Regulation of Takeovers and Security Holder Communications
Federal RegisterDec 4, 1998
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 200, 229, 230, 232, 239, and 240
[Release No. 33-7607; 34-40633; IC-23520; File No. S7-28-98]
RIN 3235-AG84
Regulation of Takeovers and Security Holder Communications
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rules.
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SUMMARY: The Securities and Exchange Commission proposes to update and
simplify the rules and regulations applicable to takeover transactions
(including tender offers, mergers, acquisitions and similar
extraordinary transactions). We propose to permit significantly more
communications with security holders and the markets before the filing
of a registration statement involving a takeover transaction, a proxy
statement or tender offer statement. We also propose to put cash and
stock tender offers on a more equal regulatory footing; integrate the
forms and disclosure requirements in issuer tender offers, third-party
tender offers and going private transactions and consolidate the
disclosure requirements in one location; permit security holders to
tender their securities during a limited period after the successful
completion of a tender offer; more closely align merger and tender
offer requirements; and update the tender offer rules to clarify
certain requirements and reduce compliance burdens where consistent
with investor protection. The proposals presented in this release
should be considered together with the companion release issued today,
the Securities Act Reform Release.
DATES: Comments should be submitted on or before April 5, 1999.
ADDRESSES: Comments concerning the proposed amendments should be
submitted in triplicate to Jonathan G. Katz, Secretary, U.S. Securities
and Exchange Commission, Mail Stop 6-9, 450 Fifth Street, N.W.,
Washington, D.C. 20549-6009. Comments also may be submitted
electronically to the following e-mail address: [email protected].
All comment letters
[[Page 67332]]
should refer to File Number S7-28-98. This file number should be
included on the subject line if e-mail is used to submit comments.
Comment letters will be available for inspection and copying in the
public reference room at the same address. Electronically submitted
comment letters will be posted on our Internet web site (http://
www.sec.gov).
FOR FURTHER INFORMATION CONTACT: James J. Moloney, in the Office of
Mergers and Acquisitions, or P.J. Himelfarb, in the Office of Chief
Counsel, Division of Corporation Finance, at (202) 942-2920. For
questions regarding proposed Rule 14e-5, please contact Irene A. Halpin
or Michael R. Trocchio, in the Office of Risk Management and Control,
Division of Market Regulation, at (202) 942-0772.
SUPPLEMENTARY INFORMATION: We propose amendments to Rules 13e-1, 13e-3,
13e-4, 14a-4, 14a-6, 14a-11, 14a-12, 14c-2, 14c-5, 14d-1, 14d-2, 14d-3,
14d-4, 14d-5, 14d-6, 14d-7, 14d-9, 14e-1 \1\ and Schedules 14A, 14C,
13E-3, and 14D-9 \2\ under the Securities Exchange Act of 1934
(``Exchange Act'').\3\ We also propose an amendment to Item 10 of
Regulation S-K \4\ and a new subpart of Regulation S-K, the 1000 series
(``Regulation M-A''); a new tender offer schedule, Schedule TO, that
would replace Schedules 13E-4 and 14D-1; \5\ a new tender offer Rule
14e-5 that would replace Rule 10b-13; \6\ and new tender offer Rules
14d-11 and 14e-8. Further, we propose to amend Rule 13(d) of Regulation
S-T and Rules of Practice 30-1 and 30-3.\7\ We also propose amendments
to Rules 145 and 432, and new Rule 162, under the Securities Act of
1933 (``Securities Act'').\8\ In addition, in the Securities Act Reform
Release,\9\ we propose new rules, forms and amendments under the
Securities Act affecting the regulatory scheme for takeovers. Some of
these proposals are republished in this release for the convenience of
readers, as follows: portions of proposed new Forms C and SB-3 and
proposed new Rules 166, 167 and 425.
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\1\ 17 CFR 240.13e-1; 17 CFR 240.13e-3; 17 CFR 240.13e-4; 17 CFR
240.14a-4; 17 CFR 240.14a-6; 17 CFR 240.14a-11; 17 CFR 240.14a-12;
17 CFR 240.14c-2; 17 CFR 240.14c-5; 17 CFR 240.14d-1; 17 CFR
240.14d-2; 17 CFR 240.14d-3; 17 CFR 240.14d-4; 17 CFR 240.14d-5; 17
CFR 240.14d-6; 17 CFR 240.14d-7; 17 CFR 240.14d-9; and 17 CFR
240.14e-1.
\2\ 17 CFR 240.14a-101; 17 CFR 240.14c-101; 17 CFR 240.13e-100;
and 17 CFR 240.14d-101.
\3\ 15 U.S.C. 78a et seq.
\4\ 17 CFR 229.10.
\5\ 17 CFR 240.13e-101; 17 CFR 240.14d-100.
\6\ 17 CFR 240.10b-13.
\7\ 17 CFR 232.13(d); 17 CFR 200.30-1; 17 CFR 200.30-3.
\8\ 17 CFR 230.145; 17 CFR 230.432; 15 U.S.C. 77a et seq.
\9\ See Release No. 33-7606A (November 13, 1998).
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Table of Contents
I. Executive Summary and Background
II. Discussion of Proposals
A. Overview of the Regulatory Schemes
B. Expand Communications Permitted in Tender Offers and Mergers
1. Overview and General Considerations
2. Eliminate Restrictions on Pre-filing Communications
3. Waiting Period and Post-Effective Period Communications
4. Alternative Communications Proposals
5. Free Communications Under the Securities Act
6. Free Communications Under the Proxy Rules
a. Expand Rule 14a-12 Safe Harbor
b. ``Test the Waters'' Proxy Solicitations
c. Eliminate Confidential Treatment of Merger Proxies
d. Timing of Filings
7. Free Communications Under the Tender Offer Rules
a. Disclosure Triggering Commencement
b. Methods to Disseminate an Offer
C. Permit Exchange Offers to Commence On Filing
1. Early Commencement
2. Dissemination of a Supplement and Extension of the Offer
3. Tenders into an Offer Exempt from Sale Requirements of the
Securities Act
D. Integrate and Streamline the Disclosure Requirements for
Tender Offers and Mergers
1. Subpart 1000 of Regulation S-K (``Regulation M-A'') and
Combination of Schedules
2. Streamline Disclosure Requirements and Improve Disclosure
a. ``Plain English'' Summary Term Sheet
b. Revise Item 14 of Schedule 14A to Clarify Requirements and
Harmonize Cash Merger with Cash Tender Offer Disclosure
c. Reduce Financial Statements Required for Non-Reporting Target
Companies
d. Registration Statement Form for Business Combinations
E. Update the Tender Offer Rules
1. Permit Securities to be Tendered During a ``Subsequent
Offering Period'' without Withdrawal Rights
2. Clarify the Financial Information Required for Bidders in
Cash Tender Offers
a. When the Bidder's Financial Statements are Required in Cash
Tender Offers
b. Content of Bidder's Financial Statements in Cash Tender
Offers; Financial Statements in Going-Private Transactions
c. Bidder's Source of Funds
d. Pro Forma Financial Information in Two-Tier Transactions
3. Clarify the Requirement that a Target Report Purchases of its
Own Securities After a Third-Party Tender Offer is Commenced
4. Harmonize the Tender Offer and Proxy Rules Relating to the
Delivery of a Stockholder List and Security Position Listing
5. Revise and Redesignate the Rule Prohibiting Purchases Outside
an Offer
a. Proposed Amendments Redesignating and Clarifying the Rule
b. Persons and Securities Subject to the Rule
c. Excepted Transactions
d. Solicitation of Comments on Proposed Rule 14e-5
6. Safe Harbor for Forward-Looking Statements
III. General Request For Comments
IV. Cost-Benefit Analysis
A. Communications
B. Filings
C. Tender Offers
V. Initial Regulatory Flexibility Analysis
A. Reasons for Proposed Action
B. Objectives and Legal Basis
C. Small Entities Subject to the Rules
D. Reporting, Recordkeeping, and Other Compliance Requirements
E. Significant Alternatives
F. Overlapping or Conflicting Federal Rules
VI. Paperwork Reduction Act
VII. Statutory Basis and Text of Proposed Amendments
I. Executive Summary and Background
Over the last several years, takeover activity has surpassed the
extraordinary levels seen during the 1980s.\10\ In 1996, there were
over 7,000 merger and acquisition transactions completed in the U.S.
valued at more than $650 billion. In 1997, U.S. merger and acquisition
activity increased to approximately 7,800 transactions valued at over
$790 billion.\11\ Global merger and acquisition activity totaled
approximately (U.S.) $900 billion in 1996.\12\ In 1997, global merger
and acquisition activity increased to (U.S.) $1.6 trillion.\13\ This
wave of takeovers has continued into 1998 with approximately $626
billion in domestic mergers and acquisitions announced as of June,
1998.\14\
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\10\ In 1988, approximately 3,000 domestic merger and
acquisition transactions were completed with a total value of over
$300 billion. In 1989, there were slightly more than 3,800
transactions valued at approximately $330 billion. See Mergers &
Acquisitions, The Dealmaker's Journal, 1998 Almanac (March/April
1998), at 42.
\11\ Id.
\12\ See 1996 Mergers and Acquisitions, Corporate Financing Week
(February 10, 1997).
\13\ See Steven Lipin, Murphy's Law Doesn't Apply: The
Conditions Are Perfect For Continued Growth In Mergers, Wall St. J.,
Jan. 2, 1998, at R6.
\14\ See John R. Wilke & Bryan Gruley, In Merger Blitz,
Regulators Vie to Bust Biggest Prizes, Wall St. J., June 11, 1998,
at B1, citing Securities Data Corp. Although the boom in U.S. merger
and acquisition activity has tempered slightly in recent months, it
is expected to remain strong. See Third Q M&A Soars, but the Bear
Lurks, Mergers & Acquisitions Report, October 5, 1998.
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Three characteristics are common to many of today's takeover
transactions. First, many acquirors are offering securities or a
combination of securities
[[Page 67333]]
and cash to the security holders of subject companies (``targets''). In
1996, almost half of the completed takeover transactions involved some
form of stock as consideration, as opposed to cash only.\15\ In 1997,
the number of stock-based takeovers remained relatively constant at
approximately half of all completed transactions.\16\ During the first
half of 1998, approximately 43% of the completed transactions involved
securities as consideration.\17\
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\15\ Stock or a combination of stock and cash was offered to
security holders in approximately 1,395 out of the 2,892
transactions announced in 1996. See Mergers & Acquisitions, The
Dealmaker's Journal, 1998 Almanac (March/April 1998), at 47. The
information reported in Mergers & Acquisitions 1998 Almanac was
based on all completed mergers, acquisitions, and divestitures
priced at $5 million and over, including purchases of partial
interests of at least a 40% stake in the target company or an
investment of a least $100 million. Id. at 42.
\16\ Stock or a combination of stock and cash was offered to
security holders in approximately 1,703 out of the 3,449
transactions announced in 1997. Id. at 47.
\17\ See Mergers & Acquisitions, The Dealmaker's Journal,
(September/October 1998) at p. 50.
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Second, there has been an increase in the number of hostile
transactions involving proxy or consent solicitations. This trend
appears to be the result of the adoption of anti-takeover devices by
many public companies and the development of more stringent state anti-
takeover laws in reaction to the wave of takeovers in the 1980s.
Today's proxy and consent solicitations are primarily aimed at
unseating incumbent directors, dismantling anti-takeover devices, and
generally facilitating transactions opposed by management.
Third, significant technological advances in communications permit
more frequent, timely and direct communications with security holders.
These developments in technology affect how acquirors, targets, and
other market participants communicate with security holders and the
securities markets regarding proposed mergers and other extraordinary
corporate transactions. For example, many companies post detailed
information regarding corporate developments on their Internet web
sites. In addition, companies use the Internet as a means of
communicating with security holders during proxy contests and in
connection with tender offers and mergers.\18\ These changes in how
companies, security holders, and market participants communicate with
one another prompted the Commission to issue several releases
addressing the use of the Internet and other electronic media under the
federal securities laws.\19\
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\18\ Companies also have broadcast annual security holder
meetings over the Internet, and are increasingly soliciting proxies
via the Internet.
\19\ See Release Nos. 33-7233 (October 6, 1995) [60 FR 53458]
and 33-7288 (May 9, 1996) [61 FR 24644], expressing the Commission's
views on the use of electronic media to satisfy information delivery
requirements under the federal securities laws. See also Release No.
33-7516 (March 27, 1998) [63 FR 14806] interpreting jurisdictional
issues involving the use of the Internet by issuers, investment
companies, broker-dalers, exchanges and investment advisers to
solicit offshore securities transactions.
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While the takeover market has evolved dramatically over the past 20
years, the applicable regulatory framework has remained substantially
the same.\20\ As a result, the application of our existing rules to
today's extraordinary transactions can often raise complex regulatory
issues. These issues may, in some instances, cause unnecessary burdens
for companies without corresponding benefits to security holders.
Today's proposals are intended to reduce these costs while maintaining
the same high level of investor protection.
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\20\ One exception is the Commission's revisions to the proxy
rules in 1992. The Commission eliminated the regulation of certain
communications with or among security holders relating to corporate
performance and other matters of interest to all security holders
when made in the context of an actual or potential proxy
solicitation. See Release No. 34-31326 (October 16, 1992) [57 FR
48276].
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In formulating the proposals, we have drawn on the staff's
experience in reviewing takeover disclosure, the suggestions of
practitioners, and the recommendations of the Task Force on Disclosure
Simplification.\21\ We have examined all of the regulations relating to
tender offers as well as other forms of takeovers with a view toward
improving the regulatory scheme.
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\21\ The Commission staff's Report of the Task Force on
Disclosure Simplification (March, 1996) recommended several of the
proposals in this release. See ``Significant Corporate
Transactions'' at pp. 51-57.
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We encourage readers to keep in mind that these proposals were
drafted, and should be considered, with the proposals presented in the
Securities Act Reform Release also issued today. The goal underlying
the proposals described below is the same as that underpinning the
Securities Act Reform Release--making the regulatory scheme more
workable for issuers and more effective for investors in today's
capital markets. While we intend that both sets of proposals move
towards adoption on the same track, we may adopt the proposals in
either release without adopting those in the companion release.
The proposals vary in some respects from those in the Securities
Act Reform Release because it is necessary to recognize the special
nature of business combination transactions in contrast to capital-
raising transactions. Specifically, we have considered that a security
holder's decision regarding a proposed business combination is not
always volitional, and that a change in security ownership can arise as
a result of the security holder's inaction.\22\ In addition, where the
acquiror offers securities, the investment decision can be complex,
requiring security holders to assess both the security of another
company offered in exchange and the security they are asked to give up.
