SEC Adopts Significant Changes to Rule 144 and Rule by dhp30827

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									                                                                                                                                                  December 14, 2007

      Skadden                                                      SEC Adopts Significant Changes to Rule 144
                                                                   and Rule 145 and Creates Compensatory
S ka d d e n , A rp s , S l a te , M e a g h e r & F l o m L L P
& A ff i l i a te s                                                Employee Stock Option Exemptions
                                                                   Overview



                                                                   T
                                                                            he SEC recently published the final rules amending Rule 144 and Rule
                                                                            145 and creating two exemptions for compensatory employee stock
                                                                            options. The final rules, among other things:
                                                                                (1) reduce the holding periods under, and modify other requirements
                                                                                    of, Rule 144 under the Securities Act of 1933 (Securities Act) for
                                                                                    the resale of restricted securities;1 and
  If you have any questions                                                     (2) establish two new exemptions from registration under the
  regarding the matters dis-                                                        Securities Exchange Act of 1934 (Exchange Act) Section 12(g).2
  cussed in this memorandum,
                                                                   The amendments to Rule 144 shorten the holding periods for the resale of restricted
  please call your regular
                                                                   securities and substantially reduce the restrictions on the sale of restricted securities
  Skadden, Arps contact.
                                                                   by non-affiliates of the issuer. In addition, the SEC codified several existing staff
                                                                   interpretations relating to Rule 144. The amendments also eliminate the presump-
                     *         *         *
                                                                   tive underwriter provision of Rule 145, except with respect to Rule 145 transactions
  This memorandum is provided                                      involving shell companies (other than business combination related shell compa-
  by Skadden, Arps, Slate,                                         nies), and conform the resale restrictions of Rule 145(d) to the revisions to Rule 144
  Meagher & Flom LLP and its                                       that apply to the resale of securities issued by shell companies.
  affiliates for educational and
                                                                   The amendments to Rule 12h-1 under the Exchange Act provide two exemptions
  informational purposes only
                                                                   from registration under Exchange Act Section 12(g) for compensatory employee
  and is not intended and should
                                                                   stock options, one of which is available only to issuers that are not required to
  not be construed as legal
                                                                   file periodic reports under the Exchange Act.3
  advice. This memorandum is
  considered advertising under                                     Changes to Rule 144
  applicable state laws.
                                                                   Background
                                                                   Generally, all offers and sales of securities must be registered with the SEC
                                                                   unless an exemption from registration is available. Section 4(1) of the Securities
                                                                   Act exempts transactions by any person other than an underwriter, issuer or deal-
                                                                   er. If a selling securityholder meets the requirements of Rule 144, such person
                                                                   will not be deemed an “underwriter” in connection with the resale of “restricted” or
                                                                   “control” securities.4 As a result, such securityholder may sell the applicable

                                                                   1   The final rules relating to the revisions to Rule 144 and Rule 145 are set forth in SEC Release No.
                                                                       33-8869 and are available at http://www.sec.gov/rules/final/2007/33-8869.pdf.

                                                                   2   The final rules relating to compensatory employee stock options are set forth in SEC Release No
                                                                       34-56887 and are available at http://www.sec.gov/rules/final/2007/34-56887.pdf.

                                                                   3   Rule 12h-1 under the Exchange Act provides exemptions from the requirement to register securi-
                                                                       ties under Exchange Act Section 12(g).

                                                                   4   Securities acquired pursuant to a transaction of the type listed in Rule 144(a)(3), which includes securi-
                 WWW.SKADDEN.COM                                                                                                                                               .
                                                                       ties acquired from an issuer in transactions not involving a public offering, are “restricted securities”
                                                                       Generally, “control securities” are securities held by an affiliate of the issuer, regardless of how such
                                                                       securities were acquired. Other than the changes to the Form 144 threshold and the increased vol-
                                                                       ume limitations for debt securities, the amendments do not significantly change the ability of affiliates
                                                                       to resell control securities that are not otherwise restricted securities. Holding period requirements
                                                                       continue not to apply to unrestricted control securities.
                                                                                                                          Skadden
2
    securities under Rule 144 without registration under the Securities Act. In addition to other crite-
    ria, Rule 144 sets forth requirements relating to the availability of public information, volume
    limitations and manner of sale requirements, and it establishes holding periods for the resale of
    restricted securities.5
    Effect of Amendments
    The amendments maintain a clear distinction between sales made by affiliates and non-affiliates
    of the issuer as well as between securities of a reporting company and securities of a non-report-
    ing company.6 The amendments to Rule 144 shorten the holding period for the resale of restrict-
    ed securities if the issuer of the securities is subject to the Exchange Act reporting requirements.
    The amendments also substantially reduce the restrictions applicable to resales of restricted secu-
    rities by non-affiliates of both reporting and non-reporting companies.
    Holders of “restricted” or “control” securities acquired before the effective date of the amend-
    ments may rely on the amended rules. The following table summarizes the rule changes for
    restricted securities:

               Type of Selling
                                                              Old Rule 144                             Amended Rule 144
        Securityholder/Type of Issuer
     Affiliate of a Reporting Company             - Hold restricted security for 1             - Hold restricted security for 6
                                                    year                                         months
                                                  - Thereafter, limited resales per-           - Thereafter, limited resales per-
                                                    mitted, subject to all Rule 144              mitted, subject to all Rule 144
                                                    requirements, including:                     requirements, including:
                                                         • current public information                 • current public information7
                                                         • volume limitations                         • volume limitations8
                                                         • manner of sale                             • manner of sale only for
                                                                                                        equity securities9
                                                  - Filing of Form 144 required if             - Filing of Form 144 required if
                                                    threshold is met                             new threshold is met10

                                                                                                                               (continued)
    5    Requirements relating to the availability of current public information are set forth in Rule 144(c), requirements relating to
         volume limitations are set forth in Rule 144(e), requirements relating to manner of sale are set forth in Rules 144(f) and
         144(g), and requirements with respect to holding periods are set forth in Rule 144(d).

    6    For purposes of Rule 144, a reporting company is a company that has been subject to the reporting requirements of the
         Exchange Act for at least 90 days prior to the sale of the security. Exchange Act reporting requirements are generally trig-
         gered under Section 13 or 15(d) for companies with a security registered on a national exchange or with total assets exceed-
         ing $10 million and a class of equity security (other than an exempted security) held of record by more than 500
         persons.

    7    Current public information is deemed available for reporting issuers if the issuer has been subject to the Exchange Act
         reporting requirements for at least 90 days and has filed all required reports (other than Form 8-K reports) during the 12
         months preceding the sale (or such shorter period that the issuer was required to file such reports). If the issuer is a non-
         reporting issuer, current public information is deemed available if the information specified in Rule 144(c)(2) is publicly avail-
         able for such issuer.

    8    The volume limitations for equity securities remain unchanged, at the greater of: (1) one percent of the shares or other
         units of the class outstanding as stated in the most recent report or statement published by the issuer, or (2) the average
         weekly volume of trading in such securities, calculated in accordance with the rule. The amendments raise the volume lim-
         itations for debt securities, allowing affiliates to sell up to 10 percent of a tranche (or class in the case of non-participatory
         preferred stock), together with all sales of securities of the same tranche (or class) sold for the account of the selling hold-
         er in any three-month period. For purposes of Rule 144, debt securities include non-participatory preferred stock (which
         has “debt-like characteristics”) and asset-backed securities.

    9    Debt securities are not subject to any manner of sale requirements under the amended rule.
                                                                                                                  Skadden
3
             Type of Selling
                                                         Old Rule 144                         Amended Rule 144
      Securityholder/Type of Issuer
     Affiliate of a Non-Reporting             - Hold restricted security for 1         - Hold restricted security for 1
     Company                                    year                                      year
                                              - Thereafter, limited resales per-       - Thereafter, limited resales per-
                                                mitted, subject to all Rule 144          mitted, subject to all Rule 144
                                                requirements, including:                 requirements, including:
                                                    • current public information             • current public information7
                                                    • volume limitations                     • volume limitations8
                                                    • manner of sale                         • manner of sale only for
                                                                                               equity securities9
                                              - Filing of Form 144 required if         - Filing of Form 144 required if
                                                threshold is met                         new threshold is met10

