The Securities and Exchange Commission (the "SEC") recently enacted a series of final rules encompassing a new regulatory scheme for business combination transactions. The SEC stated that the enactment of these rules will (i) eliminate current restrictions on communications in connection with business combinations and proxy solicitations and (ii) harmonize the treatment of different types of business combinations, particularly exchange offers and cash tender offers. The new rules became effective on January 24, 2000.
Under the new rules, free communications, both oral and written, are permitted before the filing of a registration statement in the context of a stock merger or exchange offer. Parties must file all written communications in connection with or relating to a business combination on or before the date such communications are first used, including the first public announcement of the proposed business combination. The SEC explained that such written communications will be subject to liability under Section 12(a)(2) of the Securities Act of 1933 ("Securities Act") and the antifraud provisions under the federal securities laws. In addition, all written communications must include a prominent legend advising investors to read the applicable disclosure document for such transaction. The SEC emphasized that security holders must still receive a mandated disclosure document (e.g., a prospectus, proxy statement or tender offer statement) before they are asked to make a voting or investment decision on such a business combination transaction.
The SEC has also revised Rule 14a-12 to permit both written and oral communications before the filing of a proxy statement so long as all written communications related to the solicitation are filed on the date they are first used. This exemption is not limited to business combination transactions and is available regardless of the subject matter of the solicitation. Oral communications in this context do not need to be reduced to writing and filed. To rely on this exemption, the following conditions must be met: (i) no form of proxy may be furnished until a proxy statement is delivered; (ii) the solicitor must disclose participant information (by including with written communications a prominent legend advising security holders where they can obtain a detailed list of the names, affiliations and interests of participants in the solicitation); and (iii) all written communications must be filed with a prominent legend advising security holders to read the proxy statement when it becomes available.
Commencement of Tender/Exchange Offers
Under the new rules, both cash tender and exchange offers "commence" when the bidder first publishes, sends or provides security holders with the means to tender securities into an open offer an exchange offer may be commenced by the bidder upon filing a registration statement relating to the securities offered.
To commence an exchange offer early, the new rules require a bidder to file a registration statement relating to the securities offered and to include in the preliminary prospectus all information, including pricing information, necessary for investors to make an informed investment decision. Bidders also must disseminate the prospectus and related letter of transmittal to all security holders and file a tender offer statement (new "Schedule TO," discussed below) with the SEC before the exchange offer can commence.
New Rule 162 permits the tender of securities into an exchange offer before a registration statement is effective by exempting the tender from Section 5(a) of the Securities Act. Security holders may withdraw tendered securities until they are purchased and bidders may not purchase the tendered securities until the registration statement is declared effective.
New Tender/Exchange Offer Antifraud Provision
To harmonize the commencement rules for cash tender offers and exchange offers, the SEC has eliminated the "five business day rule." That rule required a bidder to file a tender offer schedule within five business days of announcing the bidder's intent to commence such an offer In its place, the SEC has adopted new Rule 14e-8, which it characterized as an "antifraud" provision that is designed to prevent fraudulent and misleading communications regarding proposed offers in the context of the new communications scheme. Specifically, new Rule 14e-8 prohibits bidders from announcing an offer: (i) without an intent to commence the offer within a reasonable time and to complete the offer; (ii) with the intent to manipulate the price of the bidder's or the target's securities; or (iii) without a reasonable belief that the person will have the means to purchase the securities sought.
Subsequent Offering Period for Tender Offers
Under newly enacted Rule 14d-11, third party bidders may provide, at their election, for a subsequent offering period during which security holders can tender their securities into the offer without withdrawal rights. The SEC stated that the subsequent offering period could provide the benefit of assisting bidders in reaching the statutory state law minimum necessary to engage in a short-form, back-end merger with the target and would provide security holders with an ability to tender their securities in order to avoid an illiquid market after the close of the offer. New Rule 14d-11 will permit bidders to include a subsequent offering period if:
- the offer is for all outstanding securities 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 closing of the initial offering period;
- the bidder accepts and promptly pays for all securities tendered during the initial offering period on the closing of the initial period;
- the bidder announces the approximate number and percentage of outstanding securities that were deposited at the close 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.
- Rule 14d-11 will allow the subsequent offering period to be a minimum of three business days and a maximum of 20 business days. The SEC stated that bidders could opt for a short subsequent offering period and later extend the period, if necessary, and must provide notice of any extension in accordance with Rule 14e-1(d).
