D.C. Bar Program Reviews SEC's Cross Border Transaction Rules

The D.C. Bar yesterday sponsored a luncheon program on the SEC's cross border transaction rules which took effect on December 8, 2008. Christina Chalk, the senior special counsel in the Division of Corporation Finance's Office of Mergers & Acquisitions, explained that the cross border rules adopted in 2000 led to many more transactions involving U.S. persons from countries other than the U.K., creating a number of new conflicts. The staff was constantly asked to grant relief to the point that it became routine, she said. After eight years of experience with the rules, the staff was able to identify those that were not working and that led to more conflicts. The new rules were adopted in August 2008.

Chalk said the goal of the new rules was to clean up the problems and address the conflicts that arose over and over again, since they involved a time-intensive and costly response. The most significant changes were the methods of calculating U.S. ownership, she said. Where the earlier rules required a calculation of U.S. ownership 30 days before the commencement of an offer, Chalk said the rules now provide a date range that spans from 60 days before until 30 days after the public announcement of an offer.

Another significant change was the treatment of block holders. Under the former rules, block holders were not included in the calculation, but now they are. The SEC also changed the look-through analysis for determining U.S. ownership. Part of the process of identifying U.S. shareholders now includes a query of broker-dealers and other financial institutions and record holders. Jim Moloney, a partner at Gibson, Dunn & Crutcher LLP, said the look-through requirement is a labor-intensive process. It can take days if not weeks and, in many cases, there is no response at all.

Chalk acknowledged that the SEC has been heavily criticized for the time and expense involved in the process. In some jurisdictions, the information is available but in others, the staff has been told that the provision of the information is illegal. The target company has information on its ownership base, she said, so in a friendly transaction, it will be easier to obtain.

Because of the problems associated with the look-through rule, Chalk said the staff allowed companies to use a test based on the average daily trading volume ("ADTV") on a worldwide basis, based on the "hostile presumption" that the information would not be forthcoming in a nonnegotiated deal. The ADTV test was not included in the 2008 rules because the SEC concluded that U.S. ownership should be the relevant measure for when U.S. rules apply. The Office of Economic Analysis also analyzed U.S. beneficial ownership figures and determined that trading volume was a poor measure of U.S. interests.

The new rules provide an alternative approach based on the hostile presumption. Chalk said the staff will likely have to address the approach interpretively, but advised that the time and expense will not be accepted as a basis for a company's inability to conduct the look-through. Companies must make the inquiry even if they do not expect a response, she said. The rules provide an extended 120-day period before the announcement when an acquirer is unable to complete the look-through analysis within the 90-day period. The staff may be sympathetic and allow the alternative test if the information cannot be obtained within the expanded time range, she said.

Chalk said the new rules significantly expanded the tier two offers to address areas where the staff was getting regular requests for cookie cutter relief. For instance the staff codified the relief that was regularly granted under Rule 14e-5 relating to the purchase of securities outside of the tender offer while the tender offer remains open.

The SEC also adopted two changes outside of the cross-border context. It eliminated the length of the subsequent offering period. For foreign cross border offers, the subsequent period was always longer than 20 business days, she said. Since the tender offer terms are locked in and the number of securities tendered is satisfied, she said the SEC saw no harm in allowing longer subsequent offers which helped bidders get the 90% of shares needed to do a short-form merger.

The SEC also expanded the ability to begin an early commencement of exchange offers. The offers can commence on the date the registration is filed but cannot close until it goes effective.

Chalk urged registrants to contact the staff if they need additional relief with respect to conflicts of laws. The staff has the authority to provide additional exemptions and is cognizant of the tight time schedules. Moloney warned against relying on existing no-action letters, even if they appear to reflect a similar transaction. The circumstances may be unique, so it is best to call the staff first, he said. Cathy Dixon, a partner with Weil Gotshal & Manges LLP, added that the staff may be able to contact a foreign regulator on the registrant's behalf to resolve conflicts of law.