Wednesday, November 7, 2007
I've been meaning to post up the latest SEC No-Action letters relating to cross-border transactions. Here they are:
- Telemar Participações S.A., October 9, 2007
- Barclays PLC tender offer for ABN AMRO Holding N.V., August 7, 2007
- Rio Tinto plc, July 24, 2007
- Royal Bank of Scotland Group plc tender offer for ABN AMRO Holding N.V., July 23, 2007
- Endesa, S.A., July 3, 2007
It is my humble belief that any public M&A lawyer should regularly read these letters as it familiarizes you with the granular issues associated with the Williams Act and public M&A generally. But, there is a problem here. All of these releases deal with technical issues and seek to harmonize the U.S. aspects of cross-border transactions that the SEC's Cross-Border Rules did not correct. For example, Rule 14d-10 of the Exchange Act, commonly referred to as the “all-holders/best-price” rule, requires that an acquiror keep open a tender or exchange offer to all the holders of a class of securities and pay each of them the highest consideration paid to any other shareholder during the tender offer.
The practice in cross-border takeovers is to split the offer into both a U.S. offer and a non-U.S. offer. However, the practice of having separate offers open only to U.S. or non-U.S. holders runs afoul of Rule 14d-10’s requirement that the offer be open to all holders. The Tier II exemption contains a limited exception to this rule (the Tier II exemption is short-hand for the Cross-Border Rule exemptions applicable if 40% or less of the target's shareholders are U.S. holders). It provides an exemption from the all-holders rule for an acquiror to conduct its offer in two separate offers: one offer made only to U.S. holders and another offer only to non-U.S. holders, provided that the offer to U.S. holders is on terms at least as favorable as those offered any other acquiree shareholder. But, for mechanical reasons bidders want to include all of the ADS holders in the U.S. offer (believe me, doing anything else is almost impossible). This means that the U.S. offer will include non-U.S. ADS holders; disqualifying the bidder from utilizing the exemption.
The result is that in almost every single cross-border transaction, no-action relief is required under this Rule. So, for example in the RBS group's successful offer for ABN AMRO, the SEC granted exemptive relief as follows:
The exemption from Rule 14d-10(a)(1) is granted to permit the Consortium to make the U.S. Offer available to all holders of ABN AMRO ADSs and all U.S. holders of ABN AMRO Ordinary Shares. The Dutch Offer will be made to all holders of ABN AMRO Ordinary Shares located in the Netherlands and to all holders of Ordinary Shares located outside of the Netherlands and the United States, if, pursuant to local laws and regulations applicable to such holders, they are permitted to participate in such offer.
The need to seek this and other technical relief which the SEC regularly grants perverts the purpose of the Cross-Border Release which was to facilitate these transactions. Moreover, there are other, larger problems with the Cross-Border Rules which make them very user unfriendly. For example, one of the principal difficulties acquirors have experienced in applying the Cross-Border Rules is the determination of U.S. ownership for purposes of the exemptions. In both negotiated or “friendly” transactions (rather than unsolicited or “hostile” transactions), acquirors are required to “look through” the acquiree’s record ownership to determine the level of U.S. beneficial ownership. Specifically, an acquiror is required to look through the record ownership of brokers, dealers, banks and other nominees appearing on the acquiree’s books or those of its transfer agents and depositaries.
But the current look-through rule, unfortunately, does not work well in practice. First, the mechanics of shareholding in other jurisdictions make it difficult for acquirors to determine whether any exemptions are available under the Cross-Border Rules. Second, penalties for non-compliance, such as rescission in the case of a noncompliant securities offering, are potentially quite harsh. Consequently, acquirors unable to make a certain determination as to qualification for the exemptions under the Cross-Border Rules are more likely to structure cross-border takeovers to exclude participation by U.S. security holders. Alternatively, acquirors have submitted prospective no-action and exemptive relief requests to the staff of the SEC for relief along the lines of the Cross Border Rules. In fact, in the least U.S. regulated cross-border takeovers, 14E Offers, acquirors often decide to comply with the minimal requirements of Regulation 14E rather than rely on the Cross-Border Rule exemptions due to the expense and problems associated with the look-through analysis. Alternatively, offerors in the United Kingdom and other eligible jurisdictions may choose to structure a transaction as a scheme of arrangement under Section 3(a)(10) of the Securities Act in order to similarly avoid reliance upon the exemptions under the Cross-Border Rules while still minimizing compliance with the U.S. takeover rules and avoiding triggering the Securities Act’s registration requirements (see my post on this practice and schemes of arrangements generally see here).
Ultimately, the Cross-Border Rules are now seven years old. The SEC is well aware of all of these problems. They would do well to fix them in a manner which makes cross-border deals more inclusive of U.S. holders and reduces the SEC's administrative burden in repetitively responding to these no-action letters. It has been too long.
For more on this see my article, Getting U.S. Security Holders to the Party: The SEC's Cross-Border Release Five Years On