[Federal Register Volume 65, Number 147 (Monday, July 31, 2000)]
[Rules and Regulations]
[Pages 46581-46588]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-19189]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 241 and 271

[Release No. 34-43069; IC-24564]


Commission Guidance on Mini-Tender Offers and Limited Partnership 
Tender Offers

AGENCY: Securities and Exchange Commission.

ACTION: Interpretation.

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SUMMARY: We are publishing our views regarding the following issues: 
the disclosure and dissemination of tender offers that result in the 
bidder holding five percent or less of the outstanding securities of a 
company; and the disclosure for tender offers for limited partnership 
units. This interpretive guidance is intended to help bidders, subject 
companies and others participating in tender offers meet their 
obligations under the applicable statutes and rules, including the 
antifraud provisions.

EFFECTIVE DATE: July 31, 2000.

FOR FURTHER INFORMATION CONTACT: Dennis O. Garris, Chief, or Nicholas 
P. Panos, Special Counsel, Office of

[[Page 46582]]

Mergers and Acquisitions, Division of Corporation Finance at (202) 942-
2920.

SUPPLEMENTARY INFORMATION: We are aware of questions about the 
applicability of the tender offer rules under the Securities Exchange 
Act of 1934 (``Exchange Act'') \1\ to two specific situations: a tender 
offer resulting in ownership of not more than five percent of a 
company's securities (a ``mini-tender offer'') and a tender offer for 
limited partnership units. In the past, the staff has provided guidance 
on a case-by-case basis by responding to inquiries and through the 
review and comment process. This Commission interpretive release 
enhances investor protection by providing guidance in a broader 
context. It first describes the regulatory framework for tender offers 
and then sets forth our views on disclosure, dissemination and other 
obligations involving mini-tender offers and tender offers for limited 
partnership units. By following the guidelines set forth below, 
participants in tender offers will reduce the risk that they will 
violate the antifraud provisions of the statute and rules. However, in 
every instance, the determination will depend on the particular facts.
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    \1\ 15 U.S.C. 78a et seq.
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I. Tender Offer Regulatory Scheme

    For purposes of determining whether our tender offer rules apply to 
a particular acquisition program, the threshold question is whether the 
transaction constitutes a ``tender offer'' within the scope of the 
Williams Act.\2\ While the term ``tender offer'' has never been defined 
in any statutory provision or rule, the courts generally have applied 
an eight-factor test in determining whether a particular acquisition 
program constitutes a tender offer.\3\ It is not necessary that all 
eight factors be present to conclude that the acquisition program is a 
tender offer.\4\ Both mini-tender offers and offers for limited 
partnership units are tender offers subject to our rules.
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    \2\ The Williams Act added a number of provisions to Sections 13 
and 14 of the Exchange Act in 1968 addressing beneficial ownership 
disclosure, tender offers and changes in control, including Sections 
13(d) and 13(e) [15 U.S.C. 78m(d)-(e)]; and Sections 14(d) and 14(e) 
[15 U.S.C. 78n(d)-(e)].
    \3\ These factors include whether the transaction: (1) Involves 
an active and widespread solicitation of security holders; (2) 
involves a solicitation for a substantial percentage of the issuer's 
stock; (3) offers a premium over the market price; (4) contains 
terms that are fixed as opposed to flexible; (5) is conditioned upon 
the tender of a fixed number of securities; (6) is open for a 
limited period of time; (7) pressures security holders to respond; 
and (8) would result in the bidder acquiring a substantial amount of 
securities. SEC v. Carter Hawley Hale Stores, Inc., 760 F.2d 945 
(9th Cir. 1985); Wellman v. Dickinson, 475 F.Supp. 783 (S.D.N.Y. 
1979). But see Hanson Trust plc v. SCM Corp., 774 F.2d 47 (2d Cir. 
1985) (relevant determination is whether sellers need the 
protections of the tender offer rules).
    \4\ Wellman at 824.
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    Mini-tender offers generally are structured to result in ownership 
of not more than five percent of a class of securities to avoid the 
filing, disclosure and procedural requirements of Section 14(d) of the 
Exchange Act and Regulation 14D.\5\ While Congress limited the 
application of Section 14(d) to tender offers that would result in 
ownership of more than five percent of a class of securities, Section 
14(e) has no similar limitation. Security holders faced with a mini-
tender offer therefore are entitled to the protections of Section 14(e) 
and Regulation 14E.\6\
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    \5\ 17 CFR 240.14d-1 et seq.
    \6\ 17 CFR 240.14e-1 et seq.; see also Exchange Act Release No. 
16384 (November 29, 1979) [44 FR 70326], n.7 and related text.
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    Federal tender offer regulation is based on three statutory 
sections of the Exchange Act and our regulations adopted under those 
sections. The applicability of each section and its underlying 
regulations depends on: (i) The party conducting the offers, (ii) the 
nature of the subject security, (iii) whether the security is 
registered under Section 12 of the Exchange Act,\7\ and (iv) whether or 
not the bidder would own more than five percent of the securities after 
the tender offer.
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    \7\ 15 U.S.C. 78l.
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A. Section 14(d) and Regulation 14D

