Davis Polk & Wardwell Newsflash

SEC Proposes Revisions to Cross-Border Rules

May 9, 2008

Yesterday, the SEC proposed significant changes to the cross-border rules originally adopted in 1999 to increase the ability of U.S. investors to participate in foreign transactions.  The proposed changes intend to expand and refine the current exemptions and codify existing SEC interpretations of the rules.  According to the SEC release, the proposed rules:

  • Refine 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, including changes to:
    • Use the date of public announcement of the business combination as the reference point for calculating U.S. ownership;
    • Permit the offeror to calculate U.S. ownership as of a date within a 60-day range before announcement;
    • Specify when the offeror has reason to know certain information about U.S. ownership that may affect its ability to rely on the presumption of eligibility in non-negotiated tender offers; 
  • 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 schemes of arrangement, cash mergers, or compulsory acquisitions for cash;
  • Extend the specific relief afforded under Tier II to tender offers not subject to Sections 13(e) or 14(d) of the Exchange Act;
  • 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;
    • Permitting bidders to include foreign security holders in the U.S. offer and U.S. holders in the foreign offer(s);
    • Allowing bidders to suspend back-end withdrawal rights while tendered securities are counted;
    • Allowing subsequent offering periods to extend beyond 20 U.S. business days; 
    • Allowing securities tendered during the subsequent offering period to be purchased within 14 business days from the date of tender;
    • Allowing bidders to pay interest on securities tendered during a subsequent offering period;
    • Allowing separate offset and proration pools for securities tendered during the initial and subsequent offering periods;
  • Codify existing exemptive orders with respect to the application of Rule 14e-5 for Tier II tender offers;
  • Expand the availability of early commencement to offers not subject to Section 13(e) or 14(d) of the Exchange Act;
  • Require that all Form CBs and the Form F-Xs that accompany them be filed electronically;
  • Modify the cover pages of certain tender offer schedules and registration statements to list any cross-border exemptions relied upon in conducting the relevant transactions; and
  • Permit foreign institutions to report on Schedule 13G to the same extent as their U.S. counterparts, without individual no-action relief.

In addition, the proposed rules also provide guidance and solicit views on the following issues:

  • The ability of bidders to terminate an initial offering period or any voluntary extension of that period before a scheduled expiration date;
  • The ability of bidders in tender offers to waive or reduce the minimum tender condition without providing withdrawal rights;
  • The application of the all-holders provisions of our tender offer rules to foreign target security holders;
  • The ability of bidders to exclude U.S. target security holders in cross-border tender offers; and
  • The ability of bidders to use the vendor placement procedure for exchange offers subject to Section 13(e) or 14(d) of the Exchange Act.

While we believe these proposed changes are a step in the right direction, we anticipate the rules will require significant further revision prior to achieving the SEC’s intended effect.  We intend to submit comments on the SEC’s proposal by the June 23rd deadline and expect to distribute a memorandum to clients detailing these rule changes within the next few weeks. 

If you have any questions regarding this newsflash, please call your Davis Polk contact.

Davis Polk & Wardwell