Regulation of Takeovers and Security Holder Communications

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 200, 229, 230, 232, 239, and 240

[Release No. 33-7760; 34-42055; IC-24107; File No. S7-28-98]

RIN 3235-AG84

Regulation of Takeovers and Security Holder Communications

AGENCY: Securities and Exchange Commission.

ACTION: Final Rules.

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SUMMARY: We are adopting comprehensive revisions to the rules and

regulations applicable to takeover transactions (including tender

offers, mergers, acquisitions and similar extraordinary transactions).

The revised rules will permit increased communications with security

holders and the markets. The amendments also will: Balance the

treatment of cash and stock tender offers; simplify and centralize the

disclosure requirements; and eliminate regulatory inconsistencies in

mergers and tender offers. In addition, we are updating the tender

offer rules by providing for a subsequent offering period, clarifying

certain filing and disclosure requirements and reducing compliance

burdens where consistent with investor protection. We believe these

revisions will lead to a more well informed and efficient market.

EFFECTIVE DATE: The rules and amendments will become effective January

24, 2000.

FOR MORE INFORMATION CONTACT: Dennis O. Garris, Chief, or James J.

Moloney, Special Counsel, in the Office of Mergers & Acquisitions,

Division of Corporation Finance, at (202) 942-2920. For questions on

new Rule 14e-5, contact James A. Brigagliano, Assistant Director, Irene

Halpin, Florence Harmon or Michael Trocchio, Special Counsels, in the

Office of Risk Management and Control, Division of Market Regulation,

at (202) 942-0772. For questions on investment companies, contact

Martha B. Peterson, Special Counsel, in the Office of Disclosure

Regulation, Division of Investment Management, at (202) 942-0721.

SUPPLEMENTARY INFORMATION: We are adopting amendments to Rules 13e-1,

13e-3, 13e-4, 14a-4, 14a-6, 14a-12, 14c-5, 14d-1, 14d-2, 14d-3, 14d-4,

14d-5, 14d-6, 14d-7, 14d-9, 14e-1\1\ and Schedules 14A, 13E-3, and 14D-

9\2\ under the Securities Exchange Act of 1934 (``Exchange Act'').\3\

We are rescinding Exchange Act Rule 14a-11.\4\ We are adopting:

amendments to Item 10 of Regulation S-K; \5\ a new subpart of

Regulation S-K, the 1000 series (``Regulation M-A''); a new tender

offer schedule, Schedule TO, to replace Schedules 13E-4 and 14D-1; \6\

new tender offer Rule 14e-5 to replace Rule 10b-13; \7\ and new tender

offer Rules 14d-11 and 14e-8. We also are adopting amendments to Rule

13(d) of Regulation S-T and Rule of Practice 30-3.\8\ Lastly, we are

adopting amendments to Rules 135, 145 and 432, Forms S-4 and F-4, and

new Rules 162, 165, 166 and 425 under the Securities Act of 1933

(``Securities Act'').\9\

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\1\ 17 CFR 240.13e-1, 13e-3, 13e-4, 14a-4, 14a-6, 14a-12, 14c-

5,14d-1, 14d-2, 14d-3, 14d-4, 14d-5, 14d-6, 14d-7, 14d-9, and 14e-1.

\2\ 17 CFR 240.14a-101, 13e-100, and 14d-101.

\3\ 15 U.S.C. 78a et seq.

\4\ 17 CFR 240.14a-11.

\5\ 17 CFR 229.10.

\6\ 17 CFR 240.13e-101, 14d-100.

\7\ 17 CFR 240.10b-13.

\8\ 17 CFR 232.13(d); 17 CFR 200.30-3.

\9\ 17 CFR 230.135, 145, and 432; 17 CFR 239.25 and 34; 15

U.S.C. 77a et seq.

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Table of Contents

I. Executive Summary and Background

II. Discussion of New Regulatory Scheme

A. Overview

1. Increased Communications Permitted Before Filing Disclosure

Document

2. Eligibility

3. Written Communications with Legend Filed on Date of First Use

B. Communications Under the Securities Act

1. Securities Act Exemption and Filing Rules

2. Liability for Communications

3. Rules 135 and 145

4. Public Announcement

C. Communications Under the Proxy Rules

1. Rule 14a-12 Expanded

a. The ``As Soon as Practicable'' Requirement

b. Participant Information

c. ``Test the Waters''

2. Limited Confidential Treatment of Merger Proxy Materials

3. Timing of Filings

D. Communications Under the Tender Offer Rules

1. ``Commencement,'' Communications, and Filing Requirements

2. Dissemination Requirements

E. Exchange Offers May Commence On Filing

1. Early Commencement

2. Dissemination of a Supplement and Extension of the Offer

F. Disclosure Requirements for Tender Offers and Mergers

1. Schedules Combined and Disclosure Requirements Moved to

Subpart 1000 of Regulation S-K (``Regulation M-A'')

2. Streamline and Improve Required Disclosure

a. ``Plain English'' Summary Term Sheet

b. Item 14 of Schedule 14A Revised to Clarify Requirements and

Harmonize Cash Merger and Cash Tender Offer Disclosure

c. Reduced Financial Statement Requirements for Non-Reporting

Target Companies in Stock Mergers and Stock Tender Offers

G. Tender Offer Rules Updated

1. Bidders May Include a ``Subsequent Offering Period'' Without

Withdrawal Rights

2. Bidder Financial Information Clarified for Cash Tender Offers

a. When a Bidder's Financial Statements Are Not Required; Source

of Funds

b. Content of Bidder's Financial Statements in Cash Tender

Offers; Financial Statements in Going-Private Transactions

c. Pro Forma Financial Information Required in Two-Tier

Transactions

3. Target Is Required to Report Purchases of Its Own Securities

After a Third-Party Tender Offer Is Commenced

4. Tender Offer and Proxy Rules Relating to the Delivery of a

Security Holder List and Security Position Listing Harmonized

5. New Rule 14e-5: Revision and Redesignation of Former Rule

10b-13, the Rule Prohibiting Purchases Outside an Offer

a. Redesignating Rule 10b-13 as Rule 14e-5

b. Clarification of Rule 14e-5; Prohibited Period

c. Persons and Securities Subject to the Rule

d. Excepted Transactions

e. Additional Exceptions Being Adopted

III. Effective Date and Transition

A. Communications

B. Confidential Treatment of Proxy Materials

C. Early Commencement

D. Disclosure Requirements and New Schedules

E. Subsequent Offering Period

F. Revised Security Holder List Rule for Tender Offers

G. New Rules 14e-5

IV. Cost-Benefit Analysis

A. Communications

B. Filings

C. Tender Offers

V. Commission Findings and Considerations

A. Exemptive Authority Findings

B. Effect on Competition

C. Promotion of Efficiency, Competition and Capital Formation

VI. Final Regulatory Flexibility Analysis

A. Need for Action

B. Objectives of the Rule Amendments

[[Page 61409]]

C. Summary of Significant Issues Raised by the Public Comments

D. Description and Estimate of the Number of Small Entities

Subject to the New Rules

E. Projected Reporting, Recordkeeping, and Other Compliance

Requirements

F. Description of Steps Taken to Minimize the Effect on Small

Entities

VII. Paperwork Reduction Act

VIII. Statutory Basis and Text of Amendments

I. Executive Summary and Background

Last fall, we proposed comprehensive changes to the various

regulatory schemes applicable to issuer and third-party tender offers,

mergers, going-private transactions and security holder

communications.\10\ The proposed changes were prompted by an increase

in the number of transactions where securities are offered as

consideration; an increase in the number of hostile transactions

involving proxy or consent solicitations; and significant technological

advances that have resulted in more and faster communications with

security holders and the markets. Because these trends have continued

since we issued the Proposing Release and commenters, for the most

part, viewed the proposals as favorable,\11\ we are adopting the

proposals, with some modification.

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\10\ Regulation of Takeovers and Security Holder Communications,

Release No. 33-7607 (November 3, 1998) (63 FR 67331) (the

``Proposing Release'').

\11\ The comment letters are available for inspection and

copying in our Public Reference Room in File No. S7-28-98. Comments

that were submitted electronically also are available on our web

site (www.sec.gov).

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As we noted in the Proposing Release, the existing regulatory

framework imposes a number of restrictions on communications with

security holders and the marketplace. In addition, the disparate

regulatory treatment of cash and stock tender offers \12\ may unduly

influence a bidder's \13\ choice of offering cash or securities in a

takeover transaction. We also noted unnecessary differences in

regulatory requirements between tender offers and other types of

extraordinary transactions, such as mergers.\14\ Finally, we noted

that the multiple regulatory schemes that can apply to a transaction

may impose additional compliance costs without necessarily providing a

sufficient marginal benefit to security holders. Our goals in proposing

and adopting these changes are to promote communications with security

holders and the markets, minimize selective disclosure, harmonize

inconsistent disclosure requirements and alleviate unnecessary burdens

associated with the compliance process, without a reduction in investor

protection.\15\

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\12\ Stock tender offers, also referred to as exchange offers,

are tender offers where the consideration offered to security

holders includes securities (either equity or debt); these

transactions generally are registered under the Securities Act.

\13\ The term ``bidder'' is used throughout this release to

refer to the offeror or purchaser in a tender offer.

\14\ For a discussion of the regulatory schemes applicable to

cash tender offers, exchange offers, cash and stock mergers, see

Part II.A of the Proposing Release.

\15\ In this release we focus on the amendments that we are

adopting and how they differ from the original proposals. For a more

complete discussion of the background and rationale for the changes,

see the Proposing Release.

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We also proposed broad changes to the regulation of securities

offerings in a companion release.\16\ Our proposed treatment of

communications in the Securities Act Reform Release differs from our

approach in the Proposing Release. The differences were due to the

special nature of business combination transactions \17\ in contrast to

capital-raising transactions. At this time we are not adopting the

Securities Act Reform proposals that are unrelated to business

combination transactions. We are continuing to evaluate commenters'

responses to the Securities Act Reform proposals and in the future we

may take action on these proposals. We are adopting, however, several

proposals in the Securities Act Reform Release that relate to business

combination transactions. As a result, some proposals or concepts

previously presented in the Securities Act Reform Release are

incorporated into this release. Where we proposed changes that would

appear in new forms included in the Securities Act Reform Release

(Forms C and SB-3), those changes have been implemented in existing

forms (Forms S-4 and F-4). In a separate release, we also are adopting

significant changes to the regulatory scheme for cross-border tender

offers, exchange offers and rights offerings.\18\

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\16\ Securities Act Reform Release, Release No. 33-7606A

(November 13,1998) (63 FR 67174).

\17\ For purposes of this release, the Proposing Release and the

rules adopted in this release, a ``business combination

transaction'' means any Rule 145(a) transaction (17 CFR 230.145(a))

(including mergers, recapitalizations, acquisitions, and similar

matters) or tender offer (including issuer tender offers).

\18\ Release No. 33-7759 (October 22, 1999) (the ``Cross-Border

Adopting Release'').

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We believe these new rules and revisions should provide

participants in the securities markets sufficient flexibility to

accommodate changes in deal structure and advances in technology that

continue to occur in today's markets. Briefly, the new rules and

amendments adopted today will:

Relax existing restrictions on oral and written

communications with security holders by permitting the dissemination

of more information on a timely basis, so long as the written

communications are filed on the date of first use; in particular,

Permit more communications before the filing of a

registration statement in connection with either a stock tender

offer or a stock merger transaction;

Permit more communications before the filing of a proxy

statement (whether or not a business combination transaction is

involved);

Permit more communications regarding a proposed tender

offer without ``commencing'' the offer and requiring the filing and

dissemination of specified information;

Harmonize the various communications principles

applicable to business combinations under the Securities Act, tender

offer rules and proxy rules; and

Eliminate the confidential treatment currently

available for merger proxy statements, except when communications

made outside the proxy statement are limited to those specified in

Rule 135;

Balance the treatment of stock and cash tender offers

by permitting both issuer and third-party stock tender offers to

commence as early as the filing of a registration statement;

Simplify and integrate the various disclosure

requirements for tender offers, going-private transactions, and

other extraordinary transactions in a new series of rules within

Regulation S-K, called ``Regulation M-A'';

Combine the existing schedules for issuer and third-

party tender offers into one schedule available for all tender

offers, entitled ``Schedule TO'';

Require a ``plain English'' summary term sheet in all

tender offers, mergers and going-private transactions, except when

the transaction is already subject to the Securities Act plain

English rules;

Update the financial statement requirements for

takeover transactions; in particular,

Eliminate the requirement to file financial statements

for target companies \19\ in most cash mergers, consistent with the

treatment of cash tender offers;

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\19\ The term ``target'' is used throughout this release to

refer to the company to be acquired in a business combination

transaction or the company whose securities are the subject of the

transaction, whether the transaction is agreed upon or unsolicited.

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Clarify when financial statements of the acquiring

company are not required in cash mergers, and when financial

statements are required, reduce the financial statements 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

negotiated cash tender offers where the bidder intends to engage in

a back-end securities transaction;

[[Page 61410]]

Reduce the financial statements required for non-

reporting target companies in stock mergers and stock tender offers;

Permit an optional subsequent offering period after

completion of a tender offer, during which security holders can

tender shares without withdrawal rights;

Clarify Rule 13e-1, which requires issuers to report

intended repurchases of their own securities once a third-party

tender offer has commenced;

Conform the security holder list requirement in the

tender offer rules with the comparable provision in the proxy rules

so that the list will include non-objecting beneficial owners; 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.

