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The following discussion thread excerpt is from a current law.com online seminar, “Mergers and Acquisitions 2001,” moderated by Professor Jeffrey Gordon of Columbia Law School. For more information on this program, other law.com seminar offerings and our upcoming seminars please visit http://www.law.com/seminars. PROFESSOR JEFFREY GORDON, COLUMBIA LAW SCHOOL, NEW YORK, N.Y. In October 1999 the SEC adopted significant modifications to the rules governing communications with shareholders in connection with M&A transactions. These rules have implications for both exchange offers and cash tender offers. Chuck, could you offer a summary of what these changes were? Then I’ll ask for accounts of how the rules have worked in practice. CHUCK NIEMETH, O’MELVENY & MEYERS, NEW YORK, N.Y. Regulation MA became effective one year ago yesterday. It provides safe harbors under the 1933 Act, the tender offer rules and the proxy rules for pre-filing oral and written communications relating to proposed business combinations. In effect, it relaxed the prohibition on “gun-jumping” before filing a registration statement or proxy statement. It also eliminated the “five business day” rule, which previously required filings shortly after the announcement of a proposed tender offer. Consistent with the new scheme of permitting freer disclosures, it eliminated the confidential treatment previously afforded to merger proxy statements. Regulation MA also leveled the playing field between cash and stock tender offers by permitting stock tender offers to commence as soon as a registration statement is filed. PROFESSOR JEFFREY GORDON Among the October 1999 SEC M&A rule changes was a revision to the commencement day of an exchange offer. Under the prior rules, an exchange offer did not commence until the registration statement went effective, which gave a timing advantage to cash tender offers. Under new 1933 Act Rule 162 and revised 1934 Act Rules 13-4(e)(2) and 14d-4(b), an exchange offer may commence upon filing the related registration statement but before its going effective. Indeed, shareholders may tender into the exchange offer before effectiveness, though no shares can be exchanged until the effective date and shareholders have withdrawal rights until that point. The goal was to level the playing field between exchange offers and tender offers. Have the rules had that effect? Have we seen deals, especially hostile deals, that would have been cash tender offers that are now coming forward as hostile exchange offers? CRAIG WASSERMAN, WACHTELL LIPTON ROSEN & KATZ, NEW YORK, N.Y. We haven’t seen that many people using the new exchange rules yet — partially because so many of the stock deals that we’ve witnessed have been friendly pooling transactions and friendly mergers (even if structured as purchase transactions) in regulated industries — where the trend has been to use a shareholder vote through a merger proxy on Form S-4 rather than an exchange offer. There’s also the factor that many people actually like the slower pace of an S-4 proxy to an exchange offer. There are even many cash mergers that are still structured as mergers rather than cash tender offers. So I wouldn’t say the new rules have had a huge impact to date — and while the SEC has tried to be helpful in reviewing exchange offer documents quickly — they often take as much time to review the document as you would face with a merger proxy (thus reducing much of the time savings over the merger proxy alternative route). Nevertheless, when poolings go away — I think people will begin to utilize the exchange offer structure on a more regular basis, and we will start to see a big change in the way deals are structured and processed. CHUCK NIEMETH I agree that there has been little use to date of the new level playing field for stock tender offers, and my guess is that that will continue, particularly for hostile tenders where the significantly greater disclosure required for a stock deal provides fertile ground for attack by the target. PROFESSOR JEFFREY GORDON As part of the October 1999 package, the SEC mandated a “plain English” summary term sheet for cash tender offers, cash mergers, and going private transactions. There is already a comparable “plain English” summary requirement for registration statements. Has this worked in practice? Is it easy to provide a “simple” (i.e., non-confusing) account if the terms are complex? TOM KENNEDY, SKADDEN, ARPS, SLATE, MEAGHER & FLOM, NEW YORK, N.Y. I think in general the SEC plain-English rules have worked, and we have all gotten used to the sentence structure and format changes. I think the area that the most tension occurs is 1) use of industry “jargon” (which usually will help communicate what’s going on in the business to anyone with a remote understanding of the affected industry) and 2) their aversion to certain legal words (“pari passu” and “subordination” being two) where the “legalese” really has specific contractual meaning. Actually, when you combine plain English proxy with Regulation MA disclosures of presentations, etc., I think you produce an effective package of disclosure for all. CRAIG WASSERMAN I agree that plain English has worked out fine. Although on occasion, I do worry that some of the over-simplification doesn’t fully capture the true meaning of the operative legal or factual issues being discussed. The SEC staff also has been very active in forcing very detailed discussions of deliberative factors under the background and reasons sections of merger proxies — in some cases forcing the companies to talk about substantive issues that were never really addressed in the boardroom. There is a clear danger here that complex decision-making processes often don’t fit into plain English descriptions — and the draftsperson needs to hold the line on accuracy over simplicity. There are other areas where plain English hasn’t gone far enough — one such place is the interplay of the new fair disclosure rules and