May 9, 2008

SEC Proposes Changes to Cross-Border Rules

Yesterday, the SEC posted its 194-page proposing release related to the amendments to the cross-border rules, the first proposed changes to the rules since they were initially adopted in 1999. A departure from recent practice, these proposals were approved by the Commission seriatim rather than in an open Commission meeting.

The proposing release includes many proposed rule changes that would codify existing Staff interpretive positions and exemptive orders – although there are some areas that are proposed to change – as well as some Staff interpretive guidance that the SEC seeks comment on. The SEC’s proposals include:

1. Refinement of the tests for calculating U.S. ownership of the target company for purposes of determining eligibility to rely on the cross-border exemptions in both negotiated and hostile transactions, including changes to:

– Use the date of public announcement of the business combination as the reference point for calculating U.S. ownership;
– Permit the offeror to calculate U.S. ownership as of a date within a 60 day range before announcement;
– Specify when the offeror has reason to know certain information about U.S. ownership that may affect its ability to rely on the presumption of eligibility in non-negotiated tender offers;

2. Expanding relief under Tier I for affiliated transactions subject to Rule 13e-3 for transaction structures not covered under our current cross-border exemptions, such as schemes of arrangement, cash mergers, or compulsory acquisitions for cash;

3. Extending the specific relief afforded under Tier II to tender offers not subject to Sections 13(e) or 14(d) of the Exchange Act;

4. Expanding the relief afforded under Tier II in several ways to eliminate recurring conflicts between U.S. and foreign law and practice, including:

– Allowing more than one offer to be made abroad in conjunction with a U.S. offer;
– Permitting bidders to include foreign security holders in the U.S. offer and U.S. holders in the foreign offer(s);
– Allowing bidders to suspend back-end withdrawal rights while tendered securities are counted;
– Allowing subsequent offering periods to extend beyond 20 U.S. business days;
– Allowing securities tendered during the subsequent offering period to be purchased within 14 business days from the date of tender;
– Allowing bidders to pay interest on securities tendered during a subsequent offering period;
– Allowing separate offset and proration pools for securities tendered during the initial and subsequent offering periods;

5. Codifying existing exemptive orders with respect to the application of Rule 14e-5 for Tier II tender offers;

6. Expanding the availability of early commencement to offers not subject to Section 13(e) or 14(d) of the Exchange Act;

7. Requiring that all Form CBs and the Form F-Xs that accompany them be filed electronically;

8. Modifying the cover pages of certain tender offer schedules and registration statements to list any cross-border exemptions relied upon in conducting the relevant transactions; and

9. Permitting foreign institutions to report on Schedule 13G to the same extent as their U.S. counterparts, without individual no-action relief.

In addition to those proposed rule changes, the Corp Fin Staff provides interpretive guidance or solicit commenters’ views on the following issues:

1. The ability of bidders to terminate an initial offering period or any voluntary extension of that period before a scheduled expiration date;

2. The ability of bidders in tender offers to waive or reduce the minimum tender condition without providing withdrawal rights;

3. The application of the all-holders provisions of our tender offer rules to foreign target security holders;

4. The ability of bidders to exclude U.S. target security holders in cross-border tender offers; and

5. The ability of bidders to use the vendor placement procedure for exchange offers subject to Section 13(e) or 14(d) of the Exchange Act.

If you’re wondering if the lack of an open Commission meeting means that this rulemaking is less important to the SEC, the answer would be “no.” Until a few Chairman ago, most rulemakings were approved seriatim and only the ones that the SEC wanted to get the attention of the mass media were approved at an open meeting. “Seriatim” simply means that each Commissioner signs an order indicating whether they vote in favor of a particular proposing or adopting release.

That trend started to change when Harvey Pitt became Chair (remember all that SOX-forced rulemaking) and it is my hunch that since the open meetings are more “open” now due to the Web, that trend has continued to today. Plus, the SEC likes the publicity. But it’s a production to hold an open meeting, so some rulemakings have to go seriatim to keep the rulemaking machine humming.