July 5, 2006
SEC Grants Class Relief from Rule 14e-5 for Dual Tender or Exchange Offers
Here is some SEC news courtesy of Cleary Gottlieb: On June 22th, the SEC granted class-wide no action relief from Rule 14e-5 to permit dual tender or exchange offers in the United States and outside the United States, provided that certain minimum conditions are satisfied. This class-wide relief was granted in response to a no action request submitted by Cleary Gottlieb Steen & Hamilton LLP on behalf of Mittal Steel in which Mittal Steel sought relief from Rule 14e-5 to purchase Arcelor shares and convertible bonds in separate but simultaneous U.S. and non-U.S. offers. See Proposed Exchange Offer by Mittal Steel for Arcelor, File No. TP 06-76 (June 22, 2006). This is the first significant class-wide relief since the SEC’s adoption of its cross-border M&A rules in August of 2000.
Rule 14e-5 prohibits an offeror who is making a tender or exchange offer from purchasing or arranging to purchase the securities that are the subject of such offer, outside the offer. Therefore, by its terms, Rule 14e-5 would prohibit dual offers since the non-U.S. offer could be construed as an arrangement to purchase securities outside the U.S. offer. Bidders often propose separate simultaneous U.S. and non-U.S. offers in order to accommodate conflicting U.S. and non-U.S. legal requirements. As a result, bidders have regularly had to request no action relief from the application of Rule 14e-5 in this context. The SEC has granted this relief on a case-by-case basis in the past.
In Mittal Steel, the SEC has sought to obviate the need for specific relief by granting a class-wide exemption from Rule 14e-5 to permit any offeror (and its affiliates) to purchase or arrange to purchase securities pursuant to multiple simultaneous offers, so long as the transaction meets the following conditions:
1. The company that is the subject of the offers is a foreign private issuer;
2. Tier II exemptive relief is available under Rule 14d-1(d) (i.e., U.S. holders hold not more than 40% of subject securities, disregarding for these purposes shares held by 10% holders);
3. The economic terms and consideration of the offers are the same (with the exception that cash consideration may be paid in U.S. dollars in the U.S. offer at the disclosed exchange rate while the non-U.S. offer may be settled in the local currency);
4. The procedural terms of the U.S. offer are at least as favorable as the terms of the non-U.S. offer;
5. The intention of the offeror to make purchases pursuant to the non-U.S. offer will be disclosed in the U.S. offering documents; and
6. Purchases by the offeror in the non-U.S. offer will be made solely pursuant to the non-U.S. offer and not pursuant to any open market or private transaction.
Note that the Mittal Steel exemption requires that Tier II exemptive relief be available in respect of the offers. Accordingly, any offer qualifying for relief from Rule 14e-5 under the Mittal Steel exemption will also qualify under the provisions of Rule 14d-1(d) for relief from aspects of Rule 14e-1(d) (thereby permitting notices of extensions of the offers to be made in accordance with home country law or practice), Rule 14e-1(c) (thereby providing that payment in accordance with home country law or practice will satisfy U.S. law requirements for “prompt” payment), and Rule 14d-11(d) (thereby permitting subsequent offering periods under the U.S. offer to be harmonized in certain respects with non-U.S. law and practice).
Despite such class-wide relief, it is important to realize that an offeror seeking to make dual offers for an issuer with securities registered under the Exchange Act (which was not the case with the target in Mittal Steel) may nevertheless be required to seek SEC no-action relief with respect to certain other provisions of Regulation 14D of the Exchange Act, including in particular Rule 14d-10(a)(1).
This Rule prohibits the making of a tender offer unless the tender offer is open to all security holders of the class of securities subject to the tender offer. Taken literally, this would prohibit dual offers in which, for example, non-U.S. persons were prohibited from tendering into the U.S. offer or U.S. holders were prohibited from tendering into the non-U.S. offer for the same subject securities. While Tier II exemptive relief is available with respect to Rule 14d-10, the Tier II relief only provides for an offer to be separated into one made only to U.S. holders of the subject securities and another offer made only to non-U.S. holders of the subject securities.
It is far more common for offers to be separated into one offer that is only open to any holders of ADRs and U.S. holders of the underlying shares, and another offer that is open to only non-U.S. holders of the underlying shares. Accordingly, Tier II exemptive relief in respect of Rule 14d-10(a)(1) will be unavailable for such dual offer structures, and relief must be sought.
In addition, to harmonize certain other procedural terms of the offers (which includes ensuring that the procedural terms of the U.S. offer are at least as favorable as the terms of the non-U.S. offer, as required to take advantage of the Mittal Steel 14e-5 relief), it may be necessary to seek relief under additional provisions of Regulation 14D or Regulation 14E.