The Staff of SEC’s Division of Corporation Finance (the “Staff”) recently issued a series of Compliance and Disclosure Interpretations (“C&DIs”) related to tender offers, that provide useful guidance on a range of topics, in some cases restating or reformulating the guidance that previously appeared in the Manual of Telephone Interpretations or were frequently the subject of Staff comment letters. Issuers and other market participants must grapple with the tender offer rules in a variety of contexts, including issuer self-tenders for debt and equity securities, M&A transactions (including cross border M&A) and offers by third parties. Which SEC rules apply, and the extent of the restrictions such rules impose, depends on a variety of factors, including who is making the offer and whether the class of securities tendered for is registered under the Exchange Act. Below, we discuss certain of the noteworthy C&DIs released by the Staff.
The closing of a tender offer is, in some cases, subject to the satisfaction of one or more conditions. For instance, an M&A transaction structured as a tender offer may be subject to antitrust and/or regulatory approval. Many tender offers include a condition that a minimum percentage of the subject class must be tendered. Some tender offers are conditioned on financing being obtained.
In C&DI 101.01 the Staff confirmed that no tender offer may be subject to a condition, the satisfaction of which is determinable based on subjective criteria. Put differently, a tender offer may not contain a condition for which an element of the offeror’s sole judgment or discretion is involved in establishing whether the condition has been met. This prohibition applies to any tender offer subject to the SEC rules, as the SEC believes conditions determinable based on subjective criteria may constitute a “manipulative or deceptive act or practice” within the meaning of Section 14(e) of the Exchange Act. This C&DI formalizes a longstanding SEC position reflected in prior Staff comment letters.
Takeaway: Any conditions to closing of a tender offer must feature clear, objective criteria by which to establish whether or not they have been satisfied (e.g., a reasonableness requirement where the offeror is ascertaining satisfaction), and offering parties may not impose vague or ambiguous conditions on an offer with the intent of injecting uncertainty as to whether any such conditions have been satisfied (and as a result, as to whether the offer may close).
Publicizing Termination of an Offer Based on Failure to Satisfy Conditions
An offeror will generally issue a press release if it terminates the attendant tender offer. C&DI 101.03 establishes that, if the offeror terminates a tender offer because of the failure to satisfy one or more of the conditions of the offer, issuing a press release stating that the offer was terminated “pursuant to the offer conditions” (without specifying which condition or conditions had not been satisfied) could constitute a “manipulative or deceptive act or practice” under Section 14(e) of the Exchange Act. In the Staff’s view, providing such general disclosure about failing to satisfy conditions without disclosing the specific condition that was not satisfied would call into question whether the offeror had made a genuine offer for the securities. In addition, the Staff noted that failing to disclose the true reason for terminating an offer in this context could constitute a material omission of fact.
Takeaway: Offerors must consider the transparency of their disclosure when announcing the termination of an offer, including specifying the condition or conditions which were not satisfied.
Foreign Bidders and Pre-Commencement Communications
C&DI 131.02 provides guidance to any foreign bidder for a US public company as to when the bidder may become subject to filing obligations with the SEC in connection with a tender offer for the public company’s shares.
In addition to Regulation 14E under the Exchange Act, which applies to all tender offers, a tender offer for a class of shares of a US public company that is registered under Section 12 of the Exchange Act must comply with Regulation 14D under the Exchange Act, which sets forth detailed procedural requirements for tender offers (including the “all-holders best-price” rule). For tender offers subject to Regulation 14D, the bidder must also file a Schedule TO with the SEC, which is subject to review by the Staff.
In this C&DI, the Staff addresses the scenario in which a foreign bidder enters into a memorandum of understanding with a US public company target subject to Regulation 14D, pursuant to which the foreign bidder will acquire shares from the US public company’s insiders, and then commence a cash tender offer for the shares held by the public. The C&DI establishes that, if the bidder and the US public company issue a joint statement disclosing the parties, together with the form of consideration in the offer and the relevant class of securities and the amount of the class sought, such a statement would constitute a pre-commencement communication under Exchange Act Rules 14d-2 and 14d-9. This, in turn, would require the bidder to file the joint statement with the SEC under cover of Schedule 14D-9 on the date of first use.
Takeaway: Foreign bidders contemplating an offer for the shares of a US public company must discuss with counsel how the structure of the transaction and planned announcements may impact the timing and scope of their SEC filing obligations. Among other things, a foreign bidder may need to obtain SEC EDGAR codes in order to make the required filings on time (and obtaining EDGAR codes may take several days).
Application of Tender Offer Rules to Securities of Non-Public Companies
C&DI 161.01 establishes that Regulation 14E applies to tender offers for the securities of non-public companies. This C&DI affirms and expands upon guidance the SEC had previously issued in the Manual of Publicly Available Telephone Interpretations. Regulation 14E codifies the tender offer requirements applicable to any US tender offer, which include that the offer must remain open for a minimum of 20 US business days, that a tender offer must remain open for a minimum of ten US business days following an increase or decrease in the percentage of the class of securities sought or a change in the consideration offered, that payment for tendered securities must be made promptly upon expiration of an offer and that securities must be returned promptly following termination or withdrawal of the offer. Regulation 14E also imposes significant limits on when and under what circumstances a bidder may purchase the class of securities sought outside of the tender offer.