They also must consider how the acquiror may change as a result of the
acquisition, because they will receive securities in the combined
entity. Therefore, it may be important for the companies involved to
have the flexibility to announce and discuss the proposed acquisition,
regardless of the size and seasoned status of the acquiror.\23\ In
addition, it is necessary for information about the transaction to be
delivered timely to security holders who must evaluate the deal in
order to protect their existing investment.\24\
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\22\ See Form S-4 adopting release No. 33-6578 (April 23, 1995)
[50 FR 18990, at 18991].
\23\ By contrast, the Securities Act Reform Release conditions
the extent to which communications will be liberalized on the size
and seasoned status of the issuer.
\24\ The Securities Act Reform Release proposes to reduce the
prospectus delivery requirements under certain circumstances with
respect to offerings by large, seasoned issuers.
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In some cases, we have proposed significant modifications to the
entire regulatory approach to takeovers. In doing so, we have attempted
to treat different acquisition methods in a similar manner to the
extent the different methods merit similar treatment. In other cases,
we have focused on areas where current practice could be improved. Our
goals are to update the regulations in order to reduce unnecessary
regulatory burdens on participants, while maintaining investor
protection and improving the quality of information that investors
receive about business combination transactions.\25\ We describe below
three areas where the costs of compliance with the current rules
applicable to takeovers may outweigh the benefits conferred upon
security holders, and summarize the proposals in this release.
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\25\ See Part II.A for a description of the basic methods of
business combination and how they are treated under the current
regulatory scheme.
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Restrictions on Communications to Security Holders and the Marketplace
A company's ability to communicate in a timely and effective manner
with its security holders about a proposed
[[Page 67334]]
takeover is limited by the Securities Act if the transaction involves
an offering of securities. Although the impact of the Securities Act on
capital formation has been the subject of great debate,\26\
commentators have given somewhat less attention to the permissibility
of communications relating to business combinations involving the
issuance of securities. Offerors often have a compelling reason, and
may under certain circumstances have an obligation under Rule 10b-
5,\27\ to disseminate promptly full, fair and accurate information
regarding a planned extraordinary transaction to existing security
holders as well as the securities markets. As a part of this release,
we propose to increase significantly the ability of companies to
communicate with security holders with respect to business combinations
involving the registered offering of securities. In addition, many
takeovers trigger the need for compliance with the tender offer and
proxy rules, which also contain restrictions on the timing and content
of communications. We propose to permit freer communications under the
tender offer rules in connection with public announcements of tender
offers. Similarly, we propose to permit freer communications under the
proxy rules, whether or not the matter being voted on relates to a
takeover.
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\26\ See the Securities Act Reform Release.
\27\ 17 CFR 240.10-5. Rule 10b-5 prohibits misleading statements
or omissions and other fraudulent or deceptive practices in
connection with the purchase or sale of a security.
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Regulatory Disadvantage of Exchange Offers
Tender offers where the bidder is offering securities generally
cannot commence until the Securities Act registration statement for the
securities being offered becomes effective. In some cases, where the
staff undertakes to review and comment during the waiting period,\28\
the delay of effectiveness can be quite lengthy. This delay is
particularly troublesome for bidders \29\ in exchange offers.\30\ In
contrast, cash offers, which may compete with exchange offers, can
commence as soon as the required information is filed with the
Commission and disseminated to security holders. The delay in
commencing an exchange offer can place the bidder at risk that a
competing all-cash bid will commence and close before the exchange
offer can even commence. As a result, bidders that offer securities in
takeover transactions may not be as successful in acquiring targets as
cash bidders, even when the value of the stock offered is equal to or
greater than the value of the cash offered in a competing offer. In
response to the disparities in regulatory treatment, we propose to
permit exchange offers to commence on a similar time frame to cash
tender offers.
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\28\ The ``waiting period'' is the period of time between when a
registration statement is first filed and when it becomes effective.
\29\ The term ``bidder'' is used throughout this release to
refer to the offeror or purchaser in a tender offer.
\30\ Exchange offers, sometimes called stock tender offers, are
tender offers where the consideration offered to security holders
includes securities; these transactions generally are registered
under the Securities Act.
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Costs of Compliance WIth Multiple Regulatory Schemes
Many of today's takeover transactions involve a combination of
tender offer, proxy solicitation and Securities Act registration
issues. As a result, participants in a merger or acquisition may be
required to comply with several distinct regulatory schemes. Companies
can incur additional costs analyzing and complying with the multiple
filing and disclosure regimes that may apply to a transaction. For
example, when a company conducts an exchange offer for all outstanding
securities of an affiliated company, three regulatory schemes may be
involved, including the tender offer rules, the ``going-private'' rule,
and the provisions of the Securities Act relating to the registration
of securities. The proxy rules also can apply if the transaction
involves a solicitation of votes or consents. We recognize that the
application of multiple regulatory regimes to a single transaction can
significantly increase the burdens and costs of compliance without
necessarily benefiting investors. We propose to simplify the regulatory
structure for takeovers by using combined forms and a uniform
disclosure regulation.
In summary, we propose numerous revisions to the regulations to
conform them to the realities of today's environment surrounding
takeover transactions, while maintaining high quality investor
protection and enhancing the timing and quality of information
available to investors. The proposed revisions address changes in deal
structure and advances in technology. Our principal proposals are to:
Relax the current restrictions on communications with
security holders to provide the market with more information on a
timely basis; in particular,
Permit free communications before the filing of a
registration statement in connection with either a stock tender offer
or a stock merger transaction;
Permit free communications before the filing of a proxy
statement (whether or not a takeover transaction is involved);
Permit free communications about a planned tender offer
without triggering the ``commencement'' of the offer, requiring the
filing and dissemination of information;
Harmonize the various communications principles applicable
to business combinations under the Securities Act, tender offer rules
and proxy rules;
Eliminate the confidential treatment now available for
merger proxy statements;
Reduce the disparate treatment of stock and cash tender
offers by permitting stock tender offers to commence upon the filing of
a Securities Act registration statement;
Simplify the regulatory scheme by integrating the
disclosure requirements for tender offers, going-private transactions,
and other extraordinary transactions into a new 1000 series of
Regulation S-K, referred to as ``Regulation M-A'';
Combine the current schedules for issuer and third-party
tender offers into a single schedule available for all tender offers,
entitled ``Schedule TO'';
Require a ``plain English'' summary term sheet in all cash
tender offer, cash merger and going-private transactions;
Update the financial statement requirements for takeover
transactions; in particular,
Eliminate the need to file financial statements for target
companies in most cash mergers, to harmonize with the treatment of cash
tender offers;
Clarify when financial statements of the acquiring company
are not required in cash mergers, and when financial statements are
required, reduce the financial statements required for the acquiror
from three years to two;
Clarify when the bidder's financial statements are not
required in cash tender offers, and when financial statements are
required in third-party offers, reduce the requirement from three years
to two;
Require pro forma and related financial information in
cash tender offers where the bidder intends to engage in a back-end
stock merger;
Reduce the financial statements required for non-reporting
target companies in stock mergers;
Permit a subsequent offering period, similar to that
available in many United Kingdom tender offers, during which security
holders can tender their shares for a limited period after completion
of a tender offer;
[[Page 67335]]
Clarify the rule that requires issuers to report any
intended repurchases of their securities after a third-party tender
offer has commenced (Rule 13e-1), and require information to be
disseminated on a timely basis; and
Clarify the rule that prohibits purchases outside a tender
offer (Rule 10b-13), codify prior interpretations of and exemptions
from the rule, and redesignate it as Rule 14e-5.
At this time we are not proposing, but are considering, whether
we should:
Impose a federally mandated proxy solicitation period in
merger transactions comparable to the current minimum tender offer
period, to allow security holders at least a minimum time to consider
the proxy statement disclosure;
Modify the proxy rules to permit direct delivery of proxy
materials to non-objecting beneficial owners;
Create a broad safe harbor under the proxy rules that
would permit ``test the waters'' communications with security holders
without requiring the filing or delivery of a proxy statement, so long
as no proxy card is delivered to security holders;
Require delivery of a disclosure document to security
holders in cash tender offers, instead of permitting dissemination by
summary advertisement alone, to conform the dissemination required in
tender offers with that in proxy solicitations and securities
offerings;
Permit proxy cards to be sent to security holders before a
registration statement for a stock merger is effective; and
Expand by rule the coverage of the Private Securities
Litigation Reform Act safe harbor from liability to include forward-
looking statements made in connection with tender offers.
II. Discussion of Proposals
A. Overview of the Regulatory Schemes
It may be useful to discuss the regulatory schemes for different
methods of business combination before addressing how our proposals
would affect the current procedures. This release discusses two primary
business combination methods: tender offers and mergers.\31\ Tender
offers may be made either by the issuer of the securities sought or by
a third party.\32\ The essence of a tender offer is that the offeror,
or bidder, can go directly to security holders of the target company
with an offer to buy their shares. Each security holder makes an
individual decision whether or not to tender. A tender offer may or may
not have the cooperation of the target company's board of directors.
Even if the tender offer is successful, the bidder is unlikely to
receive 100% of the shares. In contrast, a merger is a collective,
voting decision.\33\ The acquiror acquires the entire company if
security holders of the target company approve the merger.\34\ The
acquiror generally needs the approval of the target's board of
directors in order to present the transaction for a security holder
vote.
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\31\ The discussion of ``business combinations'' in this release
includes all mergers and tender offers addressed by our rules,
including those that do not necessarily result in a ``combination,''
such as issuer tender offers and tender offers where the bidder is
not seeking control of the target.
\32\ An offer by the company to purchase its own outstanding
securities is an ``issuer tender offer,'' while an offer by someone
other than the issuer is a ``third party tender offer.'' Third-party
tender offers for a class of equity securities registered under
Section 12 of the Exchange Act [15 U.S.C. 78l] must comply with the
requirements of Regulation 14D. In addition, whether or not an offer
is subject to Regulation 14D [17 CFR 240.14d-1 through 240.14d-101],
the offer must comply with Regulation 14E [17 CFR 240.14e-1 through
240.14e7] and the antifraud requirements of Section 14(e) of the
Exchange Act [15 U.S.C. 78n(e)]. Issuer tender offers for the equity
securities of a public reporting must comply with Rule 13e-4.
Whether or not the issuer is a public reporting company, the issuer
tender offer must comply with Regulation 14E and Section 14(e).
\33\ Throughout the release, where we discuss mergers we also
include reclassifications, consolidations and transfers of assets
where security holders are asked to vote or consent. See Rule 145(a)
[17 CFR 230.145(a)].
\34\ The security holders of the target company almost always
must vote on the merger; sometimes the acquiring company's security
holders also must vote. This is determined by state law, the
company's governing instruments, and requirements of all applicable
self-regulatory organizations. If either voting party's securities
are equity registered under Section 12 of the Exchange Act, the
voting party must comply with the proxy or information statement
rules (Regulation 14A or 14C) [17 CFR 240.14a-1 through 240.14a-104
and 17 CFR 240.14c-1 through 240.14c-101].
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In either a tender offer or a merger, the offeror may offer cash,
securities, or a combination. If the consideration consists all or
partly of securities, the offeror generally will have to register them
under the Securities Act.\35\ The offeror will have to give more
information to security holders of the target company than if it were
offering cash, since the investment decision is more complex. Security
holders of the target need information about the issuer whose
securities they will receive if the transaction is consummated, which
really means information about the surviving, combined entity (the
issuer plus the acquired company).
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\35\ The offeror also must comply with the tender offer and
proxy rules, if applicable. All business combination methods
described in this release also are subject to the antifraud
provisions of the federal securities laws. See Securities Act
Section 17 [15 U.S.C. 77q]; Exchange Act Section 10(b) [15 U.S.C.
77j(b)]; Rule 10b-5, Rule 14a-9 [17 CFR 240.14a-9], and Exchange Act
Section 14(e) and the rules under that section.
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The following summarizes the regulatory process for the four basic
business combination methods. These examples assume that the tender
offers and proxy solicitations discussed are subject to our filing and
dissemination requirements:
1. Cash tender offer--either issuer or third party. The bidder
commences the offer by disseminating tender offer material to
security holders, including a request that they tender their shares.
On the same day, the bidder files this material publicly with the
Commission, along with a tender offer schedule that contains
additional information.\36\ Unlike the other three transactions
discussed below, the Commission staff does not have the opportunity
to review the tender offer material until after the tender offer has
begun. If the staff decides to review the filed material, and has
comments, the staff gives comments to the bidder during the tender
offer and the bidder addresses the comments appropriately. (For
example, the bidder may need to send additional information to the
security holders of the target and the offer may have to be
extended.) The offer must remain open for at least 20 business days,
and then the bidder can purchase the shares if all conditions to the
offer have been satisfied or waived.\37\
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\36\ Third-party tender offer statements are filed with the
Commission on Schedule 14D-1, while issuer tender offers are filed
on Schedule 13E-4.
\37\ In a third-party tender offer, the target company must
respond to the offer with a recommendation to its security holders.
This recommendation is disseminated to the security holders and
filed with the Commission along with a Schedule 14D-9 containing
additional information. The staff may review the material and
comment on it after it is filed, the same as with the bidders
material.
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2. Exchange offer (stock tender offer)--either issuer or third
party.\38\ The bidder files a Securities Act registration statement
containing a preliminary prospectus covering the securities it is
offering to security holders of the target in exchange for their
shares. The prospectus also contains the information about the
exchange offer required by the tender offer rules. This is a public
document. The bidder may disseminate the preliminary prospectus to
security holders of the target company, but it usually does not do
so because it cannot request tenders or buy any shares until the
registration statement is declared effective. If the staff decides
to review the registration statement, it may give comments to the
bidder. After these comments are resolved, the bidder requests that
the staff declare the registration statement effective. Once the
registration statement is effective, the tender offer may
``commence''--the bidder disseminates the combined final prospectus/
tender offer document to security holders, and requests that they
tender their shares. On the same day, the bidder files with the
Commission the
[[Page 67336]]
same tender offer schedule as for a cash tender offer.\39\ The offer
must remain open for at least 20 business days from this point
before the bidder can purchase any shares.
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\38\ In this release we sometimes refer to ``stock tender
offers'' and ``stock mergers,'' but in both cases it is possible for
the consideration offered to be either equity or debt.
\39\ The target company has the same obligations as in a cash
tender offer.