    Section 14(d) of the Exchange Act and Regulation 14D apply to all 
tender offers for Exchange Act registered equity securities made by 
parties other than the target (or affiliates of the target), so long as 
upon consummation of the tender offer the bidder would beneficially own 
more than five percent of the class of securities subject to the 
offer.\8\ A bidder must include any shares it owns before the 
commencement of the tender offer in calculating the five percent 
amount. For example, if a bidder owns four percent of the target's 
securities before it commences the tender offer, it could not make an 
offer for more than one percent of the target's securities without 
triggering Section 14(d) and Regulation 14D requirements.\9\
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    \8\ Section 14(d)(1) of the Exchange Act [15 U.S.C. 78n(d)(1)] 
and Rule 14d-1(a) [17 CFR 240.14d-1(a)].
    \9\ If the bidder acquires no more than two percent over a 12-
month period, however, Regulation 14D will not be triggered 
notwithstanding the amount the bidder owned before the commencement 
of the tender offer. Section 14(d)(8) of the Exchange Act [15 U.S.C. 
78n(d)(8)].
    \10\ Schedule TO [17 CFR 240.14d-100].
    \11\ Rule 14d-7 [17 CFR 240.14d-7].
    \12\ Rule 14d-8 [17 CFR 240.14d-8].
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    Regulation 14D requires the bidder to make specific disclosures to 
security holders and mandates certain procedural protections. The 
disclosure focuses on the terms of the offer and information about the 
bidder.\10\ The procedural protections include the right to withdraw 
tendered securities while the offer remains open,\11\ the right to have 
tendered securities accepted on a pro rata basis \12\ throughout the 
term of the offer if the offer is for less than all of the securities, 
and the requirement that all security holders of the subject class of 
securities be treated equally.\13\ Also, Regulation 14D requires the 
bidder to file its offering documents and other information with the 
Commission\14\ and hand deliver a copy to the target and any competing 
bidders.\15\
    Regulation 14D also requires the target to send to security holders 
specific disclosure about its recommendation, file a Schedule 14D-9 
containing that disclosure, and send the Schedule 14D-9 to the 
bidder.\16\

B. Rule 13e-4

    Rule 13e-4,\17\ promulgated under Section 13(e) of the Exchange 
Act, applies to all tender offers by the issuer for its equity 
securities when the issuer has a class of equity securities registered 
under Section 12 or when the issuer files periodic reports under 
Section 15(d) of the Exchange Act.\18\ Rule 13e-4 also applies to a 
tender offer by an affiliate of the issuer for the issuer's securities 
where the tender offer is not subject to Section 14(d). Rule 13e-4 is 
different from Regulation 14D because it applies even if the class of 
securities sought in the offer is not registered under Section 12. 
Also, Rule 13e-4 applies regardless of the amount of securities sought 
in the offer. Rule 13e-4 provides for disclosure, filing and procedural 
safeguards that generally mirror those provided under Section 14(d) and 
Regulation 14D.

C. Section 14(e) and Regulation 14E

    Section 14(e) of the Exchange Act is the antifraud provision for 
all tender offers, including mini-tender offers and tender offers under 
Regulation 14D and Rule 13e-4.\19\ Section 14(e) prohibits

[[Page 46583]]

fraudulent, deceptive, and manipulative acts in connection with a 
tender offer. Regulation 14E provides the basic procedural protections 
for all tender offers, including mini-tender offers and tender offers 
under Regulation 14D and Rule 13e-4.
    Section 14(e) and Regulation 14E apply to all tender offers, even 
where the offer is for less than five percent of the outstanding 
securities and offers where the bidder would not own more than five 
percent after the consummation of the offer. Section 14(e) and 
Regulation 14E apply to tender offers for any type of security 
(including debt). These provisions apply both to registered and 
unregistered securities (including securities issued by a private 
company), except exempt securities under the Exchange Act, such as 
municipal bonds.
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    \13\ Rule 14d-10 [17 CFR 240.14d-10]. This rule requires that 
the tender offer be made to all security holders and that the 
highest consideration paid to any security holder be paid to all 
security holders.
    \14\ Rule 14d-3(a)(1) [17 CFR 240.14d-3(a)(1)] and Schedule TO.
    \15\ Rule 14d-3(a)(2) [17 CFR 240.14d-3(a)(2)].
    \16\ Rule 14d-9 [17 CFR 240.14d-9] and Schedule 14D-9 [17 CFR 
240.14d-101]. Also see the discussion of Rule 14e-2 in Section I.C 
below.
    \17\ 17 CFR 240.13e-4.
    \18\ 15 U.S.C. 78o(d).
    \19\ The antifraud provisions of Section 10(b) of the Exchange 
Act and Rule 10b-5 also apply to all tender offers, including mini-
tender offers. 15 U.S.C. 78j; 17 CFR 240.10b-5.
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    Regulation 14E requires that a tender offer be open for at least 20 
business days,\20\ that the offer remain open for 10 business days 
following a change in the offering price or the percentage of 
securities being sought,\21\ and that the bidder promptly pay for or 
return securities when the tender offer expires.\22\ Regulation 14E 
also requires the target company to state its position about the offer 
within 10 business days after the offer begins.\23\ The target must 
state either that it recommends that its security holders accept or 
reject the offer; that it expresses no opinion and remains neutral 
toward the offer; or that it is unable to take a position on the 
offer.\24\ With a tender offer not subject to Regulation 14D, however, 
the bidder is not required to send its offer to the target. Therefore, 
the target may not know about the tender offer. The target should take 
all steps to comply with its obligations under Regulation 14E within 10 
business days or as soon as possible upon becoming aware of the offer.
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    \20\ Rule 14e-1(a) [17 CFR 240.14e-1(a)].
    \21\ Rule 14e-1(b) [17 CFR 240.14e-1(b)].
    \22\ Rule 14e-1(c) [17 CFR 240.14e-1(c)].
    \23\ Rule 14e-2 [17 CFR 240.14e-2].
    \24\ Rule 14e-2(a) [17 CFR 240.14e-2(a)].
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II. Mini-Tender Offers

