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

Commission Adopts Amendments to Cross-Border Tender Offer Rules

Amendments to the cross-border business combination rules were adopted unanimously by the SEC. The changes are intended to encourage foreign offerors and issuers to permit U.S. security holders to participate in business combinations, tender offers and rights offerings. In amending the rules that were previously adopted eight years ago, the SEC recognized that the exemptions did not operate as well as hoped and did not address all of the conflicts of law and practice that it had not foreseen. The SEC will also issue interpretive guidance on a number of issues that frequently arise and will codify previous no-action letters to eliminate the need for parties to obtain individual relief.

When U.S. shareholders hold a small percentage of a foreign target's securities and their participation in a transaction is not needed to ensure its completion, these holders are frequently excluded to avoid U.S. legal issues. Even when the percentage of securities held in the United States is significant, some issuers avoid extending business combination transactions and rights offerings to U.S. holders out of litigation concerns, conflicts with home country rules or practices or to avoid registering an offer with the SEC.

The SEC amended the look-through test for identifying beneficial owners to determine whether a company is eligible for an exemption. The amendments change the date for calculating U.S. ownership, which is triggered by the announcement rather than the commencement of the transaction, and eliminate from the calculation any securities held by a person who holds more than 10 percent of the securities.

The amendments provide an alternative eligibility test based on a comparison of the average daily trading volume in the United States to that of the trading volume worldwide. The alternative test requires an acquiror or an issuer to take into account the U.S. ownership reports and other resources to determine U.S. beneficial ownership.

The SEC expanded the scope of the Tier 1 and Tier II exemptions. The Tier 1 exemption is available where no more than 10 percent of the subject securities are held in the United States. Tier II exemptions are available where U.S. holders own more than 10 percent but no more than 40 percent of the target securities.

The amendments extend relief under Tier II to tender offers that are not subject to Exchange Act Sections 13(e) or 14(d). In order to eliminate conflicts with foreign laws and practices, the amendments allow multiple offers to be conducted contemporaneously with a U.S. offer, allow bidders to suspend back-end withdrawal rights while the tendered securities are being counted and allow subsequent offering periods to extend beyond 20 U.S. business days.

The rules will permit certain foreign institutions to report on Schedule 13G to the same extent as their U.S. counterparts as long as the securities are held in the ordinary course of business and with no intent to change the control of the issuer.

The SEC will issue guidance to address the ability of bidders in tender offers to waive or to reduce the minimum tender condition without providing withdrawal rights, the ability of bidders to exclude U.S. target securities holders in cross-border tender offers and the payment of cash to U.S. security holders while paying with shares to foreign holders, known as the vendor placement procedure for exchange offers subject to Sections 13(e) or 14(d).

Commissioner Elisse Walter acknowledged that cross-border tender offers and exchange offers present a real challenge. The rules address the exclusion of U.S. investors from such offers and should increase their ability to participate, she said. She urged the staff to monitor the impact of the new rules and to work closely with their regulatory counterparts abroad.

The Forms CB will be filed electronically, which will enable the staff to more closely monitor those transactions. The staff agreed with Commissioner Walter about the importance of working with their foreign counterparts and hope the amendments will eliminate many of the barriers about which people have raised concerns. The staff also noted that foreign jurisdictions grapple with many of the same issues the SEC is attempting to address.

Commissioner Luis Aguilar agreed that the amended rules should result in more opportunities for U.S. investors to participate in foreign offerings.