In several respects the rules adopted today differ from the

proposed rule changes. The primary differences are as follows:

The Securities Act exemption for communications is

extended to all parties to the transaction and any persons acting on

their behalf;

The Securities Act exemption also is revised to clarify

that an unintentional or immaterial breach of the filing requirement

will not result in a loss of the exemption so long as a good faith

and reasonable attempt was made to file and the material is filed as

soon as practicable after discovery of the failure to file;

A definition of ``public announcement'' is provided so

that parties know when they need to begin filing written

communications relating to the transaction and when the prohibition

against making purchases outside the tender offer begins;

A written communication relating to a proposed

transaction that is a Rule 135 notice must be filed unless the

notice only contains information that has already been filed;

The confidential treatment currently available for

preliminary merger proxy statements is retained under limited

circumstances;

The requirement in expanded Rule 14a-12 to furnish a

proxy statement as soon as practicable is revised so that a proxy

statement must be furnished at the time a form of proxy is given to

or requested from security holders;

Written communications permitted under expanded Rule

14a-12 must include either full participant information, as

currently required, or a legend directing security holders where

they can obtain participant information;

Long form publication is retained as a means to

commence a tender offer, rather than being eliminated as proposed;

The provision permitting commencement of exchange

offers as early as the filing of a registration statement is

extended to issuer exchange offers, not limited to third-party

offers as proposed;

A bidder that commences an exchange offer early may not

be required to deliver a final prospectus to security holders;

An acquiror in a stock merger or stock tender offer

need not provide any financial statements for a non-reporting target

if the acquiror's security holders are not voting on the transaction

and the acquisition is not significant to the acquiror at the 20%

level;

Subsequent offering period changes: this period can be

between three and 20 business days, and is not fixed at ten business

days as initially proposed; a bidder is not required to disclose an

intent to engage in a back-end merger; and a bidder must announce

the results of the initial offering period before beginning the

subsequent offering period;

A bidder must disclose pro forma financial information

in the first tier of a two-tier transaction for negotiated

transactions only, not for transactions where access to the target's

financial information is limited;

The information required by Rule 13e-1 regarding issuer

repurchases of securities need not be disseminated to security

holders; in addition, an exclusion from this rule is provided for

certain periodic, routine repurchases; and

Several additional exceptions are added to new Rule

14e-5.

At this time we are not adopting several concepts that we solicited

comment on, including:

A modification to the proxy rules that would permit the

direct delivery of proxy materials to non-objecting beneficial

owners;

A federally-mandated proxy solicitation period;

A ``test the waters'' provision for proxy

solicitations;

A requirement that bidders commencing a tender offer by

summary advertisement mail their tender offer materials to security

holders;

A proxy analogue to the early commencement provision in

exchange offers that would permit the sending of proxy cards with

``preliminary'' proxy materials; and

An expansion of the Private Securities Litigation

Reform Act of 1995 \20\ safe harbor from liability to cover forward-

looking statements made in connection with tender offers.

\20\ Pub. L. 104-67, 109 Stat. 737 (1995).

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In the future, depending on the effects of today's rule changes, we

may consider proposing additional changes to further harmonize the

regulatory requirements.

II. Discussion of New Regulatory Scheme

A. Overview

1. Increased Communications Permitted Before Filing Disclosure Document

Today, merger and acquisition transactions are occurring at a

faster pace, due in part to the rapid development of new technologies

and advancements in communications. As a result of economic and

regulatory pressures, many companies are releasing more information to

the market before a registration, proxy or tender offer statement is

filed publicly with us.\21\ In many cases, parties are releasing

information on proposed transactions including pro forma financial

information for the combined entity, estimated cost savings and

synergies. As we noted in the Proposing Release, parties to business

combination transactions provide several reasons for the need to

disclose information early,\22\ including the duty under Rule 10b-5 to

disclose material information in a manner that is not misleading.\23\

We also recognize that parties may be subject to other regulatory

requirements to disclose information to the markets early.\24\

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\21\ Companies may disclose information in response to the

market's demand for information regarding proposed transactions and

the need to keep customers, employees and other constituencies

adequately informed.

\22\ See Part II.B.1 of the Proposing Release.

\23\ 17 CFR 240.10b-5. We have long recognized the needs of

issuers to communicate with security holders regarding important

business and financial developments. See Releases No. 33-4697 (May

28, 1964) (29 FR 7317) and 33-5180 (August 16, 1971) (36 FR 16506).

In addition, the Division of Corporation Finance has previously

recognized the needs of bidders to disclose information regarding a

contemplated ``back-end'' transaction (i.e., a subsequent

transaction in which the bidder acquires any remaining securities

outstanding). Disclosure of information required by Schedule 14D-1

regarding a ``back-end'' transaction generally will not result in

``gun jumping'' because the information is not designed to prime the

market for a subsequent registered offering of securities. Instead,

the information aids investors in evaluating the terms of a tender

offer and deciding whether to tender for cash or wait for securities

in a back-end transaction. See Release No. 33-5927 (April 24, 1978)

(42 FR 18163).

\24\ Companies may be required to disclose information under the

particular rules of the stock exchange or inter-dealer quotation

system upon which their securities are traded.

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Existing restrictions on communications result primarily from the

broad concepts of ``offer'' \25\ and ``prospectus'' \26\ under the

Securities Act, ``solicitation'' \27\ under the Exchange Act proxy

rules, and ``commencement'' \28\ under the Williams

[[Page 61411]]

Act tender offer rules.\29\ We recognize that restricting

communications to one document may actually impede, rather than

promote, informed investing and voting decisions.

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\25\ Section 2(a)(3) of the Securities Act (15 U.S.C. 77b)

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. Offers are currently prohibited

during the pre-filing period and restricted during the waiting

period.

\26\ The term ``prospectus'' is defined in section 2(a)(10) (15

U.S.C. 77b) 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.

\27\ ``Solicitation'' is broadly defined 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)).

\28\ The Williams Act provides that only very limited

information can be announced without either commencing a cash tender

offer or requiring the filing of a registration statement in a stock

offer. See Rule 14d-2(c) and (d) (17 CFR 240.14d-2(c) and (d)).

\29\ 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).

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We are adopting, as proposed, non-exclusive exemptions under the

Securities Act, proxy rules and tender offer rules that permit

communications for an unrestricted length of time without a cooling-off

period between the end of communications and filing. Written

communications made in reliance on the exemptions must be filed. In

response to comments, we have modified the exemptions slightly from

those proposed, as discussed below.

One major benefit of permitting earlier communications is that more

information will be available generally to all security holders, not

simply to a limited audience of analysts and financially sophisticated

market participants. Because the new rules do not require oral

communications to be reduced to writing and filed, some selective

disclosure may continue to occur.\30\ Nevertheless, the rules adopted

today are designed to reduce selective disclosure by permitting

widespread dissemination of information through a variety of media

calculated to inform all security holders about the terms, benefits and

risks of a planned extraordinary transaction. We believe that parties

to business combination transactions generally wish to inform the

marketplace at large about their deals, and will use the new rules to

accomplish this end. The new regulatory scheme is not intended to be

used as a means to substitute selective oral disclosure for written and

oral disclosure that becomes public on a widespread basis.\31\ Although

this release does not impose new requirements on oral communications,

we remain extremely troubled by the selective disclosure of material

information.\32\ The staff is considering broader regulatory approaches

to limit or inhibit written and oral selective disclosure by issuers in

all contexts, including those addressed in this release. If we decide

to pursue these approaches, we will issue a separate release seeking

public comment.\33\

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\30\ Our exemptions permitting earlier communications do not in

any way alter the liability traditionally imposed on insider

trading. See Rules 10b-5 and 14e-3 (17 CFR 240.14e-3). Rule 14e-3

applies when a person ``has taken a substantial step or steps to

commence, or has commenced, a tender offer,'' so the timing of this

rule is not affected by the new regulatory scheme.

\31\ The new rules only provide an exemption from section 5 (and

comparable restrictions on communications under the proxy and tender

offer rules). Oral communications under the new rules, like written

communications, will have liability under the applicable regulatory

scheme. See Part II.B.2 below.

\32\ Chairman Levitt has expressed concerns about the selective

disclosure of material information to analysts and institutional

investors. See ``A Question of Integrity: Promoting Investor

Confidence by Fighting Insider Trading,'' speech given Feb. 27,

1998, available on our web site (www.sec.gov).

\33\ See ``Quality Information: The Lifeblood of Our Markets''

speech given by Chairman Levitt on Oct. 18, 1999, available on our

web site (www.sec.gov). ``The behind-the-scenes feeding of material

non-public information from companies to analysts is a stain on our

markets. This selectiveness is a disservice to investors and it

undermines the fundamental principle of fairness. In a time when

instantaneous and free flowing information is the norm, these sort

of whispers are an insult to fair and public disclosure * * *. (T)he

Commission is planning to take action where it can. Within the next

few months, we will consider proposing rules to close the gap

between those in the so-called `know' and the rest of us in the

public.''

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The scheme we adopt today provides the maximum amount of

flexibility to disclose information to security holders and the

markets.\34\ This new communications scheme, however, does not change

the current requirement that security holders receive a mandated

disclosure document before they are asked to make a voting or

investment decision (e.g., a prospectus, proxy statement, or tender

offer statement setting forth complete and balanced information).\35\

Of course, security holders may buy or sell in the market before they

receive the mandated disclosure document. That is true under the

current regulatory scheme as well as under the new one. Under the new

rules, security holders are likely to have information about the

transaction at an earlier point in time, and they can choose to act on

this information or wait for the complete disclosure document.

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\34\ We solicited comment on two alternatives to our primary

communications proposal that were not favored by commenters and are

not being adopted.

\35\ The exemptions also apply to communications made after the

mandated disclosure document is filed, so long as written

communications are filed. They do not, however, alter the

disclosure, filing and delivery requirements for the mandated

disclosure documents.

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While it is possible under the new scheme to announce a proposed

transaction long before a mandated disclosure document is filed, we do

not believe acquirors will delay the filing of a mandated disclosure

document unnecessarily because the longer they wait the greater the

risk that market forces will affect the terms of the deal or another

potential acquiror will announce a competing transaction. We believe

that companies announcing a transaction should, and we encourage them

to, file the mandated disclosure document as soon as possible after

announcing a proposed transaction.

Our long-held concern regarding communications that could condition

the market before dissemination of a mandated disclosure document is

mitigated by the continuing requirement to deliver a disclosure

document before any voting or investment decision can be made, and the

attendant liability for false or misleading statements. Communications

made in reliance on the new exemptions would, of course, be subject to

section 10(b) liability.\36\ We remind persons relying on the

exemptions that fraudulent statements in these communications could not

be cured by subsequent filings. In light of these considerations, we

believe that the benefits conferred on the marketplace by the

disclosure of more information on a timely basis outweigh the risks

that the information will be incomplete or potentially misleading.

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\36\ 15 U.S.C. 78j(b). The communications permitted under the

exemptions adopted would be subject to liability under the

particular regulatory scheme (the Securities Act, proxy or tender

offer rules) as well as Rule 10b-5 and the other antifraud rules.

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2. Eligibility

Our proposals did not make distinctions based on size and seasoned

status. Due to the extraordinary nature of business combination

transactions, security holders and the markets need full and timely

information regarding those transactions regardless of the size or

seasoned status of the companies involved. We recognized the inherent

difficulties in selecting the appropriate focus for purposes of

applying an eligibility test (i.e., should you look at the status of

the acquiror, the target or the combined entity?). All commenters who

addressed the issue agreed with our view. Therefore, the exemptions are

adopted as proposed, without any eligibility requirements.

We also asked whether the exemptions should be limited to the

parties to the transaction or available to others who may be acting on

behalf of the parties to the transaction. In particular, we noted that

in a third-party stock offer the company to be acquired would not

ordinarily be subject to the Securities Act restrictions on

communications, but under certain circumstances, it could be viewed as

joining with the acquiror in making the offer. In that case, the

exemptions would need to extend to additional parties. In addition, we

asked whether the parties' affiliates, dealer-managers,

[[Page 61412]]

and others acting on behalf of the parties to the transaction should be

permitted to rely on the exemption. Again, most commenters were

consistent in recommending that we expand the exemptions to these

persons. While we realize that in many circumstances the exemptions

would not be necessary for persons other than the parties to the

transaction or the party making the offer, we want to encourage full,

complete and continuous communications with security holders.

Therefore, we are adopting the exemptions to cover all persons acting

on the parties' behalf.

3. Written Communications With Legend Filed on Date of First Use

We are adopting, as proposed, a condition to the communications

exemptions that all written communications in connection with or

relating to a business combination transaction be filed on or before

the date of first use.\37\ In addition, all written communications must

include a prominent legend advising investors to read the registration,

proxy or tender offer statement, as applicable.\38\ We believe that a

prompt filing requirement is necessary to protect security holders and

assure that these communications are available to all investors on a

timely basis.\39\ In most cases, this information will need to be filed

electronically via the EDGAR System, and thus will be rapidly

disseminated to the marketplace.\40\

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\37\ Written communications include all information disseminated

otherwise than orally, including electronic communications and other

future applications of changing technology. Videos and CD-ROMs, for

example, should be filed on EDGAR by means of a transcript. See Rule

304 of Regulation S-T (17 CFR 232.304).

\38\ 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

or filing person, as applicable. See new Rule 165(c)(1) and revised

Rules 14a-12(a)(1)(ii), 13e-4(c), 14d-2(b)(2), and 14d-9(a).

\39\ We did not propose, and are not adopting, a requirement to

deliver written communications to security holders.

\40\ These communications must be filed on EDGAR to the same

extent that the related prospectus, proxy statement or tender offer

statement must be filed on EDGAR.

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In the Proposing Release, we asked whether parties relying on the

exemptions should be permitted to file written communications on a

later date (e.g., when the mandated disclosure document is filed or

some other date). While several commenters viewed the requirement as

reasonable, a few believed it would be burdensome. The latter group of

commenters stated that a same-day filing requirement could cause

parties to delay the release of information. These commenters believed

that communications that would otherwise be made late in the day will

be postponed until the materials can be filed on the same day. We

believe, however, that in most cases parties to business combination

transactions will be able to time their communications so that it is

possible to file them on the same day they are made. Also, Rule 13(d)

of Regulation S-T permits communications that are made outside of the

Commission's business hours to be filed electronically as soon as

practicable on the next business day.\41\ Further, we have clarified

that an immaterial or unintentional delay in filing will not preclude

reliance on the Securities Act exemption.\42\

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\41\ 17 CFR 232.13(d). See Part II.C.3 below.

\42\ See Part II.B.2 below.

