August 28, 2008

SEC Adopts Changes for Cross-Border Business Combinations, Exchange Offers and Rights Offerings

Yesterday, the SEC approved a host of changes to the exemptions for M&A transactions and rights offerings at an open Commission meeting; here are opening remarks from Tina Chalk of Corp Fin. From Mark Bergman of Paul Weiss, here is a summary of these changes:

Look-through analysis and beneficial ownership – In order to allow bidders to make the determination of eligibility (the 10% and 40% thresholds) at an earlier point in time, bidders will now be able, in negotiated transactions, to calculate U.S. beneficial ownership as of a date within a range of dates that are no more than 120 days before, and no more than 30 days after, public announcement of a transaction.

In addition, the current requirement to exclude from the calculation of U.S. ownership securities held by persons holding greater than 10% of target securities has been eliminated (the securities held by the bidder will, however, continue to be excluded from the denominator).

If the bidder is unable to conduct the new modified look-through test, an alternate eligibility test is available. This test depends on the comparison of the ADTV of the U.S. float with the worldwide float and consideration of U.S. ownership figures reported in publicly available information, including SEC filings, as well as other information that the bidder knows or has “reason to know” about the U.S. beneficial ownership.

Tier I exemption – The new rules will eliminate restrictions on the types of cross-border transactions that qualify for the Tier I exemption from Rule 13e-3. As a result, schemes of arrangement, cash mergers and other similar types of transactions will be eligible to rely on the Tier I exemption.

Tier II exemption – The SEC has extended the Tier II exemption to cover any offer regardless of whether the target’s securities are subject to Regulation 14D or Rule 13e-4.

Multiple non-U.S. offers – Bidders will now be allowed to make multiple concurrent non-U.S. offers.

Persons included in offers – Non-U.S. holders of ADRs will now be able to participate in U.S. offers. U.S. holders will also be able to participate in non-U.S. offers where required under local law (that is, where the local law expressly precludes the exclusion of U.S. persons from the local offer) and where adequate disclosure about the implications of participating in the foreign offer or offers is provided to U.S. security holders.

“Back-end” withdrawal rights – Bidders will be able to suspend back-end withdrawal rights during the time after the initial offering period, when tendered securities are being counted and before they are accepted for payment. This will, therefore, permit withdrawal rights to be terminated at the end of an offer and during the counting process where no subsequent offer period is provided.

Length of subsequent offer periods – The 20-business day limit on subsequent offer periods has been eliminated.

Rule 14e-5 – New Rule 14e-5, which prohibits purchases of target’s securities outside and during the pendency of an offer except pursuant to such offer, will codify recurrent Staff’s exemptive relief for tender offers relying on the Tier II exemption.

Schedule 13G – The new rules will permit foreign institutions (similar to the U.S. domestic institutions that can use Schedule 13G pursuant to Rule 13d-1(b)(1)(ii) of the Exchange Act), under specified conditions, to report beneficial ownership of more than 5% of a subject class of securities on Schedule 13G, rather than filing a Schedule 13D, as it was formerly required.

The SEC has also provided additional interpretive guidance on various other issues covered in the proposing release, including termination of withdrawal rights after reduction or waiver of a minimum acceptance condition; applicability of all-holders rule to non-U.S. holders; the exclusion of U.S. holders of a target to participate in a tender offer; and vendor placements.