Client Alert Latham & Watkins Corporate Department

Transcription

1 Number 711 June 10, 2008 Client Alert Latham & Watkins Corporate Department On balance, the proposals are evolutionary and not revolutionary and, therefore, do not signal a major shift or fundamental new regulatory approach with respect to cross-border transactions. The SEC Proposes Revisions to Exemptions for Cross-Border Tender Offers, Business Combinations and Rights Offerings The US Securities and Exchange Commission recently proposed revisions 1 to the rules and regulatory framework governing cross-border 2 tender offers, business combinations and rights offerings involving foreign private issuers. 3 The proposals are the latest in a series of releases that focus on how the SEC regulates foreign private issuers. They are intended to refine the current rules in order to reduce regulatory conflict between US and non-us regulatory regimes and thereby encourage bidders to include US holders of the securities of Executive Summary of the Proposals foreign private issuers in cross-border business combination 4 transactions. The proposals would essentially codify no-action letter relief and interpretive guidance that the Staff of the SEC s Division of Corporation Finance has provided on a case-by-case basis since the adoption of the current rules in On balance, the proposals are evolutionary and not revolutionary and, therefore, do not signal a major shift or fundamental new regulatory approach with respect to cross-border transactions. The proposals would: refine the test for calculating US beneficial ownership of a foreign private issuer for purposes of determining eligibility for Tier I and Tier II exemptive relief in both friendly and hostile transactions by permitting the calculation of the US beneficial ownership of a foreign private issuer as of any date within the 60-day period prior to announcement of a cross-border transaction; expand Tier I relief for going private transactions structured as compulsory acquisitions for cash and court-approved schemes of arrangement and other business combinations; codify certain relief for Tier II transactions currently granted by the Staff on a case-by-case basis by: ๐ permitting multiple, non-us offers and allowing non-us security holders to be included in the US offer and US security holders to be included in non-us offers; ๐ permitting subsequent offering periods lasting more than 20 business days; ๐ allowing securities tendered during a subsequent offering period to be purchased within 14 business days from the date of tender; Latham & Watkins operates as a limited liability partnership worldwide with an affiliated limited liability partnership conducting the practice in the United Kingdom and Italy. Under New York s Code of Professional Responsibility, portions of this communication contain attorney advertising. Prior results do not guarantee a similar outcome. Results depend upon a variety of factors unique to each representation. Please direct all inquiries regarding our conduct under New York s Disciplinary Rules to Latham & Watkins LLP, 885 Third Avenue, New York, NY , Phone: Copyright 2008 Latham & Watkins. All Rights Reserved.

2 ๐ allowing back-end withdrawal rights to be terminated at the end of the initial offering period while tenders are counted even if there will be no subsequent offering period; and ๐ expanding exceptions from the application of Rule 14e-5 s restrictions on purchasing securities outside of a tender offer; clarify that Tier II exemptive relief is available for transactions subject not only to Rule 13e-4 or Regulation 14D but also for transactions subject only to Regulation 14E; and permit certain foreign institutions to report their beneficial ownership of companies registered with the SEC on Schedule 13G, instead of the more burdensome Schedule 13D. The Proposing Release also: provides interpretive guidance, which should be viewed as effective as of the date of the Proposing Release, regarding: ๐ the equal treatment of non-us target security holders; ๐ special precautions that bidders are recommended to take to avoid triggering application of the US cross-border rules when engaging in cross-border exclusionary offers; and ๐ vendor placements used in connection with cross-border exchange offers; asks for comment about increasing the 10 percent US beneficial holder threshold for determining eligibility for Tier I exemptive relief; and asks for comment about substantially expanding and simplifying the eligibility determination by replacing the US beneficial holder eligibility threshold for Tier I and Tier II exemptive relief with one based on (1) US average daily trading volume (ADTV) or (2) the percentage of shares held in ADR form. The SEC has requested comments on the proposals by June 23, Please contact one of the persons listed at the end of this Client Alert if you would like to share your thoughts with us or would like to discuss any questions or concerns you have regarding the proposals. Background The continued globalization of capital markets has, in recent years, significantly increased US investor interest in the securities of foreign private issuers and resulted in higher volumes of cross-border transactions. 6 The SEC is to be complimented for not only recognizing this development but also making numerous efforts to modernize its regulation in light of internationalization. 7 Proposals Intended to Expand Availability of Cross-Border Exemptions, Encouraging Inclusion of US Holders in Cross-Border Transactions Prior to the adoption of the current rules, US security holders were typically excluded from cross-border business combination transactions and rights offerings because the inclusion of such US security holders automatically triggered the full regulatory force of US securities laws, including, where applicable, the Securities Act of 1933 (the Securities Act) and the Securities Exchange Act of 1934 (the Exchange Act). Where the involvement of US security holders was not necessary for the successful consummation of a transaction, full compliance with the US securities laws was often prohibitively onerous and in many cases impossible given conflicts with applicable non- US business combination regulatory regimes. The SEC attempted to address this situation through the adoption of the current rules, which extended exemptive relief from the full application of US securities laws to cross-border business combinations and rights offerings in defined situations based on the level of US beneficial ownership of the foreign private issuer. The proposals are intended to refine the current rules to further encourage bidders to include US holders of the target securities in cross-border transactions. Notwithstanding the SEC s 2 Number June 2008