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The filing requirement applies to written communications that are

made public or are otherwise provided to persons that are not a party

to the transaction.\43\ As a general matter, this would include, for

example, scripts used by parties to the transaction to communicate

information to the public and other written material (e.g., slides)

relating to the transaction that is shown to investors.\44\ In

contrast, internal written communications provided solely to parties to

the transaction, legal counsel, financial advisors, and similar persons

authorized to act on behalf of the parties to the transaction would not

need to be filed. Also, as explained in the Proposing Release, business

information that is factual in nature and relates solely to ordinary

business matters, and not the pending transaction, would not need to be

filed. We expect that filing persons will apply traditional legal

principles in determining whether a particular written communication is

made in connection with or relates to a proposed business combination

transaction.\45\

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\43\ Oral communications are covered by the exemptions, but they

do not need to be reduced to writing or filed. Oral communications,

as proposed, will be subject to liability under the applicable

regulatory scheme. For example, pre-filing oral communications

regarding a proposed offering of securities in connection with a

business combination transaction will be subject to section 12(a)(2)

liability. See Part II.B.2 below.

\44\ Cf. Rule 14a-6(c) (17 CFR 240.14a-6(c)) and Item 1016(g) of

Regulation M-A.

\45\ At this time we are not adopting proposed Rules 168 and

169, the exemptions for regularly released forward-looking

information and factual business communications from the filing

requirements. See Part VII.A.1.c.ii.(A) and (B) of the Securities

Act Reform Release and Release No. 33-5009 (Oct. 7, 1969) (34 FR

16870). Although we are not adopting these rules, we do not expect

parties to file ordinary or routine business communications that

refer to the transaction in a non-substantive way.

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Several commenters criticized the proposed filing requirement

because it could result in the filing of duplicative or substantially

similar information when similar communications are made over time. In

response to this concern, we are clarifying that any republication or

redissemination of the same information would not need to be filed

again to comply with the exemptions. If, however, information is either

added to or changed from the content of an earlier communication, then

the revised written communication must be filed.\46\

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\46\ If the same written communication is redisseminated or

contains only minimal changes (e.g., correction of minor

typographical errors, an update regarding a contact person, or

stylistic changes including a change in the format, type-size,

letterhead, addressee, etc.) without any change to the content of

the information, the written communication would not need to be

refiled. In addition, we do not expect persons to file responses to

specific unsolicited inquiries if the responses are not disseminated

to others. Of course, if a response to an unsolicited inquiry

contained material information not otherwise available to the

investing public (e.g., projections), the communication would need

to be filed.

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B. Communications Under the Securities Act

1. Securities Act Exemption and Filing Rules

We are exercising our exemptive authority to create an exemption

that will permit more communications with security holders and the

markets regarding a planned business combination transaction.\47\ We

find that free communications relating to business combination

transactions are in the public interest and consistent with the

protection of investors. Accordingly, we adopt new Rules 165, 166 \48\

and 425 \49\ and amend Rules 135 and 145.\50\ These new and amended

[[Page 61413]]

rules permit parties to communicate freely about a planned business

combination transaction before a registration statement is filed, as

well as during the waiting period and post-effective periods, so long

as their written communications used in connection with or relating to

the transaction are filed beginning with the first public announcement

\51\ and ending with the close of the proposed transaction.\52\ As

noted in the Proposing Release, these communications are not excluded

from the definition of ``offer'' in the Securities Act,\53\ as no

content restriction is imposed on the communications.\54\ Instead, new

Rule 165 exempts persons making these communications from sections

5(b)(1) and (c) of the Securities Act.\55\

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\47\ Section 28 of the Securities Act (15 U.S.C. 77z-3) gives us

authority to, by rule or regulation, 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.

\48\ We adopt proposed Securities Act Rules 165, 166 and 167 as

new Rules 165(b), 165(a) and 166, respectively. These rules are

limited to business combination transactions since the Securities

Act Reform Release proposals governing capital-raising transactions

are not being adopted at this time.

\49\In the Securities Act Reform Release, we proposed a

requirement that all ``free writing'' materials be filed as

prospectus supplements in accordance with Rule 425. In this release,

we adopt proposed Rule 425(b) and (c) as new Rule 425(a) and (b) and

limit the rule to business combination transactions. Proposed

paragraph (a) contained several exceptions from the filing

requirement. We retain the exceptions that are still applicable in

Rule 425(d).

\50\ See Part II.B.3 below discussing revised Rules 135 and 145

in greater detail.

\51\ See Part II.B.4 below for the definition of public

announcement.

\52\ See Part II.A.3 above discussing the types of written

communications that must be filed. Written communications relating

to the transaction before the filing of a registration statement are

prospectuses that must be filed under Rule 425. See new Rule 165(a).

After a registration statement is filed (during what is called the

``waiting period''), and after effectiveness of the registration

statement, written communications relating to the transaction are

prospectuses that must be filed under Rule 425. See new Rule 165(b).

Communications filed under Rule 425 do not need to be delivered to

security holders. This does not, however, change the prospectus

delivery requirements for the mandated prospectus that is part of

the registration statement, and any supplements either before or

after the registration statement is declared effective. These

prospectuses and supplements would continue to be delivered to

security holders and filed under Rule 424 (17 CFR 230.424) instead

of Rule 425.

\53\ A communication that contains no more information than that

specified in Rule 135 will not be an offer, as is currently the

case.

\54\ We note, however, that a communication relating to an

investment company that is permitted by the new and amended rules

generally would have omitted to state a fact necessary in order to

make the statements in the communication not materially misleading

unless the communication includes the information specified in Rule

34b-1 (17 CFR 270.34b-1) under the Investment Company Act of 1940

(17 U.S.C. 80a-1 et seq.)

\55\ New Rule 166 provides that communications before the first

public announcement of a transaction will not be offers, so long as

parties to the transaction take reasonable steps to prevent further

distribution or publication until the first public announcement or

the registration statement is filed.

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New Rules 165 and 166 are available only for business combination

transactions. New Rule 165 defines a business combination transaction

as a transaction specified in Rule 145(a) or an exchange offer. Thus,

either the proxy rules or the tender offer rules must be applicable to

the transaction. We have added a preliminary note to Rules 165 and 166

to state that the exemption is not available to communications that may

technically comply with the rule, but have the primary purpose or

effect of conditioning the market for a capital-raising or resale

transaction.\56\

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\56\ For example, the exemption would not be available where a

non-reporting issuer conducts an exchange offer primarily for the

purposes of giving its investors freely tradable securities and

creating a public market in, or manipulating the market for, those

securities. Likewise, it would be inappropriate to rely on the

exemptions in effecting a merger of a public ``shell'' company to

take a private company public. These mergers commonly are used to

develop a market for the merged entity's securities, often as part

of a scheme to manipulate the market for those securities.

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2. Liability for Communications

As proposed, both oral and written communications made in reliance

on the Securities Act exemption would be offers subject to section

12(a)(2) liability, based on the belief that this level of liability

would adequately protect investors without chilling communications.\57\

Approximately half the commenters who addressed the issue agreed with

the proposed liability standard, while the others believed that this

potential level of liability could have a chilling effect on

communications.

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\57\ Of course, if a communication contains material

information, that information must be disclosed in the registration

statement that is declared effective. Therefore, the information

ultimately will be subject to section 11 liability (15 U.S.C. 77k)

as well.

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We are adopting the proposed regulatory scheme. To the extent that

these communications constitute offers, they currently would be subject

to section 12(a)(2) liability. As a result, we do not believe that the

adopted rules alter the current liability levels for these

communications.\58\ In light of the extensive pre-filing communications

that are ongoing in the marketplace now with respect to business

combination transactions, we believe that a section 12(a)(2) standard

of liability would not significantly chill communications.

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\58\ In some cases, these communications are filed and

incorporated by reference into registration statements, and as a

result also are subject to section 11 liability.

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Several commenters also indicated that the proposed section 5(c)

exemption should not be conditioned on timely filing of all written

communications. Commenters were concerned that a failure to timely file

a written communication could result in a loss of protection under the

exemption, resulting in a section 5 violation that would give security

holders a right of rescission. In proposing the filing requirement, we

did not intend to provide security holders with an automatic right of

rescission if a communication is either filed late or there is an

unintentional failure to file. To clarify this issue, we are revising

the filing requirement in new Rule 165 to state that an immaterial or

unintentional failure to file or delay in filing will not result in a

loss of the exemption from section 5(b)(1) or (c), so long as a good

faith and reasonable attempt to file the written communication is made

and the communication is filed as soon as practicable after discovery

of the failure to file.\59\

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\59\ New Rule 165(e). This provision is similar to the good

faith standard in Rule 508(a) of Regulation D (17 CFR 230.508(a)).

Although an immaterial or unintentional failure to file or delay in

filing is a violation of the filing requirement, it would not render

the exemption unavailable. Factors to be considered in determining

whether a delay in filing is immaterial or unintentional include:

The nature of the information, the length of the delay, and the

surrounding circumstances, including whether a bona fide effort was

made to file timely. If a written communication is made late in the

day and the offeror attempts to file it, but experiences difficulty

in filing electronically on EDGAR, and files as soon as practicable

after business hours or the following business day, the exemption

will continue to be available.

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3. Rules 135 and 145

Currently, Rule 135 provides that disclosure of certain limited

information in notice form will not be deemed an ``offer'' for purposes

of section 5 of the Securities Act.\60\ A Rule 135 notice is typically

made upon announcement of a proposed securities offering before a

registration statement is filed.\61\ Rule 145(b)(1) contains a similar

provision regarding the information in a stock merger that will not be

deemed a ``prospectus'' or ``offer.'' \62\

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\60\ 15 U.S.C. 77e. Rule 135 generally permits prospective

offerors to issue notices that include the following information:

(1) The name of the issuer; (2) the title, amount and basic terms of

the securities to be offered, the amount of the offering, if any, by

selling security holders, the anticipated time of the offering, and

a brief statement of the manner and purpose of the offering, without

naming the underwriters; and (3) any statement or legend required by

state law. Other limited information also is permitted under the

rule for rights offerings, exchange offers and offers to employees

of the issuer or an affiliate.

\61\ Cash tender offers and cash mergers do not involve the

Securities Act, and thus no reliance on Rule 135 is necessary.

\62\ Rule 145 is the rule that applies the registration

requirements to business combinations involving security holder

voting decisions. Rule 145(b)(1) provides that written

communications containing only specified information about mergers

and similar transactions are not deemed offers or a prospectus. Rule

135(a)(4) contains a similar provision for communications about

exchange offers. Rule 145(b)(2), which provides that certain

communications subject to the proxy rules are not offers, is being

rescinded as proposed.

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We proposed several revisions to Rules 135 and 145 in the Proposing

Release and the Securities Act Reform Release. In particular, we

proposed moving the substance of Rule 145(b)(1) to Rule 135, as both

rules contain similar provisions regarding the

[[Page 61414]]

information that will not be deemed an offer. We are adopting those

revisions.\63\

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\63\ Changes to Rules 135 and 145 in the Securities Act Reform

Release that were specifically tailored to capital-raising

transactions are not being adopted at this time.

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In addition to the changes proposed, we asked whether Rule 135

notices should be filed. Although Rule 135 does not currently require

these notices to be filed, in many cases the 135 notice would be the

first written communication relating to a proposed business combination

transaction. We believe it is important for this information to reach

the marketplace promptly and on a widespread basis. Generally, these

notices are short documents (e.g., press release or other form of

written notice of an intended offer). Currently, the first press

release or other written communication announcing a proposed business

combination transaction often is filed under cover of Form 8-K.\64\ In

addition, under the new regulatory scheme these communications would

have to be filed under the proxy or tender offer rules, if applicable.

As a result, we do not believe that a filing requirement for the first

public communication regarding a business combination will impose a

significant burden.

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\64\ 17 CFR 249.308.

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We are adopting a filing requirement that encompasses Rule 135

notices. These notices must be filed under new Rule 425 because they

are written communications relating to a proposed transaction. Even

though we are requiring these notices to be filed, our rules provide

that they will not constitute offers and therefore will not have

section 12(a)(2) prospectus liability.\65\ In addition, subsequent

notices or announcements made under Rule 135 that do not contain new or

different information are not required to be filed. This approach is

consistent with the filing requirement under each of the three

regulatory schemes.

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\65\ New Rule 425(b).

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4. Public Announcement

Under the terms of the exemptions, written communications must be

filed beginning with the first public announcement of the business

combination transaction. Today we are adopting a specific definition of

``public announcement'' that encompasses all communications that put

the market on notice of a proposed transaction. For purposes of

determining when a filing obligation is incurred under the exemptions,

``public announcement'' means any communication by a party to the

transaction, or any person authorized to act on a party's behalf, that

is reasonably designed to, or has the effect of, informing the public

or security holders in general about the transaction.\66\ We asked in

the Proposing Release whether the term ``public announcement'' should

be defined, and if so, how it should be defined. Although the

commenters that responded favored a bright line definition, they

opposed a broad definition that could potentially create difficulties

in determining when a filing obligation is triggered.

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\66\ New Rule 165(f)(3). A similar definition of ``public

announcement'' is included in revised Rules 13e-4(c) and 14d-2(b).

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We agree that a definition is necessary, but we believe that the

definition should be sufficiently broad to cover communications that

are reasonably designed to, or have the effect of, putting the markets

or the security holders on notice of a proposed transaction. We do not

believe the definition should be so narrow that the parties must

actually intend to effect a broad dissemination of the information.\67\

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\67\ Of course, if the regulations of the self-regulatory

organization on which the securities are listed require a public

announcement of the transaction, that would constitute a public

announcement for purposes of the communications exemptions.

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1C. Communications Under the Proxy Rules

1. Rule 14a-12 Expanded

We are revising Rule 14a-12,\68\ substantially as proposed, to

permit both written and oral communications before the filing of a

proxy statement so long as all written communications related to the

solicitation are filed on the date of first use.\69\ This is the same

filing requirement adopted for the communications exemption under the

Securities Act.\70\ This exemption is not limited to business

combination transactions, but is available regardless of the subject

matter of the solicitation. Oral communications do not need to be

reduced to writing and filed. In revising Rule 14a-12, we retain

substantially all the proposed conditions to reliance on the exemption.

