33082-nyb_9-1 Sheet No. 103 Side A 02/27/2013 10:49:33 R R R R R R R R R R R R R R R R R R R R R R R . . 216 ** ...... 214 ...... 227 ...... 237 : ...... 233 ...... 210 ...... 211 ...... 207 ...... 225 ...... 227 ELLER ...... 235 ...... 232 ...... 217 ...... 222 ...... 204 ...... 233 ...... 233 A. K ...... 238 TRUCTURING ...... 204 FFERS ...... 208 ...... 222 ...... 207 ROCEDURAL S P O ACHARY BSTACLES FFER 199 O O * & Z ENDER T AAG PECIFIC ...... 200 ENDER S T Investment-Grade Debt Non-Investment Grade Debt Rules, Regulations, Releases, Bulletins Rules, Regulations, and Phone Calls No-Action Letters: Introduction Use of No-Action Letters in Courts No-Action Letters in the Legal Practice EGULATION AND T. H FOR DEBT SECURITIES FOR DEBT R a. b. a. b. a. b. Real-Time Fixed-Spread Tender Offers Waterfall Tender Offers Section 14(e) and Regulation 14E Twenty Business Day Requirement Ten Business Day Requirement Fixed-Spread Tender Offers SEC Regulatory Hierarchy: Rules, Opinions, SEC Regulatory Hierarchy: and No-Action Letters No-Action Letters: Use and Purpose Legal Opinion Letters: Overview The Williams Act of 1968 Regulation 14E and Timing Requirements Specific Structures for Debt Tender Offers Conducting a Tender Offer Conducting a Tender Administrative Authority and SEC Rulemaking: of No-Action Letters the Legal Position 2. 3. 1. 1. 2. 1. 1. 2. HARLES REGULATION OF TENDER OFFERS OF TENDER REGULATION C ENERAL AND ELATIONSHIPS IN ROBLEMS IN EDERAL NTRODUCTION G C. A. B. C. R A. B. HONORED IN THE BREACH: ISSUES IN THE ISSUES BREACH: IN THE HONORED I. I * Day Charles T. Haag is a partner in the Dallas, Texas office of Jones II. F ** Zachary A. Keller was a 2012 summer associate in the Dallas, Texas III. P and a member of the firm’s Capital Markets practice. and a member of the firm’s Capital Markets office of Jones Day and is a third-year student at Yale Law School. The views expressed in this article are those of the authors and do not necessarily re- present the views of Jones Day or its clients. \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 1 26-FEB-13 14:17 33082-nyb_9-1 Sheet No. 103 Side A 02/27/2013 10:49:33 Side A 02/27/2013 Sheet No. 103 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 103 Side B 02/27/2013 10:49:33 R R R R R R R R R , . I- E- T S R ’ D and EVIEW 3 ALL R W [Vol. 9:199 , ARKETS EALERS ACING These fac- M . D 4 ARKETS , Aug. 25, 2011, F NV I , M Bonds Mixed Signals APITAL UYER C B , July 28, 2012, http:// APITAL EBT OND ...... 256 C B D ...... 243 The boom in debt capi- , 2 EBT ONSEQUENCES ...... 249 See generally Taking Stock: Why Eq- CONOMIST D E C ...... 246 , In the wake of the financial ...... 240 I. 1 ...... 247 Bond-Watch Bond Market Rally Continues as Fed Remains 1 (2007). NTRODUCTION I Fourth Quarter 2006 OMMERCIAL Full Year 2011 1 (2011). , ...... 257 ...... 255 High-Yield Market Pauses for Effect C , May 1, 2012, at 98; Serena Ng, . IN ...... 253 NYU JOURNAL OF LAW & BUSINESS Gordon Platt, RACTITIONERS NDERWRITERS F P U Recasting the No-Action Letter Recasting the No-Action Forward by Looking Alternatives: Moving Backward Consent Solicitations Consent Offers Tender Auction Dutch Premiums Early Tender the Opinions: Tilting Letters and Legal No-Action Playing Field Commercial and Legal Opinions: Liability No-Action Letters Risks NDERWRITERS LOBAL G ONCLUSION Shelly Sigo & Jim Watts, THICAL AND EGAL U GEST VIEW , A. B. D. E. F. L A. B. ANAGING See See generally Activity in debt capital markets has fluctuated dramatically Activity in debt capital , Dec. 3, 2010, at 8. , M 2. Thomson Reuters 3. 1. Thomson Financial, 4. V. C IV. E ANAGING ., Jan. 2, 2007, at R4. debt capital A related factor influencing the boom in www.economist.com/node/21559675. at 7; Matthew Sheahan, M Split Investors: Yield Curve, Rates Hamper Treasuries, Muddy Forecasts Split Investors: Yield Curve, Rates Hamper Supportive uity Markets Have Forgotten Their Function J many institutional investors from eq- markets is the reallocation of funds by to be less risky. Recently, com- uity to debt securities, which are perceived dramatic shift from equity to debt mentators have discussed not only the financing, but also the increased use of debt financing for equity buybacks and takeovers to reduce equity exposure. in the past decade. with At first, the markets were booming, global debt securi- the annual issued volume of underwritten in 2006, of which the U.S. ties reaching a record $6.9 trillion portion reached $4.1 trillion. 