A. Background

    We have observed an increase in tender offers that would result in 
the bidder holding not more than five percent of a company's 
securities. These so-called ``mini-tender offers'' are generally 
structured to avoid the filing, disclosure and procedural requirements 
of Section 14(d) and Regulation 14D. These offers are subject only to 
the provisions of Section 14(e) and Regulation 14E. Mini-tender offers 
have been common in the limited partnership area for several years. 
Bidders now make mini-tender offers for corporate securities and shares 
of closed-end funds that are traded on exchanges or quoted on the 
National Association of Securities Dealers Automated Quotation system 
(``Nasdaq'').
    We are concerned that the substance of the disclosure in many of 
these offers is not adequate under Section 14(e) and Regulation 14E. We 
also are concerned that bidders are not adequately disseminating the 
disclosure to security holders. Further, we are concerned that many 
bidders are not paying for securities promptly at the expiration of the 
tender offer, as required by Regulation 14E. Recently, we have brought 
enforcement actions that address some concerns we have with mini-tender 
offers.\25\
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    \25\ In the Matter of IG Holdings, Inc., Exchange Act Release 
No. 41759 (August 19, 1999); In the Matter of Peachtree Partners, 
Exchange Act Release No. 41760 (August 19, 1999); In the Matter of 
City Investment Group, LLC, Exchange Act Release No. 42919 (June 12, 
2000).
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    The offering documents in mini-tender offers frequently are very 
brief and contain very little information. Often, these mini-tender 
offers are made at a price below the current market price.\26\ However, 
frequently there is no disclosure of this fact in the offering 
documents or in any disclosure that the security holders ultimately 
receive. This lack of disclosure can mislead security holders because 
most tender offers, especially third-party offers, historically have 
been made at prices that are at a premium to the current market price. 
Many investors could reasonably assume that a mini-tender offer also 
involves a premium to market price. However, because of the lack of 
disclosure given to shareholders, it is often difficult for 
shareholders to determine the actual price that will be paid in the 
offer and whether it is below the market price.
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    \26\ In the case of an illiquid security, such as a limited 
partnership unit, the offer is frequently made at less than net 
asset value.
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    Some bidders have devised schemes to confuse security holders about 
the actual offer price. For example, we have seen situations where a 
bidder makes an offer at a price above market price but never intends 
to purchase the shares in the offer at a premium. In these cases, the 
bidder holds the shares tendered and continuously extends the offer 
until the market price rises above the offer price. During this time, 
security holders generally are not permitted to withdraw their 
securities from the offer. Then the bidder purchases the shares at the 
offer price. In these situations, the bidder does not disclose this 
plan to security holders.\27\ We believe these practices are 
``fraudulent, deceptive or manipulative practices'' within the meaning 
of Section 14(e), and we recently brought an enforcement action to stop 
such practices.\28\
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    \27\ See Section II.B.
    \28\ See City Investment Group.
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    We have seen other situations where a bidder does not make it clear 
that certain fees or expenses will be deducted from the offer price. 
After deducting the amount of the fees, the offer price is often less 
than the market price. These fees often are disclosed only in the fine 
print in the documents that the security holders send back to the 
bidder to accept the offer, but not in the disclosure document 
itself.\29\ We believe that these disclosure practices may, under 
certain circumstances, be ``fraudulent, deceptive or manipulative 
practices'' within the meaning of Section 14(e).
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    \29\ See Section III.B.
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    Disclosure in mini-tender offers is usually deficient in other 
respects that may harm security holders. For instance, since mini-
tender offers are not subject to the specific requirements of 
Regulation 14D, these offers are generally structured as first-come, 
first-served offers without withdrawal rights and prorationing. This 
structure pressures security holders into tendering quickly. Once they 
have tendered, they are locked into their decision. Security holders 
are then unable to take advantage of new information or opportunities 
that may become available during the course of the offer, such as the 
opportunity to sell their stock outside the tender offer at a higher 
market price, the target's recommendation, or a higher offer. It is not 
typical for this aspect of a mini-tender offer to be disclosed.
    This lack of disclosure is compounded by the fact that some bidders 
do not adequately disseminate the tender offer disclosure to security 
holders. Often, bidders in mini-tender offers will deliver the offering 
documents to The Depository Trust Company (``DTC'').\30\ These bidders 
rely on DTC to forward a notice of the offer electronically to DTC's 
participant broker-dealers and banks. In some cases, the participants 
then send information to their customers for whom the