These conditions are that no form of proxy is furnished until a proxy

statement is delivered, the obligation to disclose participant

information, and the requirement to file all written communications

with a prominent legend advising security holders to read the proxy

statement.

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\68\ The expansion of Rule 14a-12 to cover all solicitations

eliminates the need for many of the provisions in Rule 14a-11. As a

result, we are rescinding Rule 14a-11 and moving paragraphs (d) and

(f) of Rule 14a-11 to new Rule 14a-12. These two provisions apply if

soliciting persons refer to information in annual reports or use

reprints or reproductions of previously published materials in their

soliciting materials. Revised Rule 14a-12 makes it clear that these

provisions are limited to election contests.

\69\ Written communications by soliciting parties before a proxy

statement is furnished to security holders must be filed on the date

of first use and must provide information regarding the participants

and their interests or include a legend advising security holders

where they can obtain this information. See revised Rule 14a-

12(a)(1). Once a proxy statement is furnished to security holders,

any additional soliciting materials used must be filed on the date

of first use but need not include participant information or a

legend advising where to obtain that information. See revised Rule

14a-6(b).

\70\ Communications under revised Rule 14a-12 generally will be

filed under cover of the proxy statement cover sheet, with the Rule

14a-12 box checked. If a transaction is subject to the Securities

Act in addition to one or more of the other regulatory schemes

(i.e., the proxy or tender offer rules), the written communications

only need to be filed under Securities Act Rule 425. Although the

materials are only filed under the Securities Act, they also would

be deemed filed and take liability under the proxy or tender offer

rules, as applicable.

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As a result of these changes to Rule 14a-12, management can

communicate more freely with security holders about significant

corporate events, including a proposed merger or acquisition, or other

significant corporate governance matters that may require a security

holder vote. Likewise, security holders are able to communicate more

freely with one another. The revised rule does not, however, expand a

company's or security holder's ability to secure promises to vote a

certain way before a proxy statement is provided.\71\ The expansion of

Rule 14a-12 to non-contested matters is premised on the same rationale

for increasing communications related to business combination

transactions under the Securities Act. We recognize the many recent

developments in technology that have enabled companies to communicate

more frequently with security holders at a significantly reduced cost.

In addition, security holders and the markets are demanding more

information from public companies about new developments and proposed

transactions. In light of the rapid pace of change in the securities

markets and developments in technology, we believe the time has come to

update the proxy rules to permit security holder communications to flow

more freely and to facilitate a more informed security holder base.

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\71\ Similarly, the revised rule does not change a security

holder's obligation under section 13(d) of the Exchange Act (15

U.S.C. 78m(d)) to file or amend a Schedule 13D (17 CFR 240.13d-101)

when a voting arrangement, agreement or understanding is reached

with respect to a company's securities.

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We believe that the requirement to file all written communications,

the condition that no proxy or form of proxy be furnished to security

holders before

[[Page 61415]]

a written proxy statement is delivered, and the requirement to include

a legend on all written communications advising security holders to

read the proxy statement and where to find participant information

should be sufficient to protect against misleading solicitations.

Together with the antifraud provisions of Rule 14a-9,\72\ these

requirements should maintain the integrity of the solicitation process

and adequacy of information disseminated to security holders.\73\ In

addition to these safeguards, security holders will receive a complete

proxy statement before they can vote.

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\72\ 17 CFR 240.14a-9.

\73\ We note that a communication relating to an investment

company that is permitted by Rule 14a-12 generally would have

omitted to state a fact necessary in order to make the statements in

the communication not materially misleading unless the communication

includes the information specified in Rule 34b-1 under the

Investment Company Act of 1940.

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In the Proposing Release we solicited comment on whether a

federally mandated proxy solicitation period would be appropriate for

mergers and similar transactions in light of the free communications

permitted under the exemption. We noted that security holders may need

a minimum amount of time (e.g., 20 business days), similar to that in

tender offers, to digest the free communications together with the

information in the proxy statement. Most commenters that responded to

this question were opposed to a minimum solicitation period. Because

this is an area that traditionally has been governed by state corporate

law, and in light of the improved ability of security holders to access

information through electronic means, we believe that the existing

solicitation periods are adequate. We are not adopting a minimum

solicitation period at this time.

We also asked whether the proxy rules should be amended to permit

direct delivery of proxy statements and other soliciting materials to

non-objecting beneficial owners to facilitate more timely and informed

voting decisions. We were concerned that security holders holding

securities in street name may not receive materials from banks, broker-

dealers, or other nominees in a timely fashion. While we believe that

direct delivery of proxy materials to non-objecting beneficial owners

may have benefits for security holders, at this time we reserve this

concept for a future rulemaking project.

a. The ``As Soon as Practicable'' Requirement

Many of the commenters urged us to revise the current and proposed

condition in Rule 14a-12 that a written proxy statement meeting the

requirements of Regulation 14A be sent or given to solicited security

holders at the earliest practicable date. These commenters pointed out

that, in practice, when the purpose of a solicitation becomes moot or

the solicitation is otherwise discontinued, persons making pre-filing

communications in reliance on the rule generally do not, and should not

be required to, send security holders a written proxy statement. We

recognize that literal adherence to the delivery requirement in Rule

14a-12 in circumstances where a solicitation is canceled prematurely

may not provide a significant benefit to security holders, but could

result in unnecessary costs to the soliciting parties and potentially

mislead security holders into believing that the solicitation is

ongoing.

In view of these concerns, current practice, and the overall

approach to communications adopted today, we are eliminating the

current ``as soon as practicable'' requirement. As revised, Rule 14a-12

requires that a definitive proxy statement be furnished to security

holders when a form of proxy is either given to or requested from

security holders.\74\ When proxies are first requested from security

holders the mandated disclosure document must be delivered to them so

they can make informed voting decisions. This approach is consistent

with the delivery requirements adopted under the other regulatory

schemes.\75\ As a result, parties relying on the rule are not obligated

to furnish a written proxy statement if the solicitation is

discontinued for any reason. If a solicitation is discontinued, we

believe it would be appropriate for the soliciting persons to inform

previously solicited security holders that the solicitation is over and

provide a brief explanation of why it is being canceled.

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\74\ Revised Rule 14a-12(a)(2).

\75\ For example, in Part II.D.1 below, we are revising the

definition of commencement in the tender offer rules so that a

complete tender offer statement need not be filed and disseminated

until the means to tender are provided to security holders.

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b. Participant Information

We are modifying the current requirement to disclose participant

information in proxy materials. Instead, the revised rule requires a

prominent legend on written communications advising security holders

where they can obtain a detailed list of the names, affiliations and

interests of participants in the solicitation.\76\ Of course, the

soliciting materials could include the participant information in full,

as currently required, instead of a legend.

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\76\ In response to our question asking whether to retain the

requirement to disclose the names of all participants and their

interests, several commenters expressed the view that the

requirement has resulted in lengthy and boilerplate disclosure that

can be costly for participants without providing any significant

benefit for security holders.

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The legend may refer to either a previously filed communication

that contains the participant information, or a separate statement that

contains the participant information and is filed as Rule 14a-12

material.\77\ We are not eliminating the requirement to make

participant information available to security holders. Rather, we are

requiring disclosure of this information once instead of in every

communication.

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\77\ The information must be filed under cover of Schedule 14A

with the appropriate box on the cover page checked to designate that

the material is filed under Rule 14a-12.

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c. ``Test the Waters''

In addition to our proposal to expand Rule 14a-12, we solicited

comment on adopting a broader ``test the waters'' approach to proxy

solicitations. Under this approach, parties could engage in soliciting

activities without filing proxy material so long as no form of proxy is

requested or sent. Test the waters would permit both written and oral

proxy solicitations before the filing of a proxy statement. Unlike the

proposed expansion of Rule 14a-12, however, test the waters would not

require written communications to be filed on first use.

Many commenters favored our concept of test the waters, but a few

commenters expressed concern that it could result in unregulated and

secret solicitations. At this time, we believe that our expansion of

Rule 14a-12, as adopted, should provide sufficient flexibility to

companies to communicate more frequently with security holders on a

timely basis. After we gain some experience with communications under

the expanded Rule 14a-12, depending on its effects, we may consider

moving toward a test the waters approach in future rulemaking.

2. Limited Confidential Treatment of Merger Proxy Materials

Today, a proxy statement relating to a merger, consolidation,

acquisition or similar matter may be filed confidentially with the

Commission.\78\ If the staff decides to review the proxy statement it

may issue comments to the

[[Page 61416]]

filing parties. When all comments are resolved, a public filing is made

either a definitive proxy statement or, if securities are being

offered, a registration statement that wraps around the proxy

statement. We proposed to eliminate the provision for confidential

treatment. We note the practice of disclosing extensive deal-related

information to the market before a registration statement or proxy

statement is filed publicly. We do not believe that material public

information regarding a merger should receive confidential treatment.

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\78\ Rule 14a-6(e)(2) (17 CFR 240.14a-6(e)(2)).

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Many commenters opposed eliminating confidential treatment due to a

concern for increased liability. These commenters pointed out that they

may be required to make revisions to their proxy statement disclosure

in response to staff comment that would be subject to unnecessary

public scrutiny. It is not clear, however, why the proxy statement

situation warrants different treatment from exchange offers and other

public filings that are routinely amended in response to staff comment.

One commenter suggested that we retain confidential treatment when the

parties to a transaction do not publicly disclose information about the

transaction outside the proxy statement.

We have decided to retain confidential treatment under limited

circumstances. Where the parties to a merger or other business

combination transaction limit their public communications to those

specified in Rule 135,\79\ confidential treatment will continue to be

available for the proxy materials. If, however, the parties elect to

publicly disclose, either orally or in writing, information relating to

the transaction that goes beyond Rule 135, confidential treatment will

not be available.\80\

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\79\ Rule 135 generally exempts from the definition of ``offer''

any notice that states no more than specific limited information;

see n.60 above. The Rule 135 limit on communications would apply to

all parties to the transaction and anyone acting on their behalf in

communicating to the public.

\80\ Revised Rules 14a-6(e)(2) and 14c-5(c)(2). Confidential

treatment will continue to be unavailable for going-private or roll-

up transactions.

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As a result, the parties to the transaction may choose either to

forgo confidential treatment and communicate publicly about the deal in

reliance on one of the new exemptions, or invoke confidential treatment

and refrain from any publicity outside the proxy statement, except for

the basic information permitted by Rule 135. We will use Rule 135 as a

bright line in determining whether parties to a transaction have

publicly disclosed sufficient information to the point that

confidential treatment of the proxy materials is no longer warranted.

This bright line will be applied whether or not the transaction is

subject to the Securities Act and Rule 135. If a preliminary proxy

statement is filed confidentially, but information beyond Rule 135 is

subsequently disclosed, confidential treatment will no longer be

available and all proxy materials related to the transaction must be

filed publicly.

Two commenters recommended that we institute a procedure that would

allow parties to seek an expedited, confidential pre-filing review of

pro forma financial statements and other accounting matters if

confidential treatment is eliminated. Currently, parties are permitted

to, and frequently do, initiate pre-filing conferences with our

accounting staff to resolve sensitive accounting issues before the

filing a merger proxy statement. Our accounting staff will continue to

be available for pre-filing conferences with filing parties.

Several commenters also indicated that if we decided to eliminate

confidential treatment, we should not require that all exhibits be

filed with the first public filing of the proxy statement. These

commenters noted that in many cases some exhibits may not exist or are

not in final form when the proxy statement is first filed. The

limitation on confidential treatment adopted today would not require

that all exhibits be filed with the initial filing of a proxy

statement. As is the case today, a proxy statement may be filed first,

without any exhibits. Schedule 14A does not have any exhibit

requirements. Exhibits could be filed at a later date when the

registration statement is wrapped around the proxy statement. If all

exhibits are not final or complete at the time the registration

statement is first filed, then those exhibits could be filed in an

amendment to the combined proxy statement/registration statement.

3. Timing of Filings

Rule 14a-6(b) requires that definitive proxy materials be ``filed

with, or mailed for filing to, the Commission not later than the date

such material is first sent or given to security holders.'' \81\

Similar language appears in several other proxy and information

statement filing rules.\82\ The mailing alternative, however, is no

longer an option because companies must file electronically.\83\

Therefore, we are amending the proxy and information statement filing

rules as proposed to require filing no later than the date the

materials are first sent or given to security holders.\84\ This change

is consistent with the filing requirements imposed under the exemptions

adopted today.

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\81\ 17 CFR 240.14a-6(b).

\82\ 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)).

\83\ See Rule 101(a)(1)(iii) of Regulation S-T (17 CFR

232.101(a)(1)(iii)). Paper filings are permitted 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. Exchange Act Rule 3a-12-3 (17

CFR 240.3a-12-3).

\84\ We also are adopting the proposed clarification to Rule

13(d) of Regulation S-T. The revised rule makes it clear that if a

communication takes place after our official business hours (i.e.,

5:30 p.m. Eastern time) or on a non-business day, the communication

must be filed electronically on EDGAR the following business day.

This revision supersedes the interpretive position expressed by the

Division of Corporation Finance in Henry Lesser, Esq. (November 28,

1995). This provision applies to all our rules that require filing

on the same date that information is furnished, including the

Securities Act, proxy and tender offer rules.

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We continue to believe that definitive materials should be

available to security holders, the market and the staff as promptly as

possible. EDGAR and other electronic sources of information, including

the Internet, increasingly are relied upon by the investment community

for information regarding public companies. When there is a lag between

the time information is first disseminated and the time it is filed,

persons relying on our filings for information on public companies are

placed at a disadvantage.

