Cross-Border M&A: SEC Adopts Enhanced Exemptions for Takeovers of Non-U.S. Companies
October 1, 2008
Laurie L. Green- Ft Lauderdale
Francois Janson- New York
On September 19, 2008, the SEC published final amendments to its rules (the “cross-border rules”) governing how takeovers of non-U.S. companies having U.S. shareholders may be exempt from compliance with U.S. securities laws.1 These amendments were adopted substantially as proposed (see our alert dated June 13, 2008), except for two major modifications: the final rules further relax the eligibility test that must be met to rely on the exemptions and introduce new limitations on the ability of bidders to make material changes to their offer without extending the offer period and providing withdrawal rights.
These amendments apply to takeovers by bidders (U.S. or non-U.S.), whether by way of a tender offer, exchange offer, merger or other forms of business combination, of non-U.S. companies that qualify as foreign private issuers2 (FPIs) under U.S. securities laws. The amendments do not concern takeovers of Canadian companies structured in accordance with the Multi-Jurisdictional Disclosure System (MJDS), as Canadian-compliant takeover bids may be extended to U.S. shareholders under those rules.
These amendments are the latest in a series of recent initiatives by the SEC to bring more flexibility in its rules applicable to non-U.S. companies that access the U.S. capital markets, report in the U.S. or simply have U.S. shareholders. These initiatives include new rules permitting FPIs to use International Financial Reporting Standards without the need for reconciliation with U.S. GAAP and various other improvements to the FPI disclosure regime.
The SEC adopted the cross-border rules in January 2000 in part to facilitate the execution of takeovers of non-U.S. companies that are subject to U.S. securities laws because the transaction is conducted in the U.S. or through the use of U.S. jurisdictional means. The rules were designed to address problems arising from the application of conflicting requirements under the U.S. tender offer rules and the laws of other jurisdictions with a connection to the transaction. These problems resulted in bidders routinely deciding not to extend their offer to U.S. shareholders when U.S. participation was not necessary for the success of the bid.
To encourage U.S. shareholder participation, the SEC implemented rules exempting tender offers, exchange offers and other business combinations involving non-U.S. targets from compliance with the relevant U.S. securities laws when U.S. ownership in the target is below certain thresholds. In the adopting release, the SEC expresses its view that the cross-border rules have generally achieved their intended purpose of fostering U.S. shareholder participation in cross-border transactions, but that a number of practical issues have arisen over the years that have required relief on a case-by-case basis. The amendments address these issues and broaden the availability of the current exemptions.
Overview
The amendments purport to:
- make it easier for bidders to determine whether they are eligible to rely on the cross-border rules by simplifying the method of calculation of U.S. ownership
- make the Tier 1 exemption available to affiliated cross-border going private transactions regardless of deal structure
- clarify that the Tier 2 procedural exemptions are not limited to tender offers for equity securities
- codify no-action positions and SEC staff guidance on multiple offers previously issued to resolve conflicts between U.S. and non-U.S. procedural takeover rules
- give bidders more flexibility to suspend withdrawal rights to facilitate counting and payment for tendered securities
- allow purchases inside and outside the non-U.S. offer subject to certain conditions
- make early commencement available to all types of exchange offers
- require that the tender offer materials that must be furnished to the SEC under the exemptions be provided electronically
- place non-U.S. institutional investors on the same footing as their U.S. counterparts with respect to reporting of beneficial ownership positions in SEC-registered companies
Current Exemptions
The exemptions available for cross-border tender and exchange offers are structured as a two-tier system that is premised on the level of U.S. ownership in the target, with the level of U.S. regulation increasing with the proportion of U.S. holders. Participation by U.S. holders must be on terms at least as favorable as non-U.S. holders.
Acquisitions of targets with no more than 10% U.S. shareholders (“Tier 1” deals) are exempt from most U.S. tender offer rules and from the requirement to register any securities offered as consideration to the target shareholders with the SEC.
