# Regulation of Takeovers and Security Holder Communications > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A99-28355 ## Record - **Collection:** Federal Register - **Document type:** Rule - **Published:** November 10, 1999 - **Citation:** 64 FR 61408 ## Text 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. ----------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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''). --------------------------------------------------------------------------- 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; --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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). --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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.'' --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \41\ 17 CFR 232.13(d). See Part II.C.3 below. \42\ See Part II.B.2 below. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \64\ 17 CFR 249.308. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \65\ New Rule 425(b). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \66\ New Rule 165(f)(3). A similar definition of ``public announcement'' is included in revised Rules 13e-4(c) and 14d-2(b). --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \78\ Rule 14a-6(e)(2) (17 CFR 240.14a-6(e)(2)). --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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)). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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)). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \116\ The latter group was primarily concerned that staff comment could necessitate the dissemination of a post-effective amendment. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \118\ Rule 14a-4(f). --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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)). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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 off [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A99-28355. Public record. Not legal advice.