The Securities and Exchange Commission (the "Commission") issued a release dated December 4, 1998 which proposed a series of reforms to update and harmonize its rules on mergers, tender offers, and other types of business combinations in conjunction with the "Aircraft Carrier" release. The release also contained proposed measures to reduce the restrictions companies currently face in communicating with shareholders while such deals are pending.
The following is a brief summary of the most significant aspects of the proposals. A copy of the executive summary of the release is attached hereto. Once we have studied the current release in depth, we intend to produce a comprehensive outline of the proposals and the issues they raise.
The Commission has requested comments on a number of issues raised by the release. The comment period for this release will end on April 5, 1999. We would be pleased to discuss specific issues raised by the release with you, or to provide you with assistance in preparing a comment letter.
According to the Commission, the mergers and acquisition market has changed considerably over the past 20 years while the regulatory framework has remained largely unchanged. The Commission is proposing a number of reforms designed to adapt the regulatory process to the realities of today's markets, while maintaining important investor protections. The proposals result from a review of all of the Commission rules relating to takeover transactions, including the Securities Act of 1933 registration provisions, the proxy rules, the tender offer rules and the going-private rules.
B. Reducing Restrictions on Communications
The release would amend current rules restricting communications to shareholders. According to the Commission, technological advances in communications have opened the door to more frequent, timely and direct communication with shareholders. Parties to business combinations, in particular, have asserted reasons why it is essential for them to communicate more frequently with shareholders, including the need to maintain an orderly market for the securities to be offered as consideration; satisfy the market's increased demand for information regarding a proposed transaction; and inform customers, employees and other constituencies. They also have asserted that the duty to disclose material information to the market may in some cases require them to publicly discuss the transaction. Yet the current rules continue to permit only communications that are made via a standard disclosure document, with limited exceptions.
The Commission believes that reducing regulatory restraints on communication would promote more informed voting and investing decisions. The proposed amendments are designed to provide full and fair disclosure to all investors -- not simply to a limited audience of analysts and financially sophisticated market participants.
The Commission's goal underlying the proposals is the same as that underpinning the "Aircraft Carrier" release -- making the regulatory scheme more workable for issuers and more effective for investors in today's capital markets. However, the proposals for business combinations vary in some respects from the proposals for capital-raising transactions because of the special nature of business combination transactions. While the "Aircraft Carrier" release conditions the proposals on the size and seasoned status of the company seeking to communicate, the proposals for business combination transactions apply to all parties to the business combination, regardless of size or seasoned status.
The proposed amendments would:
- permit free communications before the filing of a registration statement in stock mergers or stock tender offers;
- permit free communications before the filing of a proxy statement (whether or not a takeover transaction is involved);
- permit free communications about a planned tender offer without triggering the commencement of the offer, requiring the filing and dissemination of information;
- harmonize the various communications principles applicable to business combinations under the Securities Act of 1933, the tender offer rules and the proxy rules; and
- continue to require that security holders receive a mandated disclosure document (prospectus, proxy statement or tender offer material) before being able to vote or tender the securities.
Written communications would be required to be filed on first use, so that all security holders would have access to them. Written and oral communications would be subject to liability under the federal securities laws. Additionally, since parties to the transaction would no longer be subject to the current restrictions on communications, the proposals would eliminate the confidential treatment now available for merger proxy statements.
C. Parity for Cash, Stock Tenders
Under the current rules, registered stock tender offers are subject to regulatory delays that are not present in cash tender offers. In cash deals, the tender offer can commence as soon as the bidder files the tender offer schedule with the Commission. In registered stock deals, the tender offer may not commence upon the filing of a registration statement, but only after the registration statement becomes effective. This regulatory delay in stock tender offers causes difficulty particularly in competing deals, where a cash tender offer has a timing advantage over a stock tender offer, even when the value of the stock offered is equal to or greater than the value of the cash offered.
The proposals would permit bidders to begin stock tender offers as soon as a registration statement is filed. Shares tendered could not be purchased until after the registration statement was effective; the minimum 20 business day tender offer period had expired; and all material changes had been disseminated to security holders with time for them to review and act on the information. Security holders could withdraw their tendered shares at any time before the bidder purchases them.
Currently, the procedural and disclosure requirements for different kinds of business combinations vary. The proposals would clarify and harmonize the requirements for different types of business combinations. The disclosure requirements would be placed in a separate regulation, "Regulation M-A." In most cases, the harmonization would result in reducing regulatory burdens. In addition, the proposals would update the rules in a number of respects. The most significant features of the proposals would:
- permit a subsequent offering period, similar to that available in many United Kingdom tender offers, during which security holders can tender their shares for a limited period after completion of a tender offer;
- require a plain English summary term sheet in all cash tender offer, cash merger and going-private transactions;
- combine the current schedules for issuer and third-party tender offers into a single schedule, "Schedule TO;"
- require disclosure of pro forma financial information to be given up front to security holders by requiring such disclosure in cash tender offers where the bidder intends to engage in a back end stock merger;
- update and generally harmonize the financial statement requirements for business combinations;
- clarify Rule 13e-1 (which requires issuers to report any intended repurchases of their securities after a third-party tender offer has commenced) and revise the rule to require information to be disseminated on a timely basis; and
- clarify Rule 10b-13 (which prohibits purchases outside a tender offer); codify interpretations of exemptions from the rule; and redesignate the rule as Rule 14e-5.
If you have any questions or comments, please contact your representatives here at Sutherland Asbill & Brennan LLP.
Sutherland Asbill & Brennan LLP
1275 Pennsylvania Avenue, N.W.
Washington, DC 20004-2415
Sutherland Asbill & Brennan LLP
999 Peachtree Street, NE
Atlanta, GA 30309-3996