The C&DI establishes that a tender offer for securities of a non-reporting company (other than for “exempted securities,” as defined in Section 3(a)(12) of the Exchange Act) would be subject to the requirements of Regulation 14E. It states in relevant part that the Regulation 14E restrictions apply to:
issuer and third-party tender offers, (i) whether for debt or equity securities, (ii) whether or not such securities belong to a class registered pursuant to Exchange Act Section 12, and (iii) whether or not the subject company, as defined in Item 1000(f) of Regulation M-A, is required to file periodic reports pursuant to Exchange Act Section 15(d).
Takeaway: Companies launching tender offers must always evaluate the breadth of the application of Regulation 14E. Any bidder making a tender offer for securities from a US securityholder must evaluate compliance with Regulation 14E, even if the target is private and/or foreign.
Tender Offers for Convertible Debt Securities
A third party may launch a tender offer for convertible debt securities where the debt security was issued in a Rule 144A offering and was not registered but the common stock into which the debt security converts is registered under Section 12 of the Exchange Act. The SEC has reiterated in C&DI 130.01 that such a tender offer is not subject to Section 14(d) of the Exchange Act. The debt securities are considered a class of “equity securities” under the Exchange Act but the tender offer is not subject to Section 14(d) because the class of debt securities is not registered under the Exchange Act.
Takeaway: This C&DI, which restates guidance previously issued in the Manual of Publicly Available Telephone Interpretations, reaffirms the reduced regulatory obligations (and thus greater flexibility) available to parties seeking to repurchase convertible debt.
Abbreviated Tender Offers
The SEC issued a series of C&DIs that offer interpretive guidance for conducting abbreviated tender offers (tender offers with a five-US-business-day offer period). Notwithstanding the general requirement under Regulation 14E that a tender offer must remain open for 20 US business days, the SEC has issued guidance (most recently in the “Abbreviated Tender Offer No-Action Letter” in 2015) that an issuer may, under certain circumstances, use a five US business day offer period when conducting a tender offer for its own non-convertible debt securities. The new C&DIs provide the following clarifications for the conduct of such abbreviated tender offers:
- A foreign private issuer that is an Exchange Act reporting company and is conducting an abbreviated tender offer may comply with the obligation to furnish a press release in a filing made with the SEC on the first business day of the offer period by filing a Form 6-K (the comparable filing to the Form 8-K used by used domestic companies). (C&DI 162.01)
- Notwithstanding that abbreviated tender offers must be made for “any and all” of the subject class of non-convertible debt securities, such offers may feature a minimum tender condition (i.e. a minimum percentage of the subject class that must be tendered for the offer to be consummated). (C&DI 162.02)
- Under the abbreviated tender offer rules an issuer may offer all holders of the subject class of debt securities cash consideration. In addition, the issuer may offer certain holders (QIBs and non-US persons) Qualified Debt Securities, as defined in the Abbreviated Tender Offer No-Action Letter (effectively, debt securities with comparable terms to the subject class, other than interest rate and maturity). One of the new C&DIs establishes that, in a structure in which QIBs and non-US persons are offered Qualified Debt Securities, the other holders may be offered cash consideration in an amount calculated with reference to a fixed spread to a benchmark (as opposed to a fixed amount of cash), provided that the calculation is the same as the calculation used to determine the principal amount of Qualified Debt Securities paid to the QIBs and non-US persons. (C&DI 162.03)
- An issuer may, concurrently with an abbreviated tender offer, undertake an exchange offer, pursuant to Securities Act Section 3(a)(9), to QIBs and non-US persons who hold the subject class of debt securities (and not just pursuant to Section 4(a)(2) under the Securities Act or Rule 144A), in which such holders are offered Qualified Debt Securities. (C&DI 162.04)
- An issuer may announce an abbreviated offer at any time, but may not commence an abbreviated tender offer prior to 5:01 p.m. on the tenth US business day after the first public announcement of a purchase, sale or transfer of a material business or amount of assets (that would trigger the obligation to provide Regulation S-X Article 11 pro forma financial information). The ten-business-day period following such announcement is a condition to relying on the SEC relief for abbreviated tender offers. (C&DI 162.05)
Takeaway: Although the five-US-business-day offer period provides issuers with an attractive means of conducting liability management, the SEC’s no-action relief includes detailed and complex conditions, and issuers contemplating such a tender offer must carefully follow all of their compliance obligations to achieve a successful outcome.
 Where such class of securities trade on a national securities exchange or are “held of record” by either 2,000 persons, or 500 persons who are not accredited investors.
 Tender offers for the shares of foreign private issuers (“FPIs’) may be eligible for regulatory relief based on the level of US ownership. FPIs with US share ownership of less than 10% are eligible for Tier I relief ( under which most of the US tender offer rules do not apply), and FPIs with US share ownership of less than 40% are eligible for Tier II relief (more limited in scope than Tier I relief).