SEC staff clarifies cross-border exemptions

Last week, the SEC staff published new compliance and disclosure interpretations clarifying some of the inner workings of exemptions for certain cross-border business combinations, exchange offers and rights offerings. These exemptions are available for specified transactions involving foreign companies whose US ownership falls below 40% or 10% of total ownership, with the latter group being afforded significantly greater relief. When the SEC originally adopting these exemptions, it sought to induce parties to include US investors in transactions where they would typically be excluded in order to avoid the burdens of complying with US securities laws. While rarely used, the exemptions can be useful in the right circumstances. (In the last twelve months, only a few dozen transactions have relied on these exemptions.)

The new interpretations provide some welcome relief and other useful clarifications, although in some cases they create potential compliance hazards.  Among other things, the interpretations provide that:

  • Companies must determine the availability of any exemption before launching the transaction, even if the rules might technically permit a later determination date (C&DI 101.05)
  • Parties must provide English translations of documents incorporated by reference if they are publicly available in another language (C&DI 104.01)
  • In transactions where US holders must be treated no worse than non-US holders, parties cannot give non-US holders a choice between currencies without giving US holders the same choice (C&DI 103.02)
  • While US ownership is generally based on the record location of stockholders, parties cannot ignore information they know or have a reason to know; for example, a party that knows that investment and voting decisions of a foreign stockholder are made by a US parent must treat the foreign stockholder’s shares as owned by a US person (C&DI 101.02)
  • In conducting the required “reasonable inquiry” into a company’s ownership, the parties must make a particularized inquiry of brokers in each relevant jurisdiction, even where experience shows that brokers in a particular jurisdiction consistently refuse or fail to respond to the inquiry (C&DI 101.04)

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