Proposed Rule:
Cross-Border Tender Offerings, Business Combinations, and Rights Offerings

The exemption would be available to U.S. and foreign bidders. The domicile or reporting status of the bidder is not relevant.

We preliminarily believe that there should be a ceiling on the maximum percentage of U.S. security holders of the subject class to ensure that when U.S. ownership is significant, the full protections of the U.S. tender offer rules apply. When U.S. ownership exceeds 40 percent, it is unlikely that the offer would exclude U.S. security holders. We will consider relief on a case-by-case basis when there is a direct conflict between the U.S. laws and practice and those of the home jurisdiction. Any relief would be limited to what is necessary to accommodate conflicts between the regulatory schemes and practices. ⁴³

In no event will the Division exempt application of the anti-fraud and anti-manipulation provisions, including Section 14(e). ⁴⁴ Section 14(e) provides that it is unlawful for a person to make a material untrue statement, or material omission, or to engage in fraudulent, deceptive, or manipulative acts in connection with any tender offer. Receipt of an exemption from the bright-line prophylactic requirements of Rule 14e-1 ⁴⁵ does not obviate the need to comply with the anti-fraud and anti-manipulation requirements, including those contained in Section 14(e). Thus, for example, while an exemption from the requirement under Rule 14e-1(b) ⁴⁶ , which provides a bright-line threshold of ten days notice if the offeror increases or decreases the consideration offered, may be appropriate, the anti-fraud provisions may require notice of material changes in an offer.

The areas of exemptive relief under Tier II have been identified by bidders as common impediments to extending offers into the United States in past requests for exemptive relief. ⁴⁷ They include:

(1) an offer is deemed to commence upon mailing or publication pursuant to the home jurisdiction's requirements rather than upon announcement;

(2) a bidder may terminate withdrawal rights before the expiration of the offer if it has met all conditions to the offer and satisfied all duration requirements of the U.S. tender offer rules;

(3) a bidder may divide the offer into two separate offers having the same terms in which the U.S. offer would comply with the U.S. regulatory scheme and the non-U.S. offer would comply with the home jurisdiction rules, excluding U.S. security holders from the foreign offer and limiting the U.S. offer to U.S. security holders;

(4) whether the bidder meets the requirements for prompt payment for, or return of, tendered securities will depend on home jurisdiction requirements and practice; and

(5) bidders may announce extensions of the offer in accordance with the practices of the home jurisdiction, rather than before the commencement of trading on the next business day as required by the U.S. rules.

In Section II.C.2, we discuss each aspect of the proposed Tier II exemption in more detail. We also provide guidance on a bidder’s ability to reduce the minimum tender condition without extending the offer if certain conditions are met.

Q6. We request comments on the scope of the proposed relief and the conditions proposed in the Tier II exemption. Are there any other areas where relief should be granted? Are there areas of relief proposed that should not be granted? Should there be more conditions attached? For example, should a foreign bidder relying on the Tier II exemption be required, as proposed, to File a Form F-X appointing an agent for service of process in the United States?

If relief beyond the proposed Tier II exemption is necessary, the Commission staff would consider requests on an expedited basis under the proposed delegated authority. In such a case, the bidder would need to submit a written application requesting relief, along with a discussion of the basis for the request. ⁴⁸ The application must comply with the requirements of Rule 0-12 under the Exchange Act.

The Tier II exemption would be available regardless of the home jurisdiction of the foreign subject company. ⁴⁹ By creating an approach that is not country-specific, U.S. security holders will have the greatest opportunity to participate in offers for foreign companies without regard to national boundaries. Because the Tier II exemptive relief is limited, it is not necessary to determine whether the tender offer rules and practices of a particular jurisdiction are adequate. Also, a bidder need not demonstrate that there is an actual conflict between U.S. tender offer rules and rules of the home jurisdiction in order to rely on the Tier II exemption. The offers relying upon the proposed exemption would still be subject to any disclosure, filing, and most of the procedural and equal treatment requirements of the U.S. tender offer rules that would otherwise apply to the offer, as well as the going private disclosure and procedural requirements of Rule 13e-3. Further, the exemption requires that certain conditions be met to ensure an adequate level of investor protection while at the same time removing common impediments to including U.S. security holders in foreign tender offers. Consistent with the broader approach of the proposed Tier II exemption, the exemptive relief would be available to both issuer ⁵⁰ and third-party offers.

Q7. We request comments on whether the non-country specific exemption is appropriate.

Q8. Is the Tier II exemption necessary at all since, based on transactions filed with us, it appears that there will be relatively few offers for the securities of foreign private issuers that will be ineligible for the Tier I exemption if the proposed 10 percent (or possibly higher) threshold is adopted? Instead, should we continue our current practice of granting relief on a case-by-case basis, but in an expedited manner pursuant to the proposed delegated authority provision?

For tender offers conducted under Canadian law, an additional option exists. The rules under the Multijurisdictional Disclosure System ("MJDS") with Canada permit bidders for the securities of Canadian foreign private issuers to conduct cash tender offers and exchange offers in the United States on the basis of Canadian regulations and disclosure standards. ⁵¹ Eligibility is subject to certain conditions, including that U.S. record ownership of the subject class may not exceed 40 percent. Thus, a bidder for the securities of a Canadian foreign private issuer could proceed under the MJDS or the rules proposed today, depending on the level of U.S. ownership of the target securities.

The Tier II exemption would not allow the offer to proceed on the basis of the home country disclosure documents. The 1991 proposals were based on our finding that the disclosure standards applicable to cash tender offers in the United Kingdom were similar to those imposed by the U.S. tender offer rules. We have not, and could not, make this finding with respect to each jurisdiction that would be covered by the Tier II exemption. In addition, there appears to be little need for this relief, since we have not been required to grant exemptive relief with respect to the disclosure requirements of Schedule 14D-1. Bidders typically do not need regulatory relief when the target’s home jurisdiction simply requires more disclosure than our rules, or vice versa. We believe that we can resolve problems caused by conflicts between the different disclosure standards of different jurisdictions on a case-by-case basis, through our comment process. Compliance with U.S. disclosure requirements also is appropriate in light of the relief proposed for Tier I offers; only offers for foreign private issuers with more than 10 percent of their shares held in the United States would be subject to our disclosure standards.

Q9. Are there particular disclosure items under Schedule 14D-1 or other tender offer rules that should be the subject of exemptive relief? For example, should offers conducted pursuant to the Tier II exemption remain, as proposed, subject to the Commission's going private disclosure requirements?

The proposed exemption also does not provide relief from the U.S. dissemination standards. ⁵² This requirement is appropriate since the dissemination of information does not appear to impose significant burdens.

Q10. Are there aspects of the U.S. dissemination requirements that create conflicts with foreign requirements or practice or are otherwise unduly burdensome in the case of predominantly foreign offers?

Q11. We request comments on whether the 40 percent threshold is appropriate. Is a 30 percent threshold more appropriate? Should an offer for any foreign private issuer be excluded from the Tier II exemption whenever the primary trading market for the subject security is in the United States?

2. Scope of Tier II Exemptive Relief

a. Commencement of an Offer

The U.S. tender offer rules applicable to third-party cash offers for registered equity securities require a bidder to file with the Commission and to disseminate a mandated disclosure document within five business days of a public announcement of the significant terms of the offer. ⁵³ Some foreign jurisdictions, however, require a bidder to publicly announce its intention to make a tender offer even though the bidder is not yet prepared to commence the offer. ⁵⁴ In addition, the subject company triggers an obligation to file a Schedule 14D-9 by making an announcement that could be deemed to be a recommendation or solicitation with respect to the offer. ⁵⁵

The proposed exemption provides that an offer would commence only upon mailing or publishing the offer, even if the bidder makes a public announcement that would otherwise trigger the commencement requirements under the U.S. tender offer rules, as long as the announcement:

(1) is required by home jurisdiction law or practice;

(2) contains no information beyond the requirements of the home jurisdiction law or practice;

(3) if disseminated in written form in the United States, contains a legend noting that the offer will not commence until the bidder mails or publishes the offering document, which may not occur for a specified period, as permitted by the home jurisdiction; and

(4) any offer documents are mailed no later than 30 days following the announcement or the bidder makes a public announcement if it decides not to commence the offer.

