SEC Adopts Amendments to its Cross-Border M&A Rules

At its open meeting on August 27, 2008, the SEC voted to adopt amendments to the rules governing cross-border business combination transactions designed to encourage the inclusion of U.S. investors in these transactions, reduce the regulatory conflicts that commonly arise in cross-border transactions and minimize the need for individual exemptive and no-action relief by the SEC staff. Based on the SEC staff’s comments at the open meeting, we understand that the final amendments will be adopted substantially in the form proposed in the SEC’s May 2008 release, with some exceptions, the most important of which relate to the methodology for determining U.S. ownership of the foreign target company in negotiated transactions. These amendments are summarized below. The full text of the release is not yet available.

At the same meeting, the SEC acted on two other major proposals affecting foreign companies: it adopted amendments to Rule 12g3-2(b) under the Securities Exchange Act of 1934, which exempts certain foreign private issuers (FPIs) from registration with the SEC, and it adopted amendments to the rules applicable to FPIs that file reports with the SEC. The SEC also decided to issue for comment a proposed “roadmap” for moving toward the use of International Financial Reporting Standards (IFRS) by domestic U.S. issuers. We are addressing these developments in separate emails.

Determining U.S. Beneficial Ownership
To measure the level of U.S. ownership for the purpose of determining eligibility to rely on the cross-border exemptions, an acquiror must “look through” the securities held of record by nominees in specified jurisdictions to identify those held for the accounts of persons located in the United States. Under the current rules, the relevant date for determining U.S. ownership is fixed as the 30th day before commencement of the transaction for which exemption is being sought. With the adoption of the amendments, acquirors will be permitted to make the U.S. beneficial ownership calculation as of any date within a period that begins 120 days before and ends 30 days after the public announcement of the transaction. The SEC had initially proposed that the “look-through” period be a date within 60 days before the public announcement of the transaction.

If an acquiror is “unable to conduct” the modified “look-through” analysis described above, the amendments will offer an alternative eligibility test based in part on a comparison of the average daily trading volume (ADTV) of the subject securities in the United States compared to the worldwide ADTV. While the rule will not define what is meant by “unable to conduct” the analysis, at the open meeting the SEC staff indicated that inability would be based on the facts and circumstances. For example, if beneficial ownership reports are only available several times per year, or a substantial portion of the subject securities are in bearer form, the staff indicated this may be sufficient for the acquiror to conclude it is unable to do a look-through analysis. However, significant cost or delay is unlikely to be enough to satisfy the requirement. In addition, the alternative test will require the acquiror to take into account U.S. ownership figures reported in filings with the SEC, the home-country regulator or the jurisdiction of the primary trading market for the subject securities, as well as other information about U.S. beneficial ownership that the acquiror knows or has reason to know from other sources.

The amendments also will eliminate the current requirement to exclude from the U.S. ownership calculation those securities held by greater-than-10% holders. However, securities held by the bidder will continue to be excluded from the calculation. In the May release, the SEC had stopped short of proposing the elimination of this requirement. The SEC staff stated that it believes this change will significantly expand the number of cross-border business combinations eligible for the available exemptions.

While the final rule reflects improvements over the rule proposed by the SEC in May, it does not go as far as some commentators had suggested to eliminate the “look-through” analysis altogether in favor of an ADTV test for negotiated transactions. It remains to be seen whether the alternative test based on ADTV will be valuable for bidders in negotiated deals, which will depend in part on how comfortable practitioners will be to advise their clients that the inability standard has been met.

Tier I and Tier II Exemptions
The amendments will include the following additional changes to the existing Tier I and Tier II exemptions, which are being adopted substantially as proposed:

• Expanding the scope of the Tier I exemption from Exchange Act Rule 13e-3, the “going private” rule, to cover cross-border business combination transactions in addition to tender offers and mergers that currently remain subject to Rule 13e-3;
• Expanding the availability of the Tier II exemption to unregistered tender offers (e.g., tender offers for securities that are not registered under Section 12 of the Exchange Act);
• Permitting multiple foreign tender offers to be conducted contemporaneously with a U.S. tender offer and relaxing the rules relating to the persons who may be included in each offer;
• Permitting the suspension of withdrawal rights after the expiration of a tender offer while tendered securities are being counted and before they have been accepted for payment by the bidder;
• Permitting the early termination of a Tier II-exempt tender offer upon the satisfaction of all offer conditions;
• Codifying the exemptive relief previously provided by the SEC under Exchange Act Rule 14e-5 to permit certain purchases outside a tender offer conducted under the Tier II exemption; and

Eliminating for both U.S. tender offers and cross-border tender offers relying on the Tier II exemption, the current 20-business day limit on the maximum length of subsequent offering periods.

Expanded Availability of Early Commencement for Exchange Offers
As proposed by the SEC, the amendments also will expand the availability of “early commencement” (i.e., commencement before the effectiveness of the registration statement) to both U.S. and cross-border exchange offers not subject to Sections 13(e) or 14(d) of the Exchange Act under certain conditions. These exchange offers include those for unregistered equity securities and debt securities.

Beneficial Ownership Reporting by Foreign Institutions
The amendments will extend the short-form Schedule 13G filing eligibility based on the qualified investor exception under the Exchange Act to certain foreign institutions. In order to be eligible to use a Schedule 13G as a qualified institutional investor, the foreign institution will be required to certify that it is subject to a regulatory scheme “substantially comparable” to the U.S. rules.

Issuance of Interpretive Guidance
The adopting release also will include interpretive guidance from the SEC on the following issues:

• The ability of bidders in a cross-border offer to reduce or waive a minimum acceptance condition in a tender offer without providing withdrawal rights;
• The ability of bidders to exclude foreign target security holders in tender offers subject to the U.S. “all holders” rule;
• The ability of non-U.S. bidders to exclude U.S. target security holders in cross-border tender offers; and
• The ability of non-U.S. bidders to offer U.S. shareholders cash in a vendor placement procedure in cross-border exchange offers.

At the open meeting, the SEC indicated that the interpretive guidance would be consistent with the proposing release but include additional detail.

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Please feel free to contact any of your regular contacts at the firm or any of our partners and counsel listed under “Mergers, Acquisitions and Joint Ventures” or “Capital Markets” in the “Practices” section of this website if you have any questions.