[[Page 46584]]

participants hold securities in street name. Generally, bidders make no 
effort to send offering documents to security holders who hold their 
securities in their own name, rather than through brokers or banks in 
street name.
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    \30\ DTC is a clearing agency registered with the Commission 
under Section 17A of the Exchange Act [15 U.S.C. 78q-1] that holds 
securities in custody on behalf of broker-dealers, banks and others. 
In this capacity, DTC is the depository for more than 90% of the 
securities held in the United States.
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    The information sent by the broker-dealer or bank participants to 
customers often is limited to notice of the tender offer, the 
expiration date, and, in some cases, the price. The participants do not 
always request copies of the offering documents from DTC. Even if the 
participants do obtain the offering documents, they may decide not to 
send them to their customers. Therefore, security holders may make 
investment decisions without receiving material information about the 
tender offer.
    In mini-tender offers, bidders often wait 30 days or more after the 
offers expire to pay for securities. During this period, the bidder 
sells the securities it obtains in the tender offer at the market 
price, which may well be higher than the price the bidder paid in the 
offer. The bidder then uses the proceeds from the sales in the market 
to pay security holders who tendered into the offer. By conducting the 
offer in this manner, a bidder generally is not at risk. However, 
security holders are harmed because their funds are withheld for a 
significant amount of time. This practice is inconsistent with the 
prompt payment requirements of Rule 14e-1(c).

B. Disclosure Guidelines

    As discussed above, we believe security holders need better and 
clearer disclosure in mini-tender offers. To avoid ``fraudulent, 
deceptive or manipulative practices'' within the meaning of Section 
14(e), we recommend that bidders in mini-tender offers consider the 
following issues in crafting disclosures in the tender offer documents 
that are provided to security holders.\31\
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    \31\ If the mini-tender offer is for a limited partnership, the 
bidder also must consider the information specified below in Secton 
III. Further, guidance provided in this section also is applicable 
to tender offers that are subject to Section 14(d) and Regulation 
14D.
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     Offer Price: Price information is material to security 
holders. Because tender offers typically are made at prices that are at 
a premium to market, investors could reasonably assume that a mini-
tender offer also includes a premium. Bidders should disclose clearly 
if the offer price is below the market price.
    If the price offered is below the market price when the offer 
commences, the disclosure should clearly explain this prominently in 
the document. Also, the explanation should include the market price (or 
the bid and ask prices) on the day of commencement, or the most recent 
practicable date. For closed-end funds, the disclosure also should 
include the net asset value on the date the offer commences, or the 
most recent practicable date. If there is no liquid market for the 
securities, the bidder should disclose, if known, the latest price at 
which the security sold, including the date of sale, or the latest bid 
and ask prices.
    Some mini-tender offers have been made at, or slightly above, the 
market price of the security. The offer is then repeatedly extended 
until the market price rises above the offer price. These offers 
generally do not have withdrawal rights. The bidder then purchases the 
shares below the market price. If the bidder intended never to purchase 
the shares unless the market price rose above the offer price, and did 
not disclose this intent, we believe that this would be a ``fraudulent, 
deceptive or manipulative practice'' within the meaning of Section 
14(e).\32\
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    \32\ See City Investment Group.
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     Price Changes: We believe that a bidder's intent to reduce 
the offering price based on distributions made to security holders by 
the target company and fees imposed by the bidder is material 
information. In describing the offer price, the bidder should disclose, 
if applicable, that the price may be reduced by any distributions or 
fees and the amount, if known. If the bidder changes the price, the 
tender offer would need to be extended for 10 business days as provided 
by Rule 14e-1(b).
     Withdrawal Rights: The ability to withdraw a tender while 
the offer is open can influence an investor's decision whether to 
tender. The bidder should disclose clearly whether security holders 
have the right to withdraw the shares they tendered during the offer. 
If no withdrawal rights exist, the disclosure should indicate that 
security holders who tender their shares cannot withdraw their shares. 
The disclosure should also clearly state, if applicable, that if the 
bidder extends the offer, the shares tendered before the extension 
still cannot be withdrawn and may be held through the end of the offer 
until payment. If withdrawal rights do exist, the disclosure should 
explain fully the procedures for withdrawing tendered shares.
     Pro Rata Acceptance: A pro rata provision has a direct 
bearing on the amount of time available for an investment decision. If 
no pro rata provision exists, the offer can, in effect, be open for 
less than 20 business days because shares will be purchased on a first 
come, first served basis. The bidder should disclose clearly whether 
tendered securities will be accepted on a pro rata basis if the offer 
is oversubscribed. If shares will not be accepted on a pro rata basis, 
the disclosure should describe the effect on security holders.
     Target Recommendation: Security holders should be advised, 
before an investment decision is made, that additional, material 
information will come from management of the target company. This 
disclosure is especially important in instances where withdrawal rights 
do not exist. The bidder should disclose that if the target is aware of 
the offer, the target is required to make a recommendation to security 
holders regarding the offer within 10 business days of commencement. We 
encourage the bidder to send the offering document to the target at the 
commencement of the tender offer so the target can comply with its 
obligation under Rule 14e-2 to make a recommendation regarding the 
tender offer.
     Identity of Bidder: Identification of the bidder provides 
security holders with insight regarding financial resources, capacity 
to pay for tendered securities, and historic business practices. The 
bidder should completely and accurately disclose its identity, 
including control persons of the bidder and promoters. For example, it 
may be meaningful to disclose the controlling security holders, 
executive officers and directors of a corporate bidder, or the general 
partner (and its control persons) of a partnership bidder. The bidder 
also should disclose any affiliation between the target and the bidder.
     Plans or Proposals: In deciding whether to tender, it may 
be material to know whether the bidder intends to continue the 
acquisition program at some future point. The bidder should disclose 
its plans or proposals regarding future tender offers of the securities 
of the same target.
     Ability to Finance Offer: Security holders need to know 
whether the bidder has the ability to buy the securities. The bidder 
should disclose whether it has the funds necessary to consummate the 
offer. If the bidder does not have the financing for the offer (e.g., 
cash or a commitment letter from a bank) at the commencement of the 
offer, the bidder should clearly state it cannot buy the securities 
until it obtains financing.
    Bidders in mini-tender offers often do not have the financing 
necessary to purchase the shares in the offer. In many cases they 
merely accept the