3 recent emphasis on US ADTV as the appropriate mechanism to measure US investor interest in foreign private issuers and hence to determine the appropriate level of regulation and protection called for by US securities laws in the proposals, the SEC decided to retain its use of the percentage of US beneficial ownership of a foreign private issuer as the key factor to determine the availability of exemptions from the cross-border rules. At the same time, the Proposing Release suggests a stick in counterpoint to the proposals carrots : in connection with its interpretive guidance, which should be viewed as effective regardless of whether the proposals are adopted, on what special precautions bidders conducting exclusionary offers limited to non-us holders should take to prevent triggering the application of the US cross-border rules, the Proposing Release states that, in the future, the Staff will more closely monitor exclusionary offers to determine whether SEC action is necessary to protect US holders of target securities. Current Rules Regulatory Framework The current rules framework extends exemptive relief from the full application of US securities laws to cross-border business combinations transactions when the level of US beneficial ownership in the foreign private issuer subject company is no more than 10 percent (Tier I) or greater than 10 percent but no more than 40 percent (Tier II). Both US and non-us bidders may rely on the Tier I and Tier II exemptions. Cross-border business combination transactions where US beneficial ownership in the foreign private issuer subject company exceeds 40 percent are subject to US regulation as if the transaction were entirely domestic providing no US regulatory relief (absent specific no action relief). Cross-border business combination transactions eligible for Tier I or Tier II relief continue to be subject to the antifraud and anti-manipulation provisions of the US securities laws. Tier I Tender Offer and Securities Act Exemptions The Tier I exemption provides the following exemptive relief: Tender Offers. Tender offers for the securities of a foreign private issuer are exempt from most of the disclosure, filing and procedural requirements of the Exchange Act and the rules promulgated thereunder governing tender offers. Exchange Offers. Securities issued in an exchange offer, merger or similar transaction for a foreign private issuer are exempt from the registration requirements of the Securities Act. Rights Offerings. Rights offerings of equity securities by a foreign private issuer are exempt from the registration requirements of the Securities Act. To qualify for the Tier I exemption, in addition to meeting the US beneficial ownership threshold, US security holders generally must be able to participate in the offer on terms at least as favorable as those offered to any other holders. 8 Bidders must also provide US security holders with the offering materials, in English, on a comparable basis to that provided to other security holders. Tier II Tender Offer Exemptions The Tier II exemption entitles bidders making issuer and third-party tender offers to limited relief from US securities laws in areas of frequent conflict between US and foreign regulatory requirements, thus reducing the burdens of compliance. Tier II relief permits compliance with home-country procedural requirements (including prompt payment rules, withdrawal rights provisions and the rules on extending offers and providing notice of such extensions) in lieu of compliance with US rules and, in certain circumstances, permits the exclusion of US persons from participating in an offer of loan notes. 9 Except for the limited relief expressly provided by the Tier II exemptions or as otherwise provided by Staff no-action positions, bidders must comply with all other applicable provisions of the US securities laws (including, if applicable, the registration requirements of Section 5 of the Securities Act) when making cross-border tender offers. 3 Number June 2008

4 Determining US Ownership Percentage in Negotiated Transactions The number of securities of a foreign private issuer held by US holders determines whether either of the Tier I or Tier II exemptions apply to negotiated transactions. The Look Through Test. In determining the amount of the subject class of securities held by US holders, in addition to including securities held directly by US investors (including American Depositary Receipts (ADRs)), the current rules require an acquiror to look through the record ownership of brokers, dealers, banks or other nominees appearing on the foreign private issuer s books or those of transfer agents, depositaries or others acting on its behalf and determine the residency of those beneficial owners. This look through analysis is limited to securities held of record by brokers, dealers, banks or other nominees: (1) in the United States; (2) in the issuer s home jurisdiction; and (3) in the primary trading market for the issuer s securities, if different from the issuer s home jurisdiction. Excluded Securities. Under the current rules, the following securities are not taken into account and must be excluded from the calculation of the US ownership percentage: (1) securities held by holders of more than 10 percent of the class (whether US or foreign holders); (2) securities that are convertible into or exchangeable for subject securities, such as warrants, options and convertible securities; and (3) securities held by a bidder or bidding group. Determining US Ownership Percentage in Hostile Transactions The current rules allow bidders in a hostile tender offer to employ US ADTV as a percentage of worldwide ADTV of the target s securities over a 12 month period up to 30 days before the commencement of the tender offer to determine the bidder s Tier I or Tier II exemption eligibility (at a 10 percent and 40 percent threshold, respectively). 