Revisions to the Cross-Border Tender Offer, Exchange Offer, Rights Offerings, and Business Combination Rules and Beneficial Ownership Reporting Rules for Certain Foreign Institutions — A Small Entity Compliance Guide*
Introduction
On August 27, 2008, the Securities and Exchange Commission (SEC) adopted amendments to the rules governing certain cross-border business combination transactions and rights offerings. These “cross-border exemptions” apply where the target company in a business combination or an issuer conducting a rights offering is a “foreign private issuer,” as defined in Exchange Act Rule 3b-4(c). These rule changes are effective as of December 8, 2008.
The rule amendments will encourage issuers and offerors to include U.S. holders in business combinations and rights offerings on the same terms as all other target security holders. For purposes of the cross-border exemptions, a “U.S. holder” is any security holder resident in the United States. The amendments address practical problems that have limited the ability of offerors and issuers to rely on the cross-border exemptions. They also alleviate some of the burdens on issuers and offerors who must comply with more than one regulatory system in cross-border transactions.
Several of the rule amendments also apply to tenders offers for U.S. companies. The SEC extended these rule revisions to U.S. tender offers because we believe they provide increased flexibility for bidders in those offers, without compromising our investor protection goals.
The SEC also amended the beneficial ownership reporting rules for certain foreign institutions. The revisions allow them to file on the short-form Schedule 13G under the same circumstances as their U.S. counterparts. The changes to the beneficial ownership reporting rules permit these foreign institutions to file shorter form beneficial ownership reports when their domestic counterparts could do so under existing rules, so long as the foreign institutions can make certifications intended to ensure that more relaxed reporting rules are appropriate.
1. How Do the Revised Rules Affect Small Entities?
The amendments do not specifically impose new compliance requirements on small entities. Reliance on the revised exemptions is voluntary, even where the exemptions are available. However, for offerors or issuers relying on some of the revised exemptions, the revisions require electronic filing of certain forms currently permitted to be submitted to the Commission in paper format.
As discussed above, the ability to rely on the cross-border exemptions for business combinations or rights offerings depends on the status of the target company as a foreign private issuer. The exemptions are available equally to qualifying small and large entities. Because reliance on the cross-border exemptions is voluntary even where they are available, these rule changes will not impose increased requirements on small entities.
For more detailed information regarding the amendments, please refer to the adopting release, listed under “Other Resources” at the bottom of this page.
2. How Do the Rule Amendments Change the Rules Applicable to Cross-Border Business Combinations and Rights Offerings?
The revisions to the cross-border exemptions represent the first changes to those rules since they were initially adopted in 1999. Generally, the revisions expand the availability of the cross-border exemptions. They also expand the scope of the exemptions to address continuing conflicts of law and practice. As with the 1999 cross-border exemptions, the goal of the revisions is to encourage the inclusion of U.S. target security holders on the same terms as all other target holders.
a. Revised Eligibility Test for Cross-Border Exemptions
To determine eligibility to rely on the cross-border exemptions, an issuer or offeror must determine the percentage of target securities held by U.S. persons. Under the required “look through” analysis, issuers and offerors must identify U.S. beneficial owners of the subject securities by looking through record owners in specified jurisdictions that hold in nominee form.
The revised rules provide greater flexibility with respect to the calculation of U.S. ownership. Offerors and issuers may calculate U.S. ownership as of a range of dates at an earlier period in the offer process, with the announcement of the transaction as the reference point. An issuer or offeror may calculate U.S. ownership as of a date no more than 60 days before and no more than 30 days after the public announcement of a business combination or after the record date for a rights offering. Where an acquiror is unable to accomplish the look through analysis within this date range, it may calculate U.S. ownership as of a date no more than 120 days before public announcement. The issuer or offeror no longer must exclude large block holders of the subject securities when determining U.S. ownership, a change which will likely make the cross-border exemptions more widely available.