D. Communications Under the Tender Offer Rules

1. ``Commencement,'' Communications, and Filing Requirements

Currently, the tender offer rules restrict a third-party bidder's

communications regarding a proposed tender offer. The restrictions on

communications stem from the concept of ``commencement,'' the five

business day rule for cash tender offers,\85\ and the requirement that

a registration statement be filed promptly for registered exchange

offers.\86\ A target's

[[Page 61417]]

communications regarding a tender offer are similarly restricted.\87\

To harmonize the treatment of communications regarding business

combination transactions under the three regulatory schemes, and to

promote the dissemination of information to all security holders on a

more timely basis, we are modifying the definition of ``commencement''

and eliminating the five business day rule and the requirement to

promptly file a registration statement after announcing a registered

exchange offer.\88\

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\85\ Currently, an offer is deemed to ``commence'' on public

announcement of the following limited information: 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,

unless a tender offer statement is filed within five business days

of the announcement and disseminated to security holders or the

bidder makes a subsequent public announcement withdrawing the offer.

See Rule 14d-2(b) and (c) (17 CFR 240.14d-2(b) and (c)). We refer to

this as the ``five business day rule.''

\86\ Although third-party bidders offering cash or exempt

securities must file a tender offer statement within five business

days, bidders offering registered securities are not bound by the

same rule. They must file a registration statement relating to the

securities offered ``promptly'' after announcing the limited

information specified in Rule 135. See Rule 14d-2(e) 17 CFR 240.14d-

2(e)).

\87\ If the target company comments on the merits of an offer or

otherwise makes a recommendation with respect to an offer, it may be

required to file a disclosure document. See Rule 14d-9(a) (17 CFR

240.14d-9(a)).

\88\ Revised Rule 14d-2(c). Rule 13e-4 has no comparable

communications restrictions, but we are adopting changes to this

rule to conform it to the new communications scheme.

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In place of these rules, we are adopting a filing requirement for

all written communications that relate to a tender offer beginning with

and including the first public announcement of the transaction.\89\ As

with communications subject to the Securities Act and the proxy rules,

written communications must be filed on the date that the communication

is made.\90\ In addition, written communications must contain a legend

advising security holders to read the full tender offer or

recommendation statement when it becomes available.

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\89\ The public announcement also triggers the Rule 14e-5

restrictions on purchasing outside the tender offer, as discussed in

Part II.G.5 below.

\90\ Revised Rule 14d-2(b)(2). These communications will be

filed under cover of Schedule TO or 14D-9, as appropriate. Both

schedules have a box to check indicating that these are pre-

commencement communications. No signature is required. See General

Instruction D to Schedule TO and General Instruction B to Schedule

14D-9. If the transaction also is subject to the Securities Act,

then communications must be filed under Rule 425 only, and those

communications will be deemed filed under the tender offer rules.

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Under the revised rules, ``commencement'' is when the bidder first

publishes, sends or gives security holders the means to tender

securities in the offer.\91\ We believe that security holders need the

information required by the tender offer rules when they are either

asked or able to tender their securities in an offer.\92\

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\91\ Generally, this will occur if the bidder provides security

holders with a transmittal form to use to tender securities or if

the bidder publishes an advertisement advising security holders how

to tender in the offer or to contact the bidder for more information

on how to tender securities in the offer. This also would occur if

by some other means persons are able to tender securities to the

bidder. At that time, the bidder must file and disseminate the

tender offer schedule, and the required 20 business day period that

all tender offers must remain open will begin to run. Revised Rule

14d-2(a).

\92\ Although we are changing how a tender offer is commenced

for purposes of the tender offer rules, we are not defining the term

``tender offer'' or changing our position on what activities may be

deemed to constitute a tender offer. The tender offer rules still

may apply to activities that function as unconventional tender

offers. We maintain our position that the term ``tender offer''

should be interpreted flexibly in accordance with the intended

purposes of sections 14(d) and 14(e). A determination of whether a

particular transaction or series of transactions constitutes a

tender offer will, of course, depend on the particular facts and

circumstances and is not limited to ``conventional'' tender offers.

See Release No. 34-15548 (Feb. 5, 1979) (44 FR 9956).

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To minimize the potential for dissemination of false offers into

the marketplace in the absence of the five business day rule, we are

adopting new Rule 14e-8. As proposed, this rule prohibits bidders from

announcing an offer: without an intent to commence the offer within a

reasonable time and complete the offer; with the intent to manipulate

the price of the bidder or the target's securities; or without a

reasonable belief that the person will have the means to purchase the

securities sought. We believe that a specific rule prohibiting such

conduct is appropriate. This antifraud rule is intended as a means to

prevent fraudulent and misleading communications regarding proposed

offers under the new communications scheme, in addition to the existing

antifraud provisions.

Two commenters expressed concern that the rule could create new

grounds for frivolous litigation, while others supported the proposal.

Of course, if a target or other party decided to litigate under this

new rule, the plaintiff would have the burden of showing that the

bidder either did not have an intent to commence and complete the offer

or did not reasonably believe it had the ability to purchase the

securities. Although not required, a commitment letter or other

evidence of financing ability (e.g., funds on hand or an existing

credit facility) would in most cases be adequate to satisfy the rule's

requirement that the bidder have a reasonable belief that it can

purchase the securities sought.\93\

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\93\ This is not intended to change how bidders legitimately

finance their offers today. Bidders may have sufficient funds on

hand to complete the offer or they may arrange to borrow funds from

an outside source. In most cases when the bidder expects to obtain

funds from another source, financing is arranged in advance or

immediately after announcing an offer. Bidders typically get a

commitment letter from their lenders.

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Although we noted in the Proposing Release that eliminating the

current restrictions could have potentially destabilizing effects on

the securities markets,\94\ it is not clear that the market effects

differ greatly from those caused by merger announcements, which are not

subject to the same constraints. Based on our experience with tender

offers \95\ and the factors discussed above influencing our decision to

permit more communications regarding business combination transactions,

we believe that the availability of more information on a timely basis

will better assist security holders in making well informed individual

investment decisions when confronted with news of a pending or proposed

business combination. Accordingly, we are adopting the changes to the

tender offer communications provisions substantially as proposed.

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\94\ See Part II.B.7.a of the Proposing Release and Release No.

34-15548 (February 5, 1979) (44 FR 9956).

\95\ We have not observed any disruptive or destabilizing

effects in cases where precommencement publicity is currently

permitted, such as where Rule 135 information is disclosed regarding

a proposed exchange offer more than five business days before a

registration statement is filed.

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In reaching this conclusion, we note that communications regarding

issuer tender offers are not similarly restrained.\96\ Also, it appears

that some bidders do not use the term ``tender offer'' in their public

announcement of a proposed business combination transaction in an

attempt to avoid triggering application of Rule 14d-2. Furthermore,

security holders today, upon hearing news of a proposed tender offer

for their securities (either directly by the formal notice published by

the bidder or indirectly through rumors in the marketplace), must

decide whether to: (i) Retain their securities until a tender offer

statement is filed and disseminated so they can tender into the offer;

or (ii) sell into the market at prevailing prices based on the limited

information available.\97\ Under the new approach, more time may elapse

between announcement and the filing of the tender offer statement, but

more information also may be available during that period. We do not

believe there is a sufficiently compelling basis

[[Page 61418]]

to continue treating third-party cash offers, exchange offers, issuer

tender offers and mergers differently.\98\

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\96\ Issuer tender offers are subject to Rule 13e-4, which does

not contain a comparable provision to the five business day rule or

a requirement to file a registration statement promptly after

announcing limited information about a registered exchange offer.

\97\ Bidders often wait until the fifth business day following

public announcement before filing a full tender offer statement in

accordance with Rule 14d-3(a) (17 CFR 14d-3(a)). In addition, it can

take several days before mailed copies of the tender offer statement

are received by beneficial owners. Bidders offering registered

securities must promptly file the registration statement after

announcement, which in most cases is more than five business days

after the announcement.

\98\ All tender offers must remain open for at least 20 business

days. See Rule 14e-1(a) (17 CFR 240.14e-1(a)). If security holders

are willing to wait to receive the tender offer statement containing

the required information, they can consider the disclosure document

in light of all earlier communications relating to the transactions

before making an investment decision with respect to the offer. We

have no reason to believe that the current minimum time period for

tender offers is inadequate.

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Most of the commenters that addressed the proposals favored

eliminating the five business days rule and the requirement to promptly

file a registration statement after announcement of an exchange offer,

as well as the revised definition of ``commencement.'' A few

commenters, however, expressed concern that elimination of the five

business day rule could revive certain inconsistent state law

requirements. We do not believe that elimination of the five business

day rule will result in a resurgence of inconsistent state anti-

takeover statutes that impose disclosure or other requirements

incompatible with our new regulatory scheme.

We have long defined when a tender offer commences. This definition

served several purposes, including implementing a uniform nationwide

timetable for the tender offer process, regulating the flow of

information by identifying the date by which required disclosure

filings must be made with the Commission, and helping to create a level

playing field between bidders and targets. Under well-established

principles, any state law that conflicted with this provision was

preempted.

The new definition continues to serve these sorts of purposes--it

establishes a uniform time at which a tender offer is deemed to

commence, it continues to balance the rights and obligations of bidders

and targets, and it facilitates the free flow of information from both

bidders and targets before that date (subject to the antifraud

provisions), based on our judgment that this flow of information is in

the best interests of the holders of securities. The elimination of the

five business day rule and the other changes in the rule are intended

to provide security holders with the broadest possible disclosure of

information at the earliest date possible.

We believe that courts would hold that any state law that

conflicted with the new rule by attempting to establish a different

commencement date or otherwise frustrating operation of the rule would

be preempted.\99\ For instance, we believe that any state provision

that made it impossible to comply with both state and federal

requirements or that created obstacles to the accomplishment and

execution of the full purposes and objectives of the new rule would

continue to be preempted.\100\

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\99\ See Dynamics Corp. of America v. CTS Corp., 481 U.S. 69, 79

(1987).

\100\ See, e.g., Barnett Bank of Marion County versus Nelson,

517 U.S. 25 (1996) (summarizing preemption principles); see also

Fidelity Fed. Sav. & Loan Assoc. versus de la Cuesta, 458 U.S. 141,

154 (1982).

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Security holders ultimately have the choice to sell into the market

based on information disclosed early or wait until a complete, mandated

disclosure document is sent to them before making an investment

decision. The ability of security holders to sell into the market

before a complete disclosure document is filed and disseminated is no

different from their current position between the time a transaction is

announced and the time a mandated disclosure document is filed and

disseminated. However, we believe that liberalizing early

communications will better serve investors and the markets by providing

them with more information at an earlier date. The bidder continues to

have the flexibility to commence promptly after the first public

announcement. We encourage bidders to commence their offers as soon as

they are able to do so, since security holders and other market

participants will benefit from the complete information in the mandated

tender offer materials. To the extent, however, that there are delays

between announcement and commencement, we believe that investors will

benefit from the free flow of information provided by the new

regulatory scheme. Therefore, we are changing the current regulatory

scheme, and is doing so we are clearly expressing our intent that these

new rules serve, as an integrated whole, to regulate the various

communications that persons may make regarding a potential or proposed

business combination transaction.

Two commenters favored retaining the five business day rule for

hostile offers, but eliminating it for negotiated transactions. We

believe, however, that applying the rule only to hostile offers could

present problems when the same target is the subject of both a

negotiated transaction and a hostile offer, or when a negotiated

transaction becomes hostile as a result of changed circumstances or

another offer. Further, in light of the communications scheme we adopt

today, it does not appear that security holders' best interests would

be served by permitting expanded communications only with respect to

negotiated transactions.

One commenter believed that the five business day rule provides

investors and the markets with a degree of certainty regarding proposed

offers and results in the dissemination of better information in a

relatively short time. We believe that our requirements to file all

written communications relating to a proposed transaction on first use

will result in more information on a timely basis. As noted above, we

do not believe bidders will have an incentive to unnecessarily delay

commencing their offers because of the risk that market forces may

affect the terms of the offer or a competing bidder will emerge.

Under these new and revised rules, bidders and targets alike have

an increased ability to communicate with security holders along with

the requirement to file all written communications related to an offer.

Under the new scheme, the target must file all written communications

relating to the transaction on the date the communication is made.\101\

Targets need not file a formal recommendation statement until after the

offer is formally commenced and a recommendation is made. The target

remains obligated, however, to take a position with respect to the

offer no later than 10 business days after the offer commences under

Rule 14d-2.\102\ If the target makes a recommendation after

commencement, but before the tenth business day, then it must file a

recommendation/solicitation statement on Schedule 14D-9 on or before

the time the recommendation is first made.

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\101\ Revised Rule 14d-9. These communications must include a

legend similar to the one required on the bidder's pre-commencement

communications, advising security holders to read the complete

recommendation when it is available. Although we did not propose

such a legend, we solicited comment on it, and the commenters who

addressed the issue supported a legend requirement.

\102\ See Rule 14e-2(a) (17 CFR 240.14e-2(a)).

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These rules apply to issuer and third-party tender offers alike. In

addition, the new rules make no distinction based on the form of

consideration offered to security holders (e.g., cash or stock). We do

not believe that there is sufficient justification to treat tender

offer communications differently based on either the nature of the

bidder or the consideration offered. Security holders ultimately face

the same investment decision--whether or not to tender in the offer.

2. Dissemination Requirements

We also reviewed the various methods to commence a tender offer in

[[Page 61419]]

the Proposing Release.\103\ In reviewing these methods, we noted that

long form publication \104\ is rarely used by bidders due to the cost

associated with publishing extensive information about the offer in a

newspaper.\105\ We proposed to eliminate long form publication.

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\103\ See Part II.B.7.b of the Proposing Release.

\104\ Rule 14d-2(a)(1) (17 CFR 240.14d-2(a)(2)).

\105\ A bidder must publish the information specified in Rule

14d-6(e)(1) (17 CFR 240.14d-6(e)(1)).

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Several commenters agreed that long form publication is rarely

used, but urged us to retain the method, citing the lack of any abuse

under the rule. In addition, these commenters noted that, in the

future, long form publication may become a viable means of

disseminating an offer using the Internet or another electronic

delivery system. At this time, we do not believe that technology has

developed to the point where bidders can rely solely on electronic

media to disseminate information about a tender offer to security

holders. In particular, posting the information on a web site alone

would not be adequate dissemination.\106\ Nevertheless, in response to

commenters' requests that we retain long form publication as a means of

commencement, we have decided not to eliminate it.