In addition, anyone making such an announcement would not be making a solicitation or recommendation with respect to the offer within the meaning of Rule 14d-9. Requirements (1), (2) and (4) were contemplated in the 1991 proposed U.K. Exemptive Order. Requirement (3) was not contemplated in the 1991 proposed U.K. Exemptive Order.

Including the legend on the announcement when disseminated into the United States will ensure that U.S. investors are aware that commencement of the offer may be delayed. The 30-day maximum time limit for mailing the offer documents will ensure that there is not a significant delay in mailing the materials. This requirement is consistent with the U.K. requirement that the materials be mailed within 28 days of the announcement. ⁵⁶

Q12. We request comment on whether it is necessary to require that offers commence within 30 days of announcement. Is a different time period more appropriate? Further, would the proposed legend concerning the delay in commencement add meaningful protection for U.S. investors?

b. Withdrawal Rights

Under U.S. law, the bidder must permit tendering security holders to withdraw shares throughout the term of the offer, including any extension, and even following the close of the offer if the bidder has not accepted the tendered securities for payment within 40 days after the commencement of the offer. ⁵⁷ As highlighted in previous Commission exemptive orders and the 1991 proposed U.K. Exemptive Order, U.S. withdrawal rights may conflict with withdrawal rights available to security holders in other jurisdictions.

Under the U.K. City Code, for example, the bidder must provide security holders the right to withdraw previously tendered shares only if an offer does not become "unconditional as to acceptances" within 21 days after the first closing date of the initial offer. ⁵⁸ The City Code also requires that an offer remain open for at least 14 days after going unconditional as to acceptances and that shares be immediately purchased once the offer goes wholly unconditional. ⁵⁹ Allowing withdrawal rights after the offer has received the required level of acceptances would jeopardize the regulatory policy embodied in the City Code that offers may not proceed unless the bidder obtains control in the offer.

Since 1991, the Commission has consistently granted relief from the U.S. withdrawal rights requirements in U.K. offers during the mandatory extensions following the offer going wholly unconditional. Withdrawal rights are less important at this stage in the offer, because shares could have been purchased by the bidder at that time under U.S. law (i.e., when all conditions have been met). U.S. law does not require the bidder to extend the offer after obtaining its minimum acceptance level.

Under the Tier II exemption proposed today, the bidder could terminate withdrawal rights before the expiration of the offer if the offer is for all outstanding shares ⁶⁰ and if the bidder:

(1) satisfies or waives all conditions to the offer;

(2) satisfies all minimum time periods;

(3) extends withdrawal rights during all minimum time periods;

(4) accepts and promptly pays for all previously tendered securities; and

(5) immediately accepts and promptly pays for all securities tendered thereafter. ⁶¹

If the bidder satisfies all these conditions, and if it has previously advised U.S. security holders of the possibility of early termination, the bidder may terminate withdrawal rights even if a previously announced voluntary extension of the initial offering period has not expired. ⁶²

This exemption provides relief from the requirement that withdrawal rights be extended throughout the term of the offer and the requirement that withdrawal rights be provided if the securities have not been accepted for payment within 40 days after commencement of the offer.

Q13. Should bidders be permitted to terminate withdrawal rights earlier than the satisfaction of certain conditions, such as before governmental regulatory approval? Should we consider requests for this relief on a case-by-case basis rather than incorporating it into the Tier II exemption?

c. All-Holders/Best Price

The U.S. rules require that a bidder open the tender offer to all security holders and that the consideration paid to any security holder be as high as the consideration paid to any other security holder (the "all-holders/best price rule"). ⁶³ The Commission has issued exemptive relief from this requirement to permit a bidder to divide its offer into two separate offers. The U.S. offer would comply with the U.S. regulatory scheme and the non-U.S. offer would comply with the home jurisdiction rules. The bidder would exclude U.S. security holders from the foreign offer and limit the U.S. offer to U.S. security holders. ⁶⁴ We have also granted relief when bidders have offered a "loan note" alternative (a form of installment payment common in U.K. offers) only to U.K. security holders and not to U.S. security holders. ⁶⁵ The loan notes provide certain U.K. tax benefits that are not applicable to U.S. security holders. Therefore, it is not necessary to offer U.S. security holders that alternative. The proposed Tier II exemption would extend both kinds of relief to all offers eligible for the exemption.

The proposed Tier II exemption would not address the situation where the bidder seeks to offer cash-only consideration to U.S. security holders to avoid registering the exchange offer under the Securities Act. This would include the device of "vendor placements," where U.S. security holders receive a cash payment that is funded by the sale into the market overseas of any securities received in the offer. ⁶⁶ In adopting the all-holders rule, we contemplated that, under appropriate circumstances, we would grant requests for relief in connection with exchange offers by foreign bidders. ⁶⁷ This relief would permit U.S. security holders to receive cash, rather than the bidder's securities which would trigger the registration requirements of the Securities Act. We have demonstrated in numerous registered exchange offers, both negotiated and hostile, that the registration requirements of the Securities Act are not an insurmountable obstacle to meeting foreign time schedules. Moreover, relief may be unnecessary because foreign regulators may not permit bidders to offer U.S. security holders cash-only consideration when that consideration is not offered to all holders. We will continue to address these kinds of relief on a case-by-case basis.

Q14. We request comments on whether the Tier II exemption should include relief permitting a bidder to offer cash, rather than securities, to U.S. security holders. Would the need to treat U.S. security holders differently be greatly diminished if we adopt proposed Rule 802?

d. Notice of Extensions

Under the U.S. tender offer rules, all tender offers must remain open for a minimum of 20 business days, subject to mandatory extensions for changes in the terms of the offer. ⁶⁸ Today's proposals do not provide relief from the duration and extension requirements. We are not aware of jurisdictions where the U.S. duration and extension periods conflict with those of the home jurisdiction. Some home jurisdiction regulations permit a shorter time period. ⁶⁹ But in our experience, those home jurisdiction rules do not prohibit the bidder from keeping the offer open or extending the offer for a longer period of time.

Q15. Is there a need for relief from the minimum offering and extension period requirements of the U.S. tender offer provisions?

Under the U.S. tender offer rules, if a bidder determines to extend an offer beyond a scheduled expiration date it must publish a notice of the extension by the beginning of the next business day. ⁷⁰ The proposed Tier II exemption would permit bidders to announce extensions of the offer in accordance with the practices of the home jurisdiction, rather than prior to the commencement of trading on the next business day as required by U.S. rules. We are aware of situations when the U.S. rules conflict with those of the home jurisdiction, such as when the tabulation process requires more time for the bidder to decide whether to extend an offer. ⁷¹

e. Prompt Payment for or Return of Tendered Securities

After expiration of an offer, U.S. tender offer rules require an offeror to promptly pay for, or return, tendered securities. ⁷² This "prompt" payment standard is satisfied if payment is made in accordance with normal settlement periods. Under T+3 settlement requirements, that period is now three trading days in the United States. ⁷³ In the United Kingdom, for example, once the bidder is allowed to purchase tendered securities, payment must be made within 14 calendar days. ⁷⁴ We have granted relief from the prompt payment rule in many exemptive

orders. ⁷⁵ The Tier II exemption would make prompt payment relief available so long as the bidder pays for the securities in accordance with the home country’s requirements.

f. Reduction of Minimum Condition

The U.S. rules require that at least five business days remain in an offer following the waiver of the minimum tender condition. This permits investors to learn of, and react to, this material change to the offer. ⁷⁶ The concern is that certain security holders may want to withdraw if the bidder lowers the minimum condition, while others may want to tender into the offer.

In the United Kingdom, it is common for the bidder to reduce the minimum condition from 90 to 51 percent, once all other conditions to the offer are satisfied, and immediately purchase the tendered securities. Under the City Code, the offer then must remain open for 14 days (the "Subsequent Offering Period"). During the Subsequent Offering Period, the offer is open for acceptances, but not withdrawals. ⁷⁷ Bidders anticipate that during the Subsequent Offering Period, sufficient tenders will come in to satisfy the 90 percent minimum condition. The 90 percent minimum condition is important to achieve because that is the amount required to conduct a compulsory acquisition.

