SEC Proposes Major Revision to Cross-Border Exemption Rules

Taking notice of the increasing globalization of the securities markets, the SEC proposes to enhance and expand its cross-border exemptions to facilitation the participation of US shareholders in cross-border business transactions. Many of the rule changes proposed would codify existing interpretive positions and exemptive orders in the cross-border area. The proposed revisions represent a balancing between the need to protect U.S. investors and the desirability of enabling transactions that may benefit all shareholders, including those in the U.S. Expanding the availability of the cross-border exemptions should encourage bidders to include U.S. shareholders in cross-border business combination transactions from which they otherwise might be excluded.

Cross-border in this context refers to business combinations in which the target company is a foreign private issuer and rights offerings where the issuer is a foreign private issuer.

In addition, the SEC believes that the proposed changes will reduce the overall cost for issuers engaged in cross-border business combination transactions. Currently, when there are conflicts between U.S. and foreign law or practice, acquirors in cross-border business combination transactions frequently seek no-action or exemptive letters from the SEC staff. Upon adoption of the changes, much of the relief sought in the past would be available without the need for no-action or exemptive letters, with concomitant cost reduction. In addition, the changes will provide regulatory certainty about U.S. rules governing cross-border business combination transactions.
The cross-border exemptions are structured as a two-tier system based broadly on the level of U.S. interest in a transaction, measured by the percentage of target securities of a foreign private issuer held by U.S. investors. A Tier I exemption applies when no more than ten percent of the subject securities are held in the U.S. A qualifying cross-border transaction will be exempt from most U.S. tender offer rules and from the registration requirements of Section 5 of the Securities Act. Tier I also provides a broad exemption from the filing, dissemination and procedural requirements of U.S. tender offer rules and the heightened disclosure requirements applicable to going private transactions as defined in Rule 13e-3.

Tier II exemptions apply when U.S. holders own more than ten percent but no more than 40 percent of the target securities. The Tier II exemptions encompass narrowly-tailored relief from certain U.S. tender offer rules, such as the prompt payment, extension and notice of extension requirements in Regulation 14E. The Tier II exemptions do not provide relief from the registration requirements of Securities Act Section 5, nor do they include an exemption from the additional disclosure requirements applicable to going private transactions by issuers or affiliates.

The SEC proposes a refinement of the tests for calculating U.S. ownership of the target company for purposes of determining eligibility to rely on the cross-border exemptions in both negotiated and hostile transactions. The SEC also proposes to expand relief under Tier I for affiliated transactions subject to Rule 13e-3 for transaction structures not covered under the current cross-border exemptions, such as cash mergers or compulsory acquisitions for cash.

The SEC also proposes to expand the relief afforded under Tier II in several ways to eliminate recurring conflicts between U.S. and foreign law and practice, including allowing more than one offer to be made abroad in conjunction with a U.S. offer. The changes would also permit bidders to include foreign shareholders in the U.S. offer and U.S. holders in the foreign offers. The Commission also would allow subsequent offering periods to extend beyond 20 U.S. business days and permit securities tendered during the subsequent offering period to be purchased within 14 business days from the date of tender.

In addition, the Commission proposes guidance on the ability of bidders to terminate an initial offering period or any voluntary extension of that period before a scheduled expiration date. Guidance is also also proposed on the ability of bidders in tender offers to waive or reduce the minimum tender condition without providing withdrawal rights.