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\106\ Not all security holders have access to the Internet. Even

those that do have access would not have notice that a tender offer

for their company's securities was posted on a web site. All

commenters who addressed the question opposed electronic

dissemination as the sole means to disseminate an offer, noting that

there are no electronic sources of information as commonly available

and widely followed as newspapers. Of course, it is permissible to

post tender offer materials on a web site in addition to using other

methods of dissemination. Electronic media also may be used to

satisfy requirements to deliver tender offer material in accordance

with our guidelines for electronic delivery. See Release No. 33-7233

(October 6, 1995) (60 FR 53458). For example, a summary

advertisement for a tender offer could contain a consent form for

security holders to indicate their willingness to receive the

complete tender offer materials by means of a specified electronic

medium.

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We solicited comment on whether the rules should continue to permit

an offer to be commenced and disseminated by summary advertisement

alone.\107\ Currently, bidders that rely on the summary advertisement

method to disseminate an offer tend also to mail their offering

documents to security holders using a security holder list under Rule

14d-5. We asked whether bidders should always be required to use

security holder lists when disseminating an offer. Two commenters

favored retaining summary publication without the use of security

holder lists. Both cited the lack of any abuse with the rule and the

possibility that its elimination could force bidders to tip their hand

when requesting a security holder list from the target in hostile

transactions. Accordingly, we are not changing this aspect of the

summary advertisement rule.\108\ However, in keeping with the expansion

of permissible communications, we are eliminating, as proposed, the

current restriction on the information that may be included in a

summary advertisement.\109\

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\107\ Rule 14d-6(a)(2) (17 CFR 240.14d-6(a)(2)).

\108\ Similarly, we are retaining the current requirement that

bidders using stockholder lists also publish summary advertisements.

\109\ We are amending Rule 14d-6(a)(2) to delete the language

limiting the information that can appear in a summary advertisement.

We are retaining the prohibition against including a transmittal

form with the summary advertisement. A summary advertisement may

(and must, if it is designed to commence the offer) include the

means to tender, e.g., a telephone number to call to obtain the

complete tender offer materials, including the transmittal form.

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Currently, bidders must hand deliver a copy of their tender offer

statement and any additional tender offer materials to the target

company as well as any other bidder that has made an offer for the same

class of securities.\110\ We proposed a similar delivery requirement

for the first written communication disclosing a proposed offer. Under

the new communications scheme for tender offers, bidders are able to

disclose information about a proposed offer without commencing the

offer.\111\ In light of the many different communications media

available to bidders, we believe targets need a reliable way to learn

about proposed offers for their securities so they can respond in a

timely manner. Therefore, we are adopting a requirement that the bidder

deliver to the target and any other bidder the first written

communication relating to the transaction that is filed, or required to

be filed, with the Commission.\112\ This material must be delivered on

the date of the communication.\113\

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\110\ Rule 14d-3(a)(2). 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 are not extending this delivery requirement to pre-

commencement communications because the exchanges and the NASD are

relying less on paper filings and more on electronic databases to

obtain EDGAR filings.

\111\ Communications regarding offers can be made without a

summary advertisement of the offer appearing in newspapers.

\112\ As proposed, this requirement would have been triggered by

the first communication setting forth specified information. We

believe, however, that it will be simpler for bidders to know that

this obligation will attach at the same time the first pre-

commencement communication is filed. Once target companies and other

bidders receive notice of the transaction, they can monitor the

Commission's filings for subsequent pre-commencement materials.

\113\ Revised Rule 14d-2(b)(2). Instead of hand delivery, the

rule only requires ``delivery,'' so the bidder may use any other

means of delivery that is equally prompt and equally likely to

receive the attention of the target company (e.g., an e-mail to the

corporate secretary, chief executive officer and other persons of

similar authority at the target company, where the target company

uses these e-mail addresses for public communications). We have

similarly modified the bidder's current obligation to hand deliver a

copy of the mandated disclosure document. See revised Rule 14d-

3(a)(2).

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E. Exchange Offers May Commence On Filing

1. Early Commencement

We are adopting the early commencement provision substantially as

proposed, but extended to cover issuer exchange offers. Currently,

registered exchange offers may not commence until the related

registration statement becomes effective.\114\ As we noted in the

Proposing Release, this results in cash and stock tender offers being

treated differently. Cash tender offers have a distinct timing

advantage over stock tender offers because cash offers can commence as

soon as a tender offer statement is filed and disseminated.\115\ This

change should minimize this regulatory disparity by permitting stock

tender offers to commence as early as the date the related registration

statement is first filed.

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\114\ See Rule 14d-2(a)(4). Commencement occurs when definitive

copies of the prospectus/tender offer material are first published,

sent or given to security holders.

\115\ As a result, the 20 business day period that a tender

offer must remain open typically begins to run earlier for cash

offers than stock offers. See Rule 14e-1(a).

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Almost all of the commenters that addressed early commencement

indicated that it was a step in the right direction, but they believed

more was needed to fully balance the regulation of cash and stock

offers. We recognized in the Proposing Release that early commencement

alone may not be sufficient to level the playing field between cash and

stock tender offers because bidders would not be able to purchase

shares tendered in the offer until after the related registration

statement is effective. Accordingly, cash offers could close earlier

than stock tender offers due to possible staff review and comment on

the registration statement.

We solicited comment on whether there are other changes (e.g.,

expedited staff review, automatic effectiveness on filing or

effectiveness within a specified time after filing), that might further

reduce the disparity in regulatory treatment. We also asked whether

[[Page 61420]]

expedited staff review would minimize the regulatory differences.

Commenters had mixed views. Some commenters favored automatic

effectiveness or effectiveness shortly after filing, while others

believed the potential for post-effective staff review and comment

would discourage bidders from offering securities as consideration in a

tender offer.\116\ Most commenters, however, were in agreement that

expedited staff review is essential to balancing the regulatory

treatment of the two types of offers. Due to the risks associated with

automatic effectiveness and effectiveness shortly after filing (before

the staff has had an adequate opportunity to review the disclosure), we

believe these measures would not be in security holders' best

interests, especially in the business combination context where the

disclosure and accounting issues can be particularly complex. We are,

however, committed to expediting staff review of exchange offers so

that they may compete more effectively with cash tender offers.

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\116\ The latter group was primarily concerned that staff

comment could necessitate the dissemination of a post-effective

amendment.

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As proposed, early commencement was limited to third-party offers.

We solicited comment, however, on whether early commencement would

provide any benefits to issuers making exchange offers for their own

securities. Several of the commenters believed that issuers should have

the same ability to commence an exchange offer upon filing.\117\ We

agree that there is no reason to exclude issuer exchange offers from

early commencement, and therefore, we have decided to treat third-party

and issuer exchange offers alike under the new rule.

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\117\ These commenters also urged us to extend early

commencement to going-private transactions as well. We do not

believe going-private transactions warrant early commencement,

especially in light of the numerous comments issued by the staff of

the Division of Corporation Finance that result in significant

changes to the disclosure. Therefore, we are not extending early

commencement to Rule 13e-3 transactions. In addition, as proposed,

early commencement is not available to roll-up transactions. 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 registered under the Securities Act. 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.

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We also asked whether there should be a proxy analogue to early

commencement so that parties to a business combination transaction

involving a voting decision would be able to furnish proxy cards with

preliminary proxy materials. Currently, proxy cards may only accompany

the definitive proxy statement/prospectus.\118\ A proxy analogue would

further balance the regulatory treatment of mergers and tender offers.

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\118\ Rule 14a-4(f).

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We are not adopting a proxy analogue to early commencement at this

time. We note that all tender offers must remain open for at least 20

business days.\119\ Currently, the minimum proxy solicitation period is

dictated by applicable state corporate law requirements.\120\ A proxy

solicitation period, accordingly, could be less than 20 business days.

Further, under the new rules adopted today, we are specifying the

appropriate time periods necessary for dissemination of a prospectus

supplement when there are material changes to the information

previously disseminated. The proxy rules do not have similar

provisions. Since the proxy solicitation area has traditionally been

governed by state law, and because we are not adopting a federally

mandated proxy solicitation period,\121\ we are not adopting an

analogue to early commencement that would permit the sending of proxy

cards along with preliminary proxy materials. We may consider extending

the concept to the solicitation of proxies once we have sufficient

experience with early commencement of exchange offers. Any proxy

analogue to early commencement would, of course, require the

establishment of a uniform proxy solicitation period and well-defined

time periods for the dissemination and receipt of a supplement

containing all material changes from the preliminary proxy statement

previously sent or given to security holders.\122\

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\119\ Rule 14e-1(a).

\120\ Most state corporate laws require that notice of a meeting

be sent to security holders no less than 10 days and no more than 60

days before the meeting.

\121\ See Part II.C.1 above.

\122\ See Part II.E.2 below discussing appropriate time periods

for the dissemination of a prospectus supplement containing

materials changes.

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Under the new rules,\123\ to commence an exchange offer early

(before effectiveness of a registration statement), a bidder must file

a registration statement relating to the securities offered and include

in the preliminary prospectus all information, including pricing

information,\124\ necessary for investors to make an informed

investment decision.\125\ Information may not be omitted under Rule 430

or Rule 430A under the Securities Act.\126\ Bidders also must

disseminate the prospectus and related letter of transmittal to all

security holders and file a tender offer statement with us before the

exchange offer can commence.\127\

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\123\ New Rule 162 and revised Rules 13e-4(e)(2) and 14d-4(b).

\124\ If the registration statement as first filed does not

contain a prospectus with this information, the bidder may file a

pre-effective amendment to supply the requisite information and then

commence the offer.

\125\ We are not changing our current position regarding the

level of information necessary to adequately inform security holders

of the consideration offered; the pricing information required is

the same information that would be required in an effective

registration statement today. Often, in a business combination

transaction the consideration offered to security holders is based

on a formula pricing mechanism that is based on the market price of

either the target or the bidder's securities during a specified

period. The requirement to provide pricing information in a

prospectus that is delivered to security holders to commence an

exchange offer would be satisfied if all material elements of the

formula are described in sufficient detail so that security holders

can evaluate the offer. A fixed price is not required under early

commencement.

\126\ Rule 430 and 430A (17 CFR 230.430 and 430A).

\127\ Because tender offer statements generally incorporate by

reference a substantial amount of the required information from the

related registration statement, the actual filing of a tender offer

statement would serve primarily as notice to us and the markets that

the exchange offer commenced. Of course, any prospectus furnished to

security holders before the registration statement is effective must

include the red herring legend required by Item 501(b)(10) of

Regulation S-K (17 CFR 229.501(b)(10)).

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Early commencement is at the option of the bidder. Exchange offers

can commence as early as the filing of a registration statement, or on

a later date selected by the bidder up to the date of

effectiveness.\128\ If a bidder does not commence its exchange offer

before effectiveness of the related registration statement, then the

exchange offer would need to commence on or shortly after

effectiveness, as is the case today.

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\128\ Regulation M (17 CFR 242.100 through 242.105) prohibits

purchases of the bidder's securities during an exchange offer's

restricted period, beginning when the bidder commences its offer.

The restrictions under Rule 10b-13 (new Rule 14e-5) start when the

bidder makes its first public announcement.

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As proposed, we are adopting new Rule 162 to permit the tender of

securities into an exchange offer before a registration statement is

effective.\129\ New Rule 162(a) exempts the tender of securities from

section 5(a) of the Securities Act.\130\ Security holders may

[[Page 61421]]

withdraw tendered securities until they are purchased, and bidders may

not purchase the tendered securities until the registration statement

is declared effective, as is currently the case. Because security

holders must receive a mandated disclosure document before having to

make an investment decision, we believe that early commencement,

together with the communications scheme adopted today, is consistent

with the public interest and the protection of investors. Early

commencement gives bidders an incentive to disseminate their offering

materials broadly to all security holders as soon as practicable.

Further, the new rule provides bidders with greater flexibility in

choosing the form of consideration to offer in a business combination

transaction and should serve to facilitate the growth of our capital

markets.

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\129\ Rule 162, as adopted, is extended to issuer exchange

offers subject to Rule 13e-4 as well as third-party exchange offers

subject to Regulation 14D (17 CFR 240.14d-1 through 17 CFR 240.14d-

101).

\130\ This exemption is necessary to prevent the tendering of

securities into an offer from being viewed as a ``sale'' without an

effective registration statement. We are using our exemptive

authority under section 28 of the Securities Act to adopt this new

rule.

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2. Dissemination of a Supplement and Extension of the Offer

Under the early commencement provision adopted, bidders are

required to disseminate a prospectus to all security holders. If a

bidder wants to commence its exchange offer early, it must disseminate

a preliminary prospectus to all security holders as discussed above.

The new rules also provide that bidders sending a preliminary

prospectus must disseminate a supplement to security holders if there

are any material changes, whether as a result of staff review, or due

to any other material changes in the information previously disclosed.

Exchange offers must remain open for a specified minimum period of time

after a supplement is sent to security holders containing the new

information, depending on the significance of the change. This is to

permit security holders to react to the information by tendering

securities or by withdrawing securities already tendered.

Since the tender offer rules do not currently establish specific

minimum time periods necessary for the disclosure and dissemination of

material changes, other than those relating to changes in price or the

amount of securities sought,\131\ we are establishing well-defined

periods necessary for the dissemination of a prospectus supplement that

contains material changes under early commencement. The mandated

periods we adopt today are consistent with our current rules and

interpretive positions in this area.\132\ Therefore, we are revising

Rule 14d-4 to specify the minimum time periods necessary for the

dissemination of changes to preliminary prospectuses that are used to

commence an exchange offer early.\133\ As a result, exchange offers

that commence early must remain open for at least:

\131\ Rule 14e-1(b) [17 CFR 240.14e-1(b)]. A tender offer must

remain open for ten business days after a notice of an increase or

decrease in the percentage of the class of securities being sought,

the consideration offered, or the dealer's soliciting fee.

\132\ See Release No. 34-24296 (April 3, 1987) [52 FR 11458].

\133\ Revised Rules 14d-4(b) and (d) and 13e-4(e). This approach

was favored by all commenters who addressed the issue.

