Q: When is the price of an offered security "determined" for purposes of applying the Regulation M restricted period? Is the price determined when the underwriter and issuer orally agree on the price or when the underwriters formally contract to underwrite the offering, which may occur later?
A: The determination of the offering price occurs when the parties agree on the price, whether or not the agreement is memorialized in writing.
Q: A security in distribution is convertible into an actively-traded security. Is the security in distribution subject to a restricted period under Rule 101? A: Yes. The ADTV value of the subject security determines the restricted period. The ADTV value of a reference security does not affect the restricted period of a subject security.
Q: How is ADTV calculated?
A: As defined in Rule 100 of Regulation M, ADTV is worldwide average daily trading volume as measured during the two full calendar months immediately preceding, or any 60 consecutive calendar days ending within the 10 calendar days preceding, the filing of the registration statement. If the offering is made without a registration statement or involves the sale of securities on a delayed basis pursuant to §230.415, ADTV would be measured during the two full calendar months immediately preceding, or any consecutive 60 calendar days ending within the 10 calendar days preceding, the determination of the offering price.
Q: A security in distribution is an actively-traded security and thus excepted from Rule 101. It is convertible into a security (a reference security) that is not an actively-traded security. Is the reference security subject to a restricted period under Rule 101?
A: No. The restricted period for a reference security is never greater than that of the subject security.
Q: When does the restricted period for a distribution through a call for redemption of "in-the-money" convertibles or exercisable securities commence?
A: The restricted period commences upon mailing of the notice and continues through the end of the period in which the security holders can decide whether to convert.
Q: What is the restricted period for a security to be distributed through a merger or an exchange offer? If the valuation period extends after the vote, how does this affect the restricted period?
A: The restricted period begins on the day of mailing the proxy solicitation materials and continues through the end of the period in which the target shareholders can vote on the merger or exchange. The restricted period includes the valuation period as well. For instance, if the valuation period occurs outside of the proxy solicitation period, an additional restricted period would commence one or five business days prior to the commencement of the valuation period and continue until the valuation period ends.
Q: In a merger, is the restricted period based on both the target company's and acquiror company's shareholder votes?
A: No. The restricted period is based solely on the target company's shareholder vote.
Q: What is the restricted period for a security to be distributed in connection with the acquisition of a privately held company when the shareholders will not be solicited through proxies?
A: The day most comparable to the day of mailing the proxy solicitation materials is the day the target security holders are first asked to commit to the transaction, which would be the day the acquiror sends a definitive acquisition agreement to the target security holders for their execution. The restricted period would commence on the earlier of one (or five) business day(s) prior to (i) the time the acquiror furnishes the definitive acquisition agreement for execution to the security holders of the privately held target company or (ii) the commencement of the valuation period. The restricted period would continue until the later of (i) execution of the definitive acquisition agreement or (ii) the end of the valuation period.
Q: If an issuer purchases its securities before the Regulation M restricted period begins for the security in distribution, may the settlement of this trade occur during the restricted period without violating Regulation M?
A: Yes. The settlement may occur during the restricted period as long as the trade occurred outside the restricted period.
Q: Rule 100 of Regulation M states that in the case of a merger, acquisition or exchange offer, a restricted period commences on the day proxy solicitations or offering materials are first disseminated to security holders. Is a restricted period triggered when a third party solicits proxies in opposition to a proposed merger on the basis of its proposed alternative to exchange its stock for the target company stock (alternative stock transaction)?
A: In some cases, the answer is yes. "Distribution" is defined in Rule 100 as an "offering of securities . . . that is distinguished from ordinary trading transactions by the magnitude of the offering and the presence of special selling efforts." The application of Regulation M to the opposition proxy solicitation involves an analysis of the three elements of a distribution: (1) is there an "offering of securities;" (2) does the amount offered satisfy the "magnitude" test; and (3) will "special selling efforts and selling methods" be employed.
For purposes of this question, it is assumed that the alternative stock transaction will satisfy the "magnitude" and "special selling efforts and selling methods" elements because a large quantity of shares will be offered in exchange for the target company, and because of the use of a proxy solicitation.
Where the alternative stock transaction is presented to target shareholders in such specific terms so as to constitute an offering of securities under the Securities Act of 1933 (Securities Act), then the offering element is satisfied. In such circumstances, Securities Act Rules 165 and 425 permit the company presenting the alternative proposal to publicly disclose information about its counteroffer before filing a registration statement.
When an alternative investment transaction is presented to target shareholders at the time they are to vote on the proposed merger and specific details about the proposed alternative are presented so as to invite comparison with the terms of the pending proposed merger, the investment decision (i.e., the vote) necessarily requires shareholders to consider both transactions. Consequently, the company offering the alternative stock transaction has an incentive to manipulate its stock price to facilitate its offering. Therefore, the restricted period with respect to the alternative transaction would commence with the dissemination of materials soliciting proxies against the proposed merger that contained the terms of the proposed alternative.
Example: B solicits the target's shareholders to vote against A's proposed stock merger with the target. In conjunction with B's solicitation against the merger, B states that it intends to propose its own stock merger with the target. B's solicitation against the target's merger with A contains detailed information about B's proposal (such as a fixed exchange ratio and a prospective dividend payout). B's proposal constitutes an offer of securities under the Securities Act and a distribution under Regulation M. The restricted period for B's distribution begins when it sends its proxy solicitation and continues through the vote on A's merger proposal.
B's distribution continues until B's offering is concluded or abandoned. Therefore, B will be in distribution at least until the shareholder vote on B's alternative stock merger proposal or until B's offering is abandoned.
In the staff's view, however, B's restricted period need not be co-extensive with B's distribution period. Instead, it should apply when the target company's shareholders are requested to make an investment decision affected by B's counteroffer and B has an incentive to manipulate the price of its securities. Therefore, after the vote for or against A's merger proposal (and implicitly on B's counter offer), the restricted period for B would terminate. B would have another restricted period if and when it sends out the proxy solicitation for its merger proposal, and this restricted period would end upon that shareholder vote. Note that other restricted periods may apply if the offer involves an election or a valuation period separate from the proxy solicitation periods.