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SEC eases requirements to encourage cross-border offers

The Securities and Exchange Commission has adopted new rules affecting cross-border tender offers, exchange offers, business combinations and rights offerings involving foreign companies, including Canadian market participants. The rules, which become effective on January 24 2000, are designed to encourage the consistent treatment of US security holders of foreign companies with non-US security holders of such companies. The adoption of the rules marks an attempt by the SEC to stem the practice of excluding US security holders from cross-border transactions where compliance with US legislation has been considered to be onerous and outweighed in transactions where US security holders own small numbers of securities of foreign companies.

The rules apply to cross-border transactions in which the target or, in the case of a rights offering, the issuer is a "foreign private issuer", currently being any foreign company except one that has more than 50% of its voting securities held of record by US residents and either:

  • a majority of its executive officers or directors are US citizens or residents;

  • more than 50% of its assets are located in the US; or

  • its business is administered principally in the US.

An amendment to the definition of "foreign private issuer" effective in September 2000 will require that the level of US ownership of an issuer be determined on the basis of beneficial ownership, rather than on the basis of registered ownership, resulting in a requirement to "look through" the registered record of ownership of the issuer. Notably, in the case of tender offers, exchange offers and business combinations, the domicile and reporting status of the offeror under US securities legislation will not affect its ability to rely upon the rules, as long as the target is a foreign private issuer.

In the case of tender offers, the rules provide for an exemption from certain of the tender offer requirements of the Exchange Act and rules where US ownership of the target does not exceed 10% (referred to as a Tier I exemption) and for another, narrower exemption from such requirements where US ownership of the target does not exceed 40% (referred to as a Tier II exemption). In the case of securities issued in exchange offers or business combinations, new Rule 802 provides for an exemption from the registration requirements of the Securities Act where US ownership of the target does not exceed 10%. A similar exemption in the case of equity securities issued in rights offerings is provided by Rule 801 where US ownership of the issuer does not exceed 10%.

Under the Tier I exemption, tender offers will be exempt from, among other requirements, the minimum offering period, withdrawal rights and certain disclosure requirements of the Exchange Act and rules. To rely upon the Tier I exemption, an offeror is required to:

  • allow US security holders to participate in the offer on terms "at least as favourable" as those offered to non-US security holders; and

  • send to US security holders, and in certain cases file with the SEC for notice purposes, the circular or informational documents, in English, provided to security holders in the target's home jurisdiction.

Under the first requirement, US security holders may be offered only cash, even if non-US security holders are offered consideration including securities, but only if the offeror has a "reasonable basis to believe that the cash is substantially equivalent to the value" of the consideration offered to non-US security holders. An opinion to this effect from an independent expert may be required to be provided where an offered security is not a traded "margin security" within the meaning of Regulation T under the Exchange Act. The rule provides that the procedure of "vendor placements", where US security holders are paid the net proceeds of an "offshore" sale by an agent of securities otherwise issuable to US security holders under an offer, will continue to be available in "appropriate circumstances" upon application to the SEC.

Under the Tier II exemption, tender offers will be entitled to only limited relief from the tender offer requirements of the Exchange Act to minimize conflicts with non-US regulatory regimes. The exemption represents a codification of exemptive relief which has been granted in no-action letters issued by the SEC from time to time.

To rely upon the registration relief afforded by Rule 802, an offeror in an exchange offer will be required to:

  • allow US security holders to participate in the transaction on terms "at least as favourable" as those offered to non-US security holders;

  • send to US security holders, and file with the SEC for notice purposes, the circular or informational documents, in English, provided to security holders in the target's home jurisdiction; and

  • include a legend in a prominent position in the documents provided to US security holders in connection with the transaction regarding the foreign nature of the transaction and the issuer's disclosure practices and to the effect that US investors may have difficulty in enforcing rights against the issuer and its officers and directors.

The calculation of US ownership for the purpose of the rules is difficult. An offeror is required to "look through" the registered ownership of brokers, dealers, banks and other nominees in the target's home jurisdiction, in the primary trading market for the target's securities (if different from the target's home jurisdiction) and in the US to determine ownership of securities on a beneficial basis. Recognizing the difficulties in this process, the SEC has allowed for certain presumptive ownership rules in the context of hostile bids and bids commenced following an initial bid. Generally, a hostile bidder may assume that US security holders own less than 10% or 40%, as the case may be, of the subject securities unless the US trading volume in subject securities over the preceding 12 months exceeds the applicable percentage of the worldwide trading volume in the subject securities, the target's annual report indicates otherwise or the bidder knows or has reason to know otherwise. In a bid commenced following an initial bid, the subsequent offeror will be entitled to rely on the same exemption under the rules as that relied upon by previous offerors, regardless of intervening market activity. An offeror is entitled to assume that a target is a foreign private issuer if the target files reports with the SEC under the foreign integrated disclosure system or has claimed an exemption from reporting under Rule 12g3-2(b) of the Exchange Act, unless the offeror knows that the target is not a foreign private issuer.

In determining US ownership for the purpose of the Tier I, Tier II and Rule 802 exemptions (as well as the Rule 801 exemption for rights offerings), securities held by US and non-US security holders owning more than 10% of the subject securities must be excluded from the US ownership calculation. The exclusion of such holdings, considered appropriate by the SEC to ensure that US ownership is ascertained on the basis of the "non-affiliated" public float, is significant as it may limit the utility of the new rules where foreign private issuers have one or more significant security holders, something which is quite common in Canadian companies.

The rules provide that tender offers made for securities of foreign private issuers are exempt in certain circumstances from the restrictions under the Exchange Act prohibiting an offeror from purchasing securities otherwise than pursuant to a tender offer. The exemptions may be relied upon where the offer is a Tier I offer or where purchases are made by "connected exempt market makers" or "connected exempt principal traders" as defined in the UK City Code on Take-overs and Mergers in the course of their UK market making activities during cross-border offers subject to the UK City Code.

In adopting the new rules, the SEC has not provided for exemptions from the anti-fraud provisions of US securities legislation, stating its belief that such provisions "are necessary to provide a basic level of protection for US security holders participating in cross-border transactions". However, recognizing that the form requirements of US securities legislation relating to these provisions may be different from non-US disclosure requirements, the SEC has stated that the omission of information called for by US forms would not necessarily violate US disclosure requirements, and that anti-fraud actions could be brought if the omitted information is "material" in the context of the transaction and the disclosure provided is misleading as a result of the omission of the information.

Chad Hutchison

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