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Five business days for a prospectus supplement

containing a material change other than price or share levels;

Ten business days for a prospectus supplement

containing a change in price, the number of shares sought, the

dealer's soliciting fee, or other similarly significant change;

Ten business days for a prospectus supplement included

as part of a post-effective amendment; and

20 business days for a revised prospectus when the

initial prospectus was materially deficient; for example, failing to

comply with the going-private rules or filing a ``shell'' document

solely to trigger commencement and staff review.\134\

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\134\ The 20 business day period required by the tender offer

rules will not begin to run if the prospectus disseminated to

security holders is materially deficient. For example, if the

initial prospectus does not comply with the roll-up rules, the

minimum solicitation period under the roll-up rules will not begin

until a revised prospectus satisfying the roll-up rules is

disseminated.

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Of course, if a material change in the information previously

disseminated to security holders occurred shortly before the expiration

of the offer, a prospectus supplement would need to be disseminated to

security holders and the offer extended for the appropriate length of

time. We also believe that these time periods represent general

guidelines that should be applied uniformly to all tender offers,

including those subject only to Regulation 14E.\135\

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\135\ 17 CFR 240.14e-1 through 17 CFR 240.14e-8.

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We asked whether bidders should be required to deliver a final

prospectus to security holders. Commenters who addressed the issue

believed that the requirement to deliver prospectus supplements

containing all material changes should effectively eliminate the need

for the dissemination of a final prospectus. We agree that the

informational purpose of the prospectus may best be served by requiring

bidders to deliver to security holders prospectus supplements

containing material changes rather than redeliver a final prospectus

repeating substantial amounts of information that was previously

delivered.\136\ The use of prospectus supplements should adequately

inform security holders of the information they need to make an

informed investment decision.

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\136\ Any supplements sent to security holders should present

the informational changes in a clear, concise and understandable

manner. See Rule 421 of Regulation C (17 CFR 230.421). If there are

a number of changes necessitating the delivery of several

supplements, offerors should consider the need to give security

holders a complete unified document containing all changes and

updates in a revised preliminary or final prospectus.

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Accordingly, we are using our exemptive authority \137\ to exempt

exchange offers that commence early from the final prospectus delivery

requirement.\138\ In doing so, we are not changing the final prospectus

delivery requirement in Exchange Act Rule 15c2-8(d).\139\ Under these

circumstances, where a preliminary prospectus is delivered to security

holders along with prospectus supplements containing material changes

to the information previously disseminated, we believe that the cost of

delivering a final prospectus is not justified by any marginal benefit

to security holders. Although we are eliminating the requirement to

deliver a final prospectus, bidders would still need to file a final

prospectus.

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\137\ Section 28 of the Securities Act.

\138\ See new Rule 162(b), which provides an exemption from

section 5(b)(2) of the Securities Act (15 U.S.C. 77e(b)(2)). This

rule does not provide an exemption for exchange offers that commence

on the date of effectiveness or later, for which a final prospectus

must be delivered to security holders. In the Securities Act Reform

Release we proposed to eliminate the requirement to deliver a final

prospectus for certain capital-raising transactions, but not

business combination transactions. See proposed Rule 173 and Part

VIII.C.3.b of the Securities Act Reform Release.

\139\ 17 CFR 240.15c2-8(d). This rule requires all brokers or

dealers that participate in a distribution of securities registered

under the Securities Act to take reasonable steps to comply promptly

with the written request of any person for a copy of the final

prospectus. The broker or dealer must comply with this request until

the expiration of the applicable 40-day or 90-day period under

section 4(3) of the Act. 15 U.S.C. 77(d)(3). See Rule 174 (17 CFR

230.174).

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F. Disclosure Requirements for Tender Offers and Mergers

1. Schedules Combined and Disclosure Requirements Moved to Subpart 1000

of Regulation S-K (``Regulation M-A'')

Currently, there are different disclosure schedules for issuer

tender offers, third-party tender offers and going-private

transactions.\140\ Since a given transaction may involve more than one

of these regulatory schemes, a company may be required to file a

separate disclosure document to satisfy each applicable disclosure

regime. In

[[Page 61422]]

addition, the disclosure requirements appearing in the rules and

schedules can often lead to duplicative, and sometimes inconsistent,

requirements. In light of the increased pressure to announce a business

combination transaction soon after it is entered into and the attendant

requirement to file mandated disclosure documents quickly, we proposed

to integrate, simplify and update the disclosure requirements currently

in the rules and schedules. Our basic approach was to combine all the

disclosure requirements in one central location in a subpart of

Regulation S-K, called Regulation M-A. The specific disclosure

requirements in schedules were keyed to items under Regulation M-A in a

manner consistent with the integrated disclosure system previously

adopted for proxy and registration statements.

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\140\ Schedules 13E-4, 14D-1 and 13E-3, respectively.

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All commenters addressing the proposed changes in this area

believed that it was time to update and simplify the disclosure

requirements for business combination transactions.\141\ We are

adopting Regulation M-A substantially as proposed. This series of

disclosure items incorporates all the current disclosure requirements

for issuer and third-party tender offers, tender offer recommendation

statements and going-private transactions. The new regulation includes

some disclosure items for cash merger proxy statements as well. We have

made slight modifications, where necessary, to harmonize and clarify

the requirements, as well as a few substantive changes that are

discussed below in more detail. In some cases the disclosure

requirements may appear different, but that is because we have made an

effort to draft the items in Regulation M-A using clear, plain

language. In the future, we expect to expand this new regulation to

cover additional disclosure items as necessary.

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\141\ One commenter urged us to codify the availability of a

procedure for making acquisitions using securities registered on an

acquisition shelf registration statement. While we are not codifying

this procedure as part of this release, we remind offerors that the

procedure continues to be available. See Form S-4, General

Instruction H, and Service Corporation International (December 2,

1985).

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We are combining current Schedules 13E-4 and 14D-1 (the schedules

now used for issuer and third-party tender offers, respectively), into

new Schedule TO, as proposed.\142\ In addition, we are changing the

rules to allow one filing to satisfy both the tender offer and going-

private disclosure requirements.\143\ As a result, the information

required by Schedules 14D-1, 13E-4 and 13E-3 can be disclosed in one

combined filing.\144\ We believe that these revisions will reduce the

need to file two or more schedules for what is essentially the same

transaction.\145\

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\142\ The format and instructions for Schedules 13E-3 and 14D-9

are revised so that they are consistent with new Schedule TO. These

schedules refer to Regulation M-A for all substantive disclosure

requirements. We did not propose, and are not adopting, any changes

to the schedules used in connection with the multijurisdictional

disclosure system for Canadian issuers (Schedules 13E-4F, 14D-1F and

14D-9F) (17 CFR 240.13e-102; 17 CFR 240.14d-102; 17 CFR 240.14d-

103).

\143\ New Schedule TO has boxes on the cover page to check to

indicate whether the filing is an issuer tender offer, third-party

tender offer, and/or going-private transaction. We are implementing

conforming changes to the EDGAR filing tag system so that the type

of transaction and filing persons are identified when viewing a

document on EDGAR.

\144\ For example, an affiliate engaged in a tender offer having

a going-private effect can now file a Schedule TO that also serves

as a Schedule 13E-3. All filing persons and applicable schedules

must be identified on the cover page. Separate cover pages are not

required. Of course, a Schedule 13E-3 must be filed independently

when the underlying transaction is not a tender offer.

\145\ Schedule TO also may be combined with an amendment to a

previously filed Schedule 13D. See General Instruction G to Schedule

TO. The ability to file a joint 13D amendment and tender offer

statement is the same as currently permitted. See General

Instruction E to Schedule 14D-1.

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We have included an instruction in new Schedule TO, as proposed,

listing the specific line items that must be complied with for

different types of transactions.\146\ In addition, we have revised the

current instruction requiring information that is incorporated by

reference to be filed as an exhibit. As revised, filers can incorporate

information included in documents previously filed electronically on

EDGAR without refiling that information as an exhibit to the

schedule.\147\ To the extent that the existing schedules permit filers

to include negative answers in the schedule, but not in the disclosure

document sent to security holders, filers will continue to have the

ability to omit that information from documents sent to security

holders.\148\

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\146\ General Instruction J to new Schedule TO.

\147\ Documents filed electronically on EDGAR are readily

available to security holders and the public (e.g., through the

Internet, our public reference room, brokers and investment

advisors). This change also applies to going-private statements.

\148\ General Instruction E to new Schedules TO and revised

Schedule 13E-3 and General Instruction C to revised Schedule 14D-9.

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At this time we are not extending the one filing satisfies all

approach to encompass transactions involving the Securities Act and

proxy rules as well as the tender offer and going-private rules. In the

future, we may consider integrating the requirements further, to permit

the satisfaction of the disclosure required under all four regulatory

schemes with one filing.

We also are revising the rules that require filing persons to

include a fair and adequate summary of the information required by the

schedules in the disclosure document sent to security holders. Instead

of specifying some items and excluding others, as the current rules

do,\149\ the revised rules simply require that the document given to

security holders summarize all items in the schedule (except for

exhibits).\150\ As noted in the Proposing Release, this change is not

intended to increase the amount of information that is given to

security holders. Instead, it is intended to simplify the requirements.

We expect filers to exercise their judgment in determining the specific

information that must be included in the disclosure document sent to

security holders to provide a fair and adequate summary. We are not,

however, changing the current requirement that certain disclosure

required in a going-private transaction be set forth in full in the

disclosure document delivered to security holders.\151\

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\149\ See current Rules 14d-6(e), 14d-9(c), 13e-3(e) and 13e-

4(d) specifying the information that must be summarized or included

in the disclosure document sent to security holders.

\150\ Revised Rules 14d-6(d), 14d-9(d), 13e-3(e) and 13e-4(d).

\151\ Items 7, 8 and 9 of current and revised Schedule 13E-3.

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As a result of today's changes, filers no longer need to answer

each item of the schedule with a statement that the required

information is incorporated by reference from certain pages or sections

of the primary disclosure document. Under the revised rules, it is

sufficient to include a general statement in the schedule that all

information in the disclosure document filed as an exhibit is

incorporated by reference in answer to all or some of the items in the

schedule. The revised schedules, as proposed, would include a cover

page, any exhibits and the required signatures. Specific item numbers

from the schedule must be included only to the extent necessary to

provide information that is not in the disclosure document sent to

security holders, but is required to be disclosed under an item in the

schedule.\152\ This change is designed to make the schedules easier to

prepare. Of course, filers still must provide all the required

information.\153\

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\152\ For example, negative or ``not applicable'' responses or

information that goes beyond what is summarized in the disclosure

document must be disclosed under the appropriate item number in the

schedule if not included in the disclosure document sent to security

holders.

\153\ See General Instructions E and F to new Schedule TO and

revised Schedule 13E-3 and General Instructions C and D to revised

Schedule 14D-9. We are eliminating the requirement in General

Instruction F of current Schedule 13E-3 to provide a cross-reference

sheet showing where the responses are located.

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[[Page 61423]]

2. Streamline and Improve Required Disclosure

a. ``Plain English'' Summary Term Sheet

We proposed to require a plain English summary term sheet in all

cash tender offers and all cash mergers, as well as going-private

transactions. The disclosure documents in these transactions often can

be difficult to understand, especially in the context of a business

combination transaction where a vast amount of information may be

available. We believe security holders should be provided with a

concise, easy to read term sheet that highlights the most important and

relevant information regarding an extraordinary transaction.

Accordingly, we are adopting the plain English summary term sheet

requirement as proposed.\154\ We are not adopting a plain English

summary term sheet for transactions involving the registration of

securities \155\ because these transactions already are required to

have a plain English summary, although the format may be somewhat

different from the summary term sheet approach.\156\ The summary term

sheet must begin on the first or second page of the disclosure

document, and must highlight the most important or material features of

a proposed transaction.\157\ This requirement applies to all issuer and

third-party cash tender offers, cash mergers and going-private

transactions. We believe the disclosure in these transactions can be

improved through the use of a plain English summary term sheet.

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\154\ Item 1001 of Regulation M-A. For purposes of this

requirement, plain English has the same meaning as in Rule 421(b)

and (d).

\155\ If a transaction is subject both to the registration

requirements of the Securities Act and either Rule 13e-3 or the

tender offer rules, a plain English summary term sheet is not

required. See Item 1 of revised Schedule 13E-3 (17 CFR 240.13e-100)

and new Schedule TO (17 CFR 240.14d-100).

\156\ See Item 3 of Forms S-4 and F-4 and Rule 421(d) of

Regulation C (17 CFR 230.421(d)). Effectiveness of a registration

statement may be denied or a stop order issued when there has not

been a bona fide effort to present information in a reasonably

clear, concise and readable manner. See Rule 461(b)(1) of Regulation

C (17 CFR 230.461(b)(1)); see also, In the Matter of Franchard

Corporation, 42 S.E.C. 163 (1964).

\157\ The required summary term sheet should present information

in bullet-point format and may include cross-references to more

detailed information found elsewhere in the disclosure documents

provided to security holders, consistent with plain English

principles.

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In proposing this requirement, we did not mandate the specific

items or questions that must be addressed in every case. Instead, we

gave examples of information that most security holders would need when

confronted with a tender offer or merger. Most commenters favored the

proposed approach of keeping the requirement general and giving filers

the flexibility to determine the issues that rise to the level of

addressing in a plain English summary term sheet. We are adopting this

approach.

As noted in the Proposing Release, in most cases, we believe

bidders should address the following questions in the summary term

sheet accompanying their cash tender offers:

Who is offering to buy my securities?

What are the classes and amounts of securities sought

in the offer?

How much is the bidder offering to pay and what is the

form of payment?

Does the bidder have the financial resources to make

payment?

Is the bidder's financial condition relevant to my

decision on whether to tender in the offer?

How long do I have to decide whether to tender in the

offer?

Can the offer be extended, and under what

circumstances?

How will I be notified if the offer is extended?

What are the most significant conditions to the offer?

How do I tender my shares?

Until what time can I withdraw previously tendered

shares?

How do I withdraw previously tendered shares?

If the transaction is negotiated, what does my board of

directors think of the offer?