Purchasing securities immediately after the reduction or waiver of the minimum condition is inconsistent with the U.S. tender offer requirements. To address this conflict, we have permitted a bidder in a cross-border tender offer to reserve the right to reduce the 90 percent condition and announce this reservation by press release and advertisement in a U.S. newspaper of national circulation at least five business days before any reduction. ⁷⁸ Since bidders must disclose that they are reserving the right to reduce the minimum condition five days before they reduce it, security holders have sufficient time to withdraw their securities. Those security holders wishing to tender into the offer once the minimum condition is lowered will be able to tender during the Subsequent Offering Period. ⁷⁹ Bidders believe this relief is necessary because they will not know before the expiration date whether to reduce the minimum condition, since many holders do not tender until the last day of the offer. They would only reduce the minimum condition if the number of tenders on such date is close to the 90 percent level and they believe they will get to the 90 percent level during the Subsequent Offering Period.

We will not object if bidders meeting the requirements for the Tier II exemption reduce or waive the minimum acceptance condition without extending withdrawal rights during the remainder of the offer (unless an extension is required by Rule 14e-1), if the following conditions are met:

• The bidder must announce that it may reduce the minimum condition five business days prior to the time that it reduces the condition. A statement at the commencement of the offer that the bidder may reduce the minimum condition is insufficient;

• The bidder must disseminate this announcement through a press release and other methods reasonably designed to inform U.S. security holders, which could include placing an advertisement in a newspaper of national circulation in the United States;

• The press release must state the exact percentage to which the acceptance condition may be reduced and state that a reduction is possible. The bidder must declare its actual intentions once it is required to do so under the regulations of the home jurisdiction;

• During this five-day period, security holders who have tendered their shares in the offer will have withdrawal rights;

• This announcement must contain language advising security holders to withdraw their tenders immediately if their willingness to tender into the offer would be affected by a reduction of the minimum acceptance condition;

• The procedure for reducing the minimum condition must be described in the offering document; and

• The bidder must hold the offer open for acceptances for at least five business days after the satisfaction of the minimum acceptance condition.

D. Other Rules Governing Tender Offers

1. Rule 10b-13

We are proposing to amend Rule 10b-13 under the Exchange Act to facilitate the inclusion of U.S. security holders in tender offers for foreign securities. ⁸⁰ Rule 10b-13 prohibits a person who is making a tender or exchange offer from purchasing or arranging to purchase, directly or indirectly, the security that is the subject of the offer (or any security that is immediately convertible into or exchangeable for the subject security) otherwise than pursuant to the offer. ⁸¹ The rule's prohibitions apply from the time of public announcement of the offer until the time the bidder is required, pursuant to the offer's terms, either to accept or reject the tendered securities. Rule 10b-13 protects investors by preventing a bidder from extending greater or different consideration to some security holders by offering to purchase their shares outside the offer, while other security holders are limited to the offer's terms. ⁸² The rule applies to the bidder, whether the bidder is the issuer or a third party, the bidder’s affiliates, and the offer’s dealer manager. ⁸³

Many foreign jurisdictions do not expressly prohibit a bidder from purchasing or arranging to purchase the subject security outside the terms of the offer. A number of these jurisdictions, however, do require that the bidder provide consideration to tendering security holders that is equivalent to the higher of the offer price and the highest price paid to any person whose securities were purchased outside the terms of the offer. ⁸⁴ This means that tendering security holders will receive the benefit of any higher prices paid for securities outside the offer. In contrast, Rule 10b-13 is premised in part on the view that because of the time value of money, persons whose shares are purchased before payment is made in the offer receive a consideration different from that received by tendering security holders, even if they receive the same per share price. ⁸⁵ Nevertheless, the requirement that bidders pay in the offer the highest price paid for shares purchased outside the offer is similar to the requirement in Rules 14d-7 and 13e-4(f)(4) under the Exchange Act that the highest consideration paid to any security holder pursuant to a tender offer be paid to all security holders that tender into the offer.

A strict application of Rule 10b-13 in some cases could disadvantage U.S. security holders. For example, a bidder may decide to exclude U.S. security holders from the offer when Rule 10b-13 would (1) preclude purchases outside the offer; and (2) the participation of U.S. security holders is not necessary to the success of the offer. In that circumstance, flexible application of Rule 10b-13 is necessary and appropriate to encourage bidders for the securities of foreign private issuers to extend their offers to U.S. security holders. At the same time, any relief extended to foreign tender offers should be limited to circumstances that do not undermine the investor protection goals of Rule 10b-13.

We have some experience in balancing these objectives. We issued an exemption from Rule 10b-13 in 1991 for tender or exchange offers relying on the MJDS with Canada. ⁸⁶ That exemption recognizes that Canadian procedures applicable to tender offers afford a large measure of the protections provided by Rule 10b-13. ⁸⁷ Additionally, in the 1991 proposals, we sought comment on whether we should provide an exemption from Rule 10b-13 to bidders of foreign securities when certain conditions are satisfied. Although the 1991 proposals were not adopted, the Commission has granted a number of exemptions from Rule 10b-13 to accommodate cross-border tender offers. These exemptions were subject to provisions pertaining to recordkeeping and compliance with applicable tender offer laws or regulations, as well as the conditions suggested in the 1991 proposals that:

(1) the U.S. offering documents prominently disclose the possibility of any purchases or arrangements to purchase the subject security (or certain related securities), or the intent to make such purchases, otherwise than pursuant to the terms of the tender offer;

(2) the bidder discloses in the United States information regarding such purchases to the extent such disclosure is made pursuant to the home jurisdiction’s rules governing tender offers; and

(3) such purchases are made outside the United States. ⁸⁸

For tender or exchange offers that are substantially foreign in character, we preliminarily believe that allowing U.S. security holders to participate in these offers outweighs the benefits derived from applying Rule 10b-13 to such offers. Commenters on the 1991 proposals supported this view. They stated that relief from Rule 10b-13 is appropriate for tender offers that are essentially foreign in character, especially if any such exemption is consistent with the relevant laws, rules, and practices of the foreign jurisdiction governing the offer. ⁸⁹ Based on our experience in granting exemptions under Rule 10b-13 in the context of foreign tender offers, we believe that relief from Rule 10b-13 would be appropriate within the context of the two-tiered structure proposed in this release to accommodate cross-border offers.

We propose to amend Rule 10b-13 to include an exception for Tier I tender or exchange offers, subject to the conditions that:

(1) the U.S. offering documents disclose prominently the possibility of any purchases, or arrangements to purchase, or the intent to make such purchases otherwise than pursuant to the terms of the tender or exchange offer;

(2) the bidder discloses information in the United States regarding such purchases in the United States in a manner comparable to disclosure made in the home jurisdiction; and

(3) the purchases comply with the applicable tender offer laws and regulations of the home jurisdiction.

This proposed limited exception under Rule 10b-13 for Tier I tender offers largely represents a codification of the conditions contained in the exemptions previously granted by the Commission. The exception, however, would be limited to offers where U.S. persons held of record 10 percent or less of the class of securities sought in the offer.

Unlike in the 1991 proposed exemption, we are not proposing to limit the exception to purchases that are made outside the United States. Under the new proposals, in Tier I offers bidders could purchase target securities, subject to the conditions noted above, in transactions in the United States that otherwise would be prohibited under Rule 10b-13. ⁹⁰

We are not proposing an exception to Rule 10b-13 for Tier II offers because of the greater U.S. interest in those offers. We believe that we should continue to review requests for relief from Rule 10b-13 for offers other than Tier I-eligible offers on a case-by-case basis. ⁹¹ In that context, we will consider factors such as proportional ownership of U.S. security holders of the target security in relation to the total number of shares outstanding and to the public float; whether the offer will be for "any-and-all" shares or will involve prorationing; whether the offered consideration will be cash or securities; whether the offer will be subject to a foreign jurisdiction's laws, rules, or principles governing the conduct of tender offers that provide protections comparable to Rule 10b-13; and whether the principal trading market for the target security is outside the United States. This approach would comport with the Commission’s action in a recent cross-border offer involving a U.K. target company with substantial U.S. ownership. ⁹²

In our view, the proposed exception to Rule 10b-13 will simplify the procedural requirements for foreign tender or exchange offers and further promote the extension of such offers to U.S. security holders, without compromising the investor protections of Rule 10b-13.

