(The article featured below is a selection from Federal Securities Law Reporter, which is available to subscribers of that publication.)

Cross-Border Tender Offer Changes Proposed

A proposal (Release No. 33-8917) would modify the Commission's rules concerning cross-border tender offers. These changes are designed to provide protection for U.S. investors while facilitating cross-border business combinations and other transactions.

The SEC adopted the cross-border rules in 1999 to encourage issuers and bidders to include U.S. holders of foreign securities in these offers, as offerors often excluded U.S. holders due to perceived burdens of complying with federal securities law. Designed to balance investor protection with the desire to promote U.S. holders' inclusion in these transactions, the rules afforded exemptive relief from both Exchange Act tender offer rules and Securities Act registration requirements.

Cross-border tender offers are currently subject to a two-tier exemptive structure. The Tier I exemption applies when U.S. security holders own 10 percent or less of the subject securities. These offers are not be subject to most disclosure, filing, dissemination, minimum offering period, withdrawal rights and proration requirements. A more limited form of exemptive relief, designed to eliminate frequent areas of conflict between U.S. and foreign regulatory requirements, is available to offerors when the holdings of U.S. security holders do not exceed 40 percent of the subject class. This Tier II exemption codifies current SEC exemptive and interpretive positions.

The proposal would change the method for calculating U.S. ownership in both negotiated and hostile transactions, including using the announcement date as the basis for the calculations and allowing offerors to calculate U.S. ownership as of a date within a 60-day range before announcement. The amended rules would also extend relief under Tier I for affiliated transactions subject to Rule 13e-3 for cash mergers, compulsory acquisitions for cash and other transactions not presently covered.

With regard to the Tier II exemption, among other matters, proposed changes would extend the relief to tender offers not subject to Sections 13(e) or 14(d) of the Exchange Act. In addition, the proposals would eliminate recurring conflicts between U.S. and foreign law and practice by allowing: (1) more than one offer to be made abroad in conjunction with a U.S. offer, (2) bidders to include foreign security holders in the U.S. offer and U.S. holders in the foreign offer, (3) bidders to suspend back-end withdrawal rights while tendered securities are counted, (4) subsequent offering periods to extend beyond 20 U.S. business days, (5) securities tendered during the subsequent offering period to be purchased within 14 business days from the date of tender, (6) bidders to pay interest on securities tendered during a subsequent offering period, and (7) allowing separate offset and proration pools for securities tendered during the initial and subsequent offering periods.

The proposing release also included interpretive guidance concerning the treatment of foreign target security holders in tender offers generally, including those for U.S. target companies and of bidders' ability to exclude foreign target security holders. The SEC stated that "we wish to reiterate our position that the all-holders requirement does not allow the exclusion of any foreign or U.S. target holder in tender offers subject to those rules", but recognized the potential conflict with foreign law or practice. The SEC asked for comment on whether the Rule 14d-10(b) exemption applicable to state law should be extended to target holders in foreign jurisdictions.

The release also advised on vendor placements. These transactions are utilized to avoid Securities Act registration requirements with regard to securities offered as consideration to U.S. target security holders who tender into the offer. In a vendor placement, the bidder generally employs a third party to sell in offshore transactions the securities to which tendering U.S. security holders are entitled in the offer. The bidder or third party then remits the proceeds of the resale, minus expenses, to those U.S. target security holders that tendered into the offer.

The Commission noted that the staff previously has identified several factors in determining whether registration is necessary in these instances, including the level of U.S. ownership in the target company, the amount of bidder securities to be issued in the business combination, the amount of bidder securities to be issued to tendering U.S. holders, the market for the securities, timing considerations, disclosure concerns and the process used to effect the vendor placement sales. These factors remain relevant, advised the SEC. According to the Commission, in addition to these factors, "offerors should be particularly cognizant of U.S. target ownership levels."