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3. Cash merger. The offeror files a preliminary proxy statement
with the Commission that describes the transaction. This is usually
a public document, but the offeror can request that the preliminary
merger proxy statement be treated confidentially, with some
exceptions. The offeror may mail the preliminary proxy statement to
security holders, but often waits until the proxy statement is
final, or ``definitive.'' This is because the offeror can send the
proxy card only with the definitive proxy statement. The offeror may
mail the definitive proxy statement ten days after the preliminary
proxy statement is filed. However, if the staff decides to review
the proxy material, in most cases offerors wait to receive staff
comments before mailing. Once all comments have been resolved, the
offeror mails the definitive proxy statement along with a proxy card
for security holders to mark and return. There is no federally
mandated time period between the date the offeror mails the proxy
material and the date of the security holder meeting,\40\ but state
law generally requires security holder notice of the meeting a
specified time before the meeting. If the vote at the meeting is to
approve the merger and all conditions have been met, the merger can
close.
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\40\ But see note 94.
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4. Stock merger. The offeror files a Securities Act registration
statement with the Commission that contains a preliminary prospectus
as well as the information required in a proxy statement.
Registration statements are filed publicly, but the material may be
filed as a confidential proxy statement if the offeror so chooses.
The registration statement is then filed as a ``wrap around'' the
proxy statement when the offeror is ready to make the information
public. The offeror may disseminate the preliminary prospectus/proxy
statement, but ordinarily will not do so because the offeror may not
include the proxy card. If the staff decides to review the filing,
it gives comments to the offeror. After comments are resolved, the
offeror requests that the staff declare the registration statement
effective. Once the registration statement is effective, the offeror
can mail the combined final prospectus/definitive proxy statement
along with a proxy card. The process then continues as it would for
a cash merger.
Any of the above transactions also could be a ``going-private''
transaction if it meets the criteria set forth in the ``going-private''
rule.\41\ In this case, the offeror and any other party engaging in the
transaction must file another schedule and provide additional
information to the Commission and security holders, in addition to
complying with the other regulatory requirements discussed. Usually
this information is combined into a single disclosure document with the
proxy statement, tender offer material or prospectus.
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\41\ See Rule 13e-3 and Schedule 13E-3. This rule covers
specified transactions where a company may cease to be a public
reporting company or a class of equity securities may cease to be
registered or publicly traded.
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B. Expand Communications Permitted in Tender Offers and Mergers
1. Overview and General Considerations
As discussed above, the fast pace of today's securities markets and
the ready accessibility of information through electronic media have
caused changes in the mergers and acquisitions environment. We
understand that participants in many merger and acquisition
transactions are providing extensive, deal-related information to the
marketplace immediately following the execution of a definitive merger
or purchase agreement.
Frequently, parties to a merger or other similar transaction
release information to the press containing pro firma financial
information on the combined entity, as well as estimated cost savings
or ``synergies.'' The parties generally issue this type of information
through press releases, analyst conferences, and meetings with
institutional investors and the press.\42\ The information provided to
analysts often goes beyond the information disseminated to all security
holders through press releases.
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\42\ ``The boundaries of the `gun jumping' prohibition are being
pushed in the current environment. A careful balance must be made
between deal announcement activities and broader disclosures, which
may serve legitimate disclosure issues, covering expected timetables
managements financing plans, integration [of] operations and synergy
expectations. Deal participants frequently are pressured for such
information by analysts, reporters and institutional investors, and
it is not uncommon for corporations to have full analyst
presentations that announce, among other things, aggregate
synergies/cost savings and CEO succession plans at the time of the
announcement of an exchange offer, merger or spin-off transaction.''
See Brownstein & Cohen, ``Navigating the M&A Waters: Greater
Options, Greater Challenges,'' N.Y.L.J. (February 18, 1997), at p. 6
(``Brownstein & Cohen'').
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Parties to merger agreements have asserted several reasons for the
need to disclose deal-related information at an early stage, including
the duty to make ``full disclosure'' of material information under Rule
10b-5.\43\ Under Rule 10b-5, it is unlawful to make any misstatement or
omission of material fact in connection with the purchase or sale of a
security. The rule applies to mergers, exchange offers and other
extraordinary transactions. The duty to disclose can be triggered by,
among other things: (1) line-item disclosure requirements in filings
with the Commission; (2) the issuer or insider's duty to ``disclose or
abstain'' from trading while in possession of material, non-public
information; \44\ (3) the duty to provide full and complete information
when disclosing information to the markets; \45\ and (4) the duty to
correct false or misleading statements made by the company.\46\
Companies also may be required by the particular rules of the stock
exchange or inter-dealer quotation system upon which their securities
trade to inform the marketplace in a timely manner of material
corporate developments, including proposed mergers.\47\
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\43\ The Commission has long recognized the need for issuers to
communicate with their security holders with respect to important
business and finance developments. See Releases No. 33-4697 (May 28,
1964) [29 FR 7317] and 33-5180 (August 16, 1971) [36 FR 16506]. See
also Release No. 33-5927 (April 24, 1978) [42 FR 18163], in which
the Division of Corporation Finance noted that compelling policy
reasons exist, as reflected in the Williams Act disclosure
requirements, to permit disclosure of information regarding
contemplated ``back-end'' mergers in order to aid investors
confronted with a tender offer investment decision that would
otherwise ``jump the gun'' on a merger.
\44\ See SEC v. Texas Gulf Sulphur Co., 401 F.2d 833,848 (2d
Cir. 1968).
\45\ Id. at 862; Basic v. Livinson, 485 U.S.C. 224 (1988).
\46\ See Ross v. A.H. Robins Co., Inc., 465 F. Supp. 904
(S.D.N.Y.), rev'd in part and remanded on other grounds, 607 F. 2nd
545 (2d Cir. 1979), cert. denied, 446 U.S. 946 (1980); Naye v. Boyd,
CCH para.92,980 (W.D. Wash. Oct. 20, 1986); Sharp v. Coopers &
Lybrand, CCH para.96,952 (E.D. Pa. 1979); SEC v. Shattuck Denn
Minning Corp. 297 F. Supp. 470 (S.D.N.Y. 1968); Fischer v. Kletz,
266 F. Supp. 180 (S.D.N.Y. 1967). Generally, however, there is no
duty to correct statements issued by a third party unless the
statements are attributable to the company. See Electronic Specialty
Co. v. Int'l Controls Corp., 409 F.2d 937 (2d Cir. 1969); Zucker v.
Sable, 426 F. Supp. 658 (S.D.N.Y. 1976). Under certain circumstances
courts have found a duty to update information previously disclosed
when it is rendered misleading by subsequent developments. See In re
Time Warner, Inc., 9 F.3d 259 (2d Cir. 1993).
\47\ See NYSE Listed Company Manual Sec. 202.05 stating that
``[a] listed company is expected to release quickly to the public
any news or information that might reasonably be expected to
materially affect the market for its securities''; and American
Stock Exchange, Listing Standards, Policies and Requirements
Sec. 402 requiring disclosure of material information ``likely to
have a significant effect on the price of any of the company's
securities or * * * likely to be considered important by a
reasonable investor in determining a choice of action,'' providing
as an example information regarding mergers and acquisitions. See
also the National Association of Securities Dealers, Inc. (``NASD'')
Manual, Rules 4310(c)(16) and 4320(e)(14).
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We understand that parties involved in extraordinary transactions
may have certain economic reasons as well for disclosing more
information to the markets before a registration, proxy or tender offer
statement is filed with the Commission. These reasons include: the need
to maintain an orderly market for the securities to be offered as
[[Page 67337]]
consideration; \48\ the need to satisfy the market's increased demand
for information regarding a proposed transaction; \49\ and the need to
inform customers, employees or other constituencies.
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\48\ In the takeover heyday of the 1980s, the price of
participants' stock frequently dropped following the announcement of
the transaction. This also can happen today, but market reaction can
be positive when a deal appears to make business sense. Steven
Lipin, ``Corporations' Dreams Converge in One Idea: It's Time to Do
a Deal,'' Wall St. J. (February 26, 1997).
\49\ Wall Street may require education due to the complexity of
the transaction, the non-apparent nature of its value or the obscure
nature of the business. In any case, assuring that the value created
by a transaction is properly appreciated by Wall Street, and
relected in stock price, may be both a matter of responsibility to
shareholders as well as protecting the deal itself.'' Brownstein &
Cohen at p. 6. Indeed, commentators have argued that ``winning the
immediate favor of the market through disclosure of projections and
other forward-looking information can be an essential element in
ensuring the transaction's success.'' See, e.g., Victor I. Lewkow
and Paul J. Shim, Law Puts Parties in a Bind When Ammouncing Merger,
Nat'l L. J. (Feb. 10, 1997), at p. B9.
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While there may be certain regulatory and economic reasons for
early disclosure of deal-related information, provisions of the
Securities Act and Exchange Act, including the Williams Act, \50\
restrict the type of information that may be disseminated before the
filing of a registration, proxy or tender offer statement. The flow of
information to investors is constrained primarily by the concepts of
``offer'' \51\ and ``prospectus'' \52\ under the Securities Act,
``solicitation'' under the Exchange Act, and ``commencement'' under the
Williams Act. \53\ Each of these concepts reflect a judgment that the
information needed to make an informed voting or investment decision
should be provided within the four corners of a prescribed disclosure
document.
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\50\ The Williams Act was enacted in 1968 as an amendment to the
Exchange Act (Sections 13(d)-(e) and 14(d)-(f). The Williams Act
regulates tender offers and imposes beneficial ownership reporting
requirements. 15 U.S.C. 78m(d)-(e) and 15 U.S.C. 78n(d)-(f).
\51\ Section 2(a)(3) of the Securities Act broadly defines
``offer'' as including every attempt or offer to dispose of, or
solicitation of an offer to buy, a security or interest in a
security, for value. 15 U.S.C. 77b. Offers are prohibited during the
pre-filing period and restricted during the waiting period.
\52\ The term ``prospectus'' is defined in Section 2(a)(10) to
include any prospectus, notice, circular, advertisement, letter of
communication, written or by radio or television, that offers any
security for sale or confirms the sale of the security, except for
communications that are preceded or accompanied by a statutory
prospectus. 15 U.S.C. 77b.
\53\ ``Solicitation'' is broadly defined by the Commission to
include ``the furnishing of a form of proxy or other communication
to security holders under circumstances reasonably calculated to
result in the procurement, withholding or revocation of a proxy.''
See Rule 14a-1(l) [17 CFR 240.14a-1(l)]. The Williams Act provides
that only limited information can be announced without either
commencing a crash tender offer or requiring the filing of a
registration statement in a stock offer.
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We believe that alleviation of these regulatory constraints may be
appropriate in today's marketplace, particularly given technological
advances in communications. Information regarding a planned
extraordinary transaction can be provided to all security holders on a
more equal and timely basis. Restricting communications to one document
may in fact serve to impede, rather than promote, informed investing
and voting decisions. Of course, any proposed safe harbors permitting
increased communications must be balanced to assure investor
protection. Modifications to the existing regulatory scheme include
conditions designed to provide full and fair disclosure to all
investors and the broader marketplace and not simply to a limited
audience of analysts and financially sophisticated market participants.
Today's proposals are designed to reduce selective disclosure by
permitting the widespread dissemination of information through a
variety of media calculated to inform all security holders about the
terms, benefits and risks of a proposed extraordinary transaction.
It is important to note that the proposals do not change the
current requirement that before security holders are asked to vote or
tender their shares, they must receive a mandated disclosure document--
a prospectus, proxy statement, or tender offer statement--that sets
forth complete and balanced information. \54\ Our long-standing concern
about communications conditioning the market before the dissemination
of mandated disclosure documents (i.e., ``gun-jumping'') is alleviated
by continuing to require this disclosure document before the investment
decision, as well as by the liability that could attach to knowingly
false offering materials.
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\54\ See the discussion of proposed Form C in Part II.D.2.d
below.
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2. Eliminate Restrictions on Pre-filing Communications
We propose to eliminate the current restrictions on communications
about an upcoming merger, tender offer, or other business combination.
Each of the regulatory schemes would provide for a safe harbor, as
described below, for oral and written communications about the
transaction before the registration, proxy or tender offer statement is
filed. Recognizing that deal-related disclosure, including forward-
looking information, is important to a complete understanding of a
transaction, we do not propose any content limitation on the
communications. However, we request comment on whether any content
restrictions should be included in the proposed safe harbors. Of
course, even without content restrictions, the antifraud rules will
continue to apply.
We do not propose to limit eligibility for the proposed safe
harbors to transactions involving large or seasoned issuers. We
considered making distinctions by size and seasoned status along the
same lines as in the Securities Act Reform Release (i.e., Form A and
Form B), but believe that those distinctions are not as important as
other considerations in the case of business combination transactions.
In these transactions, the market does not need information about the
offeror alone, but rather the combined entity, with which the market is
unfamiliar in any case. Thus, the need for freer disclosure stems in
large part from the fact that the offeror is, in essence, becoming a
new company. Therefore, the market-driven disclosure is not company
information but ``synergies'' and similar information about the
combined entity. Further, we believe that regardless of seasoned
status, the reasons for full and timely disclosure in a business
combination still exist.
Nevertheless, we request comment as to whether the size and
seasoned status of the parties to the transaction should determine the
availability of the free communication safe harbors. Should the safe
harbor be limited to Form B companies? \55\ If the safe harbor were
based upon the size and seasoned status of the parties, should it be
the status of the acquiror or the target that would govern, or both? If
the status of the acquiror controlled, different acquirors for the same
target could be subject to different rules. Would the lack of a level
playing field for competing acquirors have adverse effects on
competition or the target's security holders?
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\55\ If the proposals in the Securities Act Reform Release are
not adopted, then the proposals presented in this release could be
limited to companies that are Form S-3 eligible, including the
requirement that the aggregate market value of voting and non-voting
common equity held by non-affiliates equal or exceed $75 million.
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While we believe that the parties involved in a business
combination transaction should be permitted to rely on the free
communications safe harbors regardless of size, certain safeguards to
protect investors are necessary. All written communications by those
parties from the date of the first announcement of the transaction
would be required to be filed with the
[[Page 67338]]
Commission upon first use.\56\ Although there would be no requirement
to deliver this information to security holders, written communications
would have to be filed upon first use in order to assure that the
information is available to all security holders--not just analysts and
institutional investors--at the same time. Furthermore, written
information about a proposed combined entity or the ``synergies'' that
are expected to result from a proposed transaction could be verified or
confirmed, and corrective disclosure could be required if needed.
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\56\ See Part II.B.5 below. Written communications include
communications that are published in electronic media, such as
videos and CD-ROMs.
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Each communication would be required to include a prominent legend
advising investors to read the registration, proxy or tender offer
statement.\57\ We solicit comment on whether certain basic information,
including the name and description of the acquiror, also should be
required in each communication.\58\
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\57\ The legend also would advise investors that they can obtain
copies of the filed documents for free at the Commission's web site
and explain which documents are available for free from the issuer.
