[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]
=======================================================================
-----------------------------------------------------------------------
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.
-----------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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
---------------------------------------------------------------------------
\9\ Release No. 34-19246, 47 FR at 53399 n. 18.
\10\ Release No. 34-19988, 48 FR at 34252.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\22\ 5 U.S.C. 553(d).
---------------------------------------------------------------------------
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
