[Federal Register Volume 61, Number 251 (Monday, December 30, 1996)]
[Rules and Regulations]
[Pages 68587-68589]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-33061]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release Nos. 33-7376; 34-38068; IC-22413; File No. S7-12-96]
RIN 3235-AG78


Odd-Lot Tender Offers by Issuers

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
adopting an amendment to Rule 13e-4 under the Securities Exchange Act 
of 1934 (``Exchange Act''). The amendment removes the rule's 
requirement that an issuer cash tender offer made to odd-lot holders 
specify a record date of ownership for eligibility to tender into the 
offer. The amendment enables issuers to conduct continuous, periodic, 
or extended odd-lot offers for their equity securities. The Commission 
also is granting a class exemption from Rule 10b-13, and a temporary 
class exemption from Rule 10b-6, under the Exchange Act to permit 
issuers to conduct odd-lot offers, to ``round-up'' odd-lots on behalf 
of odd-lot holders, and to make purchases of their securities otherwise 
than pursuant to the odd-lot offer.

EFFECTIVE DATE: December 30, 1996.

FOR FURTHER INFORMATION CONTACT: Lauren C. Mullen, Attorney, Office of 
Risk Management and Control, Division of Market Regulation, Securities 
and Exchange Commission, 450 Fifth Street, NW., Stop 5-1, Washington, 
DC 20549, at (202) 942-0772.

SUPPLEMENTARY INFORMATION:

I. Executive Summary

    The Commission is adopting an amendment to paragraph (h)(5) of Rule 
13e-4 (``Rule 13e-4'' or ``Rule'') 1 under the Exchange Act,2 
and is granting a class exemption from Rule 10b-13,3 and a 
temporary class exemption from Rule 10b-6,4 under the Exchange Act 
in connection with issuers' odd-lot tender offers. The amendment, which 
was published for comment on April 25, 1996 (``Proposing 
Release''),5 and the class exemptions permit issuers to conduct 
continuous, periodic, or extended odd-lot offers for their equity

[[Page 68588]]

securities without seeking exemptions from Rules 10b-6, 10b-13, and 
13e-4 from the Commission.
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    \1\ 17 CFR 240.13e-4.
    \2\ 15 U.S.C. 78a et seq.
    \3\ 17 CFR 240.10b-13.
    \4\ 17 CFR 240.10b-6.
    \5\ Securities Exchange Act Release No. 37132 (April 25, 1996), 
61 FR 18306.
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II. Discussion of the Amendment