Q16. We solicit comments on the proposed exemption for Tier I offers generally, and whether:

(1) as suggested in the 1991 proposal, relief from Rule 10b-13 should be granted only for purchases made outside the United States;

(2) the exception should be subject to an express requirement that either the governing tender offer statute or rules contain, or the offer itself provides for, a provision that if the price paid to security holders outside the offer is higher than the tender offer price, the higher price will be offered to all security holders;

(3) the exception should be limited to offers for all outstanding securities, on the basis that shares purchased outside a partial offer would not be subject to prorationing and therefore may be made on terms materially different from shares purchased in the offer;

(4) the exception should be limited to cash tender offers, on the basis that purchases outside an exchange offer would be made for a form of consideration that may be materially different from the offer's consideration; and

(5) the exception should be limited to offers for the securities of foreign private issuers with no more than 10% U.S. holders of record, or permit a higher percentage of U.S. record holders, e.g., 20%, 30% or 40%. If the level of permissible U.S. ownership is increased, should the exception contain additional conditions, such as limiting its availability to all cash, any-and-all offers; requiring the offer to comply with foreign tender offer rules providing protections comparable to Rule 10b-13; and/or requiring that the principal market for the security be outside the United States?

We recently granted a limited class exemption under Rule 10b-13 to permit "connected exempt market makers" and "connected exempt principal traders," as defined by the City Code, to continue their U.K. market making activities during a cross-border offer that is subject to the City Code. ⁹³ Under the City Code, connected exempt market makers and connected exempt principal traders are market makers or principal traders that are affiliated with the bidder’s advisors (Eligible Traders). Without Rule 10b-13 relief, Eligible Traders would be forced to withdraw from trading in U.K. target securities, with possible adverse consequences for the liquidity of those securities. This limited class exemption recognizes the information barrier and other requirements contained in the City Code that Eligible Traders must satisfy to be exempt from the City Code’s "acting in concert" provisions. ⁹⁴ To rely on this exemption, the Eligible Trader must comply with specified disclosure and recordkeeping requirements and is prohibited from making purchases in the United States, which are consistent with conditions contained in other Rule 10b-13 exemptions granted in the cross-border context.

We propose to codify this class exemption. The proposed Rule 10b-13 amendment for Eligible Traders would not be limited to offers where U.S. record ownership is 10 percent or less of the class of securities sought in the offer. It also applies to offers where U.S. record ownership exceeds 10 percent, but is not greater than 40 percent. The proposed amendment, however, would not provide relief under Rule 10b-13 to bidders or anyone acting on behalf of bidders (such as advisors and other nominees or brokers).

The proposed amendment for Eligible Traders is subject to the following conditions:

(1) the issuer of the target security is a "foreign private issuer," as defined in Rule 3b-4(c) under the Exchange Act;

(2) the tender or exchange offer is subject to the City Code;

(3) the Eligible Trader is a "connected exempt market maker" or "connected exempt principal trader," as those terms are used in the City Code;

(4) the Eligible Trader complies with the applicable provisions of the City Code; and

(5) the offering documents disclose the identity of the Eligible Trader and describe how U.S. security holders can obtain information regarding an Eligible Trader’s market making or principal purchases to the extent such information is required to be made public under the City Code.

Q17. We solicit comments on the proposed exception for U.K. Eligible Traders, including whether this exception should be available during any offer for a U.K. target or limited, e.g., to Tier I offers.

Q18. Is it necessary to include the condition requiring that U.S. holders be able to obtain information regarding Eligible Traders’ purchases to the extent such information is required to be made public in the United Kingdom?

Q19. Additionally, we seek comments on whether it is appropriate to exclude from Rule 10b-13’s application transactions by any market makers, including U.S. market makers, that are subject to restrictions similar to those imposed by the City Code. Should Rule 10b-13 incorporate the connected market maker concepts of the City Code and provide an exclusion where there is an information barrier between the dealer-manager and the affiliated market maker, and public disclosure is made during the offer of the total amount of shares purchased in market making transactions and of the highest price paid for those shares?

2. Regulation M

In December 1996, the Commission adopted Regulation M. ⁹⁵ Regulation M imposes trading restrictions on issuers and broker-dealers participating in exchange offers or rights offerings that are "distributions," generally from the day offering materials are disseminated until the end of the distribution. ⁹⁶ At this time, we are not proposing an exemption to Regulation M for cross-border exchange offers, whether qualifying for the registration exemption under proposed Rule 802 or the proposed Tier I or Tier II exemptions from the U.S. tender offer provisions, or for cross-border rights offerings qualifying for the registration exemption under proposed Rule 801. We preliminarily believe we should evaluate the need for exemptions from Regulation M after we gain experience with the Regulation's operation in the context of those offerings. To date we have had very limited experience with the application of Regulation M to exchange offers for foreign equity securities or rights offerings involving foreign securities. The limited number of requests for relief in these contexts suggests that Regulation M may not be an impediment to these kinds of transactions and that exemptions from its provisions may be unnecessary. ⁹⁷

Q20. Are exemptions from various rules under Regulation M necessary to accommodate cross-border rights offerings or exchange offers conducted pursuant to proposed Rules 801 or 802? Commenters should provide reasons why such exemptions would be necessary and the scope of any conditions that should be imposed.

E. Exemption from the Securities Act for Exchange Offers, Business Combinations, and Rights Offerings

1. Summary

Today's proposals also provide exemptions from Securities Act registration requirements for securities issued to U.S. security holders of a foreign private issuer in exchange offers, business combinations, and rights offerings. These exemptions are being proposed as Rule 801 for rights offerings and Rule 802 for business combinations and exchange offers. The exemptions are available only if the target company (or the issuer in an issuer tender offer or rights offering) is a foreign private issuer and U.S. security holders hold of record no more than five percent of the subject securities. The exemptions proposed today differ from the 1991 proposals in that they no longer impose a dollar limitation on the amount of securities to be issued. In addition, there are no proposals to permit registration of such offerings based on home country disclosure. ⁹⁸

Since the issuance of the 1991 proposals, we have facilitated the inclusion of U.S. security holders in exchange offers, business combinations and rights offerings by reviewing registration statements concerning these transactions on an expedited basis and by permitting certain accommodations when necessary and prudent for the protection of U.S. security holders. Nevertheless, U.S. security holders continue to be excluded from these offerings. ⁹⁹ An exemption from the registration requirements appears necessary to ensure that U.S. security holders can participate fully in these offers for foreign companies. An exemption is particularly necessary when the percentage of shares held in the United States is small.

Based on our experience in reviewing registered exchange offers, business combinations, and rights offerings involving foreign registrants, however, we have determined not to propose a home-country based registration system. The disclosure and accounting standards of foreign jurisdictions are not always consistent with the level of prospectus disclosure required in a registered offering under the Securities Act. Instead, we believe that any accommodation under the Securities Act should be limited to circumstances when the proportional U.S. interest in the transaction is insignificant, and U.S. participation is not essential to its success. In those situations, extending the transaction to U.S. security holders is unlikely to be an attempt to raise capital or develop a market for the offeror's securities in the United States. Rather, U.S. investors would benefit by participating in what is otherwise an offshore transaction. Our preliminary view is that these exemptions would be appropriate and in the public interest, because they would promote including U.S. security holders in exchange offers, rights offerings and business combinations.

When the percentage of U.S. ownership is significant, registration of the exchange offer, business combination or rights offer under U.S. disclosure and accounting standards is both appropriate and, in virtually all instances, cost effective and feasible. When the percentage of U.S. ownership is not significant, it is appropriate to exempt these offers from the registration requirements, conditioned on satisfaction of minimal offeror and transactional requirements. Although companies conduct rights offerings to raise capital, full prospectus disclosure may be less necessary because the offerees should already be familiar with the issuer and the securities being offered. In any event, the fact that a company must offer the securities only to existing security holders on a pro rata basis and the requirement that the rights may not be transferred in the United States should ensure that the offering will not serve as a means to develop a U.S. market interest.

Q21. Comment is solicited as to whether these Securities Act exemptions are necessary and appropriate. Should the other proposals proceed without the proposed Securities Act exemptions?