[[Page 46585]]

shares in the offer and then attempt to sell those shares in the market 
and use the proceeds to pay the security holders who tendered. When the 
offer is made at a premium, bidders sometimes improperly hold the 
shares and wait for the market price to rise above the offer price 
before they attempt to sell the shares in the market. This plan is not 
disclosed to security holders. We believe this method of financing 
tender offers is inappropriate and may be a ``fraudulent, deceptive or 
manipulative practice'' within the meaning of Section 14(e).\33\ Rule 
14e-8(c) expressly prohibits a person from publicly announcing a tender 
offer if that person ``does not have the reasonable belief that the 
person will have the means to purchase the securities to complete the 
offer.'' \34\ Furthermore, this method of financing does not comply 
with prompt payment as required by Rule 14e-1(c).\35\
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    \33\ See City Investment Group.
    \34\ See Securities Act Release No. 7760, Section II.D.1. 
(October 22, 1999) [64 FR 61408].
    \35\ See Section II.D. of this release.
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     Conditions to the Offer: It is important for security 
holders to be able to evaluate the genuineness of the offer. We believe 
therefore that a tender offer can be subject to conditions only where 
the conditions are based on objective criteria, and the conditions are 
not within the bidder's control. If the conditions are not objective 
and are within the bidder's control (e.g., the offer may be terminated 
for any reason or may be extended indefinitely), we believe the offer 
would be illusory and may constitute a ``fraudulent, deceptive or 
manipulative'' practice within the meaning of Section 14(e). We believe 
the bidder should disclose all material conditions to the offer.
     Extensions of the Offer: We believe that a bidder's 
ability and intent to extend the offer period is material information. 
This information is particularly important when there are no withdrawal 
rights. Security holders will be unable to withdraw shares tendered 
even if the offer is extended and shares are locked up for an 
unexpectedly long time. The initial disclosure materials should state 
whether the offer could be extended, whether the bidder intends to 
extend the offer, under what circumstances the bidder would extend, 
and, if the bidder intends to extend, the anticipated length of any 
extension. If the offer is extended after the initial disclosure 
materials are provided to security holders, the bidder should publicly 
announce this fact.

