# Regulation of Takeovers and Security Holder Communications > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A98-30227 ## Record - **Collection:** Federal Register - **Document type:** Proposed Rule - **Published:** December 4, 1998 - **Citation:** 63 FR 67331 ## Text 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. ----------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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]. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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]. --------------------------------------------------------------------------- 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). --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \40\ But see note 94. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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''). --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \54\ See the discussion of proposed Form C in Part II.D.2.d below. --------------------------------------------------------------------------- 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? --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \56\ See Part II.B.5 below. Written communications include communications that are published in electronic media, such as videos and CD-ROMs. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \59\ See Part II.E.6 below. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \60\ This is the way Form B issuers would be treated in capital- raising transactions, as proposed in the Securities Act Reform Release. --------------------------------------------------------------------------- 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? --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \71\ See the discussion of research reports in the Securities Act Reform Release. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \79\ In any event, under the proposed scheme these communications would need to be filed under the proxy or tender offer rules. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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)]. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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? --------------------------------------------------------------------------- \93\ Currently, Rule 14a-12 excludes matters covered by Rule 14a-11. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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]. --------------------------------------------------------------------------- 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? --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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? --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \105\ See Release No. 34-30849 (June 24, 1992) [57 FR 29564]. \106\ Id. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \111\ See Rule 13(d) of Regulation S-T. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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.'' --------------------------------------------------------------------------- \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)]. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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)]. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \119\ See Release No. 34-15548 (February 5, 1979) [44 FR 9956]. \120\ See Release No. 34-16384 (November 29, 1979) [44 FR 70326]. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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]. --------------------------------------------------------------------------- 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? --------------------------------------------------------------------------- \123\ Proposed Rule 14e-8. --------------------------------------------------------------------------- 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? --------------------------------------------------------------------------- \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 increasi [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A98-30227. Public record. Not legal advice.