10 The ability to use this ADTV presumption of US beneficial ownership is conditioned on the bidder not having actual knowledge or a reason to know that US beneficial ownership in the target securities exceeds the relevant Tier I or Tier II threshold. 11 Proposed Rules Regulatory Framework While the proposals do not seek to alter the underlying two-tiered structure established by the current rules, the proposed revisions to the eligibility threshold calculation present the most pronounced departure from the current rules. Determining Availability of Exemptive Relief under the Proposals Timing of the Eligibility Calculation The current rules require that the eligibility calculation in respect of the level of US beneficial ownership of the securities of the foreign private issuer be performed on exactly the 30th day prior to the date of commencement of an offer or the solicitation of a business combination. 12 Eligibility for exemptive relief under the proposals would be calculated at any time 60 days prior to the date of announcement of the transaction. 13 This alters the current rules eligibility calculation mechanics in two key ways. 1. Flexibility to choose from a range of days the date eligibility is calculated. Permitting eligibility to be calculated as of any date over a period of time further in advance of a potential cross-border transaction would address certain difficulties bidders have frequently raised with the Staff in past cross-border transactions. In some jurisdictions, for example, the look through analysis cannot be accomplished with certainty in the relatively short period of time (30 days or less) required by the current rules. Moreover, determining sufficiently in advance the date of commencement of a transaction in order to define the correct date as of which to determine US beneficial ownership has also proven troublesome since acquirors in some jurisdictions are unable to control the exact date of commencement because of their 4 Number June 2008

5 compliance with applicable non-us regulations. 2. The triggering event is the announcement of the transaction. The triggering event for performing the eligibility calculation is the date of the announcement of the transaction as opposed to the date of its commencement. This change would likely provide a more accurate picture of US beneficial ownership as ownership levels should not yet have been influenced by the announcement of the transaction. In addition, use of the date of the announcement of the transaction as the triggering mechanism allows bidders more time to address adequately home country regulatory requirements and their interaction with the US cross-border rules. Moreover, if the Tier I or Rule 802 exemption is not available, the bidder would have more time to prepare the necessary offering materials required to comply with US securities laws. Revisions Regarding Presumption of US Beneficial Ownership in Context of Hostile Tender Offers In respect of the presumption of US beneficial ownership in the context of hostile tender offers, the proposals would clarify that the bidder has reason to know information that is publicly available, including beneficial ownership information filed with the SEC, a home country regulator or disseminated in third-party beneficial ownership reports. 14 The proposals would also clarify that the date of announcement of the proposed hostile tender offer is the cut-off date after which the bidder will not be considered to have had reason to know beneficial ownership from third-party private reports. 15 Finally, in keeping with the proposals revision of the timing of eligibility calculation in the context of non-hostile tender offers, the proposals would provide that the 12 month period used in the ADTV determination ends at any time up to 60 days prior to the date of announcement of the hostile tender offer. 16 Alternative Methods for Determining Eligibility for the Cross-Border Exemptions? The proposals request comment on the appropriateness of three alternative methods for determining eligibility for the cross-border exemptions. 1. Increasing the US beneficial ownership threshold from 10 percent to 15 percent. One alternative that the proposals contemplate would be to increase the US beneficial ownership threshold from 10 percent to 15 percent for negotiated and hostile cross-border transactions. 17 Doing so would make Tier I relief available to a larger number of cross-border transactions and would likely result in US security holders being included in a greater percentage of cross-border transactions. 2. Employing an ADTV alternative threshold. A second alternative with respect to which the proposals request comment is whether to determine eligibility for exemptive relief in respect of negotiated cross-border transactions by reference to an as yet to be determined level of US ADTV of the target securities as a percentage of worldwide ADTV Using percentage of target shares held in ADR form. A third alternative the proposals discuss would be to use the percentage of a target s shares held in ADR form as a proxy for US beneficial ownership in both hostile and negotiated transactions. If such a test were to be adopted, the SEC queries whether it should amend Form 20-F to require a foreign private issuer to report the number of sponsored ADRs outstanding to facilitate the determination of whether the cross-border exemptions would be available in respect of a cross-border transaction. 19 Expanded Tier I Relief for Going Private Transactions under Proposals The proposals would remove all restrictions on the type of Tier I qualified going private transaction eligible for Tier I s exemption from Rule 13e Rule 13e-3 requires a filing with enhanced disclosure for transactions involving affiliates that have the effect of 5 Number June 2008

