News

Revised and New C&DIs

News Brief
August 12, 2010

By Cydney Posner

The SEC has posted some revised and new C&DIs, several of them related to foreign private issuers.

Securities Act Sections

Securities Act Section 5

(Revised) An issuer contemplating a registered debt exchange offer may execute a lock-up agreement (or agreement to tender) with a note holder before the filing of the registration statement in the following circumstances:

    • the lock-up agreements are signed only by accredited investors;
    • the persons signing the lock-up agreements collectively own less than 100% of the outstanding principal amount of the particular series of notes;
    • a tender offer will be made to all holders of the particular series of notes; and
    • all note holders eligible to participate in the exchange offer are offered the same amount and form of consideration.

When lock-up agreements are executed before the filing of a registration statement but the conditions above (which represent a practical accommodation by the staff) are not satisfied, the subsequent registration of the exchange offer on Form S-4 may be inappropriate. The execution of a lock-up agreement (or agreement to tender) may constitute a contract of sale under the Securities Act. If so, the offer and sale of the issuer's securities would be made to note holders who entered into the agreement before the exchange offer is made to other note holders. An exchange offer is a single transaction, and a transaction that has commenced privately must be completed privately. Similarly, if a note holder actually tenders its notes -- for example, by signing a transmittal form -- before the filing of the Form S-4, the staff has objected to the subsequent registration of the exchange offer on Form S-4 for any of the note holders because offers and sales have already been made and completed privately. An issuer seeking to lock up note holders must also consider whether those efforts represent the commencement of a tender offer.

(Revised) In a negotiated third-party exchange offer, an acquiring company may execute a lock-up agreement (or agreement to tender) before the filing of the registration statement to obtain a commitment from management and principal security holders of a target company to tender their shares in the exchange offer in the following circumstances:

  • the lock-up agreements involve only executive officers, directors, affiliates, founders and their family members, and holders of 5% or more of the subject securities of the target company;
  • the persons signing the lock-up agreements collectively own less than 100% of the subject securities of the target;
  • a tender offer will be made to all holders of the subject securities of the target; and <br>o all holders of the subject securities of the target eligible to participate in the exchange offer are offered the same amount and form of consideration.

As with the question above, when lock-up agreements are executed before the filing of a registration statement but not in compliance with the conditions identified above, the subsequent registration of the exchange offer on Form S-4 may be inappropriate. An exchange offer is a single transaction, and a transaction that has commenced privately must be completed privately. Similarly, if a holder actually tenders its subject securities — for example, by signing a transmittal form — before the filing of the Form S-4, the staff has objected to the subsequent registration of the exchange offer on Form S-4 for any of the holders of the subject securities because offers and sales have already been made and completed privately. An acquiring company seeking to lock up holders of the subject securities must also consider whether such efforts represent the commencement of a tender offer.

Securities Act Forms

Form S-3 - General Instructions I.B.1 to I.B.6 - Transaction Requirements

A company with an effective shelf registration statement on Form S-3 may not rely on General Instruction I.B.6 to file a prospectus supplement for a new offering of an amount of securities that exceeds the 1/3 limit of the instruction, even if the actual amount sold does not exceed the limit. The capacity remaining under the 1/3 limit in General Instruction I.B.6 is measured immediately prior to the registered takedown and applies to the amount of securities offered for sale pursuant to the prospectus supplement, not the amount actually sold. The concept of rolling measurement dates is limited to different takedowns, not individual sales within a takedown. When measuring the amount available for a later takedown, only those securities actually sold are counted against the 1/3 limit.

A company is able to sell up to $10 million in securities using its effective shelf registration statement on Form S-3, in reliance on General Instruction I.B.6. On Monday, June 7, the company files a prospectus supplement to offer and sell up to $5 million of securities in a continuous offering. The company promptly begins its offering and has sold $2.5 million of securities to date. The company intends to file a prospectus supplement for another continuous offering on the following Monday, June 14. The maximum amount of securities that can be offered by the June 14 prospectus supplement, assuming the 1/3 limit in General Instruction I.B.6 continues to be $10 million, is $5 million. Although the general rule is that, when measuring the amount available for a later takedown, only those securities actually sold are counted against the 1/3 limit, in the context of multiple, concurrent continuous offerings, any securities that continue to be offered in other continuous offerings in reliance on General Instruction I.B.6 would also count against the 1/3 limit. In this example, the company has sold $2.5 million of securities to date and therefore, as of June 14, can offer and sell up to $7.5 million of securities pursuant to General Instruction I.B.6. Because the company continues to offer up to $2.5 million of securities with the June 7 prospectus, it can only offer and sell up to $5 million of securities with the June 14 prospectus. To permit otherwise would allow a company to do in two or more transactions what it cannot do in one transaction.