C. Dissemination Guidelines

    In enacting the Williams Act, Congress stressed the importance of 
not merely specifying disclosure requirements but also ensuring that 
information is communicated to security holders.\36\ The bidder in a 
tender offer must make reasonable efforts to disseminate material 
information about the tender offer to security holders. The failure to 
disseminate the disclosure frustrates the purpose of the tender offer 
rules.
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    \36\ ``[T]he legislative history and case law recognize that 
dissemination as indicated in the term `published, sent or given to 
security holders' is part of the disclosure process of the Williams 
Act.'' Exchange Act Release No. 15548 (February 5, 1979) [44 FR 
9956]. In addressing the importance of dissemination to our 
disclosure rules, Chairman Manuel Cohen in testimony emphasized, 
``disclosure is useful if it reaches the people for whom it is 
intended.'' Hearings before the Subcommittee on Banking and 
Currency, United States Senate, March 21, 1967, p. 178.
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    Rule 14e-1(a) states that a tender offer must be held open for 20 
business days from the date the offer is first ``published or sent to 
security holders.'' \37\ Section 14(e) and Regulation 14E do not state 
how tender offers should be ``published or sent to security holders.'' 
However, Rule 14d-4,\38\ which applies only to tender offers subject to 
Section 14(d) and Regulation 14D, provides guidance in this area. Rule 
14d-4 sets out three alternative methods of dissemination for cash 
tender offers. The purpose of Rule 14d-4 is to add content and clarity 
to the term ``published or sent or given'' in Section 14(d)(1).\39\ 
Dissemination under Rule 14d-4 is deemed ``published or sent or given 
to security holders'' for purposes of Section 14(d)(1). These 
dissemination methods are as follows:
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    \37\ A primary reason for adopting a mandatory minimum offering 
period under Section 14(e) was to allow sufficient time for security 
holders to receive the offering materials. Exchange Act Release No. 
16384 (November 29, 1979) [44 FR 70326].
    \38\ 17 CFR 240.14d-4.
    \39\ Exchange Act Release No. 15548 (February 5, 1979) [44 FR 
9956].
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    1. Publishing the offering document in a newspaper;
    2. Publishing a summary advertisement containing certain 
information in a newspaper and mailing to security holders a copy of 
the full offering document upon request; or
    3. Mailing the offering document to security holders using a 
security holder list.
    Rule 14d-4 also provides that these methods of dissemination are 
not exclusive or mandatory.
    Depending on the facts and circumstances, adequate publication of a 
tender offer under Rule 14d-4 may require publication of the offering 
document in a newspaper with a national circulation or may only require 
publication in a newspaper with metropolitan or regional 
circulation.\40\ Publication in all editions of a daily newspaper with 
a national circulation will always constitute adequate publication for 
purposes of Rule 14d-4.\41\
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    \40\ Rule 14d-4(b) [17 CFR 240.14d-4(b)].
    \41\ Id.
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    We believe that dissemination of material information using 
mechanisms the bidder knows or is reckless in not knowing are 
inadequate would be a ``fraudulent, deceptive or manipulative'' 
practice within the meaning of Section 14(e) and Rule 14e-1. For 
example, we believe that merely sending the offering documents to DTC 
is not an adequate means of communicating the information to security 
holders. DTC is not in business to, and in fact does not disseminate 
the tender offer materials to security holders. DTC sends only limited 
notice information to its participants about tender offers. Broker-
dealers and banks have taken a variety of approaches in dealing with 
mini-tender offer materials. As a result, the bidder has no reasonable 
assurance that dissemination to DTC and then through broker-dealers or 
banks will satisfy the requirements of Section 14(e). Further, many 
bidders have refused to pay broker-dealers and banks the costs of 
forwarding information to security holders. Consequently, the tender 
offer document is not consistently reaching security holders to whom 
the offer is made. It is the bidder's obligation to assure that 
security holders get material information about the tender offer. If a 
bidder adequately disseminates the information to security holders 
through another method, such as one of the methods provided in Rule 
14d-4, the bidder also may send the information to DTC for forwarding 
to its participants.
    Also, we believe that only posting the information on a web site 
would not be adequate dissemination.\42\ Not all security holders have 
access to the Internet. By merely posting a tender offer on a web site, 
the bidder does not adequately publish the offer, nor is the offer 
deemed sent to security holders.\43\
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    \42\ Securities Act Release No. 7760, Section II.D.2.
    \43\ See Securities Act Release No. 7233 (October 6, 1995) [60 
FR 53458] for our guidelines on the use of electronic media for 
delivery of information.
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    If a bidder makes a material change to the tender offer, the bidder 
must disseminate the changes in a manner reasonably likely to inform 
security holders of the change. The bidder generally should disseminate 
the change

[[Page 46586]]

in the same manner as it disseminated the original offer.

D. Prompt Payment

    Rule 14e-1(c) requires the bidder to pay the consideration offered 
or return the tendered securities promptly after the termination or 
withdrawal of the tender offer. The rule does not define ``promptly.'' 
However, we have stated that this standard may be determined by the 
practices of the financial community, including current settlement 
practices.\44\ In most cases, the current settlement practice is for 
the payment of funds and delivery of securities no later than the third 
business day after the date of the transaction.\45\ We view payment 
within these time periods as ``prompt'' under Rule 14e-1(c). We 
understand that some bidders have waited up to 30 days to pay tendering 
security holders. We believe that this delay in payment is inconsistent 
with the prompt payment requirements of Rule 14e-1(c).
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    \44\ Exchange Act Release No. 16384 (November 29, 1979) [44 FR 
70326].
    \45\ Rule 15c6-1(a) [17 CFR 240.15c6-1(a)]. Certain exceptions 
apply, including transactions involving limited partnership 
interests that are not listed on a securities exchange or quoted on 
an automated quotation system.
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    Where the target is a limited partnership, and its securities are 
not listed on an exchange or quoted on an interdealer quotation system, 
it may not be possible to pay within three days, due to delays in 
transferring the limited partnership interests. Where the bidder is a 
third party and, therefore, cannot control the transfer and settlement 
process, we would not consider a reasonable extension of the three- to 
five-day period to be a violation of Rule 14e-1(c). The offer should 
disclose the anticipated time frame for settlement if it is expected to 
be delayed for these reasons. However, where the bidder is an affiliate 
and is able to control the settlement process, payment should not be 
delayed for these reasons and should be made as soon as possible.

III. Tender Offers for Limited Partnership Units

A. Background

    Tender offers for limited partnership units, whether or not the 
bidder is affiliated with the target, raise significant disclosure 
issues due to the nature of limited partnership investments. Limited 
partnership units may be difficult to sell, and general partners face 
conflicts of interest in deciding when and whether to liquidate the 
partnership. These issues are particularly important in the limited 
partnership context since many investors in limited partnerships are 
unsophisticated retail investors.
    In most cases, the price offered in a tender offer for limited 
partnership units is significantly lower than the original purchase 
price. It may also be below any recent appraisals of the partnership's 
assets. The tender offer may be the only way limited partners can sell 
their units because the markets for many limited partnership units are 
generally illiquid. Even when markets do exist, the limited partnership 
units usually trade at a significant discount to their appraised value.
    Further, in many partnerships, the general partner has not 
liquidated the partnership within the time frame disclosed in the 
original offering of the units. Limited partners must, therefore, hold 
their investment longer than originally anticipated. General partners 
have a conflict of interest in determining whether to liquidate the 
partnership since, upon liquidation, they would no longer receive 
management and other fees associated with continuing the partnership.