Acquisitions of targets in which the level of U.S. ownership is greater than 10% but does not exceed 40% (“Tier 2” deals ) have more limited exemptions. These exemptions provide targeted relief from some U.S. tender offer rules to address recurring areas of regulatory conflict. Except for these limited exemptions, Tier 2 takeovers must comply with the U.S. tender offer rules (Regulations 14D and 14E) when these rules are applicable and must be registered with the SEC if they involve the issuance of securities to the target shareholders.
When assessing the level of U.S. ownership, a bidder must look through the record holders located in the U.S., the target’s jurisdiction of incorporation and the main trading market and count U.S. beneficial holders in those jurisdictions. Only after making a reasonable inquiry is a bidder entitled to assume that beneficial owners are resident of the country where the record holder is located. To account for the difficulties in performing this analysis in non-negotiated transactions and the need to protect confidentiality, the rules allowed a hostile bidder to rely on the exemptions when U.S. average daily trading volume (ADTV) is below the 10% or 40% thresholds, so long as the bidder had no reason to know otherwise. The determination of U.S. ownership was required to be made as of the 30th day before the date of commencement of the transaction.
Eligibility Assessment
One of the main problem areas that arose with the cross-border rules over the years was the difficulties encountered by bidders in determining U.S. ownership levels to assess whether they may rely on the exemptions. The issues centered around the required timeframe for making the determination of U.S. ownership because in several jurisdictions the calculation cannot be performed as of a fixed date and may take several weeks to complete. In addition, the look-through analysis was further complicated because of differences in national rules and practices regarding the custody of shares and bank secrecy and privacy laws. Considering the potential consequences of making offers to U.S. investors in violation of U.S. securities laws, many bidders ultimately elected not to use the exemptions and continued making exclusionary offers. The SEC addresses these issues by bringing more flexibility in the method of calculating U.S. ownership.
In particular, the SEC adopts improvements in three areas that are key for the determination of whether the exemptions are available:
1) Reference date: bidders are allowed to use the date of announcement of a transaction instead of the date of commencement.
2) Expanded timeframe for calculation: the SEC replaces the fixed date of calculation with a 90-day range; bidders may calculate U.S. ownership no more than 60 days before and 30 days after the date of announcement of the transaction. Bidders unable to complete the look-through analysis within the expanded timeframe may use a date within 120 days before public announcement. For non-negotiated deals, the calculation of U.S. ownership must be made over a 12-calendar-month period ending no later than 60 days before the announcement.
3) New alternate test for negotiated transactions: if the bidder is unable to complete the look through analysis within the expanded timeframe, it may use the ADTV-based test previously reserved to non-negotiated deals so long as the target’s primary trading market is outside the U.S. Reliance on ADTV information is permitted unless the target’s annual report shows or the bidder knows or has reasons to know based on public filings or other sources that actual U.S. ownership is higher.
For purposes of the alternate test, the principal trading market for an issuer’s securities is deemed to be outside the U.S. when at least 55% of worldwide trading in such securities occurs on one or more markets in no more than two foreign jurisdictions during a recent 12-month period. When trading in two jurisdictions is aggregated for purposes of applying the principal trading market test, trading in at least one of the two jurisdictions must be greater than U.S. trading for the same class of securities.
The SEC no longer requires that shares held by U.S. or non-U.S. holders at the 10% level be excluded when computing U.S. ownership. This exclusion resulted in artificially inflating the proportion of U.S. ownership, thus reducing the availability of the exemptions. A significant number of Canadian and European public companies are controlled by a dominant shareholder and available data generally suggests that the ownership of public companies tends to be more concentrated outside of the U.S.