the approach that most people take to MD&A and other forward-looking disclosures. Here the problem is that people like to talk in simple sound bites when announcing earnings or speaking at an analyst conference — but understanding a complex organization’s financial prospects is not simply described — everyone focuses on a bottom-line earnings number — when a plain English MD&A analysis of the true earnings drivers in a business would be much more meaningful. I do believe that people will begin to pay much more attention to MD&A disclosures as a way of solving some of the issues raised by Regulation FD, and in this process we will begin to see a more complete and fulsome discussion of what really drives a company’s earnings and growth and how various external and internal trends should be watched in understanding where future results are likely to be heading. RON KNOX, MORROW & CO., INC., NEW YORK, N.Y. The plain-English summary term sheets for cash tender offers and cash mergers are taking a step in the right direction, but most tender offer documents are still daunting to shareholders. I realize, as Craig points out, that there has to be a balance between accuracy and simplicity, but as someone who deals with shareholders on a daily basis I would like to see simpler documents at least when it comes to the execution of documents. In particular, the Letter of Transmittal — which is usually a 9- or 10-page, accordion style document and which must be filled out and submitted by registered holders in order to tender — is a confusing document. I would challenge anyone to take a standard Letter of Transmittal and give it to your mother to see if she could properly fill it out. CRAIG WASSERMAN I certainly agree. There was a similar problem that arose in a number of part-cash/part-stock deals this year — where the choice being presented to the shareholders was so confusing that even the most experienced corporate lawyer would have a difficult time parsing through the disclosure. And, in some instances the brokers and information agents speaking directly with the shareholders were poorly armed with information. It gets a bit tricky if the deal is structured in a way that allows the value of the cash option to diverge significantly from the value of the stock option — you have to be careful in speaking to shareholders when there is a clear benefit in choosing one option over the other at the time of the election, and issuers also should consider sending out extra reminders to shareholders if there is a significant cost in failing to make a correct and timely election. PROFESSOR JEFFREY GORDON Where are we on the duty to update information in the course of an M & A transaction? Concretely, what happens if there are material changes after shareholder approval has been solicited for a merger agreement? Other scenarios? TOM KENNEDY If a material change occurs, supplementing the proxy statement and allowing adequate time for dissemination is required. I think the increased flow of information under rules MA and FD have helped keep the markets more current. The toughest questions in my mind come up in the interaction between SEC duty to update/Delaware duty of candor and the target’s contractual recommendation obligations. RON KNOX Following up on Tom’s comment, if a material change occurs there are times when this will impact the timing of the transaction. Under the tender rules if there is a change in a material term, such as an increase or decrease in either the consideration being offered or the amount of securities being purchased, then the offer has to remain open for at least 10 business days from the date notice of the change is first sent or published. So if the notice is sent five days before the expiration you would have to extend the offer for at least five business days. Under the proxy rules, there is no specific requirement as to how much notice is deemed sufficient. From a practical standpoint, dissemination of a material event should take place immediately. If the notice of a material event takes place seven to 10 calendar days prior to the meeting date, there may be no need to change the meeting date. Any less than seven days would probably require that you postpone the meeting, to allow all shareholders time to receive the additional information and cast their votes. Hopefully, you would postpone for just a few days so that you would not have to set a new record date. CRAIG WASSERMAN Jeff’s question raised the issue of what happens if the material development occurs after the shareholder vote. I agree if the development is before the vote — then the obvious solution is to update (either with a supplement — or in some cases a press release incorporated by reference into the S-4 through an 8-K filing will be sufficient) and to make sure there’s enough time for shareholders to digest this information before the meeting. If the change comes after the vote, then a lot will depend on what the proxy statement and the merger agreement say. Most merger agreements provide that conditions can be waived by either party after shareholder approval has been obtained as long as there is no change in the amount or form of the merger consideration. And the proxy statement should disclose this fact to shareholders so that they understand this fact. The SEC has in some instances required issuers to state that they either agree not to waive the tax opinion condition to the merger or if they do, that they will resolicit the shareholders if there are any material changes to the tax consequences of the transaction. In other areas, however, there could conceivably be significant changes that occur after the shareholder vote without any concern that there would need to be a resolicitation. Note, for example, the significant developments relating to the recent Time Warner/AOL merger that occurred after shareholder approval had been obtained — although the regulatory issues had been foreshadowed in the proxy statement.

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