The proposed exemptions are not available for any transaction or series of transactions that technically complies with the exemptions but is part of a plan or scheme to evade the registration provisions of the Securities Act. ¹⁰⁰ For example, if the exchange offer or rights offering is a sham, the exemptions would not be available.

2. Eligibility Conditions

a. Transactional Eligibility Requirements

i. Common Requirements for Exchange Offers, Business Combinations and Rights Offerings

a) U.S. Ownership Limitation

Under today's proposals, exchange offers, business combinations, and rights offerings would be exempt from registration under the Securities Act, so long as U.S. security holders own of record five percent or less of the foreign company's securities that are the subject of the offer. ¹⁰¹ When U.S. security holders own five percent or less of the issuer, U.S. participation is generally not necessary for the success of the offer.

Q22. Comment is requested on whether five percent is the appropriate threshold. Would an exemption set at 10 percent or as low as one percent be appropriate and consistent with the protection of investors? Is the five percent threshold too low for small businesses whose offerings are small? Is it too high for large companies, whose offerings are correspondingly large?

Unlike the 1991 proposals, we have not based today's proposal on an absolute dollar limit. The $5 million threshold we proposed in 1991 reflected the maximum dollar offering that the Commission could exempt under Section 3(b) of the Securities Act. With the recent addition of general exemptive authority under Section 28 of the Securities Act, we have greater flexibility to base the exemptions on a higher dollar ceiling, the percentage of outstanding securities held in the United States, or other relevant factors. ¹⁰² A number of commenters on the 1991 proposals urged us to use any new authority to increase the permitted amount of securities offered under the proposal. They argued that $5 million was too low to make the proposed exemptions meaningful.

We are proposing not to limit the scope of the exemptions by a dollar amount because we believe limiting the exemptions to transactions with no more than five percent U.S. participation effectively eliminates the risk that the exemptions will be abused. Without a dollar limitation, however, the exemptions could result in a significant amount of securities entering the U.S. public markets and affecting a large number of investors without registration. The larger the target company, the greater the potential impact of such an offering on U.S. security holders. For these reasons, we are considering imposing a dollar limitation as well as the percentage limitation.

Q23. Should Rules 801 and 802 be limited by a dollar ceiling of $5, $10 or $20 million? Should an issuer be allowed to issue up to, for example, $5, $10 or $15 million regardless of the amount of U.S. holdings? Should the test be in the alternative, for example, $10 million or five percent U.S. holdings, whichever is higher? Or lower?

b) Equal Treatment

The terms and conditions of the offer must be the same for U.S. and foreign security holders, subject to certain exceptions similar to the Tier I exemption under the tender offer provisions.

c) Transfer Restrictions

Proposed Rules 801 and 802 impose certain restrictions on the transferability of the securities that an acquiror may issue in exchange offers or business combinations or the equity securities that may be purchased pursuant to Rule 801 upon the exercise of the rights. We preliminarily believe that the securities that may be purchased upon the exercise of the rights should be restricted within the meaning of Rule 144. ¹⁰³ This restriction will help ensure that foreign companies will not use rights offerings to create a market in the United States.

If the securities that are the subject of the transaction made pursuant to Rule 802 are "restricted securities" under Rule 144, then securities acquired in the transaction will be "restricted securities." ¹⁰⁴ Conversely, if the securities that are the subject of the transaction made pursuant to Rule 802 are unrestricted, then securities acquired in the transaction will be unrestricted. In the latter case, the securities would be freely tradable by non-affiliate security holders, so long as they are not participating in the offer under circumstances in which they could be deemed statutory underwriters. Particularly in the case of exchange offers, requiring unaffiliated U.S. security holders to accept restricted securities in exchange for their unrestricted securities, seems unjustified. The fact that no more than five percent of the subject company’s securities may be held in the United States should minimize the potential that Rule 802 will be misused as a means to conduct distributions in the United States, and should eliminate the need to classify securities issued under Rule 802 as restricted securities.

Q24. We request comments on whether the potential for abuse, including an unregistered distribution of the acquiror's securities, should require that all securities issued under Rule 802 be deemed restricted securities for purposes of Rule 144 under the Securities Act.

Q25. Will making Rule 801 securities restricted impose monitoring and other procedural obligations that will deter reliance on the rule? For example, will the fact that the foreign issuer may have to establish a separate restricted American Depositary Receipt ("ADR") facility and monitor withdrawals from that facility deter reliance on the exemption?

ii. Additional Requirements for Rights Offerings

As with the 1991 proposals, Rule 801 as proposed today would be available only for rights offerings of equity securities made on a pro rata basis to existing security holders of the same class, including holders of ADRs evidencing those securities. Foreign companies generally make rights offerings only with respect to outstanding equity securities of the same class. We propose to limit Rule 801 to the offer of securities of the same class of securities as those held by the offerees, because the offerees already have made the decision to invest in that class. ¹⁰⁵

Proposed Rule 801 would be available only for all-cash transactions and would additionally require that the rights granted to U.S. security holders not be transferable except offshore in accordance with Regulation S. ¹⁰⁶ The rights offering exemption being proposed today is not intended to permit foreign private issuers to extend offerings to new investors in the United States.

Q26. We request comments on whether this limitation on transferability is appropriate.

b. Offeror Eligibility Requirements

i. Exchange Offers/Business Combinations

Like the 1991 proposals, Rule 802 as proposed does not contain any limitations based on the domicile or reporting status of the offeror. Any offeror can use proposed Rule 802 regardless of whether it is a U.S. company or a foreign private issuer and regardless of whether it is a reporting company. The target company, however, must be a foreign private issuer. Limiting the exemption to foreign private issuers would require a U.S. bidder for the securities of a foreign target to register the U.S. portion of an exchange offer. This would place a U.S. bidder, particularly a non-reporting U.S. company, at a competitive disadvantage to a foreign bidder for the same company.

Q27. Is it appropriate or necessary to allow U.S. companies, including reporting companies eligible to use the Form S-3 short form registration statement, to rely on the exemption? Should Rule 802 be available to a domestic company only when there is a competing bid for the target's securities?

We are considering adopting offeror eligibility requirements to address the concern that start-up companies would use Rule 802 to issue a significant amount of securities in the United States without complying with the registration requirements of the Securities Act.

Q28. Should an offeror seeking to rely on Rule 802 have to be a reporting company under Section 13(a) or 15(d) of the Exchange Act ¹⁰⁷ at the time the exchange offer or business combination is first offered to U.S. security holders?

Q29. Should we impose a minimum reporting history, either as an Exchange Act reporting company or as a listed company on a recognized foreign securities exchange or market?

Q30. Should we require that either the target security, the security to be issued, or both, be listed on an established U.S. or foreign securities exchange and have a minimum public float such as $50 million, $100 million or $150 million? This may ensure U.S. security holders a degree of liquidity if they are unwilling to accept the consideration offered in the exchange offer or business combination and would prefer to sell the investment into the public markets.

ii. Rights Offerings

Proposed Rule 801 requires that the offeror be a foreign private issuer. It does not impose any other issuer eligibility requirements. As originally proposed in 1991, Rule 801 contained additional offeror eligibility requirements, including that the offeror satisfy certain information and listing requirements. ¹⁰⁸ The Commission intended those proposed offeror eligibility requirements, in part, to prevent start-up companies or insubstantial issuers from using the exemption to raise capital in the United States without complying with Securities Act registration requirements. The requirements also were intended to assure that information about the offeror would be publicly available to investors in the United States, including at a minimum, information the issuer makes public in its home country.

We believe that investor protection should be served by facilitating U.S. security holders' participation in a rights offering for securities of any foreign private issuer with which the investor is already familiar, without narrowing those offerings with additional offeror criteria. The anti-fraud and other civil liability provisions of the federal securities laws will apply and should provide protection with regard to the disclosure investors receive in such offerings.

Q31. We solicit comments on whether it is appropriate or necessary to retain any or all of the offeror eligibility requirements that the Commission originally proposed in 1991 in connection with Rule 801. If so, is it appropriate to provide for a

size-of-issuer test as an alternative to requiring a three-year listing history on a designated foreign market for determining the eligibility of non-reporting issuers?

Q32. Should the alternative test be based on the offeror’s public float, as previously proposed, or on its net assets, net worth, or on average daily trading volume?

