[Federal Register Volume 61, Number 81 (Thursday, April 25, 1996)]
[Proposed Rules]
[Pages 18305-18308]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-10243]



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[[Page 18306]]

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 33-7283; 34-37132; File No. S7-12-96]
RIN 3235-AG78


Odd-lot Tender Offers by Issuers

AGENCY: Securities and Exchange Commission.

ACTION: Proposed Rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
publishing for comment a proposed amendment to Rule 13e-4 (``Rule 13e-
4'' or ``Rule'') under the Securities Exchange Act of 1934. Rule 13e-4 
governs cash tender offers and exchange offers by issuers for their 
equity securities. The proposed amendment would remove the Rule's 
requirement that issuer tender offers made to odd-lot holders specify a 
record date of ownership for eligibility to tender into the offer. The 
amendment would enable issuers to conduct extended odd-lot tender 
offers for their equity securities.

DATES: Comments should be submitted on or before May 28, 1996.

ADDRESSES: Comments should be submitted in triplicate to Jonathan G. 
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, 
N.W., Stop 6-9, Washington, D.C. 20549. Comments also may be submitted 
electronically at the following E-mail address: [email protected]. 
All comment letters should refer to File No. S7-12-96; this file number 
should be included on the subject line if E-mail is used. All comments 
received will be available for public inspection and copying in the 
Commission's Public Reference Room, 450 Fifth Street, N.W., Washington, 
D.C. 20549. Electronically submitted comment letters will be posted on 
the Commission's Internet web site (http://www.sec.gov).

FOR FURTHER INFORMATION CONTACT: K. Susan Grafton, Special Counsel, or 
Lauren C. Mullen, Attorney, Office of Risk Management and Control, 
Division of Market Regulation, Securities and Exchange Commission, 450 
Fifth Street, N.W., Stop 5-1, Washington, D.C. 20549, at (202) 942-
0772.

SUPPLEMENTARY INFORMATION:

I. Background

A. Odd-lot Tender Offers

    Rule 13e-4 under the Securities Exchange Act of 1934 (``Exchange 
Act'') 1 governs cash tender offers and exchange offers by issuers 
for their equity securities.2 In an odd-lot tender offer (``Odd-
lot Offer''), the offer to purchase is limited to security holders who 
own less than 100 shares (``Odd-lot Holders''). The purpose of an Odd-
lot Offer generally is to reduce the issuer's disproportionately high 
cost of servicing small shareholder accounts, and to enable such 
shareholders to dispose of their securities without incurring brokerage 
fees.
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    \1\ 15 U.S.C. 78a et seq.
    \2\ 17 CFR 240.13e-4.
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    In light of the limited purposes of Odd-lot Offers and the fact 
that they are not characterized by large premiums or significant market 
impact, the majority of these tender offers present minimal potential 
for fraud and manipulation. Thus, paragraph (h)(5) of Rule 13e-4 
excepts Odd-lot Offers from the application of the Rule's requirements, 
other than the ``all holders'' and ``best price'' provisions contained 
in paragraph (f)(8) of the Rule.3
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    \3\ 17 CFR 240.13e-4(h)(5); see Securities Exchange Act Release 
No. 19988 (July 21, 1983), 48 FR 34251 (adopting the paragraph now 
designated as (h)(5) of Rule 13e-4 excepting Odd-lot Offers from the 
Rule's requirements).
    Rule 13e-4(f)(8)(i) requires that the tender offer be open to 
all security holders of the class of securities subject to the 
tender offer. 17 CFR 240.13e-4(f)(8)(i). Rule 13e-4(f)(8)(ii) 
requires that consideration paid to any security holder pursuant to 
an issuer tender offer be the highest consideration paid to any 
other security holder during such tender offer. 17 CFR 240.13e-
4(f)(8)(ii).
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B. Record Date Requirement