     Non-Affiliate11 of a Reporting           - Hold restricted security for 1         - Hold restricted security for 6
     Company                                    year                                     months
                                              - Thereafter, limited resales per-       - After six months, but before
                                                mitted, subject to all Rule 144          one year, resales permitted in
                                                requirements, including:                 accordance with current pub-
                                                    • current public information         lic information requirement12
                                                    • volume limitations               - After one year, unlimited
                                                    • manner of sale                     resales permitted
                                              - Form 144 required if threshold         - No Form 144 required
                                                is met
                                              - Under Rule 144(k), after two
                                                years, may make unlimited
                                                resales11
     Non-Affiliate11 of a Non-Reporting       - Hold security for 1 year               - Hold security for 1 year
     Company                                  - Thereafter, limited resales per-       - After one year, unlimited
                                                mitted, subject to all Rule 144          resales permitted
                                                requirements, including:
                                                                                       - No Form 144 required
                                                    • current public information
                                                    • volume limitations
                                                    • manner of sale
                                              - Form 144 required if threshold
                                                is met
                                              - Under Rule 144(k), after two
                                                years, may make unlimited
                                                resales11




    10 The amendments increase the triggering amount for the filing of a Form 144 from an amount in excess of 500 shares or
       units or an aggregate sale price of more than $10,000 in a three-month period to an amount in excess of 5,000 shares or an
       aggregate sale price of more than $50,000 in a three-month period. Under the amendments, only affiliates are subject to
       the Form 144 filing requirement.

    11 The selling securityholder must not have been an affiliate during the three months prior to the sale.

    12 The volume limitations and manner of sale requirements do not apply under the amended rules. At this time, it is
       unclear what effect the amendments will have on “Exxon Capital” or “A/B” exchange offers. In an A/B exchange, an
       issuer typically offers debt (or non-participatory preferred) securities through a private placement and resale under Rule
       144A and follows the private placement resale under Rule 144A with an exchange offer for similar registered securities.
       As the A/B exchange offer process removes securities law-related restrictions on resales of debt securities issued
       under Rule 144A, the shortened holding periods and relaxed restrictions may prompt the market to reconsider the utili-
       ty and necessity of a registered exchange offer of this type.
                                                                                              Skadden
4
    In addition to the foregoing changes, the SEC revised the manner of sale requirements for equity
    securities by affiliates and codified prior staff interpretations relating to Rule 144, including:
           •   amending the definition of “restricted securities” under Rule 144(a)(3) to include
               securities acquired from an issuer pursuant to an exemption from registration under
               Section 4(6) of the Securities Act;
           •   amending Rule 144(d) to permit holders of restricted securities, subject to specified
               conditions, to “tack” the Rule 144 holding period in connection with transactions
               made solely to form a holding company;
           •   amending Rule 144(d) to permit the “tacking” of the Rule 144 holding period in con-
               nection with conversions or exchanges of securities where the holder acquired securi-
               ties from the issuer solely in exchange for other securities of the same issuer, even if
               the securities surrendered were not originally convertible or exchangeable by their
               terms; and
           •   amending Rule 144(d) to provide that, upon a cashless exercise of options or warrants,
               the newly acquired underlying securities are deemed to have been acquired when the
               corresponding options or warrants were acquired, even if the options or warrants orig-
               inally did not provide for cashless exercise by their terms.
    The SEC had proposed the adoption of a tolling provision that would have suspended the
    six-month holding period for restricted securities of a reporting company while the holder of the
    securities (or the previous owner of the securities) engaged in certain hedging transactions. The
    holding period would have excluded any period in which the securityholder had a short position or
    had entered into a “put equivalent position” (as defined by Exchange Act Rule 16a-1(h)) with
    respect to the same class of securities (or with respect to any nonconvertible debt securities of the
    same issuer in the case of nonconvertible debt). However, the holding period would not have lasted
    longer than one year as a result of any such hedging suspension. The SEC did not adopt the pro-
    posed tolling provision but stated it will revisit the issue if it observes abuse relating to hedging
    activities by holders of restricted securities.
    The changes to Rule 144 will take effect on February 15, 2008. The amendments are applicable to
    restricted or control securities acquired before the effective date. A table designed
    to address common questions regarding Rule 144, as amended, is attached as Exhibit A to this
    memorandum.
    Changes to Rule 145
    Background
    Rule 145(a) specifies that an “offer” or “sale” will be deemed to occur with exchanges of securi-
    ties in connection with certain reclassifications, mergers or consolidations, or transfers of assets
    that are submitted for the vote or consent of the security holders of a corporation. Accordingly,
    the “sale” must be registered unless an exemption is available. Rule 145(c), prior to the amend-
    ments, defines any party to any transaction of the type set forth in Rule 145(a) (other than the
    issuer) or an affiliate of such party who publicly offers the securities acquired in such transaction
    as an “underwriter”. Prior to the amendments, such a “presumptive underwriter” would be
    required to comply with Rule 145(d) in connection with resales of the acquired securities even if
    the person, following the transaction, were no longer an affiliate of the combined entity and even
    if such person received registered securities in the business combination.
                                                                                                            Skadden
5
    Effect of Amendments
    The amendments eliminate the presumptive underwriter provision of Rule 145(c), except with
    respect to transactions involving a shell company (other than a business combination related shell
    company). With respect to a transaction of the type set forth in Rule 145(a) not involving a shell
    company, a prior affiliate of the acquired company who is not an affiliate of the combined company
    after the transaction will no longer be presumptively deemed an underwriter in connection with the
    resale of the securities acquired in the transaction. Any party to a transaction of the type set forth in
    Rule 145(a) involving a shell company, other than the issuer, may resell the securities acquired in the
    transaction only in compliance with the resale restrictions of Rule 145(d), which have been con-
    formed with the requirements of Rule 144, as amended.13 If a person has expressly acknowledged
    or agreed in writing to be subject to, and bound by, the previous provisions of Rule 145 with
    respect to securities acquired in a transaction, such persons will presumably remain bound by
    those terms. A holder subject to such restrictions may wish to seek a waiver or modification of
    such writing to reflect the amendments to Rule 145.
    The changes to Rule 145 will take effect on February 15, 2008.
    Compensatory Employee Stock Option Exemptions
    Background
    Section 12(g) requires that a company with 500 or more holders of record of a class of equity
    securities and more than $10 million in assets at the end of its most recently ended fiscal year must
    register the class of securities under the Exchange Act unless an exemption from registration is
    available. For purposes of Section 12(g), stock options are considered to be a separate class of
    equity securities. Although an exemption exists for other types of employee benefit plans involv-
    ing securities, such exemption does not cover compensatory employee stock options. As a result,
    prior to the amendments, the issuance of compensatory employee stock options could have trig-
    gered registration under Exchange Act Section 12(g).
    Over the years, the SEC has received a number of requests for relief by companies facing regis-
    tration due to the number of holders of compensatory employee stock options. As many compa-
    nies utilize compensatory employee stock options to attract, retain and motivate employees,
    directors and consultants, the registration requirement resulted in compensation decisions of this
    type being influenced by the Section 12(g) threshold. The new exemptions provide regulatory
    relief for both non-reporting and reporting issuers.
    Effect of Amendments
    Under the amendments to Exchange Act Rule 12h-1, a private, non-reporting issuer will not
    be required to register under Exchange Act Section 12(g) compensatory employee stock options
    issued for compensatory purposes pursuant to a written compensatory stock option plan,
    provided that:




    13 The SEC has previously taken the position that Rule 145(d) applies to securities acquired pursuant to exempt
       exchanges under Section 3(a)(10). The adopting release stated that the SEC intends to address the treatment of par-
       ties to a transaction and their affiliates that have acquired securities in a transaction exempt from registration
       pursuant to Section 3(a)(10) of the Securities Act in a revised Staff Legal Bulletin No. 3.
                                                                                                              Skadden
6
           (1) the eligible optionholders under the plan are limited to employees, directors, consul-
               tants and advisors of an issuer, its parents, and majority owned subsidiaries of the
               issuer or its parents and permitted transferees;14
           (2) the transferability of the options and, prior to the exercise of the options, the shares
               issuable on exercise of those options, is restricted (subject to limited exceptions);15
               and
           (3) optionholders are periodically provided with the same risk and financial information
               as would be required under Rule 701 of the Securities Act if securities sold in reliance
               on Rule 701 exceeded $5 million in a 12-month period.16
    Only issuers that are not required to report under the Exchange Act are eligible for this exemp-
    tion. After an issuer becomes subject to the reporting requirements of the Exchange Act or no
    longer meets the conditions of the exemption, such issuer will have 120 calendar days to register
    the class of compensatory employee stock options.
    Issuers that are required to file periodic reports under the Exchange Act pursuant to Exchange
    Act Sections 13 or 15(d) are also granted an exemption to provide certainty to such issuers of
    their obligations. To qualify for the exemption, compensatory employee stock options issued by
    such companies must be issued pursuant to a written plan to participants permitted under Rule
    701 under the Securities Act or participants permitted to be granted options under an issuer’s
    Form S-8. The SEC recognized that a reporting issuer may have a small number of optionhold-
    ers that do not qualify as permitted participants. The exemption may still be available to such an
    issuer if there is an insignificant deviation from the exemption eligibility conditions.17 For
    reporting companies, separate risk and financial information is not required as such optionhold-
    ers will have access to the publicly filed Exchange Act reports of the issuer.
    A reporting issuer that becomes ineligible for the exemption will have 60 days to file a registra-
    tion statement registering the class of compensatory employee stock options or a class of security
    under Exchange Act Section 12(g).
    The SEC stressed that the exemptions only apply to the compensatory employee stock options as
    opposed to the class of securities underlying the options.
    These amendments took effect on December 7, 2007.