See proposed Securities Act Rule 421(e) in the Securities Act Reform
Release, as well as proposed Rules 14a-12(a)(2), 13e-4(c) and 14d-
2(b)(2) in this release.
\58\ As discussed below, free pre-filing communications are
permitted under the current scheme only in contested proxy
solicitations under Rules 14s-11 and 14a-12. Those rules require
that certain basic information (the identity of the participants in
the solicitation and description of their interest in the
transaction) be disclosed in each communication, whether written or
oral.
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We believe that bidders would welcome the opportunity to disclose
deal information earlier in the process and that the filing on first
use requirement would not ``chill'' disclosure of forward-looking
information because of continuing market demands. We request comment,
however, as to whether parties involved in tender offers would be
reluctant, in light of the filing requirement, to disclose forward-
looking information absent a safe harbor from liability for that
information. The safe harbor established by the Private Securities
Litigation Reform Act currently applies to merger transactions but does
not apply to tender offers. We discuss below the possibility of
expanding by rule the scope of that safe harbor to tender offers.\59\
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\59\ See Part II.E.6 below.
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Would parties to a transaction communicate more freely if the
written communications could be filed at a later date, whether along
with the mandated disclosure document \60\ or some other date, instead
of filing upon first use? If so, should the communications required to
be filed be limited to those made during a specified period of time,
such as 30 calendar days or 30 business days before the disclosure
document is filed? In addition to the filing requirement for written
communications, would any market conditioning effect of the pre-filing
communications be cured by the built-in time period between delivery of
the disclosure document and the final voting or tendering decision?
Would offerors tend to shorten this time period, to the extent
permitted by law, if they could engage in more extensive communications
at an earlier point? We also ask whether security holders would tend to
sell into the market on the basis of pre-filing communications, rather
than waiting for the disclosure document.
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\60\ This is the way Form B issuers would be treated in capital-
raising transactions, as proposed in the Securities Act Reform
Release.
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As noted, the proposed free communications safe harbors would apply
to oral as well as written communications. We do not propose to require
that oral communications be reduced to writing and filed. As one
objective of the proposal is to reduce selective disclosure, we solicit
comment on whether liberalizing oral communications would remove
incentives for offerors to file information and disseminate it in a
widespread manner.\61\Should the safe harbors be available to oral
communications? \62\ If so, would the need to provide information to
the markets generally provide a sufficient incentive for offerors to
disseminate full, fair and balanced information in a widespread manner?
Should a ``notice'' filing be required when oral communications are
made?
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\61\ Of course, nothing in the proposal would affect a person's
liability for trading on inside information. See Rules 10b-5 and
14e-3 [17 CFR 240.14e-3].
\62\ The current safe harbor in Securities Act Rule 145(b)(2),
discussed below, is limited to written communications.
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As proposed in the Securities Act Reform Release, business
information that is factual in nature and relates solely to ordinary
business matters, not to the pending transaction, would be exempt from
the prohibition on offers and would not be required to be filed. This
type of information generally does not have the potential for
conditioning the market before an extraordinary transaction and, as the
dissemination of such information is usually routine, we do not view it
as specifically related to the transaction.\63\ The proxy and tender
offer rules would provide the same exclusion.\64\
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\63\ Proposed Rule 169. Also as proposed in the Securities Act
Reform Release, there would be a safe harbor for regularly released
forward-looking information (which would be filed under Rule 425),
and the safe harbors for the publication of research reports by
broker-dealers would be revised. All of these would apply to
business combinations as well as to capital-raising transactions.
See proposed Rule 168(b) and proposed revisions to Rules 137, 138,
and 139 [17 CFR 230.137; 17 CFR 230.138 and 17 CFR 230.139].
\64\ Proposed Rules 13e-4(c), 14a-12 and 14d-2.
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3. Waiting Period and Post-Effective Period Communications
In the Securities Act Reform Release, we propose to permit free
oral and written communications during the period between filing and
effectiveness of the registration statement, in order to provide an
opportunity for open dialogue between the company and its potential
investors.\65\ This Securities Act safe harbor also would apply to the
period after effectiveness of the registration statement.\66\ The rule
would be available for business combinations as well as for capital-
raising transactions. We also would extend this safe harbor to the
proxy and tender offer rules.\67\ Like pre-filing communications,
written communications during these periods would be required to be
filed upon first use. Free communications during the waiting period
would be particularly important if our proposal to permit exchange
offers to commence before effectiveness is adopted.\68\
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\65\ Proposed Rule 165.
\66\ Currently, ``free writing'' is permitted after a
registration statement becomes effective, but the ``free writing''
material, such as sales literature, must be accompanied or preceded
by a final prospectus.
\67\ Proposed Rules 14a-12 and 14d-2.
\68\ See Part II.C.1 below.
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4. Alternative Communications Proposals
We are considering alternatives to the free communications safe
harbors that would provide more limited flexibility for pre-filing
communications. In particular, we are considering whether to allow the
companies conducting the transaction to make deal-related disclosure
only during a 48-hour period following the public announcement of a
definitive merger agreement or takeover plan. Similar to the ``free
communications'' proposal, there would be no content restrictions on
the companies' communications during the proposed 48-hour period, other
than the antifraud provisions. After the 48-hour period, the companies
would be required to remain quiet regarding the transaction until a
registration, proxy or
[[Page 67339]]
tender offer statement is filed. If this alternative proposal is
adopted, should the 48-hour time period be shorter or longer (e.g., 24
or 72 hours), or should it be based on a number of business days, such
as one, three or five business days?
Under this alternative proposal, the safe harbor would not be
available to a company if it disclosed deal-related information after
the 48-hour period without the relevant disclosure document on file.
The company, however, could take steps to regain protection under the
safe harbor by discontinuing communications related to the transaction
for at least 30 calendar days (the ``30-day quiet period'') before a
registration statement is filed. The 30-day quiet period would serve to
cure any conditioning effect that the communications may have had on
the market for the companies' securities.
As a third alternative to the free communications proposal and the
48-hour model, we also solicit comment on whether to permit free
communications for an unlimited period of time after the deal is
announced, so long as the parties observe a 30-day quiet period before
filing the registration statement, proxy statement or tender offer
material. This would be similar to the treatment of Form A companies in
capital-raising transactions, as proposed in the Securities Act Reform
Release. We ask commenters whether it would be practicable in the
business combination context to require a minimum of 30 days between
announcing the deal and filing the registration statement, proxy
statement or tender offer material.
We request comment on whether, under the alternative proposals, the
30-day quiet period would be sufficient to cure any conditioning effect
that earlier communications may have on the market. Is a longer quiet
period necessary (e.g., 45 days), or would a shorter period suffice
(e.g., 15 or 20 days)? We also solicit comment on whether the time
period for staff review should be included in the 30-day quiet period.
Should companies be permitted to file the relevant disclosure document
as soon as it is prepared despite disclosure of deal-related
information outside the 48-hour period? How should the announcement of
a hostile transaction affect the type of communications permitted
during the 30-day quiet period? Should the type of communications
permitted outside the 48-hour period be different for friendly and
hostile transactions? Should the communications be filed on first use,
or not filed until the mandated disclosure document is filed?
Finally, we request comment as to whether either of the alternative
proposals is preferable to the free communications safe harbors.\69\
Commenters should keep in mind that we would conform the proxy rules
and tender offer rules to whatever scheme we adopt under the Securities
Act for business combinations.
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\69\ Like the free communications proposal, the alternative safe
harbors would not restrict factual business communications at any
time. These communications could occur throughout the pre-filing and
waiting period without precluding reliance on the safe harbor or
triggering a 30-day quiet period.
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5. Free Communications Under the Securities Act
To implement the overall scheme discussed above, we propose new
Securities Act Rule 166(b) to permit free communications in connection
with any registration statement for a business combination. As
discussed above, this rule would not contain any content restrictions
so that deal-related information could be disclosed to analysts and
security holders alike. Given the potential breadth of the
communications, these communications still would be considered offers
under the Securities Act.
As discussed above, Section 5(c) of the Securities Act prohibits
offers unless a registration statement is on file. In 1996, the
Commission was granted exemptive authority under Section 28 of the
Securities Act.\70\ For the reasons stated above--including the need to
reduce selective disclosure and provide deal-related information to all
security holders on an equal basis--we believe that an exemption from
Section 5(c) of the Securities Act for persons making offers in
business combination transactions is in the public interest and is
consistent with the protection of investors.
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\70\ The Commission, by rule or regulation, may conditionally or
unconditionally exempt any person, security or transaction, or any
class or classes of persons, securities or transactions from any
provision of this title or any rule or regulation issued under this
title to the extent that such exemption is necessary or appropriate
in the public interest, and is consistent with protection of
investors. 15 U.S.C. 77bb.
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The proposed safe harbor under this exemption would be available to
the acquiring company--the offeror of the securities. The company to be
acquired would not ordinarily be subject to restrictions on
communications under the Securities Act, but under some circumstances
it could be viewed as joining the acquiring company in making the
offer. In this event, it also could avail itself of the safe harbor. In
addition, we request comment as to whether any other parties should be
exempted from Section 5(c) and eligible to rely on the proposed safe
harbor for pre-filing communications. For example, should the parties'
affiliates, dealer-managers and others acting on behalf of the parties
to the transaction be permitted to take advantage of the safe harbor?
\71\
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\71\ See the discussion of research reports in the Securities
Act Reform Release.
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In cases where deal-related information is disclosed before filing
a registration statement, the current practice has been to file the
communications on Form 8-K \72\ and then incorporate these filings by
reference into the registration statement. As a result, these
communications are subject to Section 11 liability.\73\ As a condition
to the proposed free communications safe harbor, written communications
relating to the transaction would be filed upon first use as pre-filing
prospectus supplements \74\ that are subject to Section 12(a)(2)
liability.\75\ This is because we believe Section 12(a)(2) liability
would adequately protect investors while not chilling parties'
willingness to make these communications. However, we request comment
on whether all written communications related to the transaction should
be incorporated into the registration statement and subject to Section
11 liability under the Securities Act.\76\ Would this encourage
offerors to rely more on oral communications? We also ask whether it is
necessary to condition the availability of the safe harbor on the
timely filing of these communications, as proposed.
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\72\ 17 CFR 249.308.
\73\ 15 U.S.C. 77k.
\74\ Written communications would be filed as offering material
under proposed Rule 425(b)(3). Like Rule 424 [17 CFR 230.424],
proposed Rule 425 would provide the procedural requirements for
filing the written communications as pre-filing prospectus
supplements. Comparable filing requirements are proposed under the
proxy and tender offer rules (proposed Rules 13e-4(c), 14a-12 and
14d-2). These communications would be filed on EDGAR to the same
extent that the related prospectus, tender offer or proxy statement
would be required to be filed electronically. For a discussion of
materials in various electronic media and how they would be filed,
see Part VII.B of the Securities Act Reform Release. If a Rule 425
filing was required, filers would not also have to file the same
document under the proxy and tender offer rules.
\75\ 15 U.S.C. 77l(a)(2). Oral communications also would be
offers subject to Section 12(a)(2) liability.
\76\ In any event, if a pre-filing communication contains
material information that is required to be in the registration
statement, the filer will put the information in the registration
statement, so Section 11 will apply.
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We note that relatively free written and oral pre-filing
communications already are permitted under the current scheme for
contested proxy solicitations. Such solicitations, if
[[Page 67340]]
written, currently are not deemed offers under the Securities Act.\77\
Written communications must be filed in accordance with proxy Rule 14a-
12(b), as discussed below.
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\77\ See Rule 145(b)(2) [17 CFR 230.145(b)(2)]. Rule 145 is the
rule that applies the registration requirements to business
combinations involving security holder voting decisions.
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To harmonize treatment of all merger transactions, whether
contested or friendly, we propose to eliminate the provision that such
communications are not offers under the Securities Act.\78\ Thus, pre-
filing communications in contested transactions also would be
considered offers and pre-filing supplements to the prospectus subject
to liability under Section 12(a)(2) of the Securities Act. We do not
believe that communications would be chilled by this modification
because of the heightened need for communications in hostile or
competing transactions. In addition, we note that such communications
already are subject to antifraud liability. We request comment,
however, as to whether treating this information as offers--imposing
Section 12(a)(2) liability under the Securities Act--would chill
communications in hostile transactions.
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\78\ Rule 145(b)(2) would be rescinded. Rule 145(b)(1), which
provides that certain written communications containing only
specified information about mergers and similar transactions are not
deemed offers, would be moved from Rule 145 to Rule 135 [17 CFR
230.135]. Rule 135 already contains similar provisions for
communications about exchange offers. See the Securities Act Reform
Release for the text of proposed Rule 135 revisions.
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Rule 135 notices are not currently, and are not proposed to be,
filed with the Commission. We solicit comment, however, on whether Rule
135 notices involving prospective business combinations should be
filed, since they could contain the initial public announcement of the
transaction. The filing would be made under Rule 425, but since these
notices are not considered ``offers'' they would not have liability as
such; Rule 425 would be modified to make this clear.\79\
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\79\ In any event, under the proposed scheme these
communications would need to be filed under the proxy or tender
offer rules.
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In the Securities Act Reform Release, the proposed scheme for
capital-raising transactions for Form A issuers contemplates that
communications more than 30 days before the filing of a registration
statement do not constitute offers.\80\ In contrast, the proposed
scheme for business combinations treats all communications related to
the transaction as offers, starting with the first communication
relating to the transaction (except for communications among the
participants in the transaction).\81\ Thus, these communications would
be subject to Section 12(a)(2) liability even if made more than 30 days
before filing the registration statement. Should we treat business
combinations the same as capital-raising transactions and apply the 30-
day rule to both? \82\ If we did this, we could still require
communications before the 30-day window to be filed, but they would not
have Securities Act liability as offers. We ask commenters to address
whether the status of deal-related communications as offers should
depend on how soon they are followed by the filing of a registration
statement.
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\80\ See proposed Rule 167(c).
\81\ See proposed Rule 167(b).
\82\ In that case, we also would apply the 30-day rule to proxy
and tender offer solicitations.
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We also solicit comment on whether, if we do retain the first
public announcement standard, we need to define ``public
announcement.'' We could define this as the first public communication
about the transaction that gives more information than permitted by
Rule 135. Alternatively, we could have a broader definition that
includes any public communication identifying the offeror, the target
company or class of securities, the number or percentage of securities
sought, and the price or range of prices. Should the definition clarify
what is meant by ``public'' (i.e., communications that go beyond the
participants to the transaction)?