Is this the first step in a going-private transaction?

Will the tender offer be followed by a merger if all

the company's shares are not tendered in the offer?

If I decide not to tender, how will the offer affect my

shares?

What is the market value (if traded) or the net asset

or liquidation value (if not traded) of my shares as of a recent

date?

Who can I talk to if I have questions about the tender

offer?

As for merger proxy statements, we believe a summary term sheet

should provide a brief outline of the particular matters proposed, the

material terms of the proposals, including the parties to the proposed

transaction, the consideration to be received by security holders, the

board's recommendation on how to vote or their position regarding the

transaction, the effect of a vote for and against each matter

presented, including the effects of not voting, the procedures for

voting and changing or revoking a vote, and the existence of appraisal

rights.

Several commenters provided useful suggestions on other information

that may assist security holders. We agree with these commenters that a

plain English summary term sheet should address, to the extent

applicable, the vote required to approve each matter presented, the

number of votes, if any, already committed to vote in a particular way,

any material interests of insiders or affiliates, as well as the

accounting and federal income tax treatment of the transaction. In the

context of a going-private transaction, we believe that the receipt of

opinions, appraisals, or other similar reports \158\ regarding the

fairness of a transaction would be of material interest to security

holders. In addition, the identity of the filing persons, including the

affiliates engaged in the transaction, a description of their

affiliation or relationship with the issuer, and their role in the

transaction may be important disclosure. Of course, we do not attempt

to provide an exhaustive list in this release of all the matters or

issues that may be material to security holders warranting inclusion in

a plain English summary term sheet. We leave that determination for

filers based on the particular facts and circumstances of their

transaction.

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\158\ See current and revised Item 9 to Schedule 13E-3.

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b. Item 14 of Schedule 14A Revised to Clarify Requirements and

Harmonize Cash Merger and Cash Tender Offer Disclosure

Item 14 of Schedule 14A specifies the information required in proxy

and information statements relating to extraordinary transactions.\159\

We are revising Item 14 substantially as proposed, except that the

revised item refers filers to the applicable disclosure requirements in

Forms S-4 and F-4, instead of Forms C and SB-3, which are not being

adopted at this time. This approach should make the item easier to

understand, and harmonize the proxy and registration statement

disclosure requirements. Since the disclosure and incorporation by

reference requirements in Forms S-4 and F-4 are essentially the same as

in current Item 14, this streamlined approach will not greatly modify

the disclosure required in a merger proxy statement. We are retaining

in Item 14 the existing

[[Page 61424]]

disclosure requirements applicable to investment companies.\160\

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\159\ 17 CFR 240.14a-101. Item 14 disclosure is required when a

vote or consent is solicited on: (i) A merger; (ii) a consolidation;

(iii) the acquisition of assets, a business or securities; (v) the

sale or transfer of all or substantially all the assets of the

registrant; (vi) a liquidation; or (vii) a dissolution. This item

requires information about the transaction and each party to the

transaction (i.e., the acquiror and the target). The information

specified in Item 14 may be incorporated by reference or physically

included in the disclosure document depending on the extent to which

the acquiror or target is eligible to use Form S-2 or S-3.

\160\ New Item 14(d) of Schedule 14A. We believe that this will

be simpler for investment companies than referring to Forms S-4 and

F-4, which generally are inapplicable to investment companies. We

also have consolidated and conformed current Instructions 6 and 8 to

Item 14 for investment companies. Instruction to paragraph (d) of

Item 14 of Schedule 14A. The requirements that we are retaining for

investment companies were not specifically tailored for investment

companies, and we believe that it would be appropriate to reconsider

these requirements in a future rulemaking project focused on the

registration and disclosure requirements applicable to investment

company business combination transactions.

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In addition, we are adopting several substantive changes regarding

the information required for acquirors and targets under Item 14. All

commenters that addressed the proposed changes to Item 14 believed they

were appropriate. We continue to believe that in certain circumstances

the disclosure requirements in Item 14 may be unnecessarily burdensome

and inconsistent with the level of information that would be required

if the same transaction was structured as an all-cash, all-share tender

offer. Therefore, we are adopting the following proposed revisions:

Item 14 is revised to clarify that financial statement

and other information about the acquiror is required in a cash

merger only if that information is material to voting security

holders' evaluation of the transaction.\161\ Similar to the need for

a bidder's financial statements in a cash tender offer, information

about the acquiror in a merger is generally not needed when target

security holders are receiving cash and the acquiror has

demonstrated its financial ability to satisfy the terms of the

offer.\162\

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\161\ Revised Instruction 2(a) to Item 14 of Schedule 14A. Pro

forma information about the transaction is not generally required in

a cash merger where only the target's security holders are voting on

the transaction.

\162\ Even if the acquiror's security holders are voting,

acquiror information may be omitted because the acquiror's security

holders are presumed to have access to information about their own

company. In this case, pro forma information about the transaction

will still be required in accordance with Article 11 of Regulation

S-X (17 CFR 210.11-01 through 17 CFR 210.11-03).

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In cases where financial statement information for the

acquiror would be material to a security holder's voting decision,

acquiror information is required for only two years and not three,

consistent with the treatment of tender offers.\163\

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\163\ Revised Item 14(c)(1) to Schedule 14A. If financial

statements of the target are required, then three years of financial

statements must be provided, consistent with the other requirements

for financial statements of acquired companies.

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The requirement to provide information about the target

in a cash merger is eliminated when the acquiror's security holders

are not voting on the transaction.\164\ Most likely, target security

holders will have information about the securities they already

hold. As a result, security holders can receive a shorter disclosure

document that is focused on the terms and effects of the

transaction. This revision harmonizes the disclosure required in

cash merger transactions with that required in all-cash, all-share

tender offers.\165\

\164\ Revised Instruction 2(b) to Item 14 of Schedule 14A.

\165\ No target information is required if target security

holders are voting on a merger in which the consideration offered

consists of acquiror securities that are exempt from Securities Act

registration. Revised Instruction 3 to Item 14 of Schedule 14A.

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The changes adopted today do not change the current requirement to

provide financial statements of the target and other company

information when the acquiror's security holders are voting on the

transaction, since those security holders may not know anything about

the target. In addition, target information is required in merger

proxies that are going-private or roll-up transactions. We believe that

target security holders have a need for current financial statements of

their company if it is subject to one of these types of transactions.

We are not adopting two proposed changes. Under the proposal, Item

14 would no longer permit information to be incorporated by reference

from the ``glossy'' annual report sent to security holders. Further, we

proposed to eliminate the instructions in Schedule 14A and Form S-4

that require filers to send the mandated disclosure document to

security holders at least 20 business days before the meeting date or

the expiration date of an exchange offer if information is incorporated

by reference.\166\ At this time we believe there still may be a number

of security holders that do not have the ability to access information

electronically, so we are not eliminating the 20 business day

incorporation by reference provision.\167\ We are retaining

incorporation by reference from the glossy annual report because this

information is delivered to security holders.\168\

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\166\ See Note D.3 to Schedule 14A; General Instruction A.2 to

Form S-4; and General Instruction A.2 to Form F-4.

\167\ We have stated that the 20 business day period must be

complied with even if the documents incorporated by reference are

delivered along with the disclosure document. See Release No. 33-

6578 (April 23, 1985) (50 FR 18990) (Form S-4 adopting release). We

are changing this interpretation. If filers furnish the information

that is incorporated by reference with the disclosure document that

is sent to security holders, they do not have to comply with the 20

business day requirement.

\168\ Revised Item 14(e) to Schedule 14A (17 CFR 240.14a-101).

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c. Reduced Financial Statement Requirements for Non-Reporting Target

Companies in Stock Mergers and Stock Tender Offers

The previous section addressed information requirements in cash

mergers. We also have examined financial statement requirements in the

context of stock mergers and stock tender offers. As we noted in the

Proposing Release, financial statements of the target generally are

required when registered securities are being offered. The rules

currently provide special treatment when the target is not subject to

the Commission's reporting requirements, but we believe these

requirements can be further relaxed. Currently, the rules require the

filing person (the acquiror) to provide financial statements of the

non-reporting target going back three years.\169\ We noted that

providing three years of financial statements prepared in accordance

with Regulation S-X \170\ for a non-reporting company can be costly and

burdensome to prepare. In some cases they may not be available.

Therefore, we proposed to reduce the financial statements required for

non-reporting targets when the acquiror's security holders are not

being asked to vote on the transaction.

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\169\ See Item 17(b)(7) of Form S-4, Item 17(b)(5) of Form F-4

and Item 14(b)(3)(ii)(A) of Schedule 14A. These items specify the

information required for non-reporting target companies in a

business combination transaction. An acquiror must provide financial

statements ``that would have been required to be included in an

annual report to security holders'' had the non-reporting company

been required to furnish an annual report that complies with Rule

14a-3(b) (17 CFR 240.14a-3(b)). This rule requires audited balance

sheets for each of the two most recent fiscal years and audited

statements of income and cash flows for each of the three most

recent fiscal years prepared in accordance with Regulation S-X.

\170\ The required balance sheet for the year preceding the

latest full fiscal year and the income statements for the two years

preceding the latest full fiscal year need not be audited if they

have not previously been audited. The required financial statements

must be audited to the extent practicable.

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Most commenters believed that the proposed reduction was

appropriate and would facilitate acquisitions of non-reporting targets.

We continue to believe that the requirement to provide target financial

statements can be curtailed, particularly because in many cases target

security holders likely made their initial investment decision in the

non-reporting company based on less extensive information than what is

currently required. In addition, security holders are being offered

securities in a public company for which there should be significantly

more information available and a more liquid market to

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sell into. Therefore, we are reducing the financial statement

requirement substantially as proposed.\171\ In addition, where the non-

reporting target is not significant to the acquiror and the acquiror's

security holders are not voting on the transaction, we believe the

financial statement requirements can be reduced even further.

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\171\ Since we are not adopting Forms C and SB-3, these changes

are implemented in amendments to Forms S-4 and F-4.

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Accordingly, we are eliminating the requirement to provide

financial statements for the non-reporting target altogether when the

acquiror's security holders are not voting on the transaction and the

non-reporting target is not significant to the acquiror above the 20%

level.\172\ The security holders that purchased securities in the non-

reporting company generally would be aware that they invested in a

company that is not subject to our reporting requirements and they

would not expect to receive the same level of financial information

that is required for a public reporting company. Moreover, if the non-

reporting company is not significant to the acquiror, we believe

security holders would likely rely on the financial statements of the

acquiror in making their voting or investment decision. Because a

combination of an insignificant non-reporting target company and a

public acquiror should not materially alter the financial condition of

the acquiror, we believe that non-reporting target security holders are

likely to rely on the required acquiror financial information

alone.\173\ In addition, the 20% threshold is the standard adopted in

1996 for the requirement of audited financial statements in filings

made under the Securities Act and the Exchange Act for business

acquisitions.\174\

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\172\ Determination of the significance of an acquisition to the

acquiror is made in accordance with Rule 3-05 of Regulation S-X (17

CFR 210.3-05). See Release No. 33-7355 (October 10, 1996) (61 FR

54509) and Rule 1-02(w) of Regulation S-X (17 CFR 210.1-02(w)).

\173\ This change is consonant with our revisions to Item 14 to

eliminate the requirement to provide target financial statements in

cash mergers when the acquiror's security holders are not voting on

the transaction and the information is not material to the target

security holders' voting decision.

\174\ In Release No. 33-7355, we streamlined the requirements

with respect to financial statements for business acquisitions.

Among other things, the amended rules raised the thresholds of

significance that determine whether financial statements of an

acquired business must be provided in filings. These rule changes

were intended to reduce impediments to registered offerings that may

have caused companies to undertake private or offshore offerings

instead. We believe the significance threshold for non-reporting

targets should be the same in Forms S-4 and F-4 as under our other

financial statement requirements. We may, however, consider

revisiting this issue in a broader context in a future rulemaking

proposal that addresses what the significance thresholds should be

in light of the current accounting environment.

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Accordingly, we are revising the financial statement requirements

for non-reporting targets when the acquiror's security holders are not

voting on the transaction,\175\ as follows:

\175\ These changes do not affect the financial statements

required in roll-up transactions.

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If a non-reporting company is being acquired in a

business combination transaction, then financial statements for the

latest fiscal year prepared in conformity with generally accepted

accounting principles (``GAAP'') must be provided.\176\

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\176\ Revised Items 17(b)(7) of Form S-4 and 17(b)(5) of Form F-

4.

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Also, if the non-reporting target security holders were

previously provided with GAAP financial statements for either or

both of the two fiscal years before the latest fiscal year, then

GAAP financial statements must be provided for those years as well.

If the non-reporting target is not significant to the

acquiror in excess of the 20% level, then no financial information

is required for the target.\177\

\177\ Under these facts pro forma and comparative per share

information is not required. See Rule 11-01(c) of Regulation S-X (17

CFR 210.11-01(c)).

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These revisions apply equally to foreign and domestic non-reporting

target companies. If the target's financial statements are prepared on

the basis of a comprehensive body of accounting principles other than

U.S. GAAP (foreign GAAP), a reconciliation to U.S. GAAP is required

unless a reconciliation is unavailable or not otherwise obtainable

without unreasonable cost or expense.\178\

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\178\At a minimum, however, a narrative description of the

material variations in accounting principles, practices and methods

used in preparing the foreign GAAP financial statements from those

accepted in the U.S. is required.

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The current requirement to provide ``audited'' financial statements

for the non-reporting target remains the same. Financial statements for

the latest fiscal year must be audited only to the extent practicable.

Audited financial statements are not required for years before the most

recent fiscal year if the target's financial statements were not

previously audited.

We are not changing the current requirement that a resale

registration statement include audited financial statements in

accordance with Rule 3-05 of Regulation S-X.\179\ Also, to the extent

that a transaction is significant to the acquiror, audited financial

statements would ultimately need to be provided under Item 7 of Form 8-

K. Of course, if the acquiror's security holders are voting on the

transaction, then the current financial statement requirements apply.

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\179\ A resale registration statement is used to register the

resale of securities to the public by anyone who is deemed an

underwriter w

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