SEC Publishes Rules Simplifying Cross-Border Transactions

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NEWS & INSIGHTS
Publications
21 OCT 2008

SEC Publishes Rules Simplifying Cross-Border Transactions
ARTICLE MERGERS AND ACQUISITIONS NEWSLETTER

by Diane Frankle, Marty Lorenzo and Sarah Cebik

The United States Securities and Exchange Commission (SEC) has approved revisions to its rules governing cross-border tender offers and other transactions, published in final form on October 9, 2008. Since 1999, tender offers and other transactions with shareholders (such as rights offerings) relating to the securities of non-US issuers have been eligible for a two-tier system of exemptions (the CrossBorder Exemptions), based on the level of US shareholdings in the subject company. The revisions to the Cross-Border Exemptions, as published in the final rules, are designed to further facilitate crossborder transactions where the rules of the US and other applicable jurisdictions are not readily harmonized. The final rules also codify several areas where SEC staff has already granted no-action or exemptive relief. Most importantly, the exemptions revise the analysis required to determine an issuer’s eligibility for these exemptions in light of experience gained since the exemptions were adopted in 1999. In addition, the SEC has issued interpretive guidance for other areas that are of concern in cross-border transactions. Finally, the SEC made a few amendments to the tender offer rules applicable to all tender offers, including those for US companies. We set out below the background to the revisions and some of the key changes adopted by the SEC. The final rule is effective December 8, 2008, except certain revisions which became effective October 9, 2008. The interpretive guidance became effective October 9, 2008. To read the SEC’s revised rules, please click here. Background Under the US Securities Exchange Act of 1934, as amended (the US Exchange Act), tender offers for

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securities of US-listed companies and certain other SEC-reporting companies are typically subject to a series of procedural rules governing tender offers. These rules are roughly analogous to the rules governing tender offers or takeovers in other jurisdictions, such as the Takeover Codes in the United Kingdom and Hong Kong. In addition, all tender offers made to security holders in the United States, including for the securities of companies that do not have a US listing and are not SEC reporting and for debt securities of any company, are subject to certain key anti-fraud provisions, such as a minimum offer period and a prompt payment requirement. The SEC adopted the Cross-Border Exemptions in 1999 to facilitate the inclusion of US investors in cross-border transactions and in recognition of the fact that both the more detailed procedural rules as well as the anti-fraud provisions under the US tender offer rules would not always be compatible with the requirements of applicable home jurisdiction rules for non-US companies. Under the exemptions, tender offers for the securities of non-US issuers with 10 percent or fewer US holders are eligible for “Tier I” relief from almost all of the procedural requirements and certain of the anti-fraud provisions. Additionally, exchange offers with 10 percent or fewer US holders are exempt from the registration requirements of the US Securities Act of 1933 as amended (the US Securities Act). Similarly, rights offerings for the shares of non-US issuers eligible for Tier I relief are also exempted from the registration requirements under the US Securities Act. Tender offers for the securities of non-US issuers with 40 percent or fewer US holders are eligible for the more limited “Tier II” relief from certain of the provisions of the US tender offer rules. The Cross-Border Exemptions have largely been effective in helping to harmonize US requirements with non-US requirements when necessary. However, over the last nine years, it has become clear that certain parts of the regulatory scheme required further clarification or refinement. While the staff of the SEC has consistently worked with bidders, target companies and their advisers to accommodate local rules that are incompatible with the US regulatory regime, these case-by-case exemptions were not codified. In certain areas, revisions were necessary to smooth the operation of the international capital markets. Is an Exemption Available? Amendments to the Eligibility Determination Most significantly, the SEC has revised certain aspects of the eligibility analysis for Tier I and Tier II of the Cross-Border Exemptions. Following the new revisions, the Cross-Border Exemptions continue to be available only for non-US issuers, and the thresholds for Tier I and Tier II eligibility remain at 10 percent and 40 percent US ownership, respectively. Moreover, in most cases, the bidder will still be required to conduct a look-through analysis, making “reasonable inquiries” of nominee security holders based in the home jurisdictions of the bidder and the target and in the United States to determine the residence of the shareholders on behalf of which they are holding securities. However, the method for calculating the number of US holders of the subject securities has changed in several respects: Reference date. Previously, the number of US holders was determined as of a fixed date 30 days prior to the commencement of the formal offer. This presented difficulties in many jurisdictions where security holder data was not available as of fixed dates or where the treatment of US holders needed to be determined farther in advance of the offering.