Q33. Should the previously proposed minimum public float of $75 million be reduced, for instance, to $50 million, or be raised to $100 million or $150 million?

Q34. Is it appropriate or necessary to limit the exemption to reporting companies?

c. Informational Requirements

Rules 801 and 802 would not mandate that specific information, including offering circulars, be sent to U.S. security holders. Instead, when any document, notice or other information is provided to offerees, copies (translated into English) must be provided to U.S. security holders. If, instead of delivering documents to offerees outside the United States, the offeror publishes information regarding the offering outside the United States, then the offeror may satisfy the information dissemination requirement by delivering written copies of the publication or advertisement (in English) to U.S. offerees. Because U.S. publication of the exempt offer creates the potential for stimulating a U.S. market interest in the offeror’s securities, we are proposing to require actual delivery of the offering materials to U.S. holders in rights offerings. ¹⁰⁹ Because it is a common practice in this country to publish exchange offers, however, we are requiring publication rather than actual delivery for transactions exempt under proposed Rule 802. Proposed Rules 801 and 802 both require that the offeror must provide the notice or offering document to U.S. security holders at the same time it provides the information to offshore offerees.

Q35. Should issuers relying on Rules 801 and 802 be required to prepare and physically deliver some form of prospectus or offering circular? In the absence of such a document, should the issuer be required to deliver its latest annual report containing audited financial statements?

To enable us to monitor the operation of the exemptions, Rules 801 and 802 as proposed also would require that an offeror submit a notification to the Commission on proposed new Form CB. The new form will include as an attachment a copy of any document, notice or other information mailed to U.S. offerees. A foreign company must contemporaneously file a Form F-X when it submits the Form CB. ¹¹⁰ The exemptions would also require that a legend be included in the offering document or notice stating that the offer is being conducted pursuant to home jurisdiction disclosure requirements, and that those requirements may differ from the U.S. disclosure requirements, including financial statement requirements.

Q36. Is this notification submission necessary, and, if so, should the notification, as proposed, attach a copy of any disclosure documents required to be filed or delivered pursuant to the home jurisdiction regulatory requirements?

Q37. Should bidders relying on the Tier I exemption for cash tender offers be required to include a legend on the offering materials similar to the legend proposed for rights offerings and exchange offers?

d. Rule 802 Eligible Securities - Trust Indenture Act Exemption

We are not proposing any restrictions on the type of securities that an issuer could offer in reliance on proposed Rule 802. ¹¹¹ Therefore, the rules proposed today will permit offerors to offer debt securities in an exchange offer or business combination for the subject company's equity or debt securities. The issuance of debt securities ordinarily requires qualification of an indenture under the Trust Indenture Act, unless the debt securities are exempt from the qualification requirements pursuant to Section 304 under that Act. ¹¹²

Qualification of an indenture assures the debtholders of the services of an independent trustee having certain qualifications and lacking conflicts of interest. The Trust Indenture Act deems a qualified indenture to automatically include certain protective covenants. ¹¹³ These mandatory protective covenants give important rights to the debtholders. For example, debtholders have the right to sue individually for the payment of principal and interest. ¹¹⁴ Further, these provisions give certain powers to the trustee and prohibit certain actions by the trustee, including the preferential collection of certain claims owed to the trustee by the obligor in the event of default. ¹¹⁵ The rules under the Trust Indenture Act require the filing of a Form T-1, which is the statement of eligibility and qualification of the trustee, and the trust indenture itself. ¹¹⁶

We are again proposing under Section 304(d) of the Trust Indenture Act ¹¹⁷ a new rule that would exempt any debt security issued pursuant to proposed Rule 802 under the Securities Act from having to comply with the provisions of the Trust Indenture Act. We believe that enforcing the statutory requirement that debt securities be issued pursuant to a qualified indenture under the Trust Indenture Act is unnecessary when 95 percent or more of the subject securities are outside the United States and many U.S. investors could lose the chance to participate in these offerings. Therefore, for the same reasons we believe it is appropriate to exempt exchange offers meeting the requirements of Rule 802 from the registration requirements of the Securities Act, we also believe that an exemption from the Trust Indenture Act is appropriate and consistent with investor protection.

The exchange of debt securities will not be integrated with any other offerings by the offeror. This means it would not affect the availability of the Trust Indenture Act exemption with regard to the issuance of other debt securities.

Q38. Is the proposed unconditional exemption from the requirements of the Trust Indenture Act for any debt security issued pursuant to Rule 802 necessary or appropriate in the public interest and consistent with investor protection and the purposes of that Act? Would it be more appropriate to exempt transactions from the procedural requirements of the Trust Indenture Act, such as filing the Form T-1, but still require that the debt securities be issued pursuant to an indenture containing some or all of the mandatory protective covenants discussed above? If so, which protective covenants should be preserved?

F. Effect of Reliance on Rule 801 or 802 on the Availability of Other Exemptions

The exemptions contemplated under proposed Rules 801 and 802 are non-exclusive. ¹¹⁸ An issuer making an offering in reliance on either of the proposed rules may claim any other available exemption under the Securities Act. Securities issued under Rule 801 or Rule 802 would not be integrated with any other exempt offerings by the issuer. ¹¹⁹ For example, security holders who are offered and sold securities in accordance with Rule 801 or Rule 802 would not be counted in the calculation of the number of purchasers in a subsequent Regulation D offering by the issuer. ¹²⁰ Similarly, the amount of securities offered in the Rule 801 or Rule 802 transaction would not be included in the aggregate offering price of any subsequent Regulation D offerings by the offeror. ¹²¹ Also, information submitted to the Commission pursuant to the requirements of Rules 801 or Rule 802, or disseminated to investors under those rules would not constitute a "general solicitation" within the meaning of Regulation D or "directed selling efforts" within the meaning of Regulation S.

The proposed rules relate only to the application of Section 5 of the Securities Act. They have no effect on the anti-fraud or anti-manipulation provisions of the federal securities laws or provisions of state law relating to the offer and sale of securities. ¹²² However, the civil liability provisions that relate only to registered offerings, such as Section 11 of the Securities Act, ¹²³ would not apply to these transactions because they would be exempt from registration.

In addition, offerings exempt under proposed Rules 801 or 802 would not trigger a continuous reporting obligation under Section 15(d) of the Exchange Act. Nor would reliance on Rules 801 or 802 disqualify the issuer from the existing Rule 12g3-2(b) ¹²⁴ exemption for foreign private issuers from the registration and reporting requirements of Section 12(g) of the Exchange Act, unless the acquired company was a reporting company.

Q39. We request comment on whether a foreign private issuer should be precluded from relying on the Rule 12g3-2(b) exemption following an offering under Rule 801 or 802, given that the Rule 12g3-2(b) exemption is intended for issuers that do not access the U.S. capital markets in any significant fashion. Should the issuer become ineligible for the Rule 12g3-2(b) exemption if the Rule 801 or 802 offering exceeds $10 million or some other dollar threshold? Should the same ineligibility result if the foreign private issuer has more than 500 holders of record in the United States after the Rule 801 or 802 offering is completed?

G. Unavailability of Rules 801 and 802 and the Tender Offer Exemptions for Investment Companies

Proposed Rules 801 and 802 would not be available for securities issued by an investment company, whether foreign or domestic, that is registered or required to be registered under the Investment Company Act of 1940 (the "Investment Company Act"). ¹²⁵ We have excluded foreign investment companies from the proposed exemptions because the Investment Company Act prohibits foreign investment companies from publicly offering securities in the United States or to U.S. persons. ¹²⁶ We excluded domestic investment companies because, unlike other issuers, an investment company that is registered or required to be registered under the Investment Company Act generally must register the securities that it offers or sells outside the United States. ¹²⁷

Q40. Should Rule 802 be available to a closed-end investment company that is registered under the Investment Company Act?