Affiliated Going Private Transactions
Currently, Tier 1 cross-border transactions with affiliates that result in the issuer no longer maintaining a listing or having 300 record holders in the U.S. are exempt from compliance with the disclosure requirements of Rule 13e-3 applicable to going private transactions provided they meet certain conditions. The types of transaction structures for which the exemption is available are limited to tender offers, mergers, stock purchases, reorganizations, reclassifications and asset sales (where substantially all the assets are being sold). When requested to do so, the SEC has accepted by way of no-action relief that other structures, such as plans of arrangement or other court-approved transactions, although not explicitly mentioned in the rules, qualify for the exemption. The SEC now codifies this position by providing that the exemption from Rule 13e-3 be available for affiliated going private transactions regardless of the type of structure used to complete the deal.
Tier 2 Not Limited to Equity Tender Offers
The SEC codifies its existing no-action position to the effect that the Tier 2 exemption is available to offers that are subject only to Regulation 14E. This includes tender offers for securities of private companies, third party tender offers where the bidder will not own in excess of 5% of outstanding float, and tender offers for debt securities that are not subject to the filing and disclosure requirements of Regulation 14D or Rule 13e-4. These transactions must comply with the procedural requirements of Regulation 14E, except for the prompt payment, extension and notice of extension requirements of which they are exempt under the Tier 2 rules.
Multiple Offers Practice
The release includes rule changes that incorporate the experience acquired by the SEC on recent international transactions that raised conflicts between U.S. and local procedural takeover rules. To reflect the fact that an increasing number of companies are subject to the securities laws of jurisdictions other than their home jurisdiction because they have multiple listings, the SEC will now allow bidders to conduct more than one non-U.S. offer concurrently with their Tier 2 U.S. offer.
The SEC will also allow bidders to include non-U.S. holders of American depositary receipts (ADRs) in their U.S. offer. Conversely, bidders are permitted to include U.S. shareholders in their non-U.S. offers to accommodate the law of certain jurisdictions such as Germany, where exclusionary tender offers are not permitted. Inclusion of U.S. holders in a non-U.S. offer is only permitted if local law expressly prohibits exclusionary offers and the risks of participating in the non-U.S. offer are adequately disclosed in the non-U.S. offer documents. These changes reflect existing SEC no-action positions.
The release also codifies the SEC’s position that securities tendered into U.S. and non-U.S. partial offers must be prorated on an aggregate basis. Other amendments include giving bidders more flexibility to maintain a subsequent offer period open for longer than 20 business days in both cross-border and domestic offers, pay for tendered securities on a delayed basis, pay interest on tendered securities if required under local law, and offer different consideration under “mix and match” offers in the initial and subsequent offer periods.
Withdrawal Rights
Bidders are now permitted to suspend withdrawal rights immediately after the close of the initial offer period while the tendered securities are being counted regardless of whether a subsequent offer period is needed. Withdrawal rights are available in domestic U.S. equity tender offers during the first seven days and after 60 days from the commencement of the initial offer, and are automatically suspended after a subsequent offer period has begun.
To accommodate the fact that counting and payment often take longer under local practices than in the U.S., the Tier 2 rules provided a limited exemption from the requirement to provide withdrawal rights while tendered securities are being counted, but this exemption was only available when a subsequent offer period was needed. The SEC will now allow bidders to suspend withdrawal rights immediately after the expiration of the initial offer period regardless of whether a subsequent offer period is needed, provided the initial offer period lasts at least 20 business days and the offer has become unconditional (except for any minimum acceptance condition) at the time the withdrawal rights are suspended.
The release also contains new guidance from the SEC staff on the issue of whether withdrawal rights must be provided after a bidder has modified or waived the minimum acceptance condition in a Tier 2 offer when local law does not permit such withdrawal rights. The release modifies the SEC staff’s current position in that such waivers or modifications are now only possible without extending the offer period and providing withdrawal rights if, among other things:
- the bidder announces that it may modify or waive the minimum acceptance condition at least five business days before doing so
- the bidder provides withdrawal rights during that period
- the offer has become firm and remains open for at least five business days
The bidder may not reduce the minimum condition below a majority of the outstanding securities or the percentage required to control the target, whichever is higher. The amendments also allow early termination of the initial offer period (or an extension thereof) when, among other things, the initial offer period has been opened for at least 20 business days, all bid conditions have been met (and no waiver or other material changes to the offer have been proposed) and a subsequent offer period is provided. This new rule is designed to accommodate non-U.S. rules and practices where bidders are encouraged to terminate the offer period when the offer has become unconditional.