    Rule 13e-4 governs cash tender and exchange offers by issuers for 
their equity securities. Paragraph (h)(5) of Rule 13e-4 excepts 
issuers' odd-lot offers from the provisions of the Rule, other than the 
``all holders'' and ``best price'' provisions of paragraphs (f)(8)(i) 
and (f)(8)(ii), respectively.6 In an odd-lot offer, the offer to 
purchase is limited to securityholders who own fewer than 100 shares of 
the subject security.
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    \6\ 17 CFR 240.13e-4(h)(5); see Securities Exchange Act Release 
No. 19988 (July 21, 1983), 48 FR 34251 (``Release No. 34-19988'') 
(adopting the paragraph now designated as (h)(5) of Rule 13e-4, 
which excepts odd-lot offers from the Rule's requirements).
    Rule 13e-4(f)(8)(i) requires that the tender offer be open to 
all securityholders 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 securityholder 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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    Prior to this amendment, paragraph (h)(5) of Rule 13e-4 required an 
issuer making an odd-lot offer to set a record date prior to the 
offer's announcement for the purpose of determining a securityholder's 
eligibility to participate in the offer. As discussed in the Proposing 
Release, the record date requirement was imposed to prevent certain 
perceived abuses.7 The Commission's experience with odd-lot 
offers, and the two comments received in response to the Proposing 
Release, indicate that such abuses rarely, if ever, occur. Therefore, 
to reduce the regulatory burdens for issuers conducting odd-lot offers, 
and to eliminate the need for the Commission to grant exemptions from 
Rule 13e-4 on a case-by-case basis for extended odd-lot offers, the 
Commission proposed amending Rule 13e-4 to delete the record date 
requirement from paragraph (h)(5). The amendment was proposed to permit 
issuers to conduct odd-lot offers on a continuous, extended, or 
periodic basis, and also to enable odd-lot holders who obtain their 
holdings prior to or during the odd-lot offer to participate in the 
offer.
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    \7\ See Securities Exchange Act Release No. 19246 (November 17, 
1982), 47 FR 53398, 53400 (``Release 34-19246'') (proposing adoption 
of the paragraph now designated as (h)(5) of Rule 13e-4).
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    The Commission has determined to adopt the amendment to Rule 13e-
4(h)(5) as proposed, with a minor modification.8 In order to 
provide issuers with flexibility, the rule as amended permits, but does 
not require, an issuer to set a record date for eligibility to 
participate in an odd-lot offer.
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    \8\ One commenter suggested that the Commission exempt issuers 
that conduct odd-lot offers from the broker-dealer registration 
requirements under Section 15(a) of the Exchange Act. The Commission 
notes that this commenter's concerns were specifically addressed by 
the staff in Letter regarding Shareholder Communications Corporation 
(July 25, 1996), 1996 SEC. No-Act. LEXIS 610. This letter discusses 
the extent to which issuers may participate in an odd-lot offer 
without requiring registration as a broker-dealer.
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    One commenter requested clarification regarding the appropriate 
procedures under the Rule for notifying beneficial holders of odd-lots 
about the offer. As previously noted, paragraph (h)(5) of Rule 13e-4 
excepts issuers from the Rule's requirements other than the ``all 
holders'' and ``best price'' provisions. Nonetheless, in proposing 
paragraph (h)(5), the Commission noted an issuer's affirmative duty 
under the Exchange Act, and various rules promulgated thereunder, to 
disclose material information to its shareholders as well as its own 
interest in the success of an odd-lot offer.9 In adopting the odd-
lot exception, the Commission further stated that odd-lot offers are 
required to be extended equally to beneficial holders and record 
holders.10
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    \9\ Release No. 34-19246, 47 FR at 53399 n. 18.
    \10\ Release No. 34-19988, 48 FR at 34252.
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    The ability to participate equally means that beneficial holders 
should have the same access to information about the offer as record 
holders.11 Accordingly, while Rule 13e-4(h)(5) does not contain 
dissemination requirements, an issuer or its agent must take reasonable 
steps to disseminate information about an odd-lot offer to beneficial 
holders in a manner comparable to the dissemination to record holders.
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    \11\ Cf. paragraph (e)(1)(ii) of Rule 13e-4, 17 CFR 240.13e-
4(e)(1)(ii), and paragraph (a)(2) of Rule 14a-7 under the Exchange 
Act, 17 CFR 240.14a-7(a)(2), respectively.
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    The same commenter also suggested excepting issuer tender offers 
made to a class of shareholders owning, in the aggregate, less than 
five percent of the issuer's outstanding securities; this commenter 
also suggested redefining the term ``odd-lot'' to include more than 99 
shares. The Commission believes that the odd-lot exception to Rule 13e-
4 is meant to cover an offer for economically de minimis holdings, 
e.g., an amount of securities for which high transaction costs create a 
disincentive for trading the shares and which also is too small to 
warrant servicing by the issuer. Moreover, increasing the exception's 
threshold to an amount greater than 99 shares would raise various 
concerns under the Rule, including the ``all-holders'' provisions. 
Nevertheless, the Commission recognizes that the odd-lot exception is 
intended to allow issuers to reduce the number of small shareholdings 
where the costs to issuers of servicing small shareholders, and the 
costs to shareholders of selling small holdings, are disproportionate 
to the value of the security. Accordingly, the Commission will 
consider, on a case-by-case basis, issuer offers involving tenders of 
more than 99 shares from each holder, where such offers involve a 
number of securities that represent a de minimis proportion of the 
value of the issuer's outstanding securities.12
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    \12\ The Commission, through its Division of Market Regulation, 
will consider requests regarding such programs. Such requests should 
be directed to the Office of Risk Management and Control, Division 
of Market Regulation, Securities and Exchange Commission, 450 Fifth 
Street, NW., Stop 5-1, Washington, DC 20549 at (202) 942-0772.
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III. Class Exemption From Rule 10b-13 and Temporary Class Exemption 
From Rule 10b-6