B. Disclosure Guidelines for Limited Partnership Tender Offers

    In order to avoid misleading investors,\46\ we believe that bidders 
should consider disclosing the particular risks and conflicts of 
interest that arise in tender offers for limited partnership units. 
Cash tender offers do not always fall within our roll-up rules,\47\ and 
partial offers usually do not trigger the going-private rule.\48\ 
However, in the course of review and comment, the Commission staff 
often draws upon these rules in assessing the adequacy of the 
disclosure furnished to limited partners. As we said in 1991, in the 
release adopting the roll-up disclosure rules, these provisions must be 
considered and applied to a transaction that is not a roll-up within 
the rules, but raises the same concerns as a roll-up, in order to 
comply with the antifraud provisions.\49\ Since bidders must not 
violate the antifraud provisions, we believe that all tender offers for 
limited partnership units should consider making these disclosures, 
whether subject to Regulation 14D or only Regulation 14E, as is the 
case for mini-tender offers.\50\
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    \46\ Section 14(e) of the Exchange Act and Rule 14e-3 [17 CFR 
240.14e-3]; Section 10(b) of the Exchange Act and Rule 10b-5.
    \47\ Section 14(h) of the Exchange Act [15 U.S.C. 78n(h)] and 
the 900 series of Regulation S-K [17 CFR 229.900 et seq.]. The roll-
up rules may, however, apply to third party exchange offers.
    \48\ 48 Rule 13e-3 [17 CFR 240.13e-3].
    \49\ 49 Securities Act Release No. 6922 (October 30, 1991) [56 
FR 57237].
    \50\ 50 The guidance in Section II also applies to limited 
partnership tender offers.
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    The following disclosure guidelines are drawn from the releases 
discussed above regarding limited partnership offerings and roll-ups, 
as well as the Division of Corporation Finance staff's practices in 
issuing comments on limited partnership tender offer filings.\51\
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    \51\ In addition, the Division staff has provided public 
guidance in this area for several years in its ``Current Issues and 
Rulemaking Projects'' outline. This outline is available on our web 
site, www.sec.gov, and may be located at the icon ``Current SEC 
Rulemaking'' under the topic heading Other Commission Notices and 
Information.
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1. Bidder Disclosure Guidelines

    Bidders must provide disclosure that is balanced so as not to be 
misleading. When determining the adequacy of disclosure, the key focus 
is the materiality of the information to security holders. If the 
disclosure document is lengthy, the disclosure should include a table 
of contents. All disclosure should be prepared in plain English.\52\ To 
avoid misleading security holders, we recommend that bidders consider 
the following issues in crafting disclosures in limited partnership 
tender offer documents provided to security holders.
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    \52\ These requirements are contained in our release regarding 
the disclosure requirements for limited partnerships (Securities Act 
Release No. 6900 (June 17, 1991) [56 FR 28979]) and roll-ups 
(Securities Act Release No. 6922 (October 30, 1991) [56 FR 57237]).
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     Risk Factors: The offering document should prominently 
include a description of the risks of the transaction. These risk 
factors should be presented clearly and concisely, for example in 
bullet form. The risk factors should disclose any valuations (e.g., 
market price, net asset value) that are higher than the offering price.
     Affiliated Bidder: Because of the potential conflict of 
interest, the bidder should disclose if it is affiliated with the 
target, describing the affiliation.
     Conflicts of Interest: It is important for security 
holders assessing the merits of an offer to know whether the bidder 
lacks independence in structuring and negotiating the offer's terms. If 
the bidder is affiliated with the target, it should disclose the 
benefits of the transaction to the bidder and the reasons for 
conducting the tender offer versus liquidating the partnership. If 
known, the bidder should also disclose the anticipated holding period 
of the assets as described in the original offering documents. The 
focus should be on the anticipated holding period,

[[Page 46587]]