Purchases Outside the Offer
The SEC codifies its existing no-action position allowing bidders not to comply with Rule 14e-5, the rule that prohibits purchases outside of equity tender offers, when making purchases in non-U.S. offers, provided U.S. holders are treated at least as favorably as non-U.S. holders. The SEC also introduces a new rule that allows bidders, their affiliates and affiliates of a financial advisor to purchase securities wholly outside of the non-U.S. offer, so long as this is appropriately disclosed in the offer materials and the tender offer price is at least equal to the price paid in the outside purchases. Purchases by affiliates of financial advisors are subject to additional conditions designed to ensure the confidentiality of the transaction and prevent insider trading.
Early Commencement of Exchange Offers
The SEC extends its rule allowing bidders to commence a cross-border exchange offer immediately after filing a registration statement with the SEC to all types of cross-border and domestic exchange offers (and not solely equity tender offers as was previously the case), provided the bidder satisfies applicable prospectus delivery requirements, withdrawal rights are made available and the offer is kept open for the periods required by law when material changes are made to the terms of the offer.
Beneficial Ownership Reporting by Non-U.S. Investors
Before the amendments, non-U.S. institutional investors were not eligible to use Schedule 13G to report beneficial ownership positions in excess of 5% at year end, except pursuant to specific no-action relief issued by the SEC. Schedule 13G is the abbreviated form that may be used by certain categories of U.S. institutional investors to report positions held in the ordinary course of business and not with a control purpose. Pursuant to Rule 13d-1(b)(2), when applicable, the filing must be made within 45 days after the end of the calendar year in which the obligation arose. The SEC reduces the burden placed on non-U.S. institutions by allowing them to report their positions in SEC-registered companies on Schedule 13G. To use Schedule 13G, such institutions must certify that they are subject to a regulatory scheme substantially comparable to that applicable to their U.S. counterparts and undertake to furnish to the SEC upon request the information that they would be required to provide on Schedule 13D.
Additional Guidance
The release contains useful guidance on some recurring issues in cross-border takeover practice. First, the SEC staff reiterates that it will continue to interpret the all-holders rule so as to preclude bidders from excluding non-U.S. security holders in U.S. tender offers. The SEC also expresses its views on the steps bidders may take to avoid the U.S. jurisdictional means that trigger the U.S. tender offer rules. The SEC staff also expresses concern about exclusionary offers and states that it will monitor those offers more closely to protect U.S. investors. The release further discusses vendor placements and the SEC staff’s views on when these types of arrangements may trigger registration requirements under the Securities Act.
Effect of Amendments
The release reflects a greater willingness on the part of the SEC to accommodate the rules and practices of other jurisdictions as the SEC gets more comfortable with the level of protection afforded to shareholders in those jurisdictions. The amendments more closely align U.S. domestic and cross-border tender offer rules to international rules and practices, and should facilitate the execution of cross-border takeovers.
For more information, contact:
Laurie L. Green
laurie.green@hklaw.com
954.468.7808
Francois Janson
212.513.3266
francois.janson@hklaw.com
toll free: 1.888.688.8500
1 Some of the amendments also apply to qualifying issuer tender offers. This alert focuses on offers by third-party bidders.
2 Any issuer that is incorporated in a jurisdiction other than the U.S. qualifies as a foreign private issuer unless (i) it has more than 50% of its shareholders resident in the U.S. and (ii) it is deemed to be based in the U.S. (which will be the case if any of the following is true: (A) a majority of the executive officers or directors of the issuer are U.S. citizens or residents; (B) more than 50% of the assets of the issuer are located in the U.S.; or (C) the business of the issuer is administered principally in the U.S.).
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