In addition, the revisions expand the availability of an alternate test to determine U.S. ownership, based in part on a comparison of the average daily trading volumes of the securities in the United States and abroad. Offerors may use the alternate test for tender offers that are not made pursuant to an agreement with the target company. Issuers and offerors may also use the alternate test when they are unable to conduct the required look through analysis to determine U.S. beneficial ownership of the target securities.
b. Changes to the “Tier I” Cross-Border Exemptions
The cross-border exemptions are structured as a two-tiered system based on the percentage of target securities beneficially held by U.S. holders. The Tier I exemptions and Securities Act Rules 801and 802 are available where U.S. holders beneficially own no more than 10 percent of the target securities and where other eligibility criteria are met. Where U.S. holders own no more than 10 percent of the subject securities, the Tier I exemptions provide broad relief from U.S. tender offer and going private rules. Securities Act Rules 801 and 802 exempt an issuer in a rights offering or an offeror in a business combination transaction from the registration requirements of Section 5 of the Securities Act of 1933.
The changes to the Tier I exemptions expand the applicability of the exemption from Exchange Act Rule 13e-3, the “going private” rule. Under the revisions, the availability of this exemption no longer depends on the transaction structure. The revised exemption applies to a broader range of cross-border transactions, such as schemes of arrangements, cash mergers, or compulsory acquisitions for cash. In order to qualify for the expanded exemption from Rule 13e-3, a party must meet all the requirements for reliance on Rule 802 or Tier I.
c. Changes to the Tier II Exemptions
The Tier II cross-border exemptions are exemptions from U.S. tender offer rules. They may be available when U.S. holders beneficially own no more than 40 percent of the target securities. These exemptions provide targeted relief to address recurring conflicts between U.S. and foreign regulatory requirements applicable in cross-border tender offers.
The revisions expand the scope of the Tier II exemptions by making them available to tender offers that are not subject to Regulation 14D or Exchange Act Rule 13e-4. In addition, the revisions broaden the relief provided in the Tier II exemptions by:
- allowing multiple foreign offers at the same time as a concurrent U.S. tender offer;
- permitting bidders to include foreign holders in the concurrent U.S. tender offer;
- allowing bidders to include U.S. target security holders in a foreign offer conducted under Tier II, where required under applicable foreign law and where appropriate disclosure about the risks of participating in the foreign offer is provided;
- allowing bidders to suspend back-end withdrawal rights while tendered securities are counted;
- allowing subsequent offering periods to last longer than 20 U.S. business days in both cross-border and domestic offers;
- allowing securities tendered during the subsequent offering period to be purchased within 20 business days from the date of tender, where “business day” is defined by the rules of the target’s home country;
- permitting the use of separate offset and proration pools for securities tendered during the initial and subsequent offering periods for cross-border tender offers and eliminating the prohibition on a ceiling for the form of consideration target security holders may choose to elect under foreign laws;
- allowing bidders to pay interest on securities tendered during a subsequent offering period, when required by foreign law;
- allowing bidders to end an initial offering period or any voluntary extension of that period before the scheduled expiration date, under certain conditions; and
- codifying existing positions under Exchange Act Rule 14e-5 that exempt purchases and arrangements to purchase outside of a U.S. tender offer.
d. Changes to Schedules and Forms
(i) Form CB and Form F-X
When offerors or issuers rely on the Tier I cross-border exemptions or Rules 801 or 802, they may be required to furnish a Form CB to the SEC. Where the entity furnishing the Form CB is a foreign company, it must also file a Form F-X with the Commission to appoint an agent in the United States for service of process.
Under the amendments, Form CB, and a Form F-X filed in connection with a Form CB, must be submitted electronically via EDGAR. The electronic filing requirement will benefit U.S. security holders by providing easier access to information.
(ii) Changes to Other Schedules and Forms
Under the revised rules, Schedule TO and Forms F-4 and S-4 include boxes on the cover page of the forms. These boxes are used by the filing persons to specify if the filing person is relying on the revised cross-border amendments, and if so, which specific exemptions. These changes will enable the staff to perform the review process more efficiently.
3. What Rule Amendments Also Apply to Domestic Business Combinations?
a. Expanded Availability of Early Commencement
As noted above, some of the amendments apply to tender offers for U.S. companies as well as for foreign target companies. For example, the revised rules permit all exchange offers to commence upon the filing of a registration statement, including offers that are not subject to Exchange Act Rule 13e-4 or Regulation 14D, if the following conditions are met:
- the bidder must provide the same withdrawal rights as required under Regulation 14D and Rule 13e-4; and
- material changes to the information provided to target security holders must be disseminated as required under Exchange Act Rule 13e-4(e)(3) and 14d-4(d) and the bidder must hold the offer open, with withdrawal rights, for the minimum periods specified in those rules.