We believe this exclusion is appropriate for some foreign private issuers that meet the definition of "investment company" contained in Section 3(a) of the Investment Company Act but have not registered with the Commission under that Act. Both foreign and domestic issuers that are excepted from the definition of "investment company" under the Investment Company Act, however, would be permitted to use the exemptions, so long as reliance on the exemptions is consistent with their unregistered status under the Investment Company Act. ¹²⁸ For example, a foreign private issuer that can offer its securities publicly in the United States in reliance on a rule, such as Rule 3a-6 under the Investment Company Act, or pursuant to an individual exemptive order under the Investment Company Act, may use Rule 801 to make a rights offering in the United States or Rule 802 to make an exchange offer or enter into a business combination in the United States. ¹²⁹

Similar to Rules 801 and 802, the Tier I and Tier II tender offer exemptions will not be available if the target company is an investment company registered or required to be registered under the Investment Company Act. The Commission has not received requests for relief in connection with a tender offer for a foreign investment company. To keep the proposed exemptions as narrow as possible to address conflicts between U.S. and foreign law, the tender offer exemptions would not extend to tender offers for foreign investment companies.

Q41. Should these exemptions be available when the target company is a foreign investment company?

H. Determination of U.S. Ownership

1. Definition of U.S. Holder

The term U.S. holder is based on shareholder residence. The term is important under both the Tier I and II exemptions. It is also important in determining the availability of the proposed Securities Act exemptions for cross-border rights offerings and exchange offers under Rules 801 and 802. Relief in each case is conditioned, at least in part, on the percentage of the target company's securities held by U.S. security holders not exceeding a specified threshold. ¹³⁰ The calculation of the target company’s U.S. security holders would be made at the commencement of the tender offer, rights offering or exchange offer. In the case of a business combination such as a merger where the securities are issued by the acquiring company, the calculation will be based on U.S. ownership of the company to be acquired at the commencement of the solicitation for the merger. In business combinations such as an amalgamation, where the securities are issued by a successor company to all participating companies, the calculation would be made as if measured immediately after completion of the business combination. In the latter situation, all participants in the business combination must be foreign private issuers.

The term U.S. holder was defined in the 1991 proposals as any person whose address appears on the records of the issuer of the subject securities, or of any voting trustee, depositary, share transfer agent, or any person acting in a similar capacity on behalf of the issuer of the subject securities, as being located in the United States. ¹³¹ The proposed definition of U.S. holder was derived from the definition of "foreign private issuer" under the Exchange Act. ¹³² The definition of U.S. holder does not turn on the residence of the beneficial owner of the securities, nor is there a requirement to identify beneficial owners in order to determine their residence.

Q42. Given the potential significance of U.S. beneficial ownership, we solicit comments on whether a beneficial holder test should be included if the bidder or issuer knows the percentage of U.S. beneficial owners or can access that information without unreasonable effort or expense. For example, should an issuer be required to determine the amount held by a foreign broker-dealer as nominee for U.S. accounts?

Several commenters asked us to clarify the definition of U.S. holder with respect to depositaries and ADR and other depositary receipt facilities. For securities registered in the name of a nominee of a depositary maintaining a book entry system, such as Cede & Co., nominee for The Depository Trust Company, the issuer or third party may rely on how the participants' names appear on the records of the depositary. This approach would be consistent with the determination of "record holder" under Section 12(g) of the Exchange Act. ¹³³ An ADR, Global Depositary Receipt ("GDR") or other depositary facility likewise will not be treated as the record holder of the ADRs. ¹³⁴ Shares deposited in an ADR depositary will be presumed to be held solely by U.S. residents in determining the percentage of shares held by U.S. security holders. If the issuer receives information to the contrary from the depositary, it may rely on that information in calculating U.S. security holders. ¹³⁵

Q43. Should we treat all holders of ADRs as U.S. residents of the underlying foreign securities only when the ADR facility is unsponsored?

A number of commenters also expressed concern as to the treatment of bearer securities in determining U.S. ownership. Since a U.S. residence will not appear on the records of the issuer for the holder of bearer securities, these securities will not be treated as being held by U.S. residents, unless the offeror knows or has reason to know that these securities are held by U.S. residents.

2. Exclusion of Foreign Security Holders Holding More than 10 Percent

We are concerned that foreign private issuers could have a significant majority of their shares held by controlling non-U.S. shareholders. As a result, U.S. holders could represent a significantly greater percentage of the company’s non-affiliated public float. For example, a foreign company with an 80 percent non-U.S. shareholder could have up to 25 percent of its non-affiliated public float owned by U.S. holders and still qualify under Rules 801 and 802 if the calculation were based upon the total amount of securities outstanding. For that reason, shares held by non-U.S. holders of more that 10 percent of the class are not included in the calculation of the U.S. ownership percentage. The exclusion is limited to non-U.S. affiliates to prevent reliance on the exemptive rules when the company is controlled by a U.S. holder with, for example, 80 percent of the shares.

Q44. Would it be appropriate to exclude affiliated shares, whether held outside the United States or in the United States, from both elements of the calculation, thus focusing only on the percent of the company's total world-wide non-affiliated float held in the United States? Is 10 percent the appropriate level of ownership for excluding a holder’s shares from the calculation? Should shares held by an acquiror or by the issuer’s senior management also be excluded? Are foreign companies with significant U.S. ownership by affiliates as likely to exclude U.S. holders from participation in exchange and rights offerings?

3. Determination of Eligibility by Persons Other Than the Issuer

The principal disadvantage of using a U.S. ownership threshold as a condition for the applicability of the Exchange Act tender offer exemptions and the Securities Act registration exemptions for exchange offers and business combinations is that it will be difficult for third-party bidders to ascertain whether the exemption is available without information on the subject company's U.S. ownership. ¹³⁶

The 1991 proposals permitted a bidder seeking to acquire securities of a foreign subject company that is a reporting company or furnishes information to the Commission under Rule 12g3-2(b) to rely upon the disclosure contained in the target company's filings regarding the extent to which their securities are held by U.S. security holders. We proposed this approach based on other proposed rules that would have required foreign private issuers to disclose their U.S. ownership on an annual basis. ¹³⁷ Further, as originally proposed, if a foreign subject company was not a reporting company under the Exchange Act and did not submit reports pursuant to Rule 12g3-2(b), an offeror or issuer could presume that the U.S. ownership did not exceed the ceiling amount, unless it had actual knowledge to the contrary. Those rules were never adopted and are not being reproposed today.

Under the current proposals, a third-party bidder in a hostile tender offer will be entitled to a presumption that the percentage threshold requirements of the Tier I, Tier II and Rule 802 exemptions are not exceeded unless:

(1) the aggregate trading volume of the subject class of securities on national securities exchanges in the United States, on the Nasdaq Stock Market or on the OTC market, as reported to the NASD, exceeds 10 percent in the case of Tier I offers, 40 percent in the case of Tier II offers, or 5 percent in the case of Rule 802, of the worldwide aggregate trading volume of that class of securities over the 12-calendar-month period prior to commencement of the offer;

(2) the most recent annual report or other informational form filed or submitted by the issuer to securities regulators in its home jurisdiction or elsewhere (including with the Commission) indicates that U.S. holdings exceed the applicable threshold; or

(3) the bidder knows or has reason to know from other sources that the level of U.S. ownership of the subject class exceeds the thresholds. ¹³⁸

This presumption is not available in negotiated transactions, since the bidder in a negotiated transaction would be able to get this information from the target company.

As to whether the foreign subject company is a foreign private issuer, the bidder could rely on the exemptions if the issuer of the subject securities files reports with the Commission under the foreign integrated disclosure system ¹³⁹ or has claimed an exemption from reporting under Exchange Act Rule 12g3-2(b), unless the bidder knows the foreign subject company is not a foreign private issuer. ¹⁴⁰ Even if the above presumptions are not available, the bidder may nevertheless rely on the exemption if it can demonstrate that U.S. ownership is less than the relevant threshold.

Subsequent changes or movements in the number of shares held by U.S. security holders after the offer commences would be irrelevant to the availability of the exemptions proposed today. In addition, an issuer or a third-party bidder instituting a subsequent competing offer could use the same information as to U.S. holdings as the initial third-party bidder or issuer to calculate the percentage of securities held by U.S. security holders. An interim filing disclosing a disqualifying level of U.S. ownership in the United States would not disqualify the second offer.

Q45. Should the presumption be available in negotiated transactions? Should a bidder that has entered into a negotiated transaction with the issuer after a prior hostile bidder has commenced a tender offer be able to use the presumption?

