SEC ADOPTS MAJOR CHANGES TO THE REGULATION OF TAKEOVERS AND SECURITY HOLDER COMMUNICATIONS
The Securities and Exchange Commission (SEC) has adopted new rules, effective January 24, 2000, which, among other things, update and simplify the rules and regulations applicable to takeover transactions (including tender offers, mergers, acquisitions and similar extraordinary transactions) and allow increased communications with security holders and the markets.
The SEC's new rules are intended to update the regulatory structure to reflect contemporary communications media, such as the Internet, and to harmonize the regulatory systems that apply to the different types of business combinations to the extent that different treatment is neither necessary nor desirable. The key elements of the new rules include the following:
Expanded Communications Permitted
Companies will be permitted to issue press releases and other communications about a proposed business combination before the mandated disclosure documents e.g., the Schedule 14D-1 tender offer statement, the Schedule 14A merger proxy statement and the Form S-4 registration statement) have been filed with the SEC, as well as during the waiting period and post-effective periods in the case of registration statements filed in connection with exchange offers and stock-for-stock mergers. Any written communications made in reliance on the exemptions must be filed with the SEC and will be subject to liability pursuant to Section 10(b) of the Securities Exchange Act.
Written communications will need to be filed with the SEC on or before the date of first use and must contain a prominent legend advising investors to read the registration, proxy or tender offer statement, as applicable. An immaterial or unintentional delay in filing written communications will not prohibit reliance on the exemption. The filing requirement applies to written communications that are made public or are otherwise provided to persons who are not a party to the transaction. For example, writings required to be filed would or include scripts used to communicate information to the public and other written documents relating to the pending transaction, such as slides that are shown to investors. Any re- republication or re-dissemination of the same information will publication not need to be filed again to comply with the exemption.
It is important to note that security holders are still required to receive a mandated disclosure document (e.g., a prospectus, proxy statement or tender offer statement) prior to making a voting or investment decision.
Oral Statements
The release does not impose new requirements on oral communications. However, the SEC notes in the release that it remains troubled by selective disclosure issues, and is considering a broader regulatory approach to limit selective disclosure of material non-public information.
Management Permitted to Communicate Directly with Shareholders Prior to Proxy Solicitation
Management, as well as other shareholders, will be free to send certain communications to shareholders in advance of a proxy solicitation, whether or not it relates to a business combination, and before proxy material is filed with the SEC. Written and oral communications will be permitted before the filing of a proxy statement as long as all written communications related to the solicitation are filed on the date of first use. Oral communications will not need to be reduced to writing and filed. To rely on the exemption, no form of proxy may be furnished until a proxy statement is delivered, participant information is disclosed and all written communications are filed and contain a prominent legend advising security holders to read the proxy statement.
Proxies Relating to Business Combinations Available to the Public
The filings of proxy statements required for various types of business combinations generally will be publicly available immediately upon filing, subject to limited exceptions. Confidential treatment of proxy statements has been retained only where parties to a merger or other business combination limit their public communications to what is specified in Rule 135 of the Securities Act. In effect, it is expected that few merger proxies will be filed confidentially.
Exchange Offers May Commence on Filing of the Registration Statement
Under current rules, exchange offers registered under the Securities Act are treated differently than cash tender offers and thus are subject to potential regulatory delay because of the SEC staff review period for the registration statement. A cash tender offer may commence as soon as a tender offer schedule is filed with the SEC and the information is distributed to security holders. Exchange offers, on the other hand, may not commence before a registration statement has been declared effective by the SEC. Under the new rules, however, the difference between the commencement of a cash tender offer and an exchange offer for securities will be eliminated so that both offers may commence upon the initial filing of the required disclosure document (or on a later date selected by the bidder). An exchange offer for securities still will not be permitted to close until a registration statement is declared effective by the SEC. In the release, the SEC has committed itself to expedited staff review of exchange offers.
"Five Business Day Rule" Eliminated
Under current tender offer rules, a bidder who publicly announces a cash tender offer commences the tender offer upon such announcement, unless the bidder files a tender offer statement within five business days of the announcement and disseminates it to security holders, or the third-party bidder makes a subsequent public announcement withdrawing the offer. This is known as the "five business day rule." In contrast, under the present rules, a bidder who publicly announces an intent to commence an exchange offer and offers registered securities is not bound by the same rule. Instead, such a bidder must promptly file a registration statement after the announcement. The new rules modify the definition of "commencement," eliminate the five business day rule and eliminate the requirement to promptly file a registration statement after public announcement of a registered exchange offer.
Under the new rules, "commencement" occurs when a bidder first publishes, sends or gives security holders the means to tender securities in the offer, such as when a bidder first disseminates to security holders transmittal letters or other instructions on how to tender into the offer. In order to prevent parties from announcing tender or exchange offers without the intent or ability to purchase the securities, the SEC has adopted a new Rule 14e-8. The new antifraud rule prohibits bidders from announcing an offer without an intent to commence the offer within a reasonable time and complete the offer, with the intent to manipulate the price of a bidder's or target's securities, or without a reasonable belief that the person will have the means to purchase the securities sought.
Disclosure Requirements Harmonized
Currently, the disclosure requirements for issuer tender offers, third-party tender offers, going-private transactions and other business combinations are located in different regulations and require different disclosure schedules. The SEC has adopted Regulation M-A to replace these different requirements with a unified set of requirements located in one central location. The disclosure forms for issuer tender offers, third-party tender offers and going-private transactions will be consolidated into one new schedule, to be called "Schedule TO."
Plain English Summary Term Sheet Required
The SEC will require a "plain English" summary term sheet of a proposed tender offer or business combination being considered in proxy material, except when the transaction is already subject to the Securities Act "plain English" rules (i.e., where securities are being registered in the transaction).
Elimination or Reduction of Financial Statements Required in Certain Cases
The SEC has updated the financial statement requirements for takeover transactions. For example, the SEC has eliminated the requirement to provide acquiror and/or target financial statements in certain merger and tender offer transactions involving only cash and, depending on the circumstances, has reduced or eliminated the target financial statements required in certain cash mergers if the target company is not a public company. In addition, where acquiror financial statements are required to be included, such requirement has been reduced from three years of financial statements to two years.
Subsequent Offering Period Without Withdrawal Rights Permitted in Certain Situations
The SEC has adopted rules that allow, at the election of the bidder, a period after the close of the tender offer during which additional shares can be tendered without withdrawal rights. The subsequent offering period must be open for a minimum of three business days and a maximum of 20 business days.
Rules Regarding Repurchases and Purchases During Tender Offers Clarified
The SEC has clarified rules requiring issuers to report intended repurchases of their own securities once a third-party tender offer has commenced and has clarified rules prohibiting purchases outside a tender offer.