6. Free Communications Under the Proxy Rules
a. Expand Rule 14a-12 Safe Harbor
In 1992, we significantly enhanced security holders' ability to
communicate with one another regarding corporate matters without
furnishing a proxy statement, so long as no proxy card or other
authorization is furnished to or requested from security holders.\83\
The enhancements have worked well to improve the quality and amount of
information flowing to and among security holders. Under the current
regulatory scheme, however, there are still some restrictions on
communications. For instance, management or security holders seeking
proxy authority may not communicate without first furnishing a proxy
statement, unless the solicitation is either in connection with an
election contest under Rule 14a-11 \84\ or in opposition to an earlier
solicitation, invitation for tenders, or certain other publicized
activity under Rule 14a-12.\85\ Both rules permit solicitations before
furnishing security holders with a written proxy statement, so long as:
(i) no form of proxy (i.e., proxy card) is furnished until a written
proxy statement is furnished; (ii) the identity of the participants in
the solicitation and a description of their interests are included in
any communication published, sent, or given to security holders; and
(iii) a written proxy statement is provided to security holders at the
earliest practicable date. The rules apply to both oral and written
solicitations.\86\ Written soliciting material must be filed with, or
mailed for filing to, the Commission no later than the date the
material is first published, sent, or given to security holders.\87\
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\83\ See Rule 14a-2(b)(1). [17 CFR 240.14a-2(b)(1)]. The rule
may not be used by the company itself. Also, there are various
exceptions for persons with specified interests in the solicitation.
For example, the rule may not be used by any person soliciting in
opposition to a merger or other extraordinary transaction, when the
soliciting person is a party to an alternative transaction.
\84\ 17 CFR 240.14a-11.
\85\ 17 CFR 240.14a-12. In addition, parties other than the
company's management may solicit proxies from up to ten persons
without being required to file a proxy statement. See Rule 14a-
2(b)(2) [17 CFR 240.14a-2(b)(2)].
\86\ The proxy antifraud rule, Rule 14a-9, applies to these
communications.
\87\ See Rules 14a-11(c) and 14a-12(b) [17 CFR 240.14a-11(c) and
240.14a-12(b)].
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Despite the 1992 amendments, some have contended that the current
rules may continue to unnecessarily restrict communications among
security holders and/or between a company and its own security holders.
Recent developments in information technology have enabled companies to
engage in more frequent, direct and timely communications with their
security holders about matters of particular interest. As the pace of
the securities markets increases, there appears to be a greater need
for some flexibility in the proxy rules to permit communications before
filing and delivery of a written proxy statement. Accordingly, we
propose to broaden the safe harbor in Rule 14a-12 to apply to all
solicitations, not just to those involving opposed matters.
The other provisions in Rule 14a-12, including the condition that
no form of proxy is furnished, the obligation to disclose participant
information, and the delivery of a written proxy statement to all
solicited security holders as soon as practicable, would be retained.
We also would continue to require that written solicitations be filed
upon first use. In addition, consistent with proposed changes to the
Securities Act and tender offer rules, each communication would be
required to prominently advise security holders to
[[Page 67341]]
read the proxy statement.\88\ These requirements, together with the
antifraud provisions in Rule 14a-9, appear sufficient to assure the
integrity and adequacy of the information and protect against
misleading solicitations.\89\
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\88\ Proposed Rule 14a-12(a)(2).
\89\ The proposed expansion of communications would not expand a
company's ability to secure promises to vote a certain way before a
proxy statement is provided. See the Securities Act Reform Release,
however, for proposed Rule 159, which would provide exemptions from
the proxy rules for certain ``lock-up'' arrangements.
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Filing of written communications upon first use also would assure
consistency with the requirements we propose for extraordinary
transactions under the Securities Act. We request comment, however, on
whether the filing upon first use requirement should be modified if
under the Securities Act we permit filing later than upon first use
(i.e., when the disclosure document is filed). We also request comment
on whether to retain the requirement to disclose the identity of
participants and their interests if we do not adopt a corresponding
requirement under the tender offer rules and the Securities Act
requirements for tender offers. If we change either the filing
requirement or the participant information requirement, should the
change apply only to proxy statements relating to business
combinations?
We proposed expanding Rule 14a-12 in 1992 to permit solicitations
before filing and delivering a written proxy statement regardless of
the existence of an opposing solicitation.\90\ We ultimately determined
not to adopt the proposal because ``the broad scope of current Rules
14a-11(d) (now Rule 14a-11) and 14a-12 reach virtually all contested
and responsive solicitations.'' \91\ We further noted that the need to
extend Rule 14a-12 to all solicitations was mitigated by the proposal
to allow registrants and other persons planning a solicitation to begin
their solicitation on the basis of a publicly filed preliminary proxy
statement.\92\ However, given the pressures--both regulatory and
market-induced--to disclose deal-related information immediately upon
announcement, we now believe that the current rules may overly restrict
communications among security holders and/or between a company and its
own security holders. Based upon our experience with the 1992
liberalization of communications, we do not believe that further easing
of restrictions would lead to abuse.
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\90\ Release No. 34-30849 (June 24, 1992) [57 FR 29564].
\91\ Release No. 34-31326 (October 16, 1992) [57 FR 48276].
Comments on the proposal were mixed. Those who objected ``questioned
whether there was a demonstrated need for the revisions and raised
concern with the potential abuse that could arise.'' Id.
\92\ Id. When a soliciting party uses a preliminary proxy
statement to begin a solicitation, the form of proxy may not be
included with the material distributed.
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Under the proposed expansion of Rule 14a-12, management could
engage more freely in communications regarding a prospective or pending
acquisition. However, this proposal is not limited to takeover-related
matters. For example, management could rely on the proposed safe harbor
to obtain security holders' views in connection with certain corporate
governance items that may require a security holder vote, such as the
adoption or amendment of executive and director compensation plans, an
increase in the number of authorized shares that may be issued, and the
adoption or redemption of a security holder rights plan. We believe
that management's ability to disseminate information on a more timely
basis may result in more informed voting decisions by security holders
and may increase the amount and quality of information generally
available to all security holders.
We request comment as to whether there are certain instances when
the requirement to deliver a proxy statement as soon as practicable
would be too burdensome. In addition, are there any circumstances under
which management or other parties may want to communicate that should
not trigger the obligation to deliver a proxy statement at the earliest
practicable date? For example, if a merger transaction was only under
consideration by management, and no formal agreements were entered
into, should it be necessary to send a proxy statement to security
holders if the transaction does not materialize? As another example,
management might find the proposed safe harbor useful to ``road-test''
an executive compensation proposal with large security holders, but not
present the matter for a security holder vote if the reaction was
negative. What impact would this have on smaller security holders?
We invite comments on whether the expansion of Rule 14a-12 to non-
contested situations would have the intended effect of permitting
management to communicate more freely with security holders and whether
this would enhance the timing or quality of information given to
security holders. One effect of the proposed expansion of Rule 14a-12
may be to eliminate any need for Rule 14a-11.\93\ Would it be
appropriate to eliminate Rule 14a-11 if we expanded Rule 14a-12 to
cover all matters, whether or not they are contested?
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\93\ Currently, Rule 14a-12 excludes matters covered by Rule
14a-11.
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As discussed above, one ``check'' on any conditioning effect that
free communications might have on security holders is the fact that
security holders will receive a mandated disclosure document in
extraordinary transactions before making their tender or voting
decision. In a tender offer, there is a mandated minimum 20-business
day period between the time the disclosure document is disseminated and
the expiration of the offer. As a general rule, however, there is no
federally mandated time period for disseminating a proxy statement.\94\
Many state laws, however, dictate that there be at least 10 and no more
than 60 days between notice of the meeting and the meeting date.
Generally, the state law notice and the federally mandated proxy
statement are mailed together to security holders. During this period,
security holders are able to assess the relevance and credibility of
all written communications in light of the mandated disclosure. In some
cases, state law permits a period so short that security holders may
not have enough time to consider the information.
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\94\ Note, however, that there is a mandated 60-day solicitation
period if the transaction is a roll-up. See Section 14(h)(1)(J) of
the Exchange Act [15 U.S.C. 78n(h)(1)(J)]; Rule 14a-6(l) [17 CFR
240.14a-6(l); General Instruction I.2 to Form S-4 [17 CFR 239.25]
and General Instruction G.2 to Form F-4 [17 CFR 239.34]. Also note
that there is a requirement to send or give security holders a
written information statement on Schedule 14C at least 20 calendar
days before the meeting date or the earliest date on which corporate
action may be taken if no meeting will be held. See Rule 14c-2(b)
[17 CFR 240.14c-2(b)]. See also Release No. 34-33768 (March 16,
1994) [59 FR 13517]. ``Although the rules do not specify the number
of days before the meeting by which registrants must make their
proxy materials available for distribution to their beneficial
owners, in order to comply with the timeliness requirement, the
materials must be mailed sufficiently in advance of the meeting to
allow five business days for processing by the banks and brokers and
an additional period to provide ample time for delivery of the
material, consideration of the material by beneficial owners, return
of their voting instructions, and transmittal of the vote from the
bank or broker to the tabulator.'' Id. (footnotes omitted).
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We request comment as to whether there should be a federally
mandated solicitation period for mergers and similar transactions,
given the free communications proposals and the need to digest the
mandated disclosure in light of earlier communications. This period
also would assure that record holders and beneficial owners alike would
have enough time to consider the proxy materials. If a federally
mandated
[[Page 67342]]
solicitation period is adopted, how long should it be? Would 20
business days make sense so that it is harmonized with the mandated
tender offer time period? Should it be 20 calendar days to conform with
the information statement requirement, or should the information
statement requirement be changed to 20 business days? Should the
solicitation period be required only as a condition of the free
communications safe harbor? Should it apply only to votes on business
combinations?
We are particularly concerned about giving security holders time to
consider proxy material in the case of street name holders--beneficial
owners of securities who obtain their proxy material through banks,
broker-dealers, or other nominees holding record title to the
securities. Do street name holders receive correcting or updating
material in a timely fashion? Would modifying the security holder
communications provisions of the proxy rules to permit direct delivery
of proxy statements and other soliciting materials to non-objecting
beneficial owners facilitate more timely and fully informed voting
decisions? \95\
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\95\ See Rules 14a-13 [17 CFR 240.14a-13], 14b-1 [17 CFR
240.14b-1], 14b-2 [17 CFR 240.14b-2] and 14c-7 [17 CFR 240.14c-7].
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b. ``Test the Waters'' Proxy Solicitations
We also are considering a broader exemption from the proxy rules
that would not require delivery of a proxy statement after
communicating with security holders. The only condition would be that
no proxy card or other authorization be requested or sent. In effect,
such a rule would permit both written and oral ``test the waters''
proxy solicitations.\96\ Such an exemption would be crafted as part of
Rule 14a-2,\97\ which sets forth a number of solicitations that are
exempt from the proxy statement disclosure and dissemination
requirements. Would a broad exemption remove the need for any of the
current exemptions in Rule 14a-2? \98\ Would it remove the need for
Rules 14a-11 and 14a-12? Would the same purpose be accomplished by
amending Rule 14a-2(b)(1) to eliminate the exceptions, so the rule
could be used by the company itself and interested parties? \99\ Should
the ``test the waters'' communication be required to include any
minimal information?
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\96\ Rule 14a-9 would, of course, impose antifraud liability on
these communications.
\97\ 17 CFR 240.14a-2.
\98\ In particular, the exemption for solicitations that do not
seek the power to act as a proxy for another security holder and do
not furnish or otherwise request a form of revocation, abstention,
consent or authorization in Rule 14a-2(b)(1) and the ``ten person''
exemption in Rule 14a-2(b)(2). [17 CFR 240.14a-2(b)].
\99\ A person relying on Rule 14a-2(b)(1) currently is not
permitted to change the exempt proxy solicitation to a non-exempt
one and send a proxy card to security holders. This position would
have to be modified to accomplish the objectives of the ``test the
waters'' proxy solicitation proposal.
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Unlike Rule 14a-12, the ``test the waters'' proxy rule would not
require that written communications be filed with the Commission.\100\
However, we are considering requiring communications to be filed in
order to harmonize with the treatment of written communications under
the Securities Act and the Williams Act. Commenters should address
whether the need to file material would reduce the usefulness of the
``test the waters'' proxy exemption. Would a filing requirement provide
benefits to security holders by assuring that information is available
on a widespread basis? If we do require filing of material under this
exemption, should it be a ``notice'' filing only as opposed to
requiring the communication itself to be filed? Should the filing
requirement be limited to the business combination context? Or should
the ``test the waters'' proxy solicitation be unavailable for business
combination communications, leaving Rule 14a-12 as the sole safe harbor
for these communications?
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\100\ Currently, communications exempt under Rule 14a-2 need not
be filed, except that notice filings are required for certain
communications under Rule 14a-2(b)(1) and the roll-up solicitation
rule, Rule 14a-2(b)(4).
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We request comment on whether a ``test the waters'' proxy rule
would benefit security holders. This change would be consistent with
the general theme of easing restrictions on communications under the
Securities Act as expressed in this release and the Securities Act
Reform Release. On the other hand, does the current requirement to
follow up communications with delivery of a proxy statement impose a
beneficial discipline on the solicitation process by discouraging
premature insupportable communications? Should we require a ``cooling-
off period'' (e.g., 20 or 30 days) between the ``test the waters''
solicitation and a request for a proxy card? Commenters should advise
whether they think the ``test the waters'' rule would work, not just in
the context of takeover-related matters, but also in the context of any
corporate governance matters or other topics that are likely to be the
subject of a proxy solicitation.
c. Eliminate Confidential Treatment of Merger Proxies
Currently, preliminary proxy material relating to certain
reclassifications and business combinations, other than going-private
or roll-up transactions,\101\ may be filed confidentially with the
Commission.\102\ In that case the proxy material is not filed on EDGAR
and is not available for public inspection.\103\ Due to the changing
realities of today's markets, and the expressed need by many companies
for an expanded safe harbor permitting early disclosure of information
before a registration statement is on file, we propose to eliminate
confidential treatment for merger proxy statements.\104\ Often
companies that invoke confidential treatment for their merger proxy
statements already have made extensive pre-filing disclosure of
information beyond what is permitted by current Securities Act Rule
145(b) and the proxy rules. It is unclear to us why a company that
broadcasts extensive deal-related information to the securities markets
soon after a definitive merger agreement is executed needs confidential
treatment for the same information contained in its proxy materials. In
some instances, the information disclosed to the market is more
extensive than the information disclosed in the preliminary proxy
statement filed confidentially.