6 causing the target to become a private company. 21 The scope of the current Tier I exemption from Rule 13e-3 does not extend to certain business combination transaction structures commonly used abroad, such as compulsory acquisitions for cash and court-approved schemes of arrangement and other business combination transactions which, due to their structure, may not need to rely on relief pursuant to Tier I or Rule Under the proposals, all transactions qualifying for the Tier I exemption would be exempt from Rule 13e-3. Changes to the Tier II Exemption under Proposals Changes to the Tier II exemption under the proposals would essentially codify Staff no-action relief that has been granted on an individual caseby-case basis and would address areas of regulatory conflict with non-us regulators. Expansion of Classes of Securities Eligible for Tier II Exemptive Relief The proposals would clarify that the Tier II exemption is available regardless of whether the target securities are subject to Rule 13e-4 (securities subject to issuer self-tender offers) or Regulation 14D (securities registered under Section 12 of the Exchange Act) as long as the other conditions to Tier II exemptive relief are satisfied. 23 Under the current rules, it is unclear whether the Tier II exemption is available for securities not subject to Rule 13e-4 or Regulation 14D. 24 Reducing Conflict with Non-US Regulatory Regimes and Market Practice The proposals would revise the mechanics of the Tier II exemption to enable better coordination between US and non-us business combination regulatory regimes: Expanded Tier II Exemptive Relief for Multiple Non-US Offers. The current rules permit a bidder conducting a cross-border tender offer to separate its offer into two (but only two) separate offers one US and one non-us for the same class of securities. This practice allows bidders greater flexibility to comply with two sets of regulatory regimes and accommodates frequent conflicts in tender offer practice between US and non-us jurisdictions. 25 The proposals would expand this relief by allowing a bidder to split its offer into multiple separate non-us offers for the same class of securities thereby enabling greater accommodation of differing regulatory regimes (especially in the case where more than two regulatory regimes are implicated by a cross-border transaction). 26 For example, a bidder making a Tier II offer for a target organized in one non-us jurisdiction, listed in another non-us jurisdiction and with US beneficial ownership of its equity securities would be allowed to make separate offers in each of the three jurisdictions, if necessary, to accommodate regulatory conflict between the applicable regulatory regimes. In addition, the proposals would provide that the separate US offer could include non-us security holders thereby accommodating the inclusion of all the target s ADRs in the US offer. 27 Expanded Tier II Exemptive Relief for Subsequent Offering Periods. To further facilitate the ability of bidders to meet the requirements of multiple regulatory regimes, the proposals would revise the subsequent offering period for Tier II cross-border tender offers by: (1) allowing subsequent offering periods to last for more than 20 business days (without any maximum time-limit on subsequent offering periods), which is regularly required by applicable non-us law; 28 (2) revising the prompt payment rule that currently requires payment on an as-tendered basis for securities tendered during a subsequent offering period to provide for payment on a modified rolling basis of 14-business day intervals from the date of tender; 29 and (3) providing additional flexibility to accommodate the commonly used non-us mix and match offer structure which regularly conflicts with the proration and the prompt payment rules applicable during subsequent offering periods. 30 Termination of Withdrawal Rights while Tendered Securities are Counted. The current rules require 6 Number June 2008

7 a bidder to provide target security holders with withdrawal rights after a set date, measured from the commencement of a tender offer until shares have been accepted for payment. This can create back-end withdrawal rights where a security holder that has tendered its shares may still withdraw its tender after the initial offering period has closed but before the bidder is able to settle payment for such shares. In many non-us jurisdictions, the counting of tendered securities after the close of the initial offering period can take substantial time during which such back-end withdrawal rights create uncertainty in determining whether a minimum tender condition has been met. Under the current rules, a bidder providing a subsequent offering period is, subject to certain conditions, permitted to suspend back-end withdrawal rights from the close of the initial offering period to the commencement of the subsequent offering period. The proposals would, subject to satisfaction of certain conditions, extend this relief by allowing withdrawal rights to be terminated at the end of the initial offering period so that such withdrawal rights are not available during the counting process even if bidders do not provide a subsequent offering period. 31 Termination of Withdrawal Rights after Reduction of a Minimum Acceptance Condition. The current rules generally require that a bidder allow an offer to remain open, and provide withdrawal rights, for a certain period of time after a material change in the offer s terms is communicated to target security holders. The Staff considers a reduction or waiver of a minimum acceptance condition to constitute a material change. This US requirement has created a conflict with many jurisdictions, particularly the UK. When it initially adopted the current rules, the SEC affirmed the Staff s interpretative guidance on when bidders meeting the conditions of the Tier II exemption could waive or reduce the minimum acceptance condition without providing withdrawal rights during the remainder of the offer. 32 In the Proposing Release, the SEC stresses that its interpretive guidance was and continues to be limited to instances where home country law and practice make it impossible or unnecessarily burdensome to comply with the extension requirements of US law. Thus, mere permissiveness of a foreign jurisdiction in this area would not be sufficient. 33 In addition, the Proposing Release expresses concern regarding the impact that a reduction or waiver of a minimum condition can have on tendering security holders not afforded withdrawal rights. 