    As discussed in the Proposing Release, odd-lot offers also raise 
issues under Rule 10b-13, which prohibits an issuer conducting a cash 
tender or exchange offer from purchasing the same security that is the 
subject of the offer (or any other security which is immediately 
convertible into or exchangeable for such security) otherwise than 
pursuant to the offer. Rule 10b-13 is designed, inter alia, to prevent 
larger shareholders from demanding greater or different consideration 
for the tender of their shares than that which is paid pursuant to the 
tender offer. Larger shareholders are ineligible to participate in odd-
lot offers because, by definition, an odd-lot offer is available only 
to shareholders owning 99 or fewer shares of the issuer's securities. 
Accordingly, the Commission believes that purchases of an issuer's 
securities otherwise than pursuant to an odd-lot offer do not raise the 
concerns that Rule 10b-13 is designed to address.
    The Commission, therefore, hereby grants an exemption from Rule 
10b-13 to permit any issuer or agent acting on behalf of an issuer in 
connection with an odd-lot offer to purchase or arrange to purchase the 
security that is the subject of the offer (or any other security which 
is immediately convertible into or exchangeable for such security) 
otherwise than pursuant to the odd-lot offer from the time that the 
odd-lot offer is publicly announced or otherwise made known to odd-lot 
holders, until the offer's expiration. Among other things, this will 
allow the issuer or its agent to purchase the issuer's securities to 
satisfy requests of odd-lot holders to

[[Page 68589]]

``round-up'' their holdings to 100 shares.
    Also, the Commission today is adopting Regulation M under the 
Exchange Act, the Securities Act of 1933,\13\ and the Investment 
Company Act of 1940,\14\ and is rescinding Rule 10b-6 under the 
Exchange Act, among other rules.\15\ Rule 102 of Regulation M, which 
along with Rule 101 replaces Rule 10b-6, contains an exception that 
permits issuers to purchase odd-lots while engaged in a distribution of 
the same or related securities. This exception allows issuers to 
conduct odd-lot tender offers, including continuous, periodic, or 
extended odd-lot offers, during a distribution of the same or related 
securities. The exception also allows issuers to purchase securities on 
behalf of odd-lot holders who wish to ``round-up'' their holdings to a 
round lot (i.e., 100 shares).\16\ The exceptions for odd-lot 
transactions under Regulation M will accomplish the same relief 
intended by the class exemption from Rule 10b-6 that was discussed in 
the Proposing Release.\17\ The exception for odd-lot transactions from 
Rule 102 of Regulation M, and a similar exception from Rule 101 for 
distribution participants and their affiliated purchasers, will be 
effective as of 60 days from publication of Regulation M in the Federal 
Register.
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    \13\ 15 U.S.C. 77a et seq.
    \14\ 15 U.S.C. 80a-1 et seq.
    \15\ Securities Exchange Act Release No. 38067 (December 20, 
1996).
    \16\ Additionally, the Commission notes that sales of tendered 
odd-lots into the open market are not subject to Rules 101 and 102 
of Regulation M (or Rule 10b-6) where such sales do not satisfy the 
magnitude and special selling efforts and selling methods elements 
of a distribution for purposes of those provisions.
    \17\ Proposing Release, 61 FR at 18307.
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    To accommodate odd-lot offers in the interim, the Commission hereby 
grants an exemption from Rule 10b-6 on a temporary basis to permit an 
issuer, or an agent acting on behalf of the issuer, to bid for or 
purchase odd-lots, or to effect transactions to allow odd-lot holders 
to ``round-up'' their holdings to 100 shares during an odd-lot offer 
conducted pursuant to Rule 13e-4(h)(5), during a distribution for the 
purposes of Rule 10b-6. This class exemption will terminate as of the 
effective date of Regulation M.