III. COST-BENEFIT ANALYSIS

U.S. residents holding stock in foreign private issuers are often excluded from tender offers ¹⁴¹ and rights offerings for the foreign private issuers' securities because of conflicts between U.S. and foreign regulation of these offers. As a result, U.S. security holders of foreign private issuers are unable to benefit from any premium offered in a tender offer ¹⁴² or are unable to purchase additional securities at a discount in a rights offering.

We know of numerous tender offers that have excluded U.S. security holders. For example, based on a random sample of 31 tender offers out of a total of 171 tender offer or merger proposals handled by the U.K. Takeover Panel (the entity that regulates tender offers in the U.K.) in 1997, when the U.S. ownership of the target was less than 15 percent (30 offers), bidders excluded U.S. security holders. When the U.S. ownership was significant, such as 38 percent (one offer), the bidder included U.S. security holders. Similarly, in rights offerings, foreign private issuers routinely issue cash in lieu of rights to U.S. security holders. ¹⁴³

The proposed rules and rule amendments would exempt from the tender offer and registration rules cross-border tender offers, exchange offers, rights offerings and business combinations when U.S. ownership of the foreign company is not significant (i.e., 10 percent for tender offers (the "Tier I exemption") and five percent for exchange offers, rights offerings and business combinations). When the U.S. ownership in the foreign company exceeds 10 percent, but is not greater than 40 percent, the proposal also includes exemptions from certain of the Commission’s tender offer rules (the "Tier II exemption").

The purpose of these exemptions is to facilitate including U.S. security holders of foreign companies in these types of transactions by removing regulatory barriers. The proposed rules and rule amendments are intended to reduce the registration requirements of cross-border transactions. We expect the exemptions to reduce the costs and burdens of extending these types of offers to U.S. security holders. U.S. security holders of foreign companies will benefit by being able to participate in these types of transactions.

Entities relying on the Tier I exemption would benefit from the proposed rules because they would not need to comply with the procedural and filing requirements of the tender offer rules. Specifically, an acquiror would not need to file Schedules 13E-4 or 14D-1. In lieu of these forms, an acquiror would submit to the Commission Form CB, which is significantly less burdensome. ¹⁴⁴ Also, a non-U.S. acquiror would file a Form F-X contemporaneously with the Form CB. ¹⁴⁵

Similarly, entities relying on Rules 801 or 802 in connection with a rights offer or exchange offer would benefit from the proposed rules because they would not need to comply with the registration requirements of the federal securities laws. Specifically, an issuer would not need to file the registration forms, including Forms S-1, S-2, S-3, S-4, F-1, F-2, F-3 and F-4. Instead of these forms, an issuer would submit to the Commission Form CB and Form F-X (if the issuer is a non-U.S. entity), which, as discussed above, are significantly less burdensome.

Entities relying on the Tier I and Tier II exemptions would also benefit from the proposals because they would not need to comply with all of the procedural requirements of the Commission's tender offer rules. ¹⁴⁶ For example, in the Tier I exemption, an acquiror would be exempt from all of the procedural requirements of the U.S. tender offer rules including those relating to the duration of the offer and withdrawal rights.

In the Tier II exemption, an acquiror would receive certain limited relief from the Commission's tender offer rules, including withdrawal rights. The Tier II exemption provides relief from the U.S. tender offer rules that are common impediments to extending offers to U.S. security holders. However, an acquiror relying on the Tier II exemption would have to comply with the remaining tender offer provisions. These provisions include, among others, the following: (1) keeping the offer open 20 business days; (2) filing a Schedule 13E-4 or 14D-1, as applicable; (3) disseminating the offering documents; and (4) offering withdrawal rights until the offer goes wholly unconditional. Although complying with these additional requirements may impose additional costs to cross-border tender offers, compliance would still be less burdensome than satisfying all the U.S. tender offer requirements. Because each foreign country’s laws are different, we do not know the extent to which these additional requirements may conflict with foreign law. Thus we are unable to estimate the incremental cost, if any, of complying with these requirements.

No specific data was provided in response to the Commission's original request in 1991 regarding the costs and benefits associated with the proposed amendments. We have information regarding several transactions that have excluded U.S. security holders. But since offerors do not file documents with the Commission when U.S. security holders are excluded, we do not have access to comprehensive data on the number of cross-border transactions that have excluded U.S. security holders. Further, if the transaction is a tender offer for securities that are not registered under Section 12 of the Exchange Act, and is subject only to Regulation 14E, there is no filing obligation. Therefore, we are unable to estimate the number of entities that will take advantage of the proposed exemptions. While we are unable to determine how many U.S. security holders will benefit from the proposed rules by being able to participate in cross-border tender, exchange and rights offerings, we believe that the proposed rules will benefit U.S. security holders by removing regulatory burdens to including U.S. security holders in these types of offers. To evaluate fully the benefits and costs associated with the proposed adoption of new Securities Act Rules 801 and 802, and Form CB, Trust Indenture Act Rule 4d-10, revisions to Securities Act Rule 144 and Form F-X, and revisions Exchange Act Rules 10b-13, 13e-4, 14d-1, 14e-1 and 14e-2, and Rule 30-1 of the Commission's Rules of Practice and Investigation, we request commenters to provide views and data as to the costs and benefits associated with these proposals. Specifically, we request data as to the number of entities who have excluded U.S. security holders due to conflicts between the U.S. and foreign regulation and how many entities would be eligible to take advantage of the exemptions. We ask that foreign regulators, foreign private issuers, their counsel and auditors provide views and data as to the costs and benefits associated with multijurisdictional tender offers under current law as compared to the costs and benefits under the proposed system.

Section 23(a) of the Exchange Act ¹⁴⁷ requires us, in adopting rules under the Exchange Act, to consider the impact any rule would have on competition. We can not adopt any rule that would impose a burden on competition not necessary or appropriate in the public interest. Our preliminary view is that the proposed rules for cross-border rights offerings, exchange offers, and tender offers would not have any anticompetitive effects. In fact, we believe the proposed rules will facilitate a variety of cross border transactions, thereby enhancing the efficiency of global competition for capital. We seek information on the impact of increased competition for capital for domestic companies as a result of an increase in securities offered into the United States by foreign companies. Also, to what extent would the benefit to U.S. investors offset the cost of any such increased competition for capital? We request comment on whether the proposals, if adopted, would have an adverse effect on competition or would impose a burden on competition that is neither necessary nor appropriate in furthering the purposes of the Exchange Act.

IV. SUMMARY OF INITIAL REGULATORY FLEXIBILITY ANALYSIS

We have prepared an Initial Regulatory Flexibility Analysis ("IRFA") in accordance with 5 U.S.C. 603 regarding the proposed rules. The IRFA notes that the proposed rules are intended primarily to facilitate tender and rights offerings for securities of foreign private issuers held by U.S. residents. The resulting reduction in the expense, time and effort of making such offerings will benefit U.S. security holders. These persons normally are excluded from such offerings. Entities that wish to extend these offers to U.S. security holders will also benefit. The IRFA discusses several alternatives to the proposed rules that we preliminary considered, including permitting registration of securities issued in rights offerings and exchange offers to be based on home country documents. However, as a preliminary matter, we believe that there is no less restrictive alternative to the proposed rule amendments that would serve the purpose of the tender offer and registration requirements of the federal securities laws. We did not identify alternatives to the proposed rules that are consistent with their objectives and our statutory authority. The proposed rules would not duplicate or conflict with any existing federal rule provisions.

The proposed rules are limited to tender offers and exchange offers for the securities of foreign private issuers. But both foreign and domestic bidders, whatever their size, are eligible to use these exemptions. Only foreign private issuers are eligible to use the exemption for rights offerings. Small entities could rely on the proposed tender and exchange offer exemptions on the same basis as larger entities, provided that they meet the conditions for relying on them.

We know of approximately 1,100 Exchange Act reporting companies, that are not investment companies, that currently satisfy the definition of "small business" under Rule 0-10. There are approximately 400 investment companies that satisfy the "small business" definition. We have no data to determine how many reporting or non-reporting small businesses may actually rely on the proposed rules, or may otherwise be impacted by the rule proposals. However, we believe that the proposed amendments will result in a substantial savings to entities (both small and large) th