34 In an attempt to mitigate that impact, in the Proposing Release, the SEC refines its prior guidance by introducing the additional requirement that the bidder must undertake not to waive or reduce the minimum acceptance condition below a majority of the outstanding target securities that are the subject of the tender offer. 35 Furthermore, a bidder seeking to rely on this guidance will now be required to disclose and discuss fully in its offering materials all of the possible implications of the potential waiver or reduction, including at the specific levels contemplated disclosure that may be challenging to provide in an exchange offer. 36 This interpretive guidance should be viewed as effective as of the date of the Proposing Release regardless of whether the proposals are ultimately adopted by the SEC. Early Termination of an Initial Offering Period or a Voluntary Extension of Such Period. The Proposing Release makes clear that the Staff still considers a change in the expiration date of a tender offer as material. 37 The Staff has given specific no-action relief from the US extension requirements to bidders to permit the early termination of an initial offering period (or any voluntary extension thereof) in situations where foreign law and practice require a bidder to terminate a tender offer and withdrawal rights immediately after all offer conditions are satisfied. Such relief is contingent on several conditions similar to those that have been established for bidders wishing to waive or reduce a minimum acceptance condition and is also 7 Number June 2008

8 not available during any mandatory extension of the offer. 38 The Proposing Release solicits comment on whether the SEC should codify guidelines set forth in Staff no-action letters in this area. 39 Tier II Exemptive Relief for Purchases of Securities Outside the Offer. Rule 14e-5 prohibits the bidder and its affiliates from purchasing or arranging to purchase target securities except as part of the tender offer to prevent a bidder from extending greater or different consideration to some, but not all, target security holders. 40 The current rules exempt Tier I tender offers from Rule 14e-5, but not Tier II offers. The proposals would extend exemption from Rule 14e-5 to Tier II transactions in two situations based on prior Staff no-action letters: 41 (1) to facilitate making multiple separate offers as part of the same tender offer transaction (discussed above); 42 and (2) to allow bidders, their affiliates and financial advisors to execute purchases outside a tender offer, including in the open market and through privately negotiated purchases and certain enumerated trading activities, when this activity is permissible under the laws of the target s home jurisdiction (subject in each case to certain conditions 43 designed to promote the fair treatment of tendering security holders). Early Commencement of an Exchange Offer under Proposals In order to reduce the regulatory disparity between cash and stock tender offers, the current rules permit certain exchange offers to commence upon the date of the filing of a registration statement for the securities to be offered in the transaction, rather than the date on which the registration statement is declared effective by the Staff. 44 Nevertheless, this early commencement option is not available under the current rules for exchange offers not subject to Rule 13e-4 (securities subject to issuer self-tender offers) or Regulation 14D (securities registered under Section 12 of the Exchange Act), including, for example, offers for unregistered equity securities and cross-border debt tender offers. 45 The proposals would allow all exchange offers eligible for the Tier II cross-border exemptions to take advantage of the early commencement procedure, subject to the condition that the offeror voluntarily provide certain protections (such as withdrawal rights) that are required in an offer subject to Rule 13e-4 or Regulation 14D. 46 Extension of Exemption to Beneficial Ownership Reporting to Foreign Institutions under Proposals The current rules require any person who acquires beneficial ownership of more than 5 percent of a class of equity securities registered under Section 12 of the Exchange Act to report the acquisition on Schedule 13D. 47 Certain US institutions such as brokers, dealers, investment companies and investment advisers registered with the SEC are allowed to file on Schedule 13G, which is significantly less burdensome to prepare and update. 48 The proposals would allow foreign institutions that are substantially comparable to the US institutions to use Schedule 13G as well, without seeking separate exemptive relief from the Staff. 49 To be eligible to file on Schedule 13G, the foreign institution would be required to certify on the Schedule 13G that it is subject to a regulatory regime comparable to that applicable to its US counterparts. 50 The foreign institution would also need to undertake to furnish to the SEC, upon request, the information it otherwise would be required to provide in a Schedule 13D. 51 As with US domestic institutions, filing on Schedule 13G would only be available to foreign institutions so long as the owned securities are held in the ordinary course of business and not with the purpose or effect of influencing or changing control of the issuer. 52 Additional Guidance Provided by Proposing Release The Proposing Release provides interpretative guidance that is effective whether or not the proposals are adopted with respect to: Equal Treatment of Non-US Target Security Holders. The Proposing Release continues to encourage 8 Number June 2008

