Cross-Border M&A: SEC Proposes Enhanced Exemptions for Takeovers of Non-U.S. Companies
June 13, 2008
Laurie L. Green- Ft Lauderdale
Francois Janson- New York
On May 6, 2008, the SEC published for comments 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 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 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 proposing 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 proposed amendments purport to address these issues and to broaden the availability of the current exemptions.
Overview
The main proposals seek 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 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 (so-called “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 allow 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 has no reason to know otherwise. The determination of U.S. ownership must 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 proposes to address these issues by bringing more flexibility in the method of calculating U.S. ownership.
In particular, the SEC proposes improvements in three areas that are key for the determination of whether the exemptions are available:
Reference date: bidders would be allowed to use the date of announcement of a transaction instead of the date of commencement.
Timeframe for calculation: the SEC is proposing to replace the fixed date of calculation with a 60-day range; bidders would be required to calculate U.S. ownership within 60 days before the date of announcement of the transaction. 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.
Non-negotiated deals: the release clarifies that a bidder may rely on ADTV unless it has reasons to know from publicly-available information accessible before the transaction announcement that actual U.S. ownership is higher.
The SEC is requesting comments on whether it should maintain its current requirement that shares held by U.S. or non-U.S. affiliates not be included when computing U.S. ownership. The SEC is concerned that excluding affiliated positions may result 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.
The SEC is also seeking comments on whether it should abandon its current U.S. ownership test based on a count of the number of record holders in favor of a test based on ADTV. The current test is similar to the test that must be used to determine whether a non-U.S. company must register under the Securities Exchange Act pursuant to Rule 12g3-2(a). The SEC has recently proposed to introduce an ADTV-based test for the determination of the level of U.S. ownership necessary to maintain an exemption from registration available to non-U.S. companies under Rule 12g3-2(b).
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 proposes to codify this position by providing that the Tier 1 exemption 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 proposes to codify its existing no-action position to the effect that the Tier 2 exemption is available to partial tender offers for equity securities (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. 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 proposes to allow bidders to conduct more than one non-U.S. offer concurrently with their Tier 2 U.S. offer.
The SEC also proposes to change the cross-border rules to allow bidders to include non-U.S. holders of ADRs in their U.S. offer. Conversely, bidders would be 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 would only be 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 proposed adjustments include giving bidders more flexibility to maintain a subsequent offer period open for longer than 20 business days, 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
The SEC proposes to allow bidders 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. 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 current Tier 2 rules provide a limited exemption from the requirement to provide withdrawal rights while tendered securities are being counted, but this exemption is only available when a subsequent offer period is needed. The SEC proposes to abandon this requirement for all Tier 2 tender offers and to allow bidders to suspend withdrawal rights immediately after the expiration of the initial offer period, provided the initial offer period lasts at least 20 business days and the offer has become unconditional (except for the minimum acceptance condition) at the time the withdrawal rights are suspended.
The release also contains new guidance from the 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. The release modifies the staff’s current position in that such waivers or modifications will now only be possible without extending the offer period and providing withdrawal rights if the minimum condition is not reduced below a majority of the outstanding securities and local rules or practice prevent extending the offer. The SEC is also soliciting comments on whether it should adopt an exemption to allow early termination or extensions of the offer period when all bid conditions have been met (and no other material changes to the offer have been proposed) to accommodate non-U.S. rules and practices where bidders are encouraged to terminate an offer period when offers become unconditional.
Purchases Outside the Offer
The SEC proposes to codify its existing no-action position allowing bidders not to comply with Rule 14e-5, the rule that prohibits purchases outside of the tender offer, 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 proposes to introduce a new rule that would allow 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 would be subject to additional conditions designed to ensure the confidentiality of the transaction and prevent insider trading.
Early Commencement of Exchange Offers
The SEC proposes to extend its rule allowing bidders to commence a cross-border exchange offer immediately after filing a registration statement with the SEC to all types of exchange offers (and not solely equity tender offers as is the case under the current rules), provided 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
Non-U.S. institutional investors currently are not eligible to use Schedule 13G to report beneficial ownership positions in excess of 5%, 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. The SEC seeks to reduce 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 would need to certify that they are subject to a regulatory scheme 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 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 staff also expresses concern about exclusionary offers and states that it will monitor more closely those offers to protect U.S. investors. The release further discusses vendor placements and the staff’s views on when these types of arrangements may trigger registration requirements under the Securities Act.
Effect of Amendments
These amendments reflect 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 release states that the staff is even considering whether some of these rules and practices should be imported into the U.S. tender offer rules. Other regulators, such as most recently those of Quebec and Ontario, have made that step by adopting cross-border exemptions modeled after the U.S. rules.
For more information, email Laurie L. Green or Francois Janson at laurie.green@hklaw.com or francois.janson@hklaw.com, respectively, or call toll free, 1.888.688.8500.
1 Some of the proposed 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.).