IV. Regulatory Flexibility Act Analysis

    The Chairman of the Securities and Exchange Commission certified in 
connection with the Proposing Release that the proposed amendment to 
Rule 13e-4 and the proposed class exemptions from Rules 10b-6 and 10b-
13, if adopted, would not have a significant impact on a substantial 
number of small entities. None of the comments addressed the 
certification.

V. Effects on Competition and Other Findings

    Section 23(a)(2) of the Exchange Act \18\ requires the Commission, 
in adopting rules under the Exchange Act, to consider the anti-
competitive effects of such rules, if any, and to balance any impact 
against regulatory benefits gained in terms of furthering the purposes 
of the Exchange Act. Furthermore, Section 2 of the Securities Act of 
1933 \19\ and Section 3 of the Exchange Act,\20\ as amended by the 
recently enacted National Securities Markets Improvement Act of 1996 
(``Markets Improvement Act''),\21\ provide that whenever the Commission 
is engaged in rulemaking, and is required to consider or determine 
whether an action is necessary or appropriate in the public interest, 
the Commission also shall consider, in addition to the protection of 
investors, whether the action will promote efficiency, competition, and 
capital formation.
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    \18\ 15 U.S.C. 78w(a)(2).
    \19\ 15 U.S.C. 77b.
    \20\ 15 U.S.C. 78c.
    \21\ Pub. L. No. 104-290, Sec. 106, 110 Stat. 3416 (1996).
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    The Commission has considered the amendment to Rule 13e-4 and the 
class exemption from Rule 10b-13 in light of the standards cited in 
Sections 3 and 23(a)(2) of the Exchange Act and believes that, for the 
reasons stated herein, the adoption of the amendment and the granting 
of the class exemption will promote efficiency for issuers conducting 
odd-lot offers, will have no adverse effect on capital formation, and 
will not impose any burden on competition not necessary or appropriate 
in furtherance of the Exchange Act.
    The Commission finds, in accordance with the Administrative 
Procedure Act,\22\ that the adoption of the amendment to Rule 13e-4 and 
the class exemptions from Rules 10b-6 and 10b-13 relieve mandatory 
restrictions and are exemptive in nature. Accordingly, the foregoing 
action becomes effective immediately.
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    \22\ 5 U.S.C. 553(d).
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VI. 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 amends 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.

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 amends 
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, 78f, 78i, 78j, 78k, 78k-1, 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.
* * * * *
    2. Section 240.13e-4 is amended by revising paragraph (h)(5) to 
read as follows:


Sec. 240.13e-4  Tender offers by issuers.

* * * * *
    (h) * * *
    (5) Offers to purchase from security holders who own an aggregate 
of not more than a specified number of shares that is less than one 
hundred: Provided, however, That:
    (i) The offer complies with paragraph (f)(8)(i) of this section 
with respect to security holders who own a number of shares equal to or 
less than the specified number of shares, except that an issuer can 
elect to exclude participants in an issuer's plan, as that term is 
defined in Sec. 242.100 of Regulation M, or to exclude security holders 
who do not own their shares as of a specified date determined by the 
issuer; and
    (ii) The offer complies with paragraph (f)(8)(ii) of this section 
or the consideration paid pursuant to the offer is determined on the 
basis of a uniformly applied formula based on the market price of the 
subject security;
* * * * *
    Dated: December 20, 1996.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-33061 Filed 12-27-96; 8:45 am]
BILLING CODE 8010-01-P