200 \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 2 26-FEB-13 14:17 downturn, the overall global debt activity dipped substantially downturn, the overall global debt to (a still-sizeable) $5 trillion in 2011. historically low default rates on corporate bonds. historically low default rates on tal markets was fueled by historically low interest rates tal markets was fueled by historically 33082-nyb_9-1 Sheet No. 103 Side B 02/27/2013 10:49:33 Side B 02/27/2013 Sheet No. 103 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 104 Side A 02/27/2013 10:49:33 , , 201 IMES This 9 N.Y. T , Additionally, al- Additionally, note 2 at 1. 7 (London), Nov. 21, 2005, supra , IMES . T IN F , Putting the Clamps on Credit the debt market remains integral market remains the debt 8 Corporate Bond Market Has Come to a Standstill HONORED IN THE BREACH THE IN HONORED note 4, at R4. See, e.g., Corporate Credit and non-investment grade (or “high-yield”) (or grade non-investment and supra 5 Aug. 7, 2007, at C2 (stating that “[t]he investment-grade corpo- Aug. 7, 2007, at C2 (stating that “[t]he Ng, Anusha Shrivastava, . J., T have created opportunities for companies to refinance for companies opportunities have created See See 6 S 7. 8. to $278.1 billion, which was By 2011, global high yield debt had fallen 9. 5.of credit- refer to the highest categories Investment-grade securities 6. as “high-yield debt.” Non-investment grade debt is also known High- ALL Aug. 7, 2007, at C1 (stating that “[h]igh-yield bond offerings fell off a cliff” Aug. 7, 2007, at C1 (stating that “[h]igh-yield . . . issued, a steep decline from in July, with “only $2.4 billion in junk bonds the $22.4 billion that came to market in June.” Further, “[h]igh-quality bonds issued by companies with sterling credit have not been immune to the rout either,” with “[i]nvestment-grade bond issues [falling] to $30.4 billion in July—the lowest monthly total in five years—from $109 billion in June.”). at 18 (stating that “[t]he stigma of a downgrade, or of ‘junk’ status, is an- at 18 (stating that “[t]he stigma of a downgrade, between investment-grade and cient history [and the] cliff that once existed high-yield companies has eroded”). a 14% decrease from 2010. Thomson Reuters rate bond market has ground to a halt, making it difficult for companies to rate bond market has ground to a halt, high-grade market . . . come amid access capital . . . . The problems in the [other] markets . . . .”); Julie Cres- turmoil in . . . [the] high-yield bond and well & Michael J. de la Merced, worthiness using the rating scales of the three nationally recognized rating rating scales of the three nationally recognized worthiness using the Standard & Investors Service, Inc. (“Moody’s”); organizations: Moody’s (“Standard and The McGraw Hill Companies, Inc. Poor’s, a division of Poor’s”); and Fitch, Inc. (“Fitch”). grade On the Moody’s scale, investment securities are rated Aaa through Baa3. scale, in- On the Standard & Poor’s though BB+, and on the Fitch scale vestment grade securities are rated AAA though BBB. investment grade securities are rated AAA below investment grade by Moody’s, yield debt refers to debt securities rated Standard & Poor’s or Fitch. were com- In the past, these debt securities of their speculative nature.monly referred to as “junk bonds” because Re- debt has changed and the cently, however, the perception of high-yield debt has been greatly reduced stigma associated with non-investment grade or eliminated. W 2012] invest- for both demand investor strong with combined tors, ment-grade \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 3 26-FEB-13 14:17 existing debt on better terms, as well as to finance acquisitions, as well as to debt on better terms, existing transactions. and other stock buybacks debt, to sur- for businesses and investors looking to capital markets vive economic decline. of the financial crisis, At the beginning that sub- markets experienced an upheaval the debt capital companies’ ability to raise capital. stantially reduced though non-investment grade debt has declined sharply with declined sharply grade debt has non-investment though contraction, the economic of 2009, continued until the first quarter downward trend increased to debt underwriting activity when quarterly global 33082-nyb_9-1 Sheet No. 104 Side A 02/27/2013 10:49:33 Side A 02/27/2013 Sheet No. 104 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 104 Side B 02/27/2013 10:49:33 E- E- 16 S R gov- The 14 12 and the [Vol. 9:199 ARKETS First Quarter 13 ANDBOOK , M Fourth Quarter , tender offers H , infra APITAL OURSE In this economic In this C . C 10 EBT RAC D P Restructuring European High Yield AND . L. ORP 1 (2008); Thomson Reuters . C In the U.S. markets, both of the pri- In the U.S. markets, Fourth Quarter 2007 NST Bryant Edwards, , 15 See has closely