SEC adopts new rules re accelerated filers and proposes amendments to the best price rule to except compensation arrangements and to allow foreign private issuers to terminate U.S. registration

By: Cydney Posner

At an open meeting today, the SEC voted to approve a set of new rules related to accelerated filers and to propose two new rules.

The SEC voted to adopt amendments to the "accelerated filer" definition in Rule 12b-2 of the Exchange Act and to ease some of the current restrictions on the exit of companies from accelerated filer status. The new amendments:

• create a new category of accelerated filer, the "large accelerated filer," for issuers that meet the accelerated filer criteria and have a public float of $700 million or more, as of the last business day of the issuer’s most recently completed second fiscal quarter;
• amend the accelerated filing deadlines so that the 60-day Form 10-K annual report deadline applies only to large accelerated filers and maintain the Form 10-Q quarterly report filing deadline for large accelerated filers at 40 days, with no further reduction;
• provide that periodic report deadlines for other accelerated filers (public float of at least $75 million and less than $700 million) will remain at 75 days for annual reports on Form 10-K and 40 days for quarterly reports on Form 10-Q;
• allow an accelerated filer with a public float of less than $50 million, as of the last business day of its most recently completed second fiscal quarter, to exit accelerated filer status that year without a second year’s determination or other delay (the current rules provide that an accelerated filer remains one until it becomes eligible to use Forms 10-KSB and 10-QSB, which requires that the issuer meet the small business issuer definition at the end of two consecutive years); and
• allow a large accelerated filer with less than a $500 million public float, as of the last business day of its most recently completed second fiscal quarter, to exit large accelerated filer status in that year.

The SEC also voted to propose amendments to the best-price rule for issuer and third-party tender offers under the Exchange Act. The best-price rule requires that a bidder pay the same price to all shareholders in a tender offer. Some courts have, however, taken the position that compensatory arrangements with employees and directors should be included in determining the amounts paid, thereby necessarily leading to violations of the rule. This split among the courts has resulted in substantial uncertainty, and the position taken by some courts has discouraged the use of tender offers in favor of statutory mergers. The SEC's proposal is designed to resolve that uncertainty by making clear that the best-price rule does not apply to these compensatory arrangements. The proposed amendments would revise the language of the best-price rule to clarify that it applies to the consideration offered and paid "for securities tendered in a tender offer," amending the current language that applies to payments made to security holders "during the tender offer." The amendments would provide a safe harbor for third-party tender offers for the negotiation, execution and amendment of, and consideration offered and paid under, employment, severance or other employee benefit arrangements entered into with employees or directors of the company. The safe harbor would be available only for payments for past or future services, not for a number of shares owned or tendered. (Hopefully, the proposal will make clear that the fact that non-competes in California are enforceable only in connection with the sale of a business, which would involve a sale of shares in a tender offer, would not preclude application of the safe harbor for payments for a non-compete.) The proposed safe harbor would allow the third-party bidder's independent compensation committee to approve an arrangement and, in doing so, deem it to be the type of compensation arrangement that would be covered by the safe harbor.

Finally, the SEC voted to propose a new rule 12h-6 that would enable a foreign private issuer meeting specified conditions to terminate its Exchange Act registration and reporting obligations under section 12(g) regarding a class of equity securities, as well as to terminate permanently (as opposed to merely suspend) its section 15(d) reporting obligations regarding a class of equity or debt securities. (The iniquities of the current system drove the Commissioners to seek refuge in unflattering metaphors. Chairman Cox likened our registration system to the problematic "Hotel California," where you can check in but not out. That's a reference to an old song for those of you not of the Chairman's vintage. Maintaining that theme, Commissioner Glassman described our current system as a "roach motel." Only Commissioner Atkins, who settled on the analogy of an alluring tropical island with no exit, seemed to be bothered that domestic companies might have the similar problems with the deregistration process.) The proposed rule for equity securities would allow a foreign private issuer to exit the system if it has been a complying reporting company for at least two years and has filed at least two annual reports, has not sold shares in U.S. offerings in the preceding 12 months, has maintained a listing for at least two years on its primary home-country trading market and meets specified quantitative benchmarks relating to the percentage of public float held by U.S. residents or (for WKSIs) the percentage of U.S. daily trading volume. Alternatively, the issuer could comply with the current rule allowing deregistration in the event the company has fewer than 300 holders of record or fewer than 300 holders that are U.S. residents. However, the inquiry would not need to be worldwide, but could be limited to the U.S., the issuer's jurisdiction of incorporation and the jurisdiction of its primary trading market. The issuer would also be permitted to rely in good faith on an independent information service provider to gather the numbers. Different rules would apply to debt-only issuers. The SEC also voted to propose a rule amendment that would apply the exemption from Exchange Act registration under Rule 12g3-2(b) to a class of equity securities immediately upon the effective date of the issuer's termination of effectiveness regarding that class of securities. Following deregistration (although not as a condition to deregistration), companies would need to post on their websites certain financial information in English.