This change further equalizes the regulatory treatment of cash and share business combination transactions.
b. No Limit on Length of the Subsequent Offering Period
The revisions eliminate the limit on the length of a subsequent offering period for both domestic and cross-border tender offers. Under prior rules, a subsequent offering period could not last longer than 20 U.S. business days. For domestic tender offers, the bidder must accept and pay for securities tendered during the subsequent offering as they are tendered because tendering holders do not have withdrawal rights during the subsequent offering period. For cross-border tender offers conducted under the Tier II exemptions, bidders may pay for securities tendered during the subsequent offering period on a modified rolling basis, within 20 business days of the date of tender, in order to accommodate foreign payment practice.
4. Changes to Beneficial Ownership Reporting Rule for Certain Foreign Institutions
The revisions permit some foreign institutions to report beneficial ownership of securities acquired and held in the ordinary course of business on a short-form Schedule 13G instead of the longer Schedule 13D. These rule amendments codify the current practice of providing exemptive relief to permit these foreign institutions to file on Schedule 13G.
Only some foreign institutions may file on Schedule 13G under the revised rules. The foreign institution must be the foreign equivalent of the kinds of U.S. institutions listed in Exchange Act Rule 13d-1(b)(1)(ii). In addition, the foreign institution may file on Schedule 13G only under the same circumstances as its U.S. counterpart, such as when the securities it is reporting have been acquired in the ordinary course of its business. The foreign institution must include a certification with the Schedule 13G representing that it is subject to a substantially comparable regulatory scheme as its U.S. counterpart, and that it will provide the information that would have been required in a Schedule 13D filing to the SEC staff upon request.
5. Interpretive Guidance
The Commission issued interpretive guidance on several issues when it proposed and adopted the changes to the cross-border exemptions. The issues addressed include (i) the applicability of the U.S. all-holders requirements to foreign target security holders, in a tender offer for a domestic company; (ii) the ability of bidders in cross-border tender offers to exclude U.S. security holders of the target company; (iii) the ability of bidders in cross-border tender offers to use a process known as a vendor placement to issue cash to U.S. security holders while issuing securities to all other target security holders; and (iv) limitations on a bidder’s ability in a cross-border tender offer to reduce or waive a minimum tender condition without providing withdrawal rights after the waiver.
For more details regarding these revisions and interpretive guidance, please refer to the adopting release referenced below.
Other Resources
The adopting release for Commission guidance and revisions to the cross-border tender offer, exchange offer, rights offerings, and business combination rules and beneficial ownership reporting rules for certain foreign institutions can be found on the Securities and Exchange Commission’s website at http://www.sec.gov/rules/final/2008/33-8957.pdf.
Form S-4, Form F-4, Form, F-X, Form CB, Schedule 13G, and Schedule TO can be accessed from http://www.sec.gov/about/forms/secforms.htm.
Contacting the SEC
The Securities and Exchange Commission’s Division of Corporation Finance is happy to assist small companies with questions regarding changes to the cross-border exemptions for business combinations and rights offerings. The Division’s Office of Mergers and Acquisitions answers questions submitted by e-mail and telephone. You can contact the Office of Mergers and Acquisitions at (202) 551-3440 or by on-line form at https://tts.sec.gov/cgi-bin/corp_fin_interpretive. Questions on other matters concerning small entities may be directed to the Division’s Office of Small Business Policy by e-mail at smallbusiness@sec.gov, or by telephone at (202) 551-3460.
Footnotes
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This guide was prepared by the staff of the U.S. Securities and Exchange Commission as a “small entity compliance guide” under Section 212 of the Small Business Regulatory Enforcement Fairness Act of 1996, as amended. The guide summarizes and explains rules adopted by the SEC, but is not a substitute for any rule itself. Only the rule itself can provide complete and definitive information regarding its requirements.