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\101\ A roll-up transaction is any transaction or series of
transactions that directly or indirectly, through acquisition or
otherwise, involves the combination or reorganization of one or more
``finite-life'' entities (usually limited partnerships) where the
securities to be issued are publicly registered. See Release No. 33-
6900 (June 17, 1991) [56 FR 28979]; Release No. 33-6922 (October 30,
1991) [56 FR 57237]; Release No. 33-7113 (December 1, 1994 [59 FR
63676]; and the 900 series of Regulation S-K.
\102\ Rule 14a-6(e)(2) [17 CFR 240.14a-6(e)(2)].
\103\ The proxy material is filed publicly in definitive or
final form when the staff has no further comments or when a related
registration statement is filed that wraps-around (or incorporates)
the information contained in the proxy statement.
\104\ When the transaction is a stock merger, this would
eliminate the need for the current practice of filing a
(confidential) proxy statement before filing the related (public)
registration statement.
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We previously proposed to eliminate confidential treatment for all
preliminary proxy statements, including those relating to mergers, in
1992.\105\ The Commission ultimately decided to preserve confidential
treatment for merger transactions in light of commenters' concerns that
the inability to file documents relating to business combinations or
acquisitions on a non-public basis would cause premature disclosure of
information. The concern articulated was that merger negotiations might
not be ripe at the time of filing and public disclosure ``would
adversely affect the timing of such transactions and thereby their
costs, since they could not obtain Commission review of the offering
documents while the
[[Page 67343]]
participants were preparing for the public announcement of the
transaction.'' \106\ In light of the current practice of disclosing
extensive deal-related information before the filing of a proxy
statement, we do not believe that preliminary merger proxy materials
continue to merit confidential treatment.
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\105\ See Release No. 34-30849 (June 24, 1992) [57 FR 29564].
\106\ Id.
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The elimination of confidential treatment of merger proxy
statements would harmonize the treatment of preliminary proxy
statements with preliminary prospectuses and tender offer materials,
which are publicly available when filed. In addition, security holders
would obtain faster access to information concerning extraordinary
transactions. Without confidential treatment, security holders also
would have more time to consider and respond to proposed mergers and
acquisitions.
We request comment on whether confidential treatment should be
retained under any limited circumstances. Should confidential treatment
be available if the parties to the merger transaction do not rely on
the new safe harbors permitting increased communications?
Some have expressed the view that confidential treatment makes
registrants more comfortable with amending their materials to comply
with staff comments, as the marketplace is not aware of the nature of
the changes. If a proxy statement is filed publicly, the trading
markets may act on the information disclosed and there may be liability
concerns if the information disclosed is revised. Do commenters believe
that these concerns outweigh the benefits of public filing? If so, how
are merger proxies different from exchange offers and other types of
filings that are not accorded confidential treatment?
We note that when the wrap-around procedure is used, registration
statement exhibits are filed on a delayed basis. Would registrants be
put at a significant disadvantage if they were required to file all
exhibits when they filed their registration statements publicly, or
would they continue the practice of filing exhibits when available?
Should we continue to permit the filing of a proxy statement before the
wrap-around registration statement, even though the proxy statement
would be public?
d. Timing of Filings
In addition to the substantive changes to the proxy rules proposed
above, we propose procedural amendments to the proxy filing
requirements. Rule 14a-6(b) requires definitive material to be ``filed
with, or mailed for filing to, the Commission not later than the date
such material is first sent or given to any security holders.'' Several
other proxy and information statement filing rules contain similar
language.\107\ The option to mail proxy materials to the Commission is
no longer relevant because companies that are subject to the proxy
rules are now required to file electronically.\108\ We propose to
update these filing rules to eliminate the ``mailed for filing''
language in the rules. Filers would be required to file definitive
material with the Commission no later than the date they send or give
proxy materials to security holders.
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\107\ See Rules 14a-4(f) [17 CFR 240.14a-4(f)], 14a-6(c) [17 CFR
240.14a-6(c)], 14a-11(c) [17 CFR 240.14a-11(c)], 14a-12(b) [17 CFR
240.14a-12(b)] and 14c-5(b) [17 CFR 240.14c-5(b)].
\108\ See Rule 101(a)(iii) of Regulation S-T [17 CFR
232.101(a)(iii)]. Registrants may use paper only if a hardship
exemption is available. Foreign private issuers that are not
required to file electronically are exempt from the proxy and
information statement requirements. 17 CFR 240.3a-12-3.
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We believe that making definitive material available to security
holders, the market and the staff as promptly as possible is important.
EDGAR, and other sources of electronic filings, including the Internet,
have become essential in supplying the investment community with public
information. Any discrepancy between the time information is first
disseminated and the time it is filed with the Commission could place
those who rely on our filings for public information at a disadvantage.
Filers (particularly those in time zones later than the
Commission's) have argued that filing proxy materials on the same day
is a hardship. It is not clear why this is the case, in view of the
treatment of tender offer materials. Such materials must be filed ``as
soon as practicable'' on the date the tender offer commences, and
filers comply with that requirement without any apparent
difficulty.\109\ While the proposed electronic filing rule acknowledges
that some information may be released when it is not possible to file
it with the Commission, we believe that material distributed during
Commission business hours should be available at that time to the
public through our filing system.\110\
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\109\ See Rule 14d-3(a) [17 CFR 240.4d-3(a)]. See also Rule 14d-
3(b) [17 CFR 240.14d-3(b)] (filing of additional tender offer
material).
\110\ In an interpretive letter, the Division of Corporation
Finance stated that, where it is impracticable to file proxy
materials on the same business day, it is consistent with the intent
of Rule 13(d) to allow issuers and others to file electronically
``promptly on the next business day following distribution to
security holders.'' See Henry Lesser, Esq. (November 28, 1995). This
proposal would supersede that interpretation. material disseminated
during the Commission's business hours would be required to be filed
on that day.
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In connection with this change to the proxy filing rules, we
propose to update our electronic filing rules to provide guidance to
filers as to when to file material that is disseminated outside normal
Commission business hours. The issue of when to file this type of
material arises most often in the context of proxy soliciting material,
although it may, on occasion, arise for tender offer filings. Our
electronic filing rule already requires material that may be ``mailed
for filing'' to be filed on or before publication or distribution; in
the event of publication or distribution on a non-business day, the
rule permits filing ``as soon as practicable on the next business
day.'' \111\ We propose to modify this rule to eliminate ``mailed for
filing'' and refer to material that is required to be filed on the same
day it is disseminated. The revised rule would continue to permit
filing as soon as practicable on the next business day if the material
was disseminated on a non-business day, but would make it clear that
dissemination after the Commission's business hours is treated the same
as dissemination on a non-business day. The revised rule would apply to
tender offer filings as well as proxy filings.
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\111\ See Rule 13(d) of Regulation S-T.
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We solicit comment on the nature and extent of problems encountered
with the timing requirement for filing proxy and tender offer material.
Commenters should consider whether the proposed rule provides adequate
guidance to filers disseminating materials outside of our business
hours. Alternatively, the rule could be amended to require filing
within one business day of dissemination instead of ``as soon as
practicable on the next business day,'' or by a certain time on the
next business day (e.g., 9:00 a.m. or 12:00 noon). We believe security
holders and the public in general should be able to access public
filings at the earliest possible time. Currently, filings are accepted
on EDGAR as late as 10:00 p.m., although filings submitted after 5:30
p.m. receive a filing date of the next business day and are not
available to the public until the next business day. We could amend
Rule 13(d) of Regulation S-T to require submission of proxy material by
10:00 p.m. on the same day it is disseminated to security holders,
unless dissemination occurs on a day that the Commission is not open.
7. Free Communications Under the Tender Offer Rules
A bidder's ability to communicate with security holders and the
markets in
[[Page 67344]]
general regarding a proposed offer is limited by the concept of
``commencement'' in the tender offer rules. A bidder is required to
file and disseminate information regarding its offer upon
``commencement.'' Commencement is the date an offer starts for purposes
of the tender offer rules. A bidder's public announcement of certain
minimal information about an offer may trigger commencement and can
result in certain filing and disclosure obligations for the bidder,
depending upon whether cash or stock is offered.\112\ Similarly, the
target cannot make a recommendation regarding the offer without
triggering filing and disclosure obligations.
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\112\ Issuer tender offers are not subject to pre-filing
communication restrictions; thus no substantive change to the issuer
tender offer rule is necessary, although we do propose some
conforming changes.
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a. Disclosure Triggering Commencement
Currently, a third-party cash tender offer is deemed to commence on
the date the bidder discloses certain information
(``announcement''),\113\ unless the bidder does one of two things
within five business days of the announcement date. If the bidder files
a tender offer statement with the Commission, and disseminates
specified information to security holders, the offer is deemed to
commence on the date of filing and dissemination, not on the date of
announcement.\114\ If the bidder makes a subsequent public announcement
that it has determined not to proceed with the offer, the initial
announcement will not be deemed to commence an offer.\115\ If the
bidder neither complies with the tender offer rules nor withdraws the
offer, the offer is deemed to commence upon public announcement,
resulting in filing and disclosure violations. We refer to this
requirement as the ``five business day rule.''
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\113\ If solely cash and/or securities exempt from registration
under Section 3 of the Securities Act are offered, then a public
announcement of: the identity of the bidder, the identity of the
subject company, the amount and class of securities sought and the
price or range of prices offered will commence the tender offer. See
Rule 14d-2 (b) and (c). [17 CFR 240.14d-2 (b) and (c)].
\114\ See Rule 14d-2(b)(2). [17 CFR 240.14d-2(b)(2)].
\115\ See Rule 14d-2(b)(1). [17 CFR 240.14d-2(b)(1)].
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Stock tender offers are not subject to the same five business day
rule. Instead, stock offers are deemed to commence when a final
prospectus is first disseminated to security holders.\116\ A bidder can
publicly announce its intention to make a stock offer, so long as the
announcement contains only the limited information permitted by the
Securities Act.\117\ This announcement will not stitute commencement of
the offer if the bidder promptly files a registration statement
relating to the securities offered.\118\
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\116\ See Rule 14d-2(a)(4) [17 CFR 240.14d-2(a)(4)].
\117\ See Rule 135-2(a)(4) [17 CFR 230.135(a)(4)].
\118\ See Rule 14d-2(e) [17 CFR 240.14d-2(e)].
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In 1979, we recognized the ``unsettling and disruptive effects''
that cash tender offers can have on the trading markets when we
proposed the five business day rule.\119\ In adopting the rule, we
noted it was common practice for bidders to publicly announce the
material terms of their cash offers in advance of formal
commencement.\120\ We observed that pre-commencement public
announcements regarding cash tender offers can trigger market
mechanisms, such as arbitrageur activity, and cause security holders to
make investment decisions with respect to a tender offer on the basis
of incomplete information. The five business day rule was designed to
prevent bidders from publicly announcing the material terms of an offer
before formally commencing the offer.
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\119\ See Release No. 34-15548 (February 5, 1979) [44 FR 9956].
\120\ See Release No. 34-16384 (November 29, 1979) [44 FR
70326].
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Based on our experience with tender offers and the factors
influencing the treatment of communications discussed earlier, we now
believe that the communications restrictions imposed on bidders in both
cash and stock tender offers may unnecessarily restrict communications
with security holders. We believe that the reasoning behind easing
restrictions on communications for other types of business combinations
applies equally to tender offers. Unrestricted communications should
result in the availability of more information to security holders on a
timely basis. As a result, security holders should have a greater
opportunity to inform themselves and assess the specific terms of a
proposed offer. In light of the fact that tender offers generally
remain open for a short period of time, usually 20 business days,
advance notice of an offer should benefit security holders.
In an effort to increase bidders' ability to communicate with
security holders, we propose to amend the provisions relating to
commencement. Specifically, we propose to eliminate the obligation to
commence or withdraw a cash offer within five business days of making a
public announcement. We also propose to eliminate the requirement to
promptly file a registration statement after public announcement of a
stock offer. The revised rule would permit bidders to engage in free
communications before commencement.\121\ The communications permitted
under the safe harbor, however, would not include a transmittal form or
instructions on how to tender into the offer.
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\121\ Proposed revision to Rule 14d-2. Shortly after adopting
the five business day rule, the Commission authorized the issuance
of an interpretive release discussing the staff's views with respect
to when certain tender offers commence under Regulation 14D and 14E.
See Release No. 16623 (March 5, 1980) [45 FR 15521]. If we rescind
the five business day rule as proposed, many of the interpretations
in the release regarding commencement would no longer be applicable.
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In place of the five business day rule and the requirement to
promptly file a registration statement, we propose to require bidders
to file and disseminate the required information when tenders are first
requested. The Williams Act and the tender offer rules were designed to
assure that there is adequate information available to security holders
so that they can make an informed investment decision before tendering
into an offer. The public announcement of an offer should not trigger
the need to file or disseminate information. Instead, the focus should
be on when security holders are provided the means to tender their
shares into the offer. That is the time when information required by
the tender offer rules must be available to security holders.\122\
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\122\ Although we propose to change the manner in which
commencement of an offer is triggered, we are not defining the term
``tender offer'' or changing our position on what activities may be
deemed to constitute a tender offer. Nothing in these proposals
affects the fact that the tender offer rules may be triggered by
activities that function as unconventional tender offers. We
reiterate our position that the term ``tender offer'' should be
interpreted flexibly in accordance with the intended purposes of
Sections 14(d) and 14(e). A determination of whether a particular
transaction or series of transactions constitutes a tender offer
will, of course, depend on the particular facts and circumstances
and is not limited to ``conventional'' tender offers. See Release
No. 34-15548 (Feb. 5, 1979) [44 FR 9956].
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Under the proposal, we would require bidders in both stock and cash
tender offers to satisfy the filing and dissemination requirements upon
first disseminating transmittal forms (the tender offer equivalent of a
proxy card) or disclosing to security holders instructions on how to
tender into an offer. For example, if a bidder published an
advertisement that instructed security holders how to contact the
bidder and receive information on tendering securities in the offer
(e.g., by publishing a telephone number for security holders to call to
receive more information on how to tender), then the bidder would be
required to comply with the filing and dissemination
[[Page 67345]]
requirements at that time. The 20 business day period would begin to
run at this time.
The five business day rule and the requirement to file a
registration statement promptly may serve as a protection against
bidders making tender offer announcements without the intent or ability
to follow through. In order to prevent the development of such
practices if these requirements are eliminated, we propose a new rule
to make it clear that such conduct would be prohibited as fraudulent
under the tender offer rules.\123\ The rule would prohibit a person
from announcing a tender offer: without the intent to commence and
complete the offer; with the intent to manipulate the price of either
the bidder's or the target's securities; or without a reasonable belief
that the person will have the means to purchase the securities sought.
Are there other provisions that should be included to prevent
inappropriate use of the free communications safe harbor, while not
deterring legitimate communications?
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\123\ Proposed Rule 14e-8.
