by George Casey and George Karafotias | Published June 2, 2008 at 11:40 AM
In The Deal NewsWeekly George Casey and George Karafotias, partners at
Shearman & Sterling LLP, analyze the SEC's proposed changes to
cross-border M&A rules.
The Securities and Exchange Commission has proposed significant changes
to its cross-border M&A rules first adopted in 1999. The proposed
changes, included in a May 6 release and open for public comment until
June 23, represent another positive step in acknowledging the
increasingly global nature of the M&A marketplace.
The proposed amendments reflect the significant
amount of experience the SEC has gained, through its exemptive and
no-action relief process and through discussions with mergers and
acquisitions practitioners and non-U.S. securities regulators, in
dealing with issues of regulatory conflict and differences in market
practice that are frequently encountered in cross-border transactions.
The proposed amendments are also consistent with other recent SEC
rulemaking initiatives intended to further enhance the U.S. regulatory
system applicable to foreign private issuers.
The release contains three types of proposed changes:
substantive changes to the cross-border rules; codification of
exemptive and no-action relief previously granted by the commission and
the staff; and technical changes that clarify applicability of the
rules. The release also contains guidance on other issues, including
use of exclusionary offers and vendor placements.
The key amendments relate to one of the more problematic
aspects of structuring cross-border transactions under SEC rules -- the
calculation of U.S. ownership for purposes of determining the
availability of the cross-border exemptions. The SEC continues with its
approach that if U.S. ownership is 10% or less, most of the SEC tender
offer rules and registration requirements do not apply. If U.S.
ownership is 40% or less, then the U.S. rules generally apply, subject
to specific exemptions designed to address recurring areas of conflict
with non-U.S. securities laws.
Under the proposed amendments, the calculation of U.S.
ownership is made as of any day within a 60-day period before
The requirement to make such a determination as of a fixed
date 30 days before commencement has proven impractical and in some
jurisdictions, such as France and Germany, impossible to comply with.
The determination will still require a "look-through" analysis to
ascertain the ultimate beneficial ownership of the shares. The SEC has
similarly relaxed the approach to determining eligibility for the
exemptions in unsolicited transactions to be based on an average
trading volume test measured during the 12-month period ending on the
60th day before announcement.
A significant number of other proposed changes relate to the
Tier II exemption (U.S. ownership levels of 40% or less). Among the
changes, the amendments would allow bidders to structure tender offers
as one offer in the U.S. and multiple offers outside of the U.S.
The changes would also permit bidders to include foreign
shareholders in U.S. offers and U.S. shareholders in the non-U.S.
offers and create more flexibility in structuring a subsequent offering
period (extending the length, allowing more time for payment, allowing
interest payment and allowing separate offset and proration pools). The
rules also permit purchases by bidders and financial advisers outside
of the tender offer.
The other interesting aspect of the release is its guidance on
exclusionary offers and vendor placements. The SEC emphasizes that
bidders structuring transactions to exclude U.S. holders must take
special precautions to ensure that the offer is not made in the U.S.
The SEC warns that the staff will monitor exclusionary offers to
determine whether SEC action is necessary to protect U.S. holders.
With respect to vendor placements, the SEC has reiterated its
position that bidders who use this structure in offers for
SEC-registered securities must first seek an exemption from the SEC. In
practice, it is likely that such relief will be granted only in
The release has generated a significant amount of interest
among M&A practitioners and will stimulate further discussion about
the scope and the direction of changes in cross-border rules.
Best of all, the discussion generated through comment letters
from M&A practitioners and others will bolster the SEC's efforts to
achieve the fine balance between facilitating the structuring of
cross-border M&A transactions and the overall goal of protecting