SEC Amends Best-Price Rule; Edgar Upgrade

In a move aimed at alleviating uncertainty related to the so-called “best-price” rule, the Securities and Exchange Commission has voted unanimously to amend the rule to clarify how it applies to employment arrangements hatched during tender-offer mergers—changes that should “level the playing field” between those offers and statutory mergers and acquisition vehicles, according to the SEC.

The amendments, approved at an Oct. 18 meeting, confirm that the best-price rule applies only with respect to the consideration offered and paid for securities tendered in a tender offer. They also exclude compensation arrangements, so long as they meet certain requirements and provide a safe harbor for compensation arrangements approved by independent directors.

The amendments take effect 30 days after publication in the Federal Register, which should happen in the near future.

While the final rule had not yet been posted to the SEC Web site at press time, Keith Higgins, a partner with Ropes & Gray and chairman of the American Bar Association’s committee on the federal regulation of securities, says the changes ought to increase the percentage of all cash transactions that are structured as tender offers.

While the tender-offer structure was once common for cash acquisitions of public companies, Higgins notes that litigation introduced uncertainty regarding how to apply the rule to employee-retention, severance, and change-of-control arrangements in recent years, and cash mergers became more common. “Rules that bring more clarity to this area should once again make two-step acquisitions appealing,” Higgins says.

While the rule was intended originally to ensure that all shareholders are treated equally and paid the same price in tender offers, conflicting court interpretations regarding the consideration of compensation paid to target company executives in recent years have chilled the use of tender offers. Acquirers worried that employment, severance, or other compensatory arrangements for target company executives might be deemed to violate the rule, requiring buyers to “top up” the target stockholders by giving them all the same additional consideration.

A comment letter on the proposed amendments noted that the number of tender offers declined from a high of 468 in 2000 to 264 in 2005 and to 169 through August of this year.

SEC Chairman Christopher Cox said the rule changes “provide greater clarity and greater certainty” to the regulation and “recognize that compensation arrangements are often a critical aspect of a business combination.”

“We believe these amendments will help level the playing field between tender offers and statutory mergers as available acquisition vehicles,” said John White, director of the SEC Division of Corporation Finance.

While the SEC said it incorporated many revisions suggested by commenters, one proposed recommendation not included in the final rule was the addition of an exemption for commercial arrangements.

“As we thought it through, we became convinced that we couldn’t maintain the investor protections the rule is designed to provide if we included an exception for commercial arrangements,” White said. The problem with adding a broad definition or exemption for commercial arrangements was that, “it allowed any kind of arrangement to come in,” he added. “It seemed too open-ended.”

For example, he said, “If you enter into an arrangement with a hedge fund invested in your company, is that a commercial arrangement? If you put qualifiers in, like ‘arm’s length’ or ‘bona fide’, it’s left to the courts to decide and you lose the certainty being sought through these exemptions.”

SEC To Implement EDGAR System Release 9.5 Oct. 30

The Securities and Exchange Commission’s EDGAR system will be upgraded to Release 9.5 next week. Changes include support for the designation of accelerated-filer status and a duty to file reports indicator for Form 15 filers.

Because of the EDGAR modifications, starting Oct. 30, 2006, the SEC said filers will be required to download new EDGARLink templates #2 and #3. For additional information see the EDGAR Filer Manual (Volumes I, II).

SEC Approves Nasdaq ‘Independence’ Revision

The SEC has approved a rule change proposed by Nasdaq to modify some of its corporate-governance standards, including its definition of “independent director.”

As Compliance Week previously reported, the rule, proposed in July, clarifies that the acceptance of compensation—rather than “payments”—of more than $60,000 by a director or family member would taint independence, and that a director who served as an interim executive officer for less than a year isn’t disqualified from being considered independent.

In related news, Nasdaq has filed a rule change with the SEC to update its definition of independent director to raise the threshold for related-party transactions from $60,000 to $120,000 to reflect changes to the SEC’s compensation-disclosure rules.