9 international securities regulators to limit the ability of bidders to exclude US holders from cross-border business combination transactions. 53 The Proposing Release then articulates the importance of committing to the reverse obligation and reiterates the SEC s position that the equal treatment obligations (the allholders provision) under the US cross-border rules do not allow the exclusion of any foreign or US target security holder in tender offers subject to US law. 54 Special Precautions in the Context of Exclusionary Offers. The Proposing Release provides guidance on what special precautions bidders conducting exclusionary offers limited to non-us holders should take to prevent triggering the application of the US cross-border rules. Legends indicating that such offers are not being made into the US are unlikely to be sufficient in themselves to ensure that the offers do not use US jurisdictional means and thus are not subject to the US securities laws. 55 Instead, bidders seeking to engage in exclusionary offers should consider employing legends coupled with adequate measures reasonably designed to guard against sales to and purchases and tenders from US holders, including limiting Internet availability of materials and establishing certain procedures and obtaining representations from tendering security holders to ensure that the offer has not triggered US jurisdictional means. 56 Perhaps the most salient aspect of this guidance is the explicit statement contained in the Proposing Release that in the future the Staff will more closely monitor exclusionary offers to determine whether SEC action is necessary to protect US target holders. 57 Vendor Placements. The Proposing Release briefly discusses vendor placements sometimes used in connection with cross-border exchange offers but primarily reiterates existing guidance on the subject. Vendor placements involve the bidder hiring a thirdparty to sell in offshore transactions the securities to which US security holders are entitled in an exchange offer as a means to avoid the potential application of the registration requirements of the Securities Act essentially converting an exchange offer into a cash-only tender offer to US holders. The Staff has, in several no-action letters, taken a position that such arrangements do not involve an offer or sale of securities into the US and therefore do not require registration under the Securities Act of the securities sold on account of US persons. The Proposing Release states that such relief will be granted only where it is in the interest of US investors. 58 The factors that the SEC considers when determining whether a vendor placement obviates the need for Securities Act registration include: (1) the level of US ownership in the target company; (2) the amount of bidder securities to be issued overall in the business combination as compared to the amount of bidder securities outstanding before the offer; (3) the amount of bidder securities to be issued to tendering US holders and subject to the vendor placement, as compared to the amount of bidder securities outstanding before the offer; (4) the liquidity and general trading market of the bidder s securities; (5) the likelihood that the vendor placement can be effected within a very short time after the termination of the offer and the bidder s acceptance of shares tendered in the offer; (6) the likelihood that the bidder plans to disclose material information around the time of the vendor placement sales; and (7) the process used to effect the vendor placement sales, including whether the sales involve special selling efforts by brokers or others acting on behalf of the bidder. Bidders which seek to use the vendor placement structure for tender offers subject to Regulation 14D at US beneficial ownership levels above Tier I must also seek an exemption from the US equal treatment rules Number June 2008

10 The SEC Proposes Revisions to Exemptions for Cross-Border Tender Offers, Business Combinations and Rights Offerings: Summary of Key Current and Proposed Rules Provision Proposed to be Amended General Rule Description Current Rule Proposed Rule Eligibility Threshold to Benefit from Exemptions Timing of Eligibility Calculation Eligibility under the current rules for Tier I, Tier II, and Rule 801 and Rule 802 exemptive relief is calculated on the 30th day before commencement of the transaction. Eligibility under the proposals for Tier I, Tier II and Rule 801 and Rule 802 exemptive relief would be calculated at any time 60 days prior to announcement of the transaction. Appropriate Threshold? Hostile Tender Offers Except in the context of hostile tender offers, Tier I, Tier II, and Rule 801 and Rule 802 exemptive relief are all based on the level of US ownership calculated at a specific point in time prior to the contemplated transaction and involving a look through analysis of US beneficial ownership. Eligibility for Tier I (for nonhostile transactions) and Rule 801 and Rule 802 exemptive relief is based on a 10 percent US beneficial ownership threshold involving a look through analysis to determine the beneficial holders. Eligibility for Tier I, Tier II and Rule 802 exemptive relief in the context of hostile tender offer transactions can be determined via an alternative ADTV threshold test as long as the acquiror does not have a reason to know (or actually knows) that US beneficial holding is greater than 10 percent. The proposals request comment on whether to increase the 10% US beneficial ownership threshold to 15% for determining eligibility for Tier I exemptive relief or whether to employ an alternative test based on US average daily trading volume ( ADTV ) or the percentage of target shares held in ADR form to replace the US beneficial holder eligibility thresholds for Tier I and Tier II exemptive relief. The proposals: (1) clarify what constitutes a reason to know (essentially the acquiror is deemed to know all publicly available information and filings); (2) shift the ADTV calculation period to be the 12- month period ending 60 days prior to the announcement of the transaction; and (3) clarify that the reason to know (or actual knowledge) refers to knowledge as of the date of announcement of the transaction. Tier I Exemption Rule 13e-3 Rule 13e-3 establishes specific filing and disclosure requirements for issuers or affiliates engaging in going private transactions. The scope of Rule 13e-3(g)(6) exemptions does not apply to some transaction structures commonly used abroad, including schemes of arrangements and compulsory acquisitions for cash. The proposals would broaden the scope of the Rule 13e-3(g)(6) exemption to cover schemes of arrangements, compulsory acquisitions for cash and other transactions that meet the other conditions of Tier I exemption. Tier II Exemption Expansion of the Classes of Securities Eligible for Tier II Exemptive Relief Rule 13e-4 governs issuer tender offers and Regulation 14D governs third party tender offers for equity securities registered under Section 12 of the Exchange Act. Under the current rules, it is unclear whether the Tier II exemption applies to securities not subject to Rule 13e-4 or 14D Regulation. The proposals would clarify that the Tier II exemption is available regardless of whether the target securities are subject to Rule 13e-4 or Regulation 14D as long as the other conditions to satisfy Tier II exemptive relief are met. 10 Number June 2008