tracked the activity of the debt tracked the activity has closely L. I 11 NYU JOURNAL OF LAW & BUSINESS NDERWRITERS U RACTISING P Bloomberg Terminal Database (last visited May 7, 2009) (showing Bloomberg Terminal Database (last visited VIEW RIES ANAGING See These market trends for debt securities have also mani- debt securities trends for These market , 1281 Debt Capital Markets Review 1 (2009); Thomson Reuters Debt Capital Markets Review 1 (2009); Debt Capital Markets Review 1 (2009). M 907, 915 (Dec. 2001) (noting that U.S. institutional investors are a prin- 16. Because this paper primarily addresses the transactions themselves, 11.in Part II, As will be discussed in greater detail 10. Thomson Financial 12. 13. 15 U.S.C. § 77a (2010). 14. 15 U.S.C. § 78a (2010). As discussed in this article, the Exchange Act 15. integral both to American mar- The laws governing tender offers are cipal market for many international offerings). the Exchange Act will be the main statute discussed. 2008 2009 Successfully navigating these two acts can be what separates a Successfully navigating these two opens the issuer, financial successful transaction from one that as well to liabilities under advisor, and perhaps legal counsel federal securities law. having Given the high stakes involved, 202 crisis began. the since amount its largest securities. involve the purchase of large blocks of \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 4 26-FEB-13 14:17 capital markets and similarly experienced a decline beginning similarly experienced a decline capital markets and 2009. 2007 and a resurgence in early in the middle of mary federal securities statutes may be involved in a debt statutes may be involved mary federal securities tender offer. the offering of debt The Securities Act regulates offer rules issuers, and the tender securities by corporate refinancing transactions. under the Exchange Act regulate Bonds Securities Exchange Act of 1934 (the “Exchange Act”), Act of 1934 (the “Exchange Securities Exchange erning tender offers. atmosphere, understanding the nuances of globalized debt globalized of the nuances understanding atmosphere, in a crisis-af- essential to succeeding has become structuring dynamic economy. fected, highly offer market. the debt tender fested in of global activity The offers debt tender particularly in the volume of debt offerings, rapid fluctuations have gener- increases in tender offer activity, with the earlier laws, prima- in the U.S. federal securities ated renewed interest Act of 1933 (the “Securities Act”) rily the Securities that the number of debt tender offers worldwide fluctuated from 351 in the that the number of debt tender offers worldwide of 2008 and then to 148 in the first first half of 2007 to 93 in the first half four months of 2009). Exchange Act contain rules applica- and a variety of rules adopted under the ble to issuer tender offers for debt securities. kets and global markets. 33082-nyb_9-1 Sheet No. 104 Side B 02/27/2013 10:49:33 Side B 02/27/2013 Sheet No. 104 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 105 Side A 02/27/2013 10:49:33 203 547, 548 (2007). . IN & F In debt markets, manag- In debt markets, Determinants of Bond Tender Pre- at 554. 19 Id. ANKING J. B , 31 at 557. The authors do note, however, that Id. HONORED IN THE BREACH THE IN HONORED For debt markets, interest rates are an ex- For debt markets, 17 . at 557 Steven V. Mann & Eric A. Powers, This variable makes timing paramount to achieving de- timing paramount to achieving This variable makes See id See Indeed, lack of clarity can delay beneficial refinancing can delay beneficial lack of clarity Indeed, This paper addresses these ambiguities and the resulting This paper addresses these ambiguities 18 18. itself—independent As a recent study found, the tender offer of 19. 17. whether that tender offer is being issued pursuant to a subsequent or a si- whether that tender offer is being issued multaneous debt offering—is correlated with risk-free bond rates, bond spreads, and the yield curve. “[w]hether this is a response to changes in macroeconomic conditions or some other pervasive factor is not clear.” 