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We solicit comment on whether the five business day rule or the
requirement to file a registration statement promptly provide
investors, bidders, targets or security holders with any benefits that
the proposed rule would not provide. Do these requirements cause
bidders to provide security holders with needed information sooner?
We also ask whether the proposed rules increase the risk that
investors will make investment decisions based solely on a bidder's
pre-commencement communications without adequate information. Security
holders might sell into the market based on a bidder's pre-filing
communications. This risk, however, exists today under the current
rules, although for a more limited time. Should the tender offer rules
focus on this risk? Is the risk of market activity, based on incomplete
information, greater for cash offers than it is for stock offers? If
so, is it more important to maintain the five business day rule than to
harmonize cash tender offers with other types of business combinations?
Would the proposed obligation to file and disseminate information when
security holders are first solicited to tender using a transmittal form
adequately protect security holders? Is there less of a need to permit
bidders to provide information to the marketplace before filing than
there is for other types of business communications because cash tender
offer material may be prepared and disseminated so quickly?
Currently, bidders are required to hand deliver a copy of the
tender offer statement and additional tender offer materials to the
target company and any other bidder for the same class of
securities.\124\ In addition, we propose to require delivery to the
same parties of the first written communication a bidder makes that
sets forth its identity, that of the target company, the amount and
class of securities sought, and the price or range of prices
offered.\125\ Is this needed, or would the fact that the communication
must be filed with the Commission provide adequate notice to the target
company and any other bidders?
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\124\ See Rule 14d-3(a)(2).
\125\ The current rule also requires telephonic notice and
mailing of tender offer material to any securities exchange or the
NASD on which the securities are listed or traded. We do not propose
to extend this to cover pre-commencement communications, as the
exchanges and the NASD are moving away from relying on paper filings
and increasingly using electronic databases to obtain EDGAR filings.
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Each communication made in reliance on the safe harbor would be
required to prominently advise security holders to read the complete
tender offer material, consistent with the Securities Act and proxy
rule proposals.\126\ Should we require any additional information in
these communications? For example, should a bidder be required to
disclose information such as its identity, the target's identity, the
form and amount of consideration offered, any conditions to the offer,
and the bidder's interest(s) in the target, including security
ownership? This would be similar to the current requirement in Rule
14a-12 that specified information be contained in any communications
made before the filing of a proxy statement.
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\126\ See proposed Rules 13e-4(c) and 14d-2(b)(2).
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Currently, the tender offer rules require specified information to
be included in any communications made after the bidder has commenced
the offer and disseminated the complete tender offer disclosure
document. These ``additional tender offer materials'' must include
basic information about the identity of the bidder and subject company,
the terms and the expiration date. \127\ We propose to retain this
requirement. Does the requirement serve a useful purpose in preventing
confusion, particularly where there are competing offers? Would it be
more important to require specific information in pre-commencement
communications than in post-commencement additional material?
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\127\ See Rule 14d-6(c), proposed to be redesignated Rule 14d-
6(b).
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We also propose to revise the rules to permit targets the same
freedom to make pre-commencement communications as bidders. A target
(or other person who makes any solicitation or recommendation to
security holders regarding the offer) must provide specified
information to security holders and file a Schedule 14D-9 with the
Commission on the same date that it makes a recommendation regarding
the offer.\128\ This obligation is triggered by the target's
communications even if the bidder has not yet commenced the tender
offer. We propose to amend the rule so this obligation is not triggered
by communications made by the target before the bidder has filed its
tender offer statement and commenced the offer. Targets would be
required to file pre-commencement communications on first use. This
would put the bidder and target in an equal position to engage in free
pre-commencement communications. We solicit comment on whether there is
any reason to treat bidders and targets differently. We also ask
whether the target's communications should be required to contain a
statement advising security holders to read the complete recommendation
when it is available.
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\128\ See Rule 14d-9. A target must respond to a tender offer by
communicating a position on the offer no later than ten business
days from the date the offer is disseminated. See Rule 14e-2.
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b. Methods to Disseminate an Offer
The tender offer rules currently provide for several non-exclusive
methods to ``commence'' an offer. If one or more of the specified
methods are followed,\129\ the tender offer will be deemed ``published,
sent or given to security holders''' for purposes of Section 14(d)(1)
of the Exchange Act. The methods of disseminating information that will
commence an offer include: (i) long form publication; \130\ (ii)
summary advertisement; \131\ (iii) summary advertisement or long form
publication using stockholder lists and security position listings;
\132\ and (iv) if securities are to be offered as consideration,
publishing, sending, or giving copies of a final prospectus to security
holders.\133\ While a tender offer can be commenced in other ways,\134\
the
[[Page 67346]]
methods listed above are generally regarded as safe harbors and will
give the bidder comfort that the offer has commenced under the tender
offer rules. Commencement is important because if an offer is not
deemed to commence, the required 20 business day period will not begin
to run.\135\
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\129\ A bidder can use more than one method provided it complies
fully with each method used.
\130\ See Rule 14d-2(a)(1) [17 CFR 240.14d-2(a)(1)]. See also
Rule 14d-4 for these methods of dissemination, which also are means
of publicizing changes to the initial tender offer information.
\131\ See Rule 14d-2(a)(2) [17 CFR 240.14d-2(a)(2)].
\132\ See Rule 14d-2(a)(3) [17 CFR 240.14d-2(a)(3)].
\133\ See Rule 14d-2(a)(4) [17 CFR 240.14d-2(a)(4)].
\134\ See Rule 14d-2(a)(5) [17 CFR 240.14d-2(a)(5)] providing
that an offer may commence when ``the tender offer is first
published, sent or given to security holders by the bidder by any
means not otherwise referred to in paragraphs (a)(1) through (4) of
this section.''
\135\ See Rule 14e-1(a) [17 CFR 240.14e-1(a)].
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Long form publication requires the bidder to publish extensive
information regarding the tender offer in a newspaper.\136\ Before we
adopted the summary advertisement method in 1979,\137\ long form
publication was the accepted means of dissemination. Due to escalating
costs and scheduling problems associated with long form publication,
summary publication has replaced long form publication as the common
means of disseminating a tender offer. Given that long form publication
is not viewed as cost-effective and is rarely used by bidders, we
propose to eliminate it as a means of disseminating information about a
tender offer.\138\ We solicit comment, however, on whether the method
should be retained, perhaps in connection with publication on the
Internet in combination with other methods of dissemination.
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\136\ A bidder must publish the information specified in Rule
14d-6(e)(1) [17 CFR 240.14d-6(e)(1)].
\137\ See Release No. 34-16384 (November 29, 1979) [44 FR
70326].
\138\ We propose this change both for issuer and third-party
tender offers. See Rule 13e-4(e)(i) (issuer) and 14d-4(a)(1) (third
party).
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Under the summary publication method, a bidder must publish an
advertisement in a newspaper and furnish its tender offer materials
with reasonable promptness to any security holder who requests a copy.
The advertisement must contain, and is limited to, certain specified
information.\139\ Bidders are not permitted to include a transmittal
form with the summary advertisement.\140\ Security holders therefore
must request and receive complete information from the bidder before
they can tender into the offer.
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\139\ See Rule 14d-6(a)(2) [17 CFR 240.14d-6(a)(2)]. Bidders,
however, generally disclose more information in their summary
advertisements than is currently permitted under the rules. There is
some judicial support for the disclosure of additional information.
See Crouse-Hinds Co. v. Internorth, Inc., 518 F. Supp. 416 (N.D.N.Y.
1980) (permitting disclosure of conditions to an offer in a summary
advertisement). Based on our proposals to permit free
communications, we would amend Rule 14d-6(a)(2) to delete the
language limiting the information that can appear in a summary
advertisement. We would retain the prohibition against including a
transmittal form with the summary advertisement. However, the
summary advertisement could (and should, if it is designed to
commence the offer) include the means to tender, e.g., a telephone
number to call to obtain the complete tender offer materials,
including the transmittal form.
\140\ See Rule 14d-6(e)(3) [17 CFR 240.13d-6(e)(3)].
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Summary advertisements alone usually are not sufficient to prompt a
large number of security holders to request a copy of the tender offer
materials. Therefore, bidders generally will supplement their
solicitation of tenders with a request for a stockholder list under
Rule 14d-5, in addition to publishing a summary advertisement. Under
this rule bidders can request a stockholder list from the target. The
target has the option of either mailing the offering materials to
security holders at the bidder's expense, or providing the bidder with
a stockholder list of record holders prepared as of the most recent
practicable date.\141\
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\141\ In Part II.E.4 below, we propose to expand the stockholder
list rule to make it more useful by including beneficial owner
information.
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We solicit comment on whether we should eliminate dissemination by
summary advertisement alone (without the use of stockholder lists) to
make the cash tender offer regulations more comparable to other
business combination methods. Should the stockholder list requirement
apply to amendments disclosing material changes as well as to initial
tender offer material? We note that delivery is required if registered
securities are offered, given that prospectuses must be delivered as
required by the Securities Act. Similarly, delivery of a disclosure
document would be necessary if security holder approval was solicited
under the proxy rules.\142\ While we note that bidders typically use
stockholder lists, we solicit comment on whether there are
circumstances when the use of stockholder lists is impracticable.
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\142\ When delivery is required by the rules, this can be
accomplished by using electronic media, provided the bidder
satisfies the guidelines set forth in Release No. 33-7233 (October
6, 1995) [60 FR 53458], regarding electronic delivery. For example,
a summary advertisement for a tender offer could contain a consent
form for a security holder to indicate his or her willingness to
receive the complete tender offer materials by means of a specified
electronic medium.
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In addition, we solicit comment on whether to retain the current
requirement that bidders using stockholder lists also publish summary
advertisements. The summary advertisement serves as an additional means
of publicizing tender offer information while it is in the process of
being mailed to security holders. This may be particularly useful in
the short time frame of a cash tender offer.
Finally, we request commenters' views on whether we should permit
means of disseminating tender offer material other than those
described. The increasing use of electronic media, particularly the
Internet, provides an avenue for widespread access to information. On
the other hand, many security holders rely on more traditional sources
of information, such as newspapers and the mail. We do not want to put
these security holders at a disadvantage in obtaining tender offer
information. Therefore, we are not proposing that electronic media be
permitted as a sole means of dissemination. We are, however, interested
in comment as to how electronic media are currently used in the tender
offer area and whether there are electronic sources of information that
are as commonly available and widely followed as the newspapers of
general circulation used for summary advertisements.\143\
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\143\ Rule 14d-4(b) [17 CFR 240.14d-4(b)] provides that
publication in all editions of a daily newspaper with a national
circulation is deemed to constitute adequate publication.
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C. Permit Exchange Offers To Commence on Filing
1. Early Commencement
The Commission first adopted the requirement for an effective
registration statement before commencing an exchange offer in
1979.\144\ In proposing the requirement, we noted that we intended to
codify ``the current practice of commencing the bidder's offer when its
registration statement under the Securities Act becomes effective.''
\145\ In 1983, a Commission Advisory Committee \146\ noted the
regulatory disincentives to offering securities as consideration \147\
in a tender offer and recommended that exchange offers be permitted to
commence as soon as the registration statement is filed.\148\
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\144\ Release No. 34-16384 (November 29, 1979) [44 FR 70326,
70338].
\145\ Release No. 34-15548 (February 5, 1979) [44 FR 9956].
\146\ See Advisory Committee on Tender Offer Report on
Recommendations (July 8, 1983). We established the Committee to
examine the tender offer process and other techniques of acquiring
control of public issuers and to recommend legislative and/or
regulatory changes deemed appropriate or necessary. Release No. 34-
19528 (February 24, 1983) [48 FR 9111].
\147\ The Committee stated that ``there are significant
regulatory impediments to undertaking an exchange offer rather than
a cash tender offer, which impediments are not necessary for the
protection of shareholders'' and that ``regulation should not be a
principal factor in determining the method of acquisition.''
Advisory Committee Report at 16. On that basis, the Committee issued
Recommendation 5: Cash and securities tender offers should be placed
on an equal regulatory footing so that bidder, the market and
shareholders, and not regulation, decide between the two.
\148\ Recommendation 12 of the Committee's Report stated:
Bidders should be permitted to commence their bids upon filing
of a registration statement and receive tenders prior to the
effective date of the registration statement. Prior to
effectiveness, all tendered shares would be withdrawable.
Effectiveness of the registration statement would be a condition to
the exchange offer. If the final prospectus were materially
different from the preliminary prospectus, the bidder would be
required to maintain, by extension, a 10-day period between mailing
of the amended prospectus and expiration, withdrawal and proration
dates.
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[[Page 67347]]
In order to put cash and stock tender offers on a more level
playing field, we propose to permit ``early commencement'' of third-
party exchange offers. Currently, stock tender offers commence on the
date the related registration statement becomes effective. Under
today's proposal, exchange offers could commence upon the filing of a
registration statement, or on a later date selected by the bidder.\149\
As a result, the regulatory bias against stock offers would be reduced.
We request comment as to whether the current regulatory scheme is a
significant factor in deciding how offers are structured. Is it
important to harmonize the regulatory treatment of cash and stock
offers? If so, does the proposal accomplish this goal while continuing
to protect investors?
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\149\ Proposed Rule 14d-4(b).
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Under the proposal, a bidder that wished to ``commence'' an
exchange offer by requesting tenders would have to satisfy several
requirements. First, the bidder would have to file a registration
statement relating to the securities offered. The preliminary
prospectus would need to include all information, including pricing
information, necessary to allow security holders to make an informed
investment decision. Information could not be omitted under Rule 430 or
Rule 430A of the Securities Act.\150\ Second, the prospectus would have
to be disseminated to all security holders. Third, a tender offer
statement would have to be filed with the Commission. The filing of a
registration statement alone would not suffice. The bidder would have
to file both a registration statement and a tender offer statement
\151\ and furnish a preliminary or final prospectus to security
holders.\152\ Security holders would have the right to withdraw shares
tendered at any time until they were purchased, and bidders could not
purchase shares until after the registration statement was
effective.\153\
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\150\ Generally, a prospectus that is used before effectiveness
may omit certain pricing information including the offering price,
underwriting discounts or commissions, discounts or commissions to
dealers, amount of proceeds, conversion rates, call prices or other
matters dependent upon the offering price. See Rule 430 [17 CFR
230.430]. A prospectus in a registration statement that is declared
effective may also omit certain syndicate, underwriting discounts or
commissions, discounts or commissions to dealers, amount of
proceeds, conversion rates, call prices and other information that
is dependent upon the offering price, delivery dates, and terms of
the securities dependent upon the offering date. See Rule 430A. [17
CFR 230.430A].