11 Provision Proposed to be Amended General Rule Description Current Rule Proposed Rule Expanded Tier II Exemptive Relief for Multiple Offers In general, the current rules do not allow disparate treatment of target security holders. The Staff in no-action letters and the current rules establish certain exceptions to this principle to accommodate regulatory conflicts. The current rules permit a bidder conducting a tender offer to separate its offer into two (but only two) separate offers one US and one non- US for the same class of securities. The proposals would expand this relief by permitting multiple non-us offers and allowing non-us security holders to be included in the US offer and US security holders to be included in non-us offers. Expanded Tier II Exemptive Relief for Subsequent Offering Periods Under Rule 14d-11, subsequent offering periods are subject to a maximum day limit and certain other restrictions. The current rules provide that any subsequent offering period can only last for a maximum of 20 business days and is subject to the prompt payment rule which requires that securities tendered into a subsequent offering period are paid on a same-day basis. The proposals would: (1) allow the Tier II subsequent offering periods to last for more than 20 business days (without any maximum timelimit on subsequent offering periods); (2) revise the prompt payment rule so that payment would only be required at 14- business day intervals; (3) and provide additional flexibility to accommodate the commonly used non-us mix and match offer structures which regularly conflict with the proration and the prompt payment rules applicable during subsequent offering periods. Termination of Withdrawal Rights while Tendered Securities are Counted The current rules require a bidder to provide target security holders with withdrawal rights after a set date, measured from the commencement of a tender offer until shares have been accepted for payment. This can create back-end withdrawal rights where a security holder who has tendered their shares may still withdraw his/her shares after the initial offering period has closed but before the bidder is able to finish counting the tendered shares to determine whether the minimum acceptance condition has been met. Under the current rules, a bidder providing a subsequent offering period is, subject to certain conditions, permitted to suspend back-end withdrawal rights from the close of the initial offering period to the commencement of the subsequent offering period. The proposals would extend this relief by allowing withdrawal rights to be terminated at the end of the initial offering period so that such withdrawal rights are not available during the counting process even if bidders do not provide a subsequent offering period. Termination of Withdrawal Rights after Reduction of a Minimum Acceptance Condition The current rules and Staff interpretation require that a bidder allow an offer to remain open, and provide withdrawal rights, for periods of time after certain changes in the offer s terms are communicated to target security holders. To the Staff, a reduction or waiver of a minimum acceptance condition constitutes a material change. Subject to certain qualifying conditions, the current rules allow bidders meeting the conditions of the Tier II exemption to waive or reduce the minimum acceptance condition without providing withdrawal rights during the remainder of the offer. The Proposing Release would require that a bidder: (1) undertake not to waive or reduce the minimum acceptance condition below a majority of the outstanding target securities that are the subject of the tender offer and (2) fully disclose and discuss in its offering materials all of the potential implications of the potential waiver or reduction, including at the specific levels contemplated. This interpretive guidance should be viewed as effective as of the date of the Proposing Release regardless of whether the proposals are ultimately adopted by the SEC. 11 Number June 2008

12 Provision Proposed to be Amended General Rule Description Current Rule Proposed Rule Early Termination of an Initial Offering Period or a Voluntary Extension of Such Period Under the current rules, the initial offering period in a tender offer must remain open for specified minimum time periods after a material change in the terms of an offer; the minimum time periods vary with the materiality of the change. The Staff has issued no-action letter guidance in this area allowing, in certain cases and subject to certain conditions, early termination of an initial offering period or a voluntary extension of such period. The Proposing Release solicits views on whether the SEC should codify Staff no-action letters in this area. Tier II Exemptive Relief for Purchases of Securities Outside the Offer Rule 14e-5 prohibits the bidder and its affiliates from purchasing or arranging to purchase any subject equity securities except as part of the tender offer in order to prevent a bidder from extending greater or different consideration to some but not all target equity securities holders. The current rules exempt Tier I tender offers from Rule 14e-5 (subject to satisfaction of certain conditions), but not Tier II offers. The proposals would extend the exemption from Rule 14e-5 to Tier II transactions in two situations: (1) to facilitate making multiple separate offers as part of the same aggregate tender offer transaction (discussed earlier); and (2) to allow bidders and financial advisors to execute purchases outside an offer, including in the open market and through privately negotiated purchases and certain enumerated trading activities, when this activity is permissible under the laws of the target s home jurisdiction (subject to certain conditions designed to promote the fair treatment of tendering security holders). Early Commencement of Exchange Offers The early commencement rule permits certain