    Paragraph (h)(5) of Rule 13e-4 requires issuers making Odd-lot 
Offers to set a record date prior to the offer's announcement for the 
purpose of determining a security holder's eligibility to participate 
in the offer. This provision applies only to Odd-lot Offers, and was 
incorporated into the Rule to prevent holders of round-lots from 
separating their holdings into eligible odd-lots and tendering them 
pursuant to the Odd-lot Offer.4 Also, acceptance of such shares 
was considered to result in added cost to the issuer without achieving 
the corresponding benefit from reducing the number of its small 
shareholder accounts. Furthermore, Odd-lot Holders could be 
disadvantaged if such behavior were to result in an oversubscription of 
the Odd-lot Offer, causing bona fide Odd-lot Holders to have their 
securities rejected or prorated by the issuer. Finally, the Commission 
was concerned that Odd-lot Offers left open indefinitely or for an 
extended period of time might establish a minimum price for the subject 
security. In adopting paragraph (h)(5), the Commission expressed its 
view that the record date requirement would minimize any pegging effect 
by limiting the number of shares eligible to be purchased by the issuer 
at the tender offer price.
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    \4\ See Securities Exchange Act Release No. 19246 (November 18, 
1982), 47 FR 53398, 53400 (proposing adoption of the paragraph now 
designated as (h)(5) of Rule 13e-4).
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C. Extended Odd-lot Offers

    The requirement of a record date places a practical limitation on 
the time period that an Odd-lot Offer can be made available, because 
only those shareholders who were Odd-lot Holders as of the record date 
may participate. Recently, some issuers have expressed an interest in 
offering to purchase odd-lots on a continuous, periodic, or extended 
basis (collectively, ``Extended Odd-lot Offers'') to avoid the costs 
associated with implementing sequential programs. An issuer desiring to 
make an Extended Odd-lot Offer must obtain an exemption from the Rule's 
record date requirement.
    Several exemptions have been granted to allow issuers to conduct 
Extended Odd-lot Offers.5 Based on information provided to the 
staff, the Commission preliminarily believes that the record date 
requirement is no longer necessary for the following reasons:
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    \5\ See, e.g., Letter regarding American Telephone and Telegraph 
Company Odd-Lot Program, 1992 SEC No-Act. LEXIS 622 (May 4, 1992); 
Letter regarding BellSouth Corporation Odd-Lot Program, 1992 SEC No-
Act. LEXIS 631 (May 4, 1992).
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     Round-lot holders generally do not separate their holdings 
into odd-lots to participate in Extended Odd-lot Offers.
     Risk of prorationing or over-subscription is absent 
because Extended Odd-lot Offers do not limit the number of shares that 
will be accepted.
     There is little manipulative incentive because an Extended 
Odd-lot Offer typically involves a de minimis percentage of an issuer's 
outstanding shares.
     Because the consideration offered in an Extended Odd-lot 
Offer typically is based on a uniformly applied formula tied to the 
market price of the subject security, and not on a fixed-price, it is 
unlikely that such tender offer could be used to peg the price of a 
security.
     Odd-lot transactions generally have little influence on 
the market price of a security, thus, even a fixed-price Extended Odd-
lot Offer is unlikely to have a pegging effect on the subject security.
    In light of its experience with Extended Odd-lot Offers and the 
advantages of these programs for issuers as well as for shareholders, 
the Commission proposes to amend the Rule to eliminate the mandatory 
record date requirement.

[[Page 18307]]

