SEC Rule Amendments Simplify Cross-Border Transactions
Corporate & Finance Alert
November 25, 2008
Approximately nine years after the implementation of the original cross-border transaction exemptions, the Securities and Exchange Commission (“SEC”) has approved revisions to expand and improve the effectiveness of the cross-border exemptions. The amendments have been designed to address the realities of the present securities markets, the increasing globalization of world markets, and the potential for regulatory conflicts in the context of cross-border business combination transactions. The final rules become effective December 8, 2008, with certain revisions effective as of October 9, 2008.
Since 1999, tender offers and other transactions for securities of non-U.S. issuers have been eligible for a two-tier system of exemptions from the procedural rules governing tender offers of U.S. listed and certain other SEC reporting companies, based on the level of U.S. shareholders in the subject company. All tender offers in the United States, including securities of companies that do not have a U.S. listing and are not SEC reporting companies, are subject to certain anti-fraud provisions, such as a minimum offer period and prompt payment requirement.
The original cross-border exemptions symbolized an attempt to assist in the inclusion of U.S. security holders in foreign transactions in a manner consistent with U.S. investor protections. Under the exemption, tender offers for the securities of non-U.S. issuers with 10% or fewer U.S. holders are eligible for Tier I relief from almost all the procedural requirements of a tender offer and certain of the anti-fraud provisions. In addition, exchange offers and rights offerings for the securities of non-U.S. issuers with 10% or fewer U.S. holders are exempt from the registration requirements of the Securities Act of 1933, as amended. Tender offers for the securities of non-U.S. issuers with 40% or fewer U.S. holders are eligible for the more limited “Tier II” relief from certain provisions of the U.S. tender offer rules.
This alert highlights some of the changes to the cross-border exemptions. The cross-border exemptions continue to be available exclusively for non-U.S. issuers, and the threshold U.S. ownership percentages of Tier I and Tier II eligibility remain at 10% and 40% U.S. ownership, respectively, however, the “look through analysis” and certain calculations in the method for determining the number of U.S. securities holders has changed.
Fixed Determination Date
Previously, the number of U.S. shareholders was determined at a fixed date 30 days prior to the commencement of a tender offer or before the solicitation for a business combination other than a tender offer. This presented difficulties in jurisdictions where security holder data was not available as of fixed dates. Pursuant to the new rule, U.S. ownership calculations may be determined as of any date no more than 60 days before and no more than 30 days after the public announcement of the cross-border transaction. The SEC Staff advised that, when utilizing the 30 day post-public announcement period to calculate ownership, acquirors must ensure that the date is prior to the commencement of the offer. The SEC Staff also stated that by permitting a range of dates both before and after public announcement, the new rule will provide acquirors whose home country laws permit them to wait to conduct the “look-through analysis” until after public announcement, providing flexibility to maintain confidentiality to the greatest extent possible.
The SEC stated that the 90-day range may not be enough time in some foreign jurisdictions, depending on the procedures available for obtaining beneficial share ownership information. Therefore, the new rule specifies that where the issuer or acquiror is unable to complete the “look-through analysis” as of the 90-day period it may use a date within 120 days before public announcement.
Inclusion of Large Security Holders
The 1999 cross-border transactions exemption rules allowed security holders holding more than 10% of the class of the subject securities to be excluded from the analysis when calculating the number of U.S. holders. Under the new amendments, 10% holders will not be excluded from the calculation, although securities held by the bidder will continue to be excluded. The SEC believes that this change will significantly expand the number of cross-border business combinations eligible for the exemptions, while continuing to provide appropriate investor protections.
Alternative Trading Volume Test
In most cases, the bidder is required to conduct a “look-through analysis” making reasonable inquiries of nominee security holders based in the home jurisdiction of the bidder and the target and in the U.S. to determine the residence of the beneficial shareholders. Where an acquiror is unable to conduct the “look-through analysis” because of specific circumstances, the revised rule will allow acquirors to use an alternate test based upon average daily trading volume (“ADTV”) rather than a count of U.S. security holders. This alternate test was previously only available in hostile transactions, but now extends to certain negotiated transactions in which there is a “primary trading market” for the subject securities. In addition to hostile transactions, the SEC gave three examples in which the alternate test could be used; (i) transactions in jurisdictions where security holder lists are not available, (ii) negotiated transactions involving bearer securities, and (iii) transactions where local legal restrictions prohibit nominees from disclosing information about the beneficial owner on securities they hold.
Under the alternate test, an acquiror or issuer may rely on the cross-border exemptions unless (i) average daily trading volume in the U.S. exceeds certain limits, (ii) reports filed by the target company indicate levels of U.S. ownership inconsistent with the limits for the applicable exemptions, or (iii) the acquiror knows or has reason to know that U.S. ownership exceeds the limits for the applicable exemption.
The first prong of the alternate test is based on a comparison of the ADTV of the subject securities in the United States, as compared to worldwide ADTV. As revised, the alternative test is satisfied where the ADTV for the subject securities in the U.S. over a twelve month period ending no more than 60 days before the announcement of the transaction is not more than 10% for Tier I and 40% for Tier II of the ADTV on a world wide basis. The SEC stated that the requirement to perform the comparison as of a twelve month period minimizes the potential for manipulation of the trading volumes both inside and outside the U.S. The revised rule also requires that there be a “primary trading market” as defined in Securities Exchange Act of 1934, for the subject securities, because the SEC believes that the existence of a primary trading market will ensure that a foreign regulator will have supervision over the transaction.
The second prong of the alternate test requires an acquiror to consider information about U.S. ownership levels that appear in annual reports or other annual information filed by the issuer with the SEC or with regulators of the foreign issuer in its home jurisdiction. An acquiror may be disqualified from relying on the cross-border exemption sought if the reports or other filings indicate levels of U.S. ownership that exceed applicable limits for the exemption.
The cross-border exemption will not be available, even where all other elements of the alternate test are met, if the acquiror “knows or has reason to know” that U.S. beneficial ownership levels exceed limits for the applicable exemption. An acquiror or offeror is deemed to have reason to know information about U.S. ownership of the subject class of securities that appears in any filing with the SEC or any regulatory authority of the issuer’s home country or any jurisdiction in which its primary trading market is located. An acquiror will also be deemed to know any information acquired during the course of due diligence investigation of the target.
In a transaction that does not fit one of the three examples in which the SEC has indicated the alternative ADTV test can be used, acquirors should contact the SEC Staff before relying on the alternative test to discuss the reasons for being unable to accomplish the look-through analysis.