\151\ Generally, tender offer statements in exchange offers
incorporate by reference substantial portions of the information
contained in the prospectus in response to the various disclosure
requirements. Incorporation by reference would continue to be
available under the proposal.
\152\ Under the proposal, a bidder could disseminate a
preliminary prospectus without requesting tenders, as permitted
under the current rules, and not trigger commencement.
\153\ Proposed Securities Act Rule 162.
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The ``early commencement'' proposal is limited to third-party
exchange offers because the need to put cash and stock offers on a more
level playing field appears to arise most often in that context. We ask
for comment, however, on whether issuer exchange offers present the
same timing and competitive concerns. Should the proposal be expanded
to issuer exchange offers?
Going-private and roll-up transactions involving exchange offers
would not be permitted to commence before the effectiveness of a
related registration statement. These types of transactions often
involve material disclosure issues. We continue to believe that the
staff should have a full opportunity to review and comment upon the
documents filed in connection with these transactions before
commencement of an exchange offer in order to ensure that the rules are
complied with and the appropriate level of disclosure is made to
security holders.
Under the proposal, early commencement would be at the option of
the bidder. The filing of a tender offer statement would serve as
notice to the Commission and the public that the offer commenced and a
prospectus was disseminated to security holders. A bidder could
commence upon filing the registration statement, or wait for staff
comments or effectiveness before actually commencing its offer.
We request comment on whether a bidder should be required to
commence its offer as soon as it files a registration statement.
Alternatively, should bidders be free, as the rule proposes, to
determine when a stock offer commences? If we do not require bidders to
commence on filing the registration statement, should there be an
outside date on which the exchange offer must commence (e.g., no later
than effectiveness of the related registration statement or no later
than five or ten business days after effectiveness)?
The early commencement proposal is intended, in part, to provide
bidders with an incentive to disseminate their offering materials
broadly to all security holders at the earliest practicable date. The
proposal would not prohibit bidders from making selective
communications in addition to or instead of using the early
commencement procedure to disseminate material to all security holders.
When combined with the proposals above regarding communications,
however, the availability of early commencement should encourage full
and fair disclosure to all security holders. We request comment as to
whether bidders would continue to communicate with large institutional
investors to the exclusion of small retail investors. Is it necessary
to require bidders to disseminate a prospectus to all security holders
as soon as it is filed with the Commission? If we require delivery,
however, the preliminary prospectus might include certain information
that is not complete or accurate. In light of the inherent limitations
on the information available to bidders that could be included in a
preliminary prospectus, would mandatory dissemination to all security
holders benefit or harm small retail investors?
The ability to commence upon filing may not be sufficient to level
the playing field if bidders are not assured of having an effective
registration statement within a reasonable period of time. While cash
offers can expire after a minimum of 20 business days, stock offers
could not expire under the proposal until the related registration
statement became effective. Therefore, we solicit comment on whether
expedited staff review is necessary to effectively harmonize the
regulatory treatment of cash and stock tender offers. If so, how short
would the Commission staff's review and comment period need to be in
order to assure timely completion of a stock tender offer? Would it be
helpful if the staff committed to an expedited review of stock tender
offers whenever a competing cash tender offer emerges? Would it be
necessary to provide for some form of accelerated effectiveness for
stock offers to fully balance the treatment of cash and stock offers?
One way to achieve this balance would be to allow or require some
or all exchange offers registered on Form C and Form SB-3 \154\ to
become effective
[[Page 67348]]
on filing,\155\ or allow the bidder to specify the date after filing on
which the registration statement would become effective.\156\ This
approach would provide bidders with greater certainty as to when their
offer could close and shares could be accepted in the offer. ``Early
commencement'' would then be unnecessary. This approach would allow
bidders to freely decide between offering cash or stock without concern
for regulatory delay. Of course, the staff would not have an
opportunity to review the information before it is disseminated to
security holders, but could review it after effectiveness just as it
now reviews cash tender offer materials after they are mailed to
security holders. We would not extend this approach to going-private or
roll-up transactions. If this approach were permitted, should it be
limited to third-party tender offers or also extend to issuer tender
offers? Do the same timing concerns apply to mergers? If so, and this
approach is adopted, should it apply to mergers as well? Should
automatic effectiveness be limited to bidders entitled to use Form B?
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\154\ As noted in the Securities Act Reform Release, Form C (and
Form SB-3 for small business issuers) would be the successor to
Forms S-4 and F-4. If Forms C and SB-3 are not adopted, then the
proposals in this release would apply to exchange offers registered
on Form S-1, S-4, F-4 and S-11.
\155\ The Task Force Disclosure Simplification recommended that
registration statements on Forms S-4/F-4 relating to exchange offers
by S-3/F-3 eligible companies become effective automatically upon
filing, so long as the securities offered are common stock traded on
a national securities exchange or quoted in the Nasdaq NMS, or are
investment grade debt or preferred stock. See Report of the Task
Force on Disclosure Simplification (March 1996) at p. 56. If the
Securities Act Reform Release proposals are adopted, we could
provide automatic effectiveness on filing for Form B issuers, or we
could provide it for all registration statements on Form C only and
not Form SB-3.
\156\ This is how Form B would be treated in the Securities Act
Reform Release.
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We also are considering whether to harmonize the proxy rules with
the tender offer rules by providing a proxy analogue to the ``early
commencement'' proposal. If we did this, we would permit proxy cards in
connection with mergers and similar business combinations to be sent
with a preliminary proxy statement/prospectus, rather than requiring
that they accompany only a definitive proxy statement/final prospectus.
Proxies may be revoked at any time before the vote, just as tenders may
be withdrawn before the offer expires. The vote could not take place
until after the proxy statement was definitive or the registration
statement was effective, and security holders would have to be given
information about material changes in sufficient time to act on it, as
discussed below in connection with exchange offers. Would this
procedure be useful in mergers? Is the merger situation different from
the tender offer situation; would there be greater risk that security
holders would vote on the basis of premature or incomplete information
and not receive updating or corrective information in a timely fashion?
In particular, would street name holders receive this information in
sufficient time to make an informed voting decision?
We have considered how the ``early commencement'' proposal
interacts with our rules regarding stock purchases outside a tender
offer. Regulation M \157\ prohibits purchases of the bidder's
securities during an exchange offer's restricted period, while Rule
10b-13 \158\ prohibits purchases of the target's securities once the
offer is publicly announced. The Regulation M restricted period begins
as of the date that the exchange offer is commenced, i.e., when the
bidder has first published, sent or given security holders the means to
tender. In contrast, the restrictions of Rule 10b-13 start as of the
time the offer is first publicly announced to security holders, which
can be before the offer commences. We believe these rules would operate
appropriately in the ``early commencement'' context, but solicit
commenters'' views.
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\157\ 17 CFR 242.100 through 242.105.
\158\ 17 CFR 240.10b-13. Rule 10b-13 is proposed to be revised
and redesignated as Rule 14e-5. See Part II.E.5 below.
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2. Dissemination of a Supplement and Extension of the Offer
The Division of Corporation Finance staff decides whether to review
a registration statement after it is filed, along with a related tender
offer statement, based upon its selective review criteria. Under the
``early commencement'' proposal, the bidder already may have
disseminated the combined prospectus/tender offer before staff comments
are received. If the staff had material comments, the bidder would be
required to file and disseminate a prospectus supplement, or possibly a
post-effective amendment to the registration statement.
We propose to require bidders using ``early commencement'' to
disseminate supplements to disclose any material changes, whether as a
result of staff review, or due to any other material changes in the
information previously disclosed. If a supplement contained material
information, the exchange offer would need to remain open for a minimum
period of time after a supplement was sent, as discussed below. The
proposed rule would require a bidder to provide sufficient time for
security holders to reconsider their investment decision (i.e., by
withdrawing previously tendered shares or tendering shares not yet
tendered) based upon the additional information.
The tender offer rules do not currently establish a specific
minimum time period with respect to the disclosure and dissemination of
material changes, except for those relating to price or the amount of
securities sought.159 In an interpretive release relating to
the tender offer rules, however, the Commission provided the following
guidelines:
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\159\ See Rule 14e-1(b) [17 CFR 240.14e-1(b)]. A tender offer
must remain open for ten business days after a notice of an increase
or decrease in the percentage of the class of securities being
sought, the consideration offered, or the dealer's soliciting fee.
As a general rule, the Commission is of the view that to allow
dissemination to shareholders in a manner reasonably designed to
inform (them) of such change (17 CFR 240.14d-4(c)), the offer should
remain open for a minimum of five business days from the date that
the material change is first published, sent or given to security
holders. If material changes are made with respect to information
that approaches the significance of price and share levels, a
minimum period of ten business days may be required to allow for
adequate dissemination and investor response. Moreover, the five
business day period may not be sufficient where revised or
additional materials are required because disclosure disseminated to
security holders is found to be materially deficient. Similarly, a
particular form of dissemination may be required. For example,
amended disclosure material designed to correct materially deficient
material previously delivered to security holders would have to be
delivered rather than disseminated by publication.160
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\160\ Release No. 34-24296 (April 3, 1987) [52 FR 11458].
Under the ``early commencement'' proposal, if the bidder had to
send a supplement containing material changes either before or after
effectiveness of the registration statement, the offer would need to
remain open for at least a specified minimum period.161 The
original expiration date would have to be extended if necessary. The
offer would need to remain open at least:
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\161\ Proposed Rule 14d-4(d)(2).
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Five business days for a supplement containing a material
change other than price or share levels;
Ten business days for a 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 supplement included as part of a
post-effective amendment; and
[[Page 67349]]
20 business days for a revised prospectus when the initial
prospectus was materially deficient; for example, failing to comply
with the going-private rules or filing a ``shell'' document solely to
trigger commencement and staff review.162
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\162\ This would, in effect, re-start the 20 business day period
required by the tender offer rules. If the initial prospectus did
not comply with the roll-up rules and was revised during the
offering period, the minimum solicitation period under the roll-up
rules would be tolled until a revised prospectus satisfying the
roll-up rules was disseminated.
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We invite comment on whether these time periods are appropriate,
and if not, what periods should be substituted. Would the ready
availability of this information in electronic format (e.g., on the
Commission's or the bidder's Internet web site) mean that these time
periods could be shorter? On the other hand, would shortening these
periods deprive security holders of essential information if they are
not willing or able to take advantage of electronic media? As proposed,
this rule would apply only to exchange offers where ``early
commencement'' is used. Should it instead replace Rule 14e-1(b) and
thus apply to all tender offers?
We also solicit comment on whether bidders would be likely to take
advantage of ``early commencement'' before receiving staff comments or
a notification that the filing would not be reviewed. Would the risk of
having to disseminate additional information and possibly extend the
offer deter bidders from using this procedure? Or would they take those
uncertainties into account as they now do for cash tender offers?
The Securities Act Reform Release proposes to eliminate the
requirement that a final prospectus be delivered to investors who have
received a preliminary prospectus.163 This exemption would
not apply to business combinations, which have a distinct scheme for
delivery of information. However, we solicit comment on whether bidders
who use the ``early commencement'' rule should be required to deliver a
final prospectus after effectiveness. The informational purpose of the
prospectus may be best served by requiring security holders to be given
supplements setting forth significant changes, rather than by requiring
the prospectus to be re-delivered.
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\163\ Proposed Rule 173.
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3. Tenders into an Offer Exempt from Sale Requirements of the
Securities Act
Under the ``early commencement'' proposal, once a bidder commenced
an offer, security holders could tender into the offer before the
related registration statement became effective, but the bidder could
not purchase securities tendered until the offer expired. Security
holders would have the right to withdraw tenders until the offer
expired, as they do now. As discussed above, expiration always would be
after effectiveness of the related registration statement. In order to
prevent the tendering of securities into an offer from being viewed as
a ``sale'' without an effective registration statement, we propose a
new rule to address this issue.164 We would use our new
exemptive authority 165 to provide that transactions
involving tenders during the ``waiting period'' when the early
commencement rule is complied with would be exempt from the Securities
Act requirements for sales.
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\164\ Proposed Securities Act Rule 162.
\165\ Section 28 of the Securities act [15 U.S.C. 77z-3].
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The purpose of this rule is to place cash and exchange offers on a
more equal footing by allowing them to operate on a more comparable
time schedule and minimizing any regulatory factors that may influence
a bidder's decision to offer cash instead of securities in a tender
offer. The proposed exemption is necessary to assure bidders that they
would not be viewed as violating Section 5 of the Securities Act
166 when security holders tender into an exchange offer
during the waiting period. Investors would continue to receive
disclosure before making an investment decision. We believe that it is
consistent with the public interest and the protection of investors to
reduce the regulatory bias towards cash so that the bidder's choice of
consideration is not unduly affected by concerns about timing. However,
we solicit comment on whether this is an appropriate use of the
Commission's exemptive authority.
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\166\ 15 U.S.C. 77e.
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D. Integrate and Streamline the Disclosure Requirements for Tender
Offers and Mergers
1. Subpart 1000 of Regulation S-K (``Regulation M-A'') and Combination
of Schedules
Currently, there is a different disclosure schedule for issuer
tender offers, third-party tender offers and going-private
transactions. Compliance with the line-item requirements in each of
these schedules results in certain differences in the information
disclosed to security holders.167 These differences in the
disclosure requirements can be particularly troublesome to companies
that are seeking to comply with the disclosure requirements in today's
fast-paced takeover environment. We believe that the cost of compliance
could be reduced, and the quality of disclosure improved, if the
disclosure requirements were integrated into one set of uniform
regulations and unnecessary differences were harmonized.168
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\167\ For example, while Schedules 14D-1, 13E-4 and 13E-3 all
require disclosure of high and low bid quotations of the subject
security for each quarterly period during the preceding two years,
only Schedules 13E-4 and 13E-3 require disclosure of the source of
such quotations. See Item 1(c) of Schedule 13E-4 and Schedule 13E-3.
As another example, Schedules 14D-1 and 13E-3 both require
disclosure of past contacts, negotiations or transactions between
the parties subject to a proposed tender offer or going-private
transaction. Schedule 13E-3 (which generally requires more
disclosure because of the affiliated nature of the transaction)
requires disclosure for only the two preceding years, while Schedule
14D-1 requires disclosure for the preceding three years. See Item 3
of Schedule 13E-3 and Item 3 of Schedule 14D-1.
\168\ Integration has worked well in the past. In 1985, the
Commission integrated the disclosure requirements of the
registration statement most commonly used in stock-based
extraordinary transactions, Form S-4, with the disclosure
requirements for proxy statements on Schedule 14A. See Release No.
33-6578 (April 23, 1985) [50 FR 18990].
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Accordingly, we propose to integrate the disclosure items contained
in the schedu
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