2012] to is integral standards legal binding and precedent clear markets. capital functioning properly be- transactions from cases, prevent and, in some transactions ing completed. particularly signifi- of timing is The element are highly and bond repurchases tender offers cant because to market conditions—bothsensitive pricing and the market as the prevail- of the bonds themselves as well creditworthiness ing interest rates. \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 5 26-FEB-13 14:17 miums and the Percentage Tendered ogenous variable that can govern a transaction’s success or fail- that can govern a transaction’s ogenous variable ure. time sensitive transactions because of the sirable refinancing rate fluctuations. nature of interest ing timing requirements and maximizing flexibility in the pric- and maximizing flexibility ing timing requirements critical to serving a client’s needs.ing structure are However, can obligations are unclear, difficulties if timing and pricing transaction in attempting to structure its emerge for an issuer for it and attractive to bondholders. a manner favorable offer regulations.issues that arise under the tender Its pur- methods employed by the Se- pose is to show how the current (“SEC” or the “Commis- curities and Exchange Commission to the SEC and some market sion”), while perhaps attractive and costs for market par- participants, create substantial risks who must guide and ticipants and the transactional attorneys approve of the tender offer transaction.provides an Part II of tender offers, focus- overview of the U.S. federal regulation and regulations, as well as ing primarily on relevant statutes promulgated these rules how the SEC has interpreted and options.through its various administrative section also The use the SEC’s communica- addresses how legal practitioners paid to the SEC’s use of no- tions, with particular attention how legal practitioners for- action letters; it further addresses 33082-nyb_9-1 Sheet No. 105 Side A 02/27/2013 10:49:33 Side A 02/27/2013 Sheet No. 105 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 105 Side B 02/27/2013 10:49:33 , de aff’d 787, ERIES [Vol. 9:199 Instead, S Wellman v. 20 ELATIONSHIPS ANDBOOK H R standard, the following OURSE . C FFERS 460 U.S. 1069 (1983). RAC O ROCEDURAL P Wellman II. P AND , Liability Management for the Frequent Issuer ENDER IN . L. cert. denied. T ORP Conducting a Tender Offer . C NST A. NYU JOURNAL OF LAW & BUSINESS legality. conse- Part IV discusses the practical EGULATION AND L. I R According to the de jure 21 curity holders; outstanding securities; . Norman D. Slonaker See RACTISING EDERAL (1) of public se- Active and widespread solicitation (2) percentage of the Solicitation for a substantial The term “tender offer” is not defined in the Exchange The term “tender offer” is not P and F 21. Wellman v. Dickinson, 475 F. Supp. 783, 823-24 (S.D.N.Y. 1979) 20. 794-95 (Nov. 1999). 682 F.2d 355 (2d Cir. 1982), 204 a for letters opinion through letters with these engage mally transaction.client’s in- legal ambiguities the III discusses Part for debt securities offer structures specific tender herent in struc- relate to those offer regulations current tender and how tures. conflicts between discusses the the section Specifically, and the securities structures used transaction many commonly a divide between SEC has created well as how the laws, as facto \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 6 26-FEB-13 14:17 factors are central to determining whether an offering quali- factors are central to determining fies as a tender offer: Act or in other U.S. federal securities laws, and it is particularly Act or in other U.S. federal securities the issue of control, a ma- ambiguous in debt offerings, where is not present. jor concern for equity acquisitions, Dickinson courts and the SEC engage in a multifactor analysis of a given courts and the SEC engage in a transaction that is heavily fact dependent. typi- The analysis set out in cally follows an eight-factor test originally quence of these ambiguities for attorneys today, both in terms ambiguities for attorneys today, quence of these and liability risk.of commercial impact The section shows could create demonstrated in Part III how the incongruities overseeing the transaction.problems for attorneys Part V con- be recti- as to how these issues might cludes with suggestions for the presenting alternative approaches fied moving forward, as regard- tender offers specifically as well SEC regarding debt regulatory toolbox more generally. ing the use of their 1150 33082-nyb_9-1 Sheet No. 105 Side B 02/27/2013 10:49:33 Side B 02/27/2013 Sheet No. 105 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 106 Side A 02/27/2013 10:49:33 205 Wellman , 774 F.2d . 22 at 791. With respect to case in the context of the In addition, because Id. Hoover v. Fuqua Industries, 23 See case involved the hostile takeover , 346 U.S. 119, 125 (1953) (stating that Ralston Purina . Hanson Trust PLC v. SCM Corp Wellman ; . The Id HONORED IN THE BREACH THE IN HONORED . In addressing the definition of a tender offer, the prevailing market price; market prevailing