Exchange Act Rules

Definitions: Rules 3a11-1 to 3b-19

A foreign issuer qualifies as a foreign private issuer on the last business day of its most recently completed second fiscal quarter, which is the "determination date" for foreign private issuer status under Exchange Act Rule 3b-4(c). If, shortly thereafter, the foreign issuer reincorporates in Delaware, it may not continue to use the foreign private issuer forms and rules until it retests its foreign private issuer status on the next determination date. Under Exchange Act Rule 3b-4(e), a foreign issuer generally may use the foreign private issuer forms and rules until the first day of the fiscal year following the determination date on which it no longer qualifies as a former private issuer. That provision, however, does not apply to domestic issuers. A U.S.-domiciled company can never be a foreign issuer or foreign private issuer, no matter how few U.S. shareholders it may have or where its assets, business, officers or directors are located. Therefore, as a successor to the foreign issuer's reporting obligations, the Delaware corporation must immediately begin filing Exchange Act reports on domestic issuer forms.

Exchange Act Forms

Form 10-K

General Instruction G(3) to Form 10-K allows a company to incorporate by reference Part III information from its proxy statement to be filed within 120 days after the end of the fiscal year covered by the Form 10-K, but only from its definitive proxy statement. If a company has filed only a preliminary proxy statement containing the Part III information within the 120-day period, but the definitive proxy statement will be filed after the 120-day period, the company must amend its Form 10-K prior to the end of the 120-day period to file the Part III information.

Exchange Act Section 16 and Related Rules and Forms

Section 16 - General Guidance

(Revised) A company reincorporated from Canada to Delaware, thus losing its "foreign private issuer" status (see Rule 3b-4). Before the reincorporation, an officer of the company purchased shares of company common stock, which he sold after the reincorporation but within six months of his purchase. The officer's purchase would be subject to Section 16, and the officer would be required to file a Form 3 within 10 days of the reincorporation and a Form 4 reporting both the purchase and sale of the common shares following the sale of those shares. While transactions effected by Os & Ds of a foreign company before the loss of "foreign private issuer" status are generally not subject to Section 16, this position does not apply where the event that culminated in the loss of "foreign private issuer" status also involved the company's initial registration under Section 12 (compare the last two C&DIs below). In that event, Rule 16a-2(a) would be applicable, which subjects to Section 16 O&D transactions effected in the six months before the initial Section 12 registration. In the staff's view, for purposes of Section 16, a reincorporation by a foreign company that causes it to lose its "foreign private issuer" status is analogous to a company's initial registration of equity securities under Section 12 because, in each event, the change in the company's "foreign private issuer" status was within the control of the company and insiders should have been aware of the change sufficiently in advance to take potential Section 16 responsibilities into account when buying and selling the company's equity securities.

Under Rule 3b-4(e), if a foreign issuer with securities registered under Section 12 does not qualify as a foreign private issuer as of the last business day of its most recently completed second fiscal quarter (the "determination date"), it must begin using the forms prescribed for domestic companies and complying with Section 16 starting on the first day of the fiscal year following the determination date. In this situation, a Form 3 must be filed on or before the first day of the fiscal year following the determination date.

Rule 16a-2 - Persons Subject to Section 16

If a foreign issuer with securities registered under Section 12 loses foreign private issuer status as described in the question immediately above, Rule 16a-2(a) would not apply to make transactions effected by its officers and directors before a Form 3 is due subject to Section 16 and reportable on Form 4.

In contrast to the C&DI above, where the foreign issuer is not a foreign private issuer and files its initial registration statement to register equity securities under Section 12, in this case, Rule 16a-2(a) would apply to make transactions by its officers and directors within six months before the effectiveness of the registration statement subject to Section 16 and reportable on Form 4.

This content is provided for general informational purposes only, and your access or use of the content does not create an attorney-client relationship between you or your organization and Cooley LLP, Cooley (UK) LLP, or any other affiliated practice or entity (collectively referred to as “Cooley”). By accessing this content, you agree that the information provided does not constitute legal or other professional advice. This content is not a substitute for obtaining legal advice from a qualified attorney licensed in your jurisdiction and you should not act or refrain from acting based on this content. This content may be changed without notice. It is not guaranteed to be complete, correct or up to date, and it may not reflect the most current legal developments. Prior results do not guarantee a similar outcome. Do not send any confidential information to Cooley, as we do not have any duty to keep any information you provide to us confidential. This content may be considered Attorney Advertising and is subject to our legal notices.