It is 2:43 AM and you are out drinkin’ in some honky-tonk. Your cell phone rings. It is your good client, Kenny Rogers. “I’m in Freedonia,” Kenny’s sonorous voice booms, “and my people are doing diligence on Anglo Freedonian Mining SA. The numbers look good. We want to launch a tender offer ASAP.” Despite the dim lights, thick smoke (and loud, loud music), you recall that Anglo Freedonian is a company incorporated under the laws of Freedonia and trading in London, and that it has US shareholders (in this case, the Marx brothers of Hollywood, CA). You want to tell Kenny that he can’t outrun “The Long Arm of the Law”, but you also know there are some exemptions from the US securities laws that may help in cross-border tender offers.

Tender offers, exchange offers and business combinations involving a non-US target with US securities holders potentially trigger a variety of provisions of the federal securities laws, including Exchange Act Sections 13(d)-(e) and 14(d)-(f), and Exchange Act Regulation 13D, Rule 13e-3, Rule 13e-4, Regulation 14D and Regulation 14E. Depending principally on the level of US ownership, various exemptions from this regulatory scheme may be available – the Tier I exemption, which gives the broadest exemptive relief, and the Tier II exemptions, which gives more limited exemptive relief. Both US and non-US bidders may rely on the Tier I and Tier II exemptions.

Regardless of whether a transaction qualifies for the Tier I or Tier II exemption, bear in mind that the antifraud provisions of the US securities laws still apply, including Section 14(e) of the Exchange Act.

To qualify for the Tier I exemption under Rule 14d-1(c), US shareholders must hold not more than 10% of the class of securities sought in the tender offer. To qualify for the Tier II exemption under Rule 14d-1(d), US shareholders must hold not more than 40% of the class of securities sought in the tender offer. A US shareholder is defined as a person resident in the United States.

In addition, for both the Tier I and Tier II exemption, the target company must be a foreign private issuer¹ and must not be an investment company within the meaning of the Investment Company Act that is registered or required to be registered under that Act (other than a registered closed-end investment company).

No. Under Instruction 2(ii) to paragraphs (c) and (d) of Rule 14d-1, the bidder’s shares are excluded from the calculation of US shareholder ownership and should be subtracted from the denominator of the target company’s outstanding shares used in the calculation. Securities convertible into or exchangeable for the subject securities are also excluded.

In determining whether or not a holder is a US resident, you need to review the addresses of security holders in the foreign private issuer’s records. If the foreign private issuer is a public company, then the first place to start is the company’s publicly filed reports in their home jurisdiction. However, the bidder must “look through” institutional custodians (such as Cede & Co.) and other commercial depositories (such as DTC and Euroclear) to identify the participants in those systems (such as banks, broker-dealers and nominees). Then, you need to drill down beyond certain “street name” accounts – that is, accounts held of record by a broker-dealer, bank or nominee for someone else – to find the amount of shares in each “street name” account actually held by US residents.

However, you are not required to look through all street name accounts. Instead, your inquiry as to the amount of shares represented by US resident accounts can be limited to those broker-dealers, banks and other nominees located in:

• the United States;
• the foreign private issuer’s jurisdiction of incorporation; and
• the jurisdiction that is the foreign private issuer’s primary trading market for its voting securities (if different than the jurisdiction of incorporation).

For Anglo Freedonian, a Freedonian company trading in London, this would mean examining the shareholders in the US, Freedonia and the United Kingdom. For example, you would need to “look through” the shares held by a Freedonian broker-dealer to determine how many of those shares were held by US residents, and add that number to the amount of US shareholder ownership used for the Tier I/Tier II eligibility calculations.

The Tier I/Tier II eligibility calculations can be made at any time within the period commencing 60 days prior to and ending 30 days after the date of announcement of the transaction.

Yes. There is an alternative Tier I/Tier II eligibility test based on average daily trading volume (or ADTV) to determine US ownership in limited situations where an issuer or bidder cannot complete the “look-through” analysis to determine US ownership.

To qualify, the ADTV for the target’s securities in the United States over a 12-month period ending no more than 60 days before the announcement of the transaction must not be more than 10% of the ADTV for the Tier I exemption (or 40% for the Tier II exemption) on a worldwide basis. Information indicating otherwise must not be in annual information published by the target, and the bidder must not have a reason to know that the target’s US ownership levels do not qualify.

“Thank you,” says Kenny. “Let’s move forward. I’ll have my people start working on the look-through analysis. Let’s set up some time to talk next week about what the Tier I exemption means and how to launch a Tier I compliant tender offer.”

Stay tuned for a future installment on the law and lore of launching a Tier I-compliant tender offer and another on the more limited exemption under Tier 2.

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¹    Navigating the foreign private issuer definition can be tricky. See our Client Alert Defining Foreign Private Issuers: Are You a Wizard or a Muggle? for FAQs on this topic.