not the legal termination date of the partnership.
     Market Price: Secondary market sales price information is 
material because an investment decision can be based, in whole or in 
part, upon the comparison between historical or currently reported 
values and the consideration being offered. The bidder should disclose 
the prices at which recent sales have been made, to the extent known or 
reasonably available, even when there is no established market.
     Method of Determining the Offer Price: Security holders 
need to know what valuation methodologies were used in deciding the 
amount of consideration offered. The bidder should summarize how the 
offer price was determined. If the bidder prepared a valuation for the 
partnership, it should disclose the value along with the basis for the 
value. If the bidder decided not to perform a valuation analysis, 
investors may want to know why. The bidder should disclose any 
liquidation value that was calculated.
     Third Party Reports: General partners sometimes have 
engineering, property valuation, or other reports about the underlying 
assets or asset value of the partnership. Investors may find this 
information useful in evaluating the price they are offered. The bidder 
should summarize any report received from a third party that is 
materially related to the transaction. It should also disclose the 
identity of the third party that prepared the report. In addition, it 
should file the report as an exhibit to the Schedule TO, if a Schedule 
TO is required to be filed.
     Valuations by the General Partner: General partners are in 
the best position to know the value of the partnership assets. The 
bidder should disclose any valuations or projections prepared by the 
general partner or its affiliates and obtained by the bidder that are 
materially related to the transaction.
     Purpose and Plans: A bidder's intention to conduct 
successive tender offers or execute additional market purchases upon 
consummation of the current offer can influence a security holder's 
investment decision. The bidder should disclose the purpose of the 
offer, the bidder's plans for the issuer, and whether or not the bidder 
intends to continue to acquire units in the future until control is 
obtained.
     Property/Business Disclosure: Property/business 
information provides security holders with basic information concerning 
the partnership's core operations and industry, as well as partnership, 
profit potential. In real estate partnerships, the bidder should 
provide disclosure similar to that required by Items 14 and 15 of Form 
S-11 (e.g., occupancy rate, location, average rental per square 
foot).\53\ In other partnerships, the bidder should disclose comparable 
information specific to that industry. An unaffiliated bidder need only 
provide information that is otherwise publicly available unless it has 
received non-public information from the target, in which case the non-
public information also would need to be disclosed, if material.
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    \53\ 17 CFR 239.18.
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     Financial Information: Because limited partnerships do not 
hold annual meetings, the proxy rules do not require them to send the 
annual report to security holders that contains financial 
statements.\54\ Security holders, as a result, may not otherwise have 
material financial information regarding the partnership's operating 
performance. The bidder should disclose, to the extent known, financial 
information about the target similar to that required by Item 301 of 
Regulation S-K (selected financial data).\55\ If the partnership is a 
public reporting partnership, the information can be obtained from the 
most recent Form 10-K.\56\ A non-affiliated bidder may disclose the 
extent of its due diligence with respect to such information if taken 
from the target's Form 10-K.
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    \54\ Rule 14a-6 [17 CFR 240.14a-6] provides that a proxy or 
information statement relating to the election of directors must be 
accompanied or preceded by an annual report to security holders.
    \55\ 17 CFR 229.301.
    \56\ 17 CFR 249.310.
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     Tax Consequences: One of the primary investment objectives 
of those who invest in limited partnerships is often favorable tax 
treatment. The bidder should disclose the tax consequences and any 
limitations on transfers in order to preserve favorable tax status.
     Transfer or Processing Fees: General partners frequently 
charge a fee to investors for transferring ownership interests on the 
books of the partnership when investors sell their interests to third 
parties. In tender offers by affiliates of the partnership, the general 
partner typically waives the fee. These fees can be significant in 
relation to the amount of the sales price. The fees may be charged on a 
per unit basis or one fee per investor for as many units that the 
investor sells. The bidder should disclose the amount of the transfer 
fees and whether the fees are charged on a per unit basis or per 
investor basis. The bidder also should disclose whether it intends to 
subtract the amount of these fees from the proceeds to be paid in the 
offer.
     Price Reductions due to Distributions: We believe that a 
bidder's intent to reduce the offering price by any cash or other 
distributions to security holders made by the target company is 
material information. In describing the offer price, the bidder should 
disclose, if applicable, that the price may be reduced by any 
distributions and the amount, if known. If a distribution occurs and 
the price is reduced, the tender offer would need to be extended for 10 
business days as provided by Rule 14e-1(b).

2. Target Disclosure Guidelines

    The general partner has an obligation under Rule 14e-2 to respond 
to an offer, stating the reasons for its position, within 10 days of 
commencement of the offer. To avoid misleading security holders, we 
recommend that targets consider the following issues in crafting 
disclosures in the tender offer documents that are provided to security 
holders:
     Conflicts of Interest: It is important for security 
holders considering the target's recommendation to know what conflicts 
of interest could affect that recommendation. The target should 
disclose the conflicts arising in making the recommendation whether or 
not to tender (e.g., interest in recommending against the offer in 
order to continue to collect management fees). It also should disclose, 
if true, why the partnership is not being liquidated in accordance with 
the terms in the original offering document.
     Valuations by the General Partner: The target should 
disclose any valuations prepared by the general partner or its 
affiliates that are materially related to the transaction. The target 
also should disclose the basis for the valuations.
     Third Party Reports: The target should summarize any 
report received from a third party that is materially related to the 
transaction, and disclose the identity of the third party preparer. In 
addition, the target should file the report as an exhibit to the 
Schedule 14D-9, if a Schedule 14D-9 is required to be filed.

List of Subjects

17 CFR Parts 241 and 271

    Securities.

17 CFR Part 271

    Investment companies, Securities.

Amendments to the Code of Federal Regulations

    For the reasons set forth in the release, we are amending title 17,

[[Page 46588]]

chapter II of the Code of Federal Regulations as follows:

PART 241--INTERPRETIVE RELEASES RELATING TO THE SECURITIES EXCHANGE 
ACT OF 1934 AND GENERAL RULES AND REGULATIONS THEREUNDER

    1. Part 241 is amended by adding Release No. 34-43069 and the 
release date of July 24, 2000 to the list of interpretive releases.

PART 271--INTERPRETIVE RELEASES RELATING TO THE INVESTMENT COMPANY 
ACT OF 1940 AND GENERAL RULES AND REGULATIONS THEREUNDER

    2. Part 271 is amended by adding Release No. IC-24564 and the 
release date of July 24, 2000 to the list of interpretive releases.

    Dated: July 24, 2000.

    By the Commission.
Jonathan G. Katz,
Secretary.
[FR Doc. 00-19189 Filed 7-28-00; 8:45 am]
BILLING CODE 8010-01-U