    14 Eligible optionholders are the same as those permitted under Rule 701 under the Securities Act.

    15 Options are only permitted to be transferred to limited categories of transferees and under limited circumstances.

    16 The optionholders must be provided with the required information every six months, including financial statements that
       are no older than 180 days. However, an issuer is not obligated to provide the information to an optionholder that will
       not agree to maintain the confidentiality of the information.

    17 The deviation must be insignificant with respect to the number of optionholders and number of options outstanding.
       In addition, after the effective date, the issuer must have made a reasonable, good faith attempt to be in compliance
       with the terms of the exemption.
7
                                                                        Exhibit A                                                                Skadden


                  Common Questions Regarding the Sale of Restricted Securities
                                 Under Amended Rule 144

Holder/Length of Time Held/Restricted Security                   Rule 144 Sale       Current Public Volume        Manner of Sale Form 144
Type                                                             Permitted?          Information    Limitations Applicable?iii   Required if
                                                                                     Required?i     Applicable?ii                Threshold
                                                                                                                                 Met?iv
AFFILIATE OF REPORTING COMPANY:
Held security for less than 6 months (Debt or Equity)            No                  --                 --               --                  --
Held security for 6 months or more (Equity)                      Yes                 Yes                Yes              Yes                 Yes
Held security for 6 months or more (Debt)                        Yes                 Yes                Yes              No                  Yes

AFFILIATE OF NON-REPORTING COMPANY:
Held security for less than 1 year (Debt or Equity)              No                  --                 --               --                  --
Held security for 1 year or more (Equity)                        Yes                 Yes                Yes              Yes                 Yes
Held security for 1 year or more (Debt)                          Yes                 Yes                Yes              No                  Yes

NON-AFFILIATE OF REPORTING COMPANY:
Held security for less than 6 months (Debt or Equity) No                             --                 --               --                  --
Held security for more than 6 months but less than    Yes                            Yes                No               No                  No
1 year (Debt or Equity)
Held security for 1 year or more (Debt or Equity)     Yes (unlimited)                No                 No               No                  No

NON-AFFILIATE OF NON-REPORTING COMPANY:
Held security for less than 1 year (Debt or Equity)              No                  --                 --               --                  --
Held security for 1 year or more (Debt or Equity)                Yes (unlimited)     No                 No               No                  No




 i     Current public information is deemed available for reporting issuers, if the issuer has been subject to the Exchange Act reporting requirements
       for at least 90 days and has filed all required reports (other than Form 8-K reports) during the 12 months preceding the sale (or such shorter peri-
       od that the issuer was required to file such reports). If the issuer is a non-reporting issuer, current public information is deemed available if the
       information specified in Rule 144(c)(2) is publicly available for such issuer.

 ii    The volume limitations for equity securities remain unchanged, at the greater of: (1) one percent of the shares or other units of the class out-
       standing as stated in the most recent report or statement published by the issuer, or (2) the average weekly volume of trading in such securi-
       ties, calculated in accordance with the rule. The amendments raise the volume limitations for debt securities, allowing affiliates to sell up to 10
       percent of a tranche (or class in the case of non-participatory preferred stock), together with all sales of securities of the same tranche (or class)
       sold for the account of the selling holder in any three-month period. For purposes of Rule 144, debt securities include non-participatory pre-
       ferred stock (which has “debt-like characteristics”) and asset-backed securities.

 iii   Debt securities are not subject to the manner of sale requirements under the amended rule.

 iv The amendments increase the triggering amount for the filing of a Form 144 to an amount in excess of 5,000 shares or an aggregate sale price
    of more than $50,000 in a three-month period. Under the amendments, only affiliates are subject to the Form 144 filing requirement.




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