D. Related Issues

    Odd-lot Offers also raise issues under Rules 10b-6 and 10b-13 under 
the Exchange Act.6 Rule 10b-6 is an anti-manipulation rule that, 
subject to certain exceptions, prohibits persons engaged in a 
distribution of securities from bidding for or purchasing, or inducing 
others to purchase, such securities, or any related securities, until 
they have completed their participation in the distribution. The rule 
is intended to prevent distribution participants and their affiliated 
purchasers from artificially conditioning the market for the subject 
security in order to facilitate the offering, and to protect the 
integrity of the securities market as an independent pricing mechanism. 
Rule 10b-13 prohibits any person making a cash tender offer or exchange 
offer for an equity security from purchasing or arranging to purchase 
such security, or any security immediately convertible into or 
exchangeable for such security, otherwise than pursuant to the tender 
or exchange offer, during the period commencing as of the public 
announcement of the offer and ending on the date when the offer must, 
by its terms, be accepted or rejected. The rule is intended to 
eliminate the incentive for the bidder to purchase shares from certain 
holders otherwise than pursuant to the offer at a more favorable price 
than the tender offer consideration.
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    \6\ 17 CFR 240.10b-6 and 17 CFR 240.10b-13.
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    Where an issuer is involved in a distribution, as defined in Rule 
10b-6, purchases by the issuer (or its affiliated purchasers) of 
securities that are the subject of the distribution are restricted, 
including purchases pursuant to an Odd-lot Offer. For example, the 
issuer may wish to conduct a public offering during an Odd-lot Offer, 
or the securities purchased during an Odd-lot Offer may be resold in a 
manner constituting a distribution. Securities also may need to be 
purchased in connection with an Odd-lot Offer to satisfy the request of 
Odd-lot Holders who want to ``round up'' their holdings. In addition, 
purchases by an issuer conducting an Odd-lot Offer also are restricted 
by Rule 10b-13, which prohibits purchases of the target security, 
including purchases in connection with an open market repurchase 
program, once the Odd-lot Offer is publicly announced and continuing 
until its expiration.
    Issuers frequently have sought exemptive relief from Rules 10b-6 
and 10b-13 in connection with their Extended Odd-lot Offers.7 The 
Commission is proposing to issue class exemptions from Rules 10b-6 
8 and 10b-13 that would permit issuers to conduct Odd-lot Offers 
while the issuer is engaged in a distribution under Rule 10b-6, to 
round up odd-lots on behalf of Odd-lot Holders, and to make purchases 
of its securities otherwise than pursuant to the Odd-lot Offer.9 
The class exemptions from Rules 10b-6 and 10b-13 would be available 
during any Odd-lot Offer.
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    \7\ See, e.g., Letter regarding Society National Bank, 1995 SEC 
No-Act. LEXIS 912 (December 11, 1995); Letter regarding Armco, Inc., 
1995 SEC No-Act. LEXIS 754 (October 20, 1995); Letter regarding 
Yankee Energy Systems, Inc., 1995 SEC No-Act. LEXIS 142 (January 6, 
1995); and Letter regarding El Paso Natural Gas Company, 1994 SEC 
No-Act. LEXIS 52 (January 7, 1994). The Commission previously has 
granted exemptions from Rule 10b-13 to permit the issuer, or the 
broker or trustee for the Odd-lot Offer, to bid for or purchase 
securities that are the subject of the Odd-lot Offer in order to 
satisfy a round up feature of the Odd-lot Offer, or to satisfy the 
requirements of issuer plans, provided that no such purchases are 
made otherwise than pursuant to the offer from the Odd-lot Holders 
eligible to participate in the Odd-lot Offer. The proposed 
exemptions from Rule 10b-13, if issued, would not include a 
restriction on purchases of securities from eligible Odd-lot 
Holders. Comment is requested on whether such a restriction should 
be included.
    \8\ On April 11, 1996, the Commission issued a release proposing 
new Regulation M, which would replace Rule 10b-6, among other rules. 
Securities Exchange Act Release No. 37094 (April 11, 1996). Proposed 
Rule 102 of Regulation M would permit issuers to purchase odd-lots 
during a distribution. If the Commission determines to issue the 
proposed class exemption from Rule 10b-6 for Odd-lot Offers, it may 
be superseded by adoption of Regulation M.
    \9\ If adopted, the proposed amendment, along with any class 
exemptions from Rules 10b-6 and 10b-13, would supersede any prior 
exemptions granted with respect to Odd-lot Offers. These provisions, 
however, would not address other issues that may be raised by Odd-
lot Offers under the Securities Act of 1933, 15 U.S.C. 77a et seq., 
or under Sections 15(a) or 14(d) of the Exchange Act, 15 U.S.C. 
78o(a) or 78n(d), respectively. See, e.g., Letter regarding Armco, 
Inc., supra note 7.
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II. Request for Comment

    The Commission requests that interested persons submit comments on 
any aspect of the proposed amendment to Rule 13e-4 to eliminate the 
record date requirement. If the record date requirement is deleted, 
issuers would not be able to specify a record date in an Odd-lot Offer 
because of the Rule's ``all holders'' provision. Should Rule 13e-4 
retain a provision to permit issuers to specify a record date in an 
Odd-lot Offer? Commenters should discuss whether there is any potential 
for round-lot holders to divide their round-lots to participate in 
Extended Odd-lot Offers. The Commission is interested in information 
regarding issuers' experiences with Odd-lot Offers, including Extended 
Odd-lot Offers.
    Additionally, the Commission encourages comment on any potential 
market impact of Extended Odd-lot Offers. Is there any opportunity for 
an Extended Odd-lot Offer to have a pegging effect on the security's 
price? Should Extended Odd-lot Offers be limited to those offering a 
consideration based on a market price formula (e.g., based on the 
average price per share of the securities subject to the offer)?
    Finally, the Commission seeks comment on the proposed class 
exemptions from Rules 10b-6 and 10b-13.
    Comments should be submitted in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Stop 6-9, Washington, DC 20549, and should refer to file No. S7-12-96. 
Comments also may be submitted electronically at the following E-mail 
address: [email protected], and should include the file number on 
the subject line of the E-mail.