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As of the effectiveness of the revisions, US ownership may be calculated as of any date no more than 60 days before and no more than 30 days after the public announcement of the transaction (or, in the case of rights offerings, the record date). The staff has advised that, when utilizing the 30 day postpublic announcement period to calculate ownership, acquirors must ensure that the date is prior to commencement of the offer in order to ensure compliance with the exemptions prior commencing the offer. Where bidders are unable to conduct the analysis within the 90-day range, they may look back to any date no more than 120 days prior to the announcement. In some foreign jurisdictions, the acquiror may need to conduct the look-through analysis before announcement, because home country law may require that the announcement include detailed information about the transaction, including the treatment of US holders. The revisions to the determination date provide additional flexibility to bidders to accommodate local practice, by allowing a broad range of dates for analysis, while addressing the need to protect the confidentiality of a transaction by delaying the analysis, which can tip the market, until after the transaction has been publicly announced. Inclusion of large security holders. Under the prior terms of the exemptions, security holders holding more than 10 percent of the class of securities sought were excluded from the analysis when determining the number of US holders. Many commenters believe that this typically had the effect of exaggerating the percentage of US holders. Under the revised Cross-Border Exemptions, 10 percent holders will not be excluded from the calculation, although securities held by the bidder will continue to be excluded. This is a change from the proposing release. This revision should expand the number of transactions that will be eligible for the exemptions. Alternative trading volume test. When an acquiror is unable to conduct the look-through analysis because of specific circumstances, the revised Cross-Border Exemptions permit acquirors to use an alternate test based upon average daily trading volume (ADTV) rather than a “count” of US holders. The ADTV test was previously only available in hostile transactions. The revised Cross-Border Exemptions extend the availability of the ADTV test to certain negotiated transactions in which there is a ‘‘primary trading market’’ for the subject securities, as that term is defined in Exchange Act Rule 12h–6(f) (5). In addition to hostile transactions, the SEC gave three examples in which the ADTV test may be used: transactions in jurisdictions where security holders lists are not available, negotiated transactions involving bearer securities, or where local legal restrictions prohibit nominees from disclosing information about the beneficial owners on whose behalf they hold. The ADTV test is not available where the target’s public filings (in the US, the home jurisdiction or the primary trading market) indicate that the 10 percent (or, in the case of Tier II, 40 percent) threshold has been breached or the bidder otherwise knows or has reason to know that the threshold has been breached. The “reason to know” prong of the ADTV test provides that an otherwise applicable CrossBorder Exemption is not available, even where all other elements of the alternate test are met, if the acquiror ‘‘knows or has reason to know’’ that US beneficial ownership levels exceed the limits for the exemption. An acquiror is deemed to have reason to know information about US ownership of the subject class that appears in any filing with the SEC or any regulatory authority in the issuer’s home country or (if different) the jurisdiction in which the issuer’s primary trading market is located. An acquiror will also be deemed to know any information that the acquiror has obtained in the process of its due

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diligence investigation of the target. Additionally, acquirors should be aware that if they are in a jurisdiction in which acquirors in other transactions have been able accomplish the look-through analysis, then there will be a high burden of proof regarding a claim that the alternate test was available. In addition, in a transaction that does not fit one of the three examples in which the SEC has indicated the alternate ADTV test can be used, acquirors should contact the SEC Staff before relying on the alternate test to discuss the reasons for being unable to accomplish the look-through analysis. Other Changes In addition to the changes to the eligibility tests for the Cross-Border Exemptions, the SEC also adopted several other changes and issued binding interpretive guidance regarding the Cross-Border Exemptions and other aspects of the US tender offer rules, including: Allowing all exchange offers, including those for domestic target companies not subject to Rule 13e–4 or Regulation 14D, to commence upon the filing of the registration statement registering the offer, under the conditions proposed; Eliminating the 20-day time limit on subsequent offering periods in respect of tender offers for both US and non-US targets; Extending the availability of Tier I relief to certain “going-private” transactions and extending to Tier II tender offers relief from all but the anti-fraud provisions of the US Exchange Act; Extending procedural relief in Tier II offers to accommodate local counting and other practices; Accommodating certain of the timing requirements in respect of payments of other jurisdictions; Codifying existing exemptive relief to permit trading outside tender offers reasonably believed to be Tier II eligible under certain circumstances; and Issuing interpretive guidance on issuer’s right to exclude US holders and the reach of US Securities cases.

Amendments Seek to Harmonize Cross-Border Requirements The revised Cross-Border Exemptions reflects the goal on the part of the SEC to harmonize US requirements with non-US requirements where necessary. The revised Cross-Border Exemptions provide greater flexibility for transactions to qualify for an exemption from US securities regulations and encourage offerors and issuers to permit US security holders to participate in cross-border transactions on the same terms as other target security holders.

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