a two-tier transaction.²¹⁷ Security holders need pro forma financial information to make an informed investment decision because if security holders do not tender in an offer they may receive securities of the bidder in exchange for the securities they hold in the target at a later date in a back-end securities transaction. Bidders frequently disclose information regarding expected synergies and other financial information to effectively sell their transaction to the market. We believe that pro forma information may be necessary to balance the disclosure disseminated to security holders and the markets. In addition, disclosure of pro forma financial information is generally consistent with our free communications scheme.²¹⁸ We are, however, adopting a slightly less burdensome pro forma requirement than proposed in response to some of the concerns expressed by commenters.²¹⁹

Three commenters generally supported the proposed pro forma requirement, expressing different views on the appropriate level of pro forma financial information and the circumstances under which the information should be required. Two commenters believed that the pro forma requirement would be burdensome and provide only a marginal benefit to security holders. Several commenters noted that external factors may affect a bidder's ability to prepare pro forma financial information in compliance with the proposed requirement. Some of these factors include: the lack of any agreement with the target regarding the type and amount of consideration to be offered to security holders in any back-end securities transaction; the hostile or negotiated nature of the transaction; and the results of the tender offer.

We recognize that it may be more difficult for bidders to prepare accurate and complete pro forma financial information when the target is not cooperating with the bidder. We also realize that bidders may decide later not to offer securities in a back-end transaction for a number of reasons. Nevertheless, to the extent that a bidder, at the time of the cash tender offer, intends to offer securities in a back-end securities transaction with the target, we believe such information would be material to target security holders.²²⁰ In addition, bidders that intend to offer securities in a back-end transaction would most likely have prepared some level of pro forma financial information on the combined entity for their own negotiating and planning purposes. As a result, we do not believe the requirement to provide pro forma financial information should be unduly burdensome for the bidder. Therefore, we are adopting a requirement that bidders disclose pro forma financial information prepared in accordance with Article 11 of Regulation S-X, in addition to historical financial statements,²²¹ when they intend to engage in a back-end securities transaction following a cash tender offer.²²² We limit this requirement, however, in two important respects.

First, the requirement is limited to "negotiated" transactions (i.e., management of the target is cooperating with the bidder). Generally, in negotiated transactions, bidders have access to internal financial information of the target necessary to prepare pro forma financial information.²²³ In transactions where the bidder does not have access to the internal information necessary to prepare reliable pro forma financial information in compliance with Article 11 of Regulation S-X (i.e., non-negotiated transactions), we are not requiring pro forma financial information. However, we encourage bidders to provide pro forma or other similar financial information that they consider useful and meaningful to security holders, regardless of whether the transaction is negotiated or not. Second, if an acquisition of a target is not significant to the bidder, we do not believe that pro forma financial information for the transaction would be helpful to security holders. Therefore, we are only requiring bidders to disclose pro forma financial information in a first-step tender offer when the acquisition is significant above the 20% level.²²⁴

3. Target Is Required to Report Purchases of Its Own Securities After a Third-Party Tender Offer Is Commenced

Rule 13e-1 prohibits an issuer whose securities are the subject of a third-party tender offer from repurchasing any of its equity securities until information about the intended acquisition is filed and disseminated to security holders. We proposed to clarify the timing of the disclosure called for by the rule so that the required information is disclosed only after a third-party tender offer is made, when it is most relevant. We also proposed to rewrite the rule in plain English. We are now adopting the revised rule as proposed, but without a requirement to send information to security holders. We also provide an exclusion from the rule for periodic repurchases in connection with employee benefit plans and other similar plans that are made in the ordinary course and not in response to the third-party offer.

Several commenters suggested that we rescind Rule 13e-1 based on the relatively low number of filings received during the past several years. Although few filings are made under the rule,²²⁵ we continue to believe that the requirement serves the useful purpose of informing the marketplace in advance that an issuer plans to repurchase its own equity securities in response to a third party tender offer. While some of the information required by the rule may be provided in Schedule 14D-9, that schedule could be filed as late as ten business days after commencement of a third-party offer. Therefore, we are adopting the rule substantially as proposed, but as a filing requirement only. The information would not be required to be sent to security holders.²²⁶ This will eliminate the cost to issuers of mailing the information, but the information will be publicly available to the marketplace.

4. Tender Offer and Proxy Rules Relating to the Delivery of a Security Holder List and Security Position Listing Harmonized

We are adopting as proposed revisions to Rule 14d-5 to conform the tender offer dissemination requirements with the proxy dissemination requirements in Rule 14a-7.²²⁷ The revised rule expands the scope of information included in a security holder list under the tender offer rules so that it is consistent with the security holder list requirements in the proxy rules. Under the revised rule, a target company that elects to provide a bidder with a security holder list instead of mailing the bidder's materials to security holders must disclose the most recent list of names, addresses and security positions of non-objecting beneficial owners (as well as record holders) it has in its possession, or subsequently obtains. The security holder list must be in the format requested by the bidder if it can be provided without undue burden or expense. The purpose of the amendment to the rule is to give bidders the same ability as target companies to communicate directly with non-objecting beneficial owners of securities.

Most commenters supported the proposal, with one commenter expressing concern on the mechanics of tracking transmittal letters. We do not believe that the revised rule would unduly complicate the tender process or the tracking of transmittal forms. Bidders would mail their tender offer materials to record holders, consistent with current practice, and record holders would then forward the materials to beneficial owners. Bidders also would have the option of supplementing their distribution by mailing directly to non-objecting beneficial owners set forth on the security holder list provided by the target. Transmittal forms would include instructions, as they do today, stating where to send transmittal forms (e.g., forms should be returned to the record holder with directions to tender shares in the offer).

5. New Rule 14e-5: Revision and Redesignation of Former Rule 10b-13, the Rule Prohibiting Purchases Outside an Offer

Rule 10b-13 prohibits a person who is making a cash tender offer or exchange offer from purchasing or arranging to purchase, directly or indirectly, the security that is the subject of the offer (or any security that is immediately convertible into or exchangeable for the subject security), otherwise than as part of the offer. We proposed to clarify the rule's text, codify several interpretations and exemptions, and redesignate it as new Rule 14e-5. We are adopting the amendments substantially as proposed. In response to commenters' suggestions, we are adopting four additional exceptions. We also are implementing the changes proposed in the cross-border tender offers proposing release since those proposals are being adopted today.²²⁸ With these two further exceptions regarding cross-border offers adopted today,²²⁹ Rule 14e-5 has ten exceptions.

a. Redesignating Rule 10b-13 as Rule 14e-5

Former Rule 10b-13 is redesignated as Rule 14e-5. We originally promulgated Rule 10b-13 under Sections 10, 13 and 14 of the Exchange Act²³⁰ to safeguard the interests of persons who sell their securities in response to a tender offer.²³¹ As stated in the Proposing Release, because the rule addresses conduct during tender offers, we believe it belongs with the other rules under Regulation 14E under the Exchange Act that address activities in the context of tender offers.²³² No commenters disagreed with this change, and we are adopting it as proposed.²³³

b. Clarification of Rule 14e-5; Prohibited Period

The amendments to Rule 14e-5 being adopted today do not alter the rule's basic terms. Instead, they modify the rule's text to more clearly set forth the covered activities. Rule 14e-5 will continue to protect investors by preventing an offeror from extending greater or different consideration to some security holders outside the offer, while other security holders are limited to the offer's terms.²³⁴ Rule 10b-13 prohibited a person who is making a cash tender offer or exchange offer from purchasing or arranging to purchase, directly or indirectly, the security that is the subject of the offer (or any security that is immediately convertible into or exchangeable for the subject security), otherwise than as part of the offer. Similarly, Rule 14e-5 prohibits a covered person from purchasing or arranging to purchase any subject securities or any related securities except as part of the tender offer. Rule 14e-5 does not explicitly include the term "exchange offer" as former Rule 10b-13 did because in Regulation 14E the term "tender offer" includes offers to exchange securities for cash and/or securities.²³⁵

We are changing the language describing the time period of the rule's restrictions. As adopted, the restrictions of Rule 14e-5 start upon "public announcement," which is defined in the rule as any oral or written communication by the offeror, or any person authorized to act on the offeror's behalf, that is reasonably designed to, or has the effect of, informing the public or security holders in general about the tender offer.²³⁶ Although the language regarding the commencement of the rule's restrictions is different from the language in Rule 10b-13,²³⁷ the scope is the same; the restrictions apply from the time holders of the subject securities, or the public more generally, are notified of the tender offer.²³⁸

We are adopting the proposed simplification of the language regarding the end of the rule's restrictions. Under Rule 14e-5, the restrictions end when the offer expires.²³⁹ Under Rule 14d-11, a tender offer may be extended up to 20 days under specific circumstances without offering withdrawal rights,²⁴⁰ thus giving security holders an additional opportunity to tender into the offer.

As adopted, Rule 14e-5 does not apply to purchases or arrangements to purchase outside of a tender offer during a subsequent offering period if the consideration is the same in form and amount. In the Proposing Release, we said we believed offeror purchases outside the offer during this subsequent offering period present the same concerns as during the initial offering period; therefore, we proposed that Rule 14e-5 restrictions would cover any subsequent offering period provided under proposed Rule 14d-11. Two commenters agreed with the proposal, and two others thought the rule should not extend to a subsequent offering period so long as the purchase price does not exceed the offer price. We now believe that the requirements of Rules 14d-11 and 14e-5 are sufficient to avoid any of the problems that Rule 14e-5 is designed to prevent. More specifically, under the terms of Rule 14e-5, any purchases made outside the offer during the subsequent offering period must be made using the same form and amount of consideration offered in the tender offer. Also, under the terms of Rule 14d-11, the offeror must immediately accept and promptly pay for all securities as they are tendered in the subsequent offering period, which eliminates any difference in the time value of money between those who tender and those who sell to the offeror outside the offer. Under these conditions, we believe those people who tender during a subsequent offering period will not be disadvantaged in relation to those whose securities are purchased outside of, but during, a subsequent offering period.

c. Persons and Securities Subject to the Rule

Scope of Persons Subject to the Rule

Rule 10b-13 applied to the person who made the offer, which had been interpreted to cover the offeror, the offeror's affiliates, and the offer's dealer-manager.²⁴¹ Under Rule 14e-5, the Rule 10b-13 term "person" is replaced by "covered person" to codify this interpretation. The definition of "covered person" we are adopting has several changes from the proposed definition. The proposal defined a covered person as: the offeror and its affiliates; the offeror's dealer-manager(s) and other advisors; and any person acting, directly or indirectly, in concert with them. Two commenters objected to including all advisors within the meaning of covered person as too broad. We agree, and have narrowed the scope of the advisor category.

Covered person, as adopted, means: the offeror and its affiliates; the offeror's dealer-manager and its affiliates; any advisor to the offeror, dealer-manager or their affiliates, if such advisor's compensation is dependent on the completion of the offer; and any person acting, directly or indirectly, in concert with any of the other covered persons in connection with any purchase or arrangement to purchase any subject securities or any related securities.²⁴² These changes replace the broader proposed term "other advisors" with two narrower categories: affiliates of the dealer-manager; and advisors to the offeror, dealer-manager or their affiliates, if such advisor's compensation is dependent on the completion of the offer. These changes mean that advisors such as attorneys and accountants will not be affected by the rule where they have no stake in the outcome of the offer.

The proposed definition of an affiliate borrowed heavily from the definition in Rule 12b-2.²⁴³ As proposed in Rule 14e-5, the term meant any person that "directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the offeror." The only distinction between the two definitions is that the proposed Rule 14e-5 definition was limited to affiliates of the offeror whereas, Rule 12b-2 extends to the affiliate of other relevant persons.²⁴⁴ In order to accommodate other changes from proposed Rule 14e-5,²⁴⁵ we needed to broaden this definition to include affiliates of the dealer-manager as well as the offeror, so we are adopting the entire definition of affiliate in Rule 12b-2.

Scope of Securities Subject to the Rule

We are adopting the proposed changes from Rule 10b-13 regarding the scope and treatment of related securities in the definitions of subject securities and related securities. Rule 14e-5 applies only to offers for equity securities, just as Rule 10b-13 did. Moreover, Rule 14e-5, as with Rule 10b-13, prohibits purchases outside the offer of not only the subject securities,²⁴⁶ but also related securities. "Related securities" are defined as securities that are immediately convertible into, exchangeable for, or exercisable for subject securities. Among other things, this clarifies that securities that are immediately "exercisable for" subject securities, such as options, are included in the types of securities that a covered person cannot generally purchase outside the offer.

d. Excepted Transactions

Exercise of Related Securities

Rule 10b-13 specified that if the person making the offer "is the owner of another security which is immediately convertible into or exchangeable for the security which is the subject of the offer, his subsequent exercise of his right of conversion or exchange with respect to such other security shall not be prohibited by this rule." We are amending this provision as proposed.

When Rule 10b-13 was adopted, options were not nearly as common as they are today, and the text of this exception did not explicitly include the exercise of options. We believe the exercise of options acquired before announcement of the offer is no more likely to lead to undesirable effects than the exchange or conversion of other related securities, so we want to make it clear that the exercise of options is included in this exception. Thus, Rule 14e-5 will permit, as proposed, a covered person to convert, exchange, or exercise related securities, if the covered person owned the related securities before public announcement.

Purchases by or for Plans

The exception for purchases for plans is adopted as proposed. Since the adoption of Rule 10b-13, there has been an exception for purchases by the issuer of the target security (or a related security) under certain types of plans, by participating employees of the issuer or the employees of its subsidiaries, or by the trustee or other person acquiring the security for the account of the employees.²⁴⁷ We are eliminating the references to outdated Internal Revenue Code provisions that were contained in Rule 10b-13 to define permissible plan purchases; instead, we are using the more expansive plan scope contained in the Commission's Regulation M. The exception now permits purchases of subject securities or related securities for any "plan" if the purchases are made by an "agent independent of the issuer" as these terms are defined in Regulation M.

Purchases During Odd-Lot Offers

We are adopting the proposed exception to permit purchases during an issuer odd-lot tender offer conducted in compliance with the provisions of Rule 13e-4(h)(5) under the Exchange Act.²⁴⁸ This exception codifies a class exemption from Rule 10b-13 issued by the Commission in connection with a 1996 revision to Rule 13e-4(h)(5).²⁴⁹ Under Rule13e-4(h)(5), an issuer tender offer is excepted from application of Rule 13e-4 if the offer is directed solely to odd-lot security holders and provides "all holders" and "best price" protections to tendering security holders.

Purchases as Intermediary

We proposed to add an exception for unsolicited purchases by a dealer-manager that are made on an agency basis. We based this exception on a prior exemption²⁵⁰ that allowed a dealer-manager to continue to conduct its customary brokerage (i.e., agent) activities during a tender offer. These activities generally do not raise the concerns that proposed Rule 14e-5 is intended to address. In the Proposing Release, we asked if the exception should permit "riskless principal" transactions by dealer-managers as well. Two commenters answered this question and both agreed that the exception should be broadened to permit unsolicited purchases as a riskless principal by dealer-managers. One of the two thought it should extend to other financial advisors.

As adopted, we are broadening this exception in two ways from the proposal. First, we are including affiliates of the dealer-manager within the exception. Second, in addition to agency transactions, we are permitting purchases to offset a contemporaneous sale after having received an unsolicited order in the ordinary course of business to buy from a customer who is not a covered person, if the dealer-manager or affiliate is not a market maker.²⁵¹ We believe these changes appropriately accommodate a dealer-manager's and its affiliates' activities as intermediary without allowing the offeror to use the dealer-manager and its affiliates to facilitate the tender offer.

e. Additional Exceptions Being Adopted

We are adopting four exceptions that were not proposed specifically, although we either sought comment in the Proposing Release or received suggestions from commenters on them.

Purchases Pursuant to Contractual Obligations

In the Proposing Release, we asked whether an offeror should be permitted to purchase subject or related securities outside an offer if a purchase contract was entered into before public announcement of the offer and the per share purchase price is no higher than the offer consideration. Four commenters addressed this issue, and all agreed such purchases should be permitted. One commenter stated that it could not discern any public policy rationale for permitting purchases pursuant to conversions, exchanges or exercises but not pre-announcement contracts. We agree with the commenters.

As adopted, this exception is available only if: the contract was entered into before public announcement; the contract is unconditional and binding on both parties; and the existence of the contract and all material terms, including quantity, price and parties, are disclosed in the offering materials.²⁵² We are not requiring that the contract price be the same as the offer price because we view these contracts as the functional equivalents of options that have no such price restriction for their exercise under Rule 14e-5.

Basket Transactions

In response to a commenter's suggestion, we are adopting an exception for transactions in baskets of securities containing a subject security or a related security.²⁵³ We are requiring that: the purchase or arrangement to purchase the basket be made in the ordinary course of business and not to facilitate the offer; the basket contains 20 or more securities; and covered securities and related securities do not comprise more than 5% of the value of the basket.²⁵⁴

We believe that transactions in baskets, following the terms of this exception, provide little opportunity for a covered person to facilitate an offer or for a security holder to exact a premium from the offeror. Facilitation of an offer includes purchases intended to bid up the market price of the covered or related security, and includes buying a basket to strip out the covered security in an effort to get the offeror the number of shares it is seeking.

Covering Transactions

In response to a commenter's suggestion, we are adopting an exception from Rule 14e-5 for purchases of subject and related securities that are made to satisfy an obligation to deliver arising from a short sale or from the exercise of an option by a non-covered person. This exception is available to any covered person, so long as the short sale or option transaction was made in the ordinary course of business, not to facilitate the tender offer, and before public announcement. We adopt this exception because we believe such purchases effected for the purpose of making delivery to another party warrant the same treatment as purchases made pursuant to contractual obligations.

Purchases by an Affiliate of the Dealer-Manager

In response to a commenter's suggestion, we are adopting an exception from Rule 14e-5 for purchases of subject and related securities by an affiliate of the dealer-manager.²⁵⁵ This exception permits purchases or arrangements to purchase by an affiliate of a dealer-manager if:

• the dealer-manager maintains and enforces written policies and procedures reasonably designed to prevent the flow of information to or from the affiliate that might result in a violation of the federal securities laws and regulations;

• the dealer-manager is registered as a broker or dealer under Section 15(a) of the Exchange Act;²⁵⁶

• the affiliate has no officers (or persons performing similar functions) or employees (other than clerical, ministerial, or support personnel) in common with the dealer-manager that direct, effect, or recommend transactions in securities; and

• the purchases or arrangements to purchase are not made to facilitate the tender offer.

This exception, based largely upon the definition of "affiliated purchaser" in Rule 100 of Regulation M, allows investment affiliates to continue their investment advisory activities without interruption, on the same basis as they do during distributions subject to Rule 101 of Regulation M.²⁵⁷ We believe effective information barriers between the dealer-manager and affiliate prevent improper motives from influencing purchases by affiliates while permitting such affiliates to continue their normal advisory activities. We are limiting this exception to the affiliates of dealer-managers that are registered under Section 15(a) of the Exchange Act because the dealer-managers are subject to a high level of regulatory and reporting oversight.