exchange offers to commence upon the date of the filing of a registration statement for the securities to be offered in the transaction, rather than the date on which the registration statement is declared effective by the SEC. Beneficial Ownership Reporting by Foreign Institutions The early commencement option is not available under the current rules for exchange offers not subject to Rule 13e-4 (securities subject to issuer self-tender offers) or Regulation 14D (securities registered under Section 12 of the Exchange Act). The proposals would allow all exchange offers eligible for the Tier II cross-border exemptions to take advantage of the early commencement procedure, subject to the condition that the offeror voluntarily provide certain protections (such as withdrawal rights) that are required in an offer subject to Rule 13e-4 or Regulation 14D. The current rules require any person who acquires more than 5 percent of a class of equity securities registered under Section 12 of the Exchange Act to report the acquisition on Schedule 13D or Schedule 13G. Certain US institutions such as brokers, dealers, investment companies and investment advisers registered with the SEC are allowed to report on Schedule 13G, which is significantly less burdensome to prepare the Schedule 13D. The current rules do not allow foreign institutions to file on Schedule 13G. Subject to certain conditions, the proposals would allow foreign institutions that are substantially similar to the US institutions to take advantage of filing on Schedule 13G without seeking separate exemptive relief from the Staff. 12 Number June 2008

13 Provision Proposed to be Amended General Rule Description Current Rule Proposed Rule Interpretive Guidance which should be viewed as effective as of the date of the Proposing Release regardless of whether the proposals are ultimately adopted by the SEC Equal Treatment of Non-US Target Security Holders Special Precautions in the Context of Exclusionary Offers Vendor Placements The Proposing Release explains that the SEC continues to encourage its fellow international securities regulators to limit the ability of bidders to exclude US holders from business combination transactions. The Proposing Release then articulates the importance of committing to the reverse obligation and reiterates the SEC s position that the equal treatment obligations ( all-holders provision) under the US cross-border rules do not allow the exclusion of any foreign or US target security holder in tender offers subject to US law. The Proposing Release provides guidance on what special precautions bidders conducting exclusionary offers limited to non-us holders should take to prevent triggering the application of the US cross-border rules. Legends indicating that such offers are not being made into the US are unlikely to be sufficient in themselves to ensure that the offers do not use US jurisdictional means and thus not be subject to the US securities laws. Instead, bidders seeking to engage in exclusionary offers should consider employing legends coupled with adequate measures reasonably designed to guard against sales to and purchases and tenders from US holders, including limiting Internet availability of materials and establishing certain procedures and obtaining representations from tendering security holders to ensure that the offer has not triggered US jurisdictional means. Perhaps the most salient aspect of this guidance is the explicit statement contained in the Proposing Release that in the future the Staff will more closely monitor exclusionary offers to determine whether SEC action is necessary to protect US target holders. Vendor placements involve the bidder hiring a third-party to sell in offshore transactions the securities to which US security holders are entitled in an exchange offer to avoid the potential application of the registration requirements under the Securities Act essentially converting an exchange offer into a cash-only tender offer to US holders. Bidders who seek to use the vendor placement structure for tender offers subject to Regulation 14D at US beneficial ownership levels above Tier I must seek an exemption from the US equal treatment rules. The Proposing Release briefly discusses vendor placements but primarily reiterates and reemphasizes existing guidance on the subject. The Proposing Release sets forth the factors the SEC considers when determining whether a vendor placement obviates the need for Securities Act registration. Endnotes 1 See Release Nos ; ; File No. S (May 6, 2008) (the Proposing Release). A copy of the Proposing Release can be obtained by accessing the SEC s Web site at 2 The Proposing Release stipulates that crossborder refers to business combinations in which the target company is a foreign private issuer as defined in Exchange Act Rule 3b-4(c), and rights offerings where the issuer is a foreign private issuer, as so defined. See Proposing Release, supra note 1, at p See Exchange Act Rule 3b-4(c): (c) The term foreign private issuer means any foreign issuer other than a foreign government except an issuer meeting the following conditions: (1) More than 50 percent of the outstanding voting securities of such issuer are directly or indirectly owned of record by residents of the United States; and (2) Any of the following: (i) The majority of the executive officers or directors are United States citizens or residents; (ii) More than 50 percent of the assets of the issuer are located in the United States; or (iii) The business of the issuer is administered principally in the United States. 4 Business combination is defined in Securities Act Rule 800(a) as any statutory amalgamation, merger, arrangement or reorganization requiring the vote of security holders of one or more participating companies. It also includes a statutory short form merger that does not require a vote of security holders. In this Client Alert, in keeping with similar usage employed by the SEC in the Proposing Release, we use the term more broadly to include those kinds of transactions, as well as tender and exchange offers. See Securities Act Rule 165(f)(1) [17 CFR (f)(1)] (defining the term more broadly, to include the types of transactions listed in Rule 145(a) [17 CFR (a)], as well as exchange offers). 13 Number June 2008