III. Summary of Initial Regulatory Flexibility Act Analysis

    The Regulatory Flexibility Act, which became effective on January 
1, 1981, imposes procedural steps applicable to agency rulemaking which 
has a ``significant economic impact on a substantial number of small 
entities.'' 10 The Chairman of the Commission has certified 
pursuant to the Regulatory Flexibility Act that the proposed amendment 
to Rule 13e-4, if adopted, will not have a significant economic impact 
on a substantial number of small entities. This certification, 
including the reasons therefore, is attached to this release as 
Appendix A.
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    \10\ 5 U.S.C. 601 et seq. Although Section 601(b) of the 
Regulatory Flexibility Act defines the term ``small entity,'' the 
statute permits agencies to formulate their own definitions. 5 
U.S.C. 601(b). The Commission has adopted definitions of the term 
small entity for purposes of Commission rulemaking in accordance 
with the Regulatory Flexibility Act. Those definitions are set forth 
in Rule 0-10, 17 CFR 240.0-10. See Securities Exchange Act Release 
No. 18452 (January 28, 1982). An issuer, other than an investment 
company, is a ``small business'' or ``small organization'' under 
Rule 0-10, if the issuer, on the last business day of its most 
recent fiscal year, had total assets of $5,000,000 or less.
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IV. Statutory Basis

    Pursuant to Sections 3(b), 9(a)(6), 10(b), 13(e), 14(e), and 23(a) 
of the Exchange Act; 15 U.S.C. 78c(b), 78i(a)(6), 78j(b), 78m(e), 
78n(e), and 78w(a), the Commission proposes to amend Rule 13e-4 in 
Chapter II of Title 17 of the Code of Federal Regulations by amending 
paragraph (h)(5) of Sec. 240.13e-4.

[[Page 18308]]

List of Subjects in 17 CFR Part 240

    Brokers, Confidential business information, Fraud, Reporting and 
recordkeeping requirements, Securities.

Text of the Proposed Amendment

    For the reasons set out in the preamble, the Commission is 
proposing to amend Title 17, Chapter II of the Code of Federal 
Regulations as follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

    1. The authority citation for part 240 continues to read, in part, 
as follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77eee, 77ggg, 
77nnn, 77sss, 77ttt, 78c, 78d, 78i, 78j, 78l, 78m, 78n, 78o, 78p, 
78q, 78s, 78w, 78x, 78ll(d), 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-
37, 80b-3, 80b-4 and 80b-11, unless otherwise noted.
* * * * *


Sec. 240.13e-4  [Amended]

    2. Section 240.13e-4 is amended by removing the phrase ``as of a 
specified date prior to the announcement of the offer'' from the 
introductory text of paragraph (h)(5).

    Dated: April 19, 1996.

    By the Commission.
Jonathan G. Katz,
Secretary.

    Note: This Appendix A to the Preamble will not appear in the 
Code of Federal Regulations.

Appendix A

Regulatory Flexibility Act Certification

    I, Arthur Levitt, Chairman of the Securities and Exchange 
Commission, hereby certify pursuant to 5 U.S.C. 605(b) that the 
proposed amendment to Rule 13e-4 set forth in Securities Exchange 
Act Release No. 37132, if promulgated, will not have a significant 
economic impact on a substantial number of small entities. 
Specifically, issuers making a tender offer to holders of odd-lots 
will be excepted from the record date requirements of the rule, and 
will no longer be required to distinguish between their odd-lot 
holders on the basis of the dates upon which those security holders 
acquired their odd-lot holdings. Accordingly, issuers will be 
relieved of the need to request an exemption from the provisions of 
the rule to conduct periodic, continuous, or extended odd-lot 
offers. Although the proposed amendment to Rule 13e-4 is expected to 
have favorable effects on issuers and small investors, the size of 
these effects will not have a significant economic impact on a 
substantial number of small entities.

    Dated: April 19, 1996.
Arthur Levitt,
Chairman.
[FR Doc. 96-10243 Filed 4-24-96; 8:45 am]
BILLING CODE 8010-01-P