Prospectus Delivery for Early Commencement
Under the new rules, exchange offers that commence early also are exempt from the final prospectus delivery requirement. The SEC, however, has established defined periods that are necessary for the dissemination of a prospectus supplement that contains material changes. The revised Rule 14d-4 states that an exchange offer that is commenced early must remain open for at least:
- five business days for a prospectus supplement containing a material change other than price or share levels;
- ten business days for a prospectus supplement containing a change in price, the number of shares sought, the dealer's soliciting fee or other similarly significant change;
- ten business days for a prospectus supplement included as part of a post-effective amendment and
- 20 business days for a revised prospectus when the initial prospectus was materially deficient (e.g., filing a "shell" document or failing to comply with going-private rules).
Regulation M-A & Schedule TO
The new rules combine the disclosure requirements for issuer tender offers, third-party tender offers and going-private transactions into new Schedule TO. The SEC stated that this revision will reduce the need to file different schedules, with potentially duplicative information, for the same transaction. The disclosure items for Schedule TO are contained within a subpart of Regulation S-K, called "Regulation M-A." The specific disclosure requirements on Schedule TO are keyed to items under Regulation M-A in a manner consistent with the integrated disclosure system currently used for proxy and registration statements. The SEC also has eliminated the need to file as an exhibit any information which is incorporated by reference into such documents if the information was previously filed electronically on EDGAR.
The SEC also clarified the need of a target to respond to any tender / exchange offer in light of the new communications scheme. The SEC stated that a target need not file a formal recommendation statement until after the offer is formally commenced and a recommendation is made. The SEC emphasized, however, that the target still remains obligated to take a position with respect to the offer no later than ten business days after the commencement of the offer. If the target makes a recommendation after commencement, but before the tenth business day, then it must file a recommendation / solicitation statement on Schedule 14D-9 on or before the time the recommendation is first made.
Plain English Summary Term Sheet
Under the new rules, all securities filings in connection with cash tender offers, cash mergers and going-private transactions must contain a plain English summary term sheet. The SEC noted its belief that such disclosure would clarify these transactions and benefit investors. The SEC did not provide line item disclosure requirements; rather, it stated that filers should have flexibility to address those items necessary for such a term sheet.
No Safe Harbor for Tender Offer Communications
While the SEC had asked for comments on a proposed safe harbor for forward-looking statements in the tender offer context, it declined to enact such a safe harbor in the final rules. According to the SEC, it would not be prudent to extend the safe harbor considering the infancy of the judicial interpretation of the safe harbor under the Private Securities Litigation Reform Act of 1995.
Regulation of Takeovers and Security Holder Communications, SEC Rel. No. 33-7760, 34-42055, 64 Fed. Reg. 61408 (Nov. 10, 1999) (to be codified at 17 C.F.R. pts. 200, 229, 230, 232, 239 and 240)
- SEC Guidelines For Plain English Summary Term Sheets
The SEC believes that bidders should address the following questions in the summary term sheet accompanying their cash tender offers:
- Who is offering to buy my securities?
- What are the classes and amounts of securities sought in the offer?
- How much is the bidder offering to pay and what is the form of payment?
- Does the bidder have the financial resources to make payment?
- Is the bidder's financial condition relevant to my decision on whether to tender in the offer?
- How long do I have to decide whether to tender in the offer?
- Can the offer be extended, and under what circumstances?
- How will I be notified if the offer is extended?
- What are the most significant conditions to the offer?
- Who is offering to buy my securities?
- How do I tender my shares?
- Until what time can I withdraw previously tendered shares?
- How do I withdraw previously tendered shares?
- If the transaction is negotiated, what does my board of directors think of the offer?
- Is this the first step in a going-private transaction?
- Will the tender offer be followed by a merger if all the company's shares are not tendered in the offer?
- If I decide not to tender, how will the offer affect my shares?
- What is the market value (if traded) or the net asset or liquidation value (if not traded) of my shares as of a recent date?
- Who can I talk to if I have questions about the tender offer?
- How do I tender my shares?
As for merger proxy statements, the SEC believes a summary term sheet should provide:
- A brief outline of the particular matters proposed;
- The material terms of the proposals, including: (i) the parties to the proposed transaction; (ii) the consideration to be received by security holders; (iii) the board's recommendation on how to vote or their position regarding the transaction; and (iv) the effect of a vote for and against each matter presented, including the effects of not voting, the procedures for voting and changing or revoking a vote; and
- A brief outline of the particular matters proposed;
- The existence of appraisal rights.