Background
On September 19, 2008, the U.S. Securities and Exchange Commission
(the "SEC") adopted changes to the exemptions for
certain cross-border tender offers, exchange offers, and rights
offerings.1 The exemptions, which were originally
adopted in 1999, are structured to provide relief from various U.S.
regulations that would otherwise apply to cross-border
transactions. The level of relief is designed to be inversely
proportionate to the U.S. interest in the transaction, as
calculated by the percentage of target securities that are
beneficially owned by U.S. holders. The rules provide for a
two-tier system. Relief under the "Tier I" level of U.S.
ownership is available in situations where U.S. beneficial
ownership of the non-U.S. target is less than or equal to 10%, and
"Tier II" relief is available where U.S. beneficial
ownership is more than 10% but not more than 40%. Generally, under
Tier I there are broad exemptions in place from various U.S.
filing, dissemination and procedural requirements. The Tier II
rules provide more narrow relief.
Revision of Test for Calculating U.S. Ownership of Target Company
The most significant change contained in the new amendments is
the time and manner under which the U.S. ownership percentages will
now be calculated. Under the new rules, the percentages allocated
to the two tiers remain unchanged. However, the SEC has adopted
rules that allow for greater flexibility in making the
calculations. Under the prior system, the level of beneficial
ownership had to be calculated 30 days before the commencement of a
tender offer or the record date for a rights offering. The new
rules provide for a window of 90 days to make the calculation (up
to 60 days before the announcement of the transaction or the record
date and through up to 30 days after the announcement or the record
date). The ability to perform the look-through analysis after the
public announcement should help to maintain the confidentiality of
the transaction. In special cases, where it is not possible to
obtain information within the 90 days allotted, the calculation may
be made as of a date that is within 120 days before the public
announcement of the transaction.
In another change to the rules, individual holders that own more
than 10% of the subject securities will no longer be excluded in
the calculation. Many practitioners have observed that excluding
large target holders often has the effect of disproportionately
increasing the percentage of U.S. ownership in a foreign private
issuer. The SEC anticipates that this amendment will increase the
number of target companies eligible for the exemptions.
Nevertheless, the change to the rules will have the effect of
causing a target with one large U.S. holder to be automatically
ineligible for the Tier I exemptions.
An Alternate Test to the Look-Through Analysis
Although the look-through analysis will remain the primary and
preferred method of determining eligibility, the new rules include
an alternative test to the look-through analysis, which is based
upon the percentage of overall average daily trading volume
("ADTV") of the target company that occurs within
the U.S. For the ADTV test, the applicable U.S. percentage levels
remain at 10% and 40% and must be calculated over a 12 month period
ending no more than 60 days before the public announcement of the
transaction. However, the ADTV test may only be used in limited
circumstances, where the transaction is not negotiated or where it
is not possible to perform the look-through analysis due to the
laws of a foreign jurisdiction. Additionally, an acquiror will not
be able to rely on the ADTV test if, before the public
announcement, U.S. ownership levels can be obtained from annual
reports or other annual information filed by the issuer with the
SEC, with the regulator in its home jurisdiction or if the acquiror
has "reason to know" that the U.S. ownership
level is greater than the relevant threshold. The adopting release
for the new rules also provide guidance that an acquiror has
"reason to know" of publicly available information.
Expanded Relief
In addition to the foregoing amendments, the new rule changes
will exempt from SEC Rule 13e-3 (the rule applicable to "going
private" transactions with affiliates that requires
significantly enhanced disclosure, typically accompanied by
enhanced SEC scrutiny) transaction structures currently not covered
under the cross-border exemptions, such as schemes of arrangement,
cash mergers, or compulsory acquisitions for cash that otherwise
satisfy the Tier I qualifications.
The new rules clarify that tender offers that are not subject to
most of the substantive U.S. tender offer rules, such as tender
offers for equity securities not listed on a U.S. exchange and not
registered under the U.S. Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and tender offers for debt
securities, will be eligible for the Tier II exemptions if those
exemptions would have been available had the offerings been subject
to all of the U.S. tender offer rules applicable to companies with
securities registered under the Exchange Act. Also, the release
implements many rules that expand relief under Tier II with the
goal of decreasing conflicts between U.S. and foreign laws,
including:
- Permitting the use of more than one tender offer outside of the United States;
- Allowing bidders in a cross-border tender offer to make a U.S. offer available to all holders, including non-U.S. holders of American Depositary Receipts (ADRs) and allowing U.S. investors to participate in a non-U.S. offer;
- Allowing bidders to suspend back-end withdrawal rights while tendered securities are counted and before they are accepted for payment;
- Allowing securities tendered during a subsequent offering to be purchased within 20 business days from date of tender, as opposed to on a "rolling basis" as the securities are tendered;
- Allowing subsequent offering periods to extend beyond 20 U.S. business days;
- Permitting bidders to pay interest on securities tendered during subsequent offering period, where required under foreign law;
- Permitting bidders to terminate initial offering period or any voluntary extension of that period before a scheduled expiration date;
- Allowing separate offset and proration pools for securities tendered during the initial and subsequent offering periods in order to accommodate "mix and match" offer structures; and
- Codifying prior SEC no-action letters relating to relief under Rule 14e-5, which, in the context of a tender offer, generally prohibits purchases of the subject securities other than pursuant to that tender offer.
Interpretive Guidance
The adopting release for the new rules also contains interpretative guidance by the SEC Staff regarding the application of the US tender offer rules:- The SEC has confirmed that tender offers subject to the provisions of Section 13(e) or 14(d) of the Exchange Act must be open to all target security holders, including foreign persons, and, although foreign target holders may not be excluded from the U.S. tender offers under these provisions, the rules do not require dissemination of offer materials outside the U.S.;
- The SEC has reiterated that, in those situations in which a bidder excludes U.S. holders from the tender offer, the bidder must take steps to ensure that the tender offer does not involve U.S. jurisdictional means. It is not sufficient merely to include a legend or disclaimer in the offer documents to the effect that the offer is not being made within the U.S.; additional steps must be implemented to ensure that tenders are not accepted from, and that securities are not issued to, U.S. holders and that the offer materials are not mailed in the U.S. This guidance is consistent with the SEC's long-term objective of enabling U.S. holders to participate in business combination transactions and the "skepticism" with which the SEC views exclusion of U.S. holders; and
- The release also provides guidance on "vendor placements" in exchange offer transactions in which securities that would otherwise be issued to U.S. holders in a business combination transaction are sold on behalf of the U.S. holders, and the proceeds of the sales (less expenses) are delivered to U.S. holders. The vendor placement mechanism is often implemented in situations in which the bidder does not wish to register its securities in the U.S. and otherwise become subject to U.S. regulation. In the release, the SEC notes that it no longer intends to issue no-action letters with respect to the application of the registration requirements to vendor placements (reflecting the SEC's general approach that U.S. shareholders should be entitled to participate in business combination transactions on the same terms as other shareholders). The release also sets out the criteria that bidders should consider in determining whether a vendor placement should be available and implemented.
Footnote
1 The rule changes do not affect the exemptions for certain tender offers for shares of Canadian companies that may be generally conducted pursuant to Canadian tender offer rules in accordance with the U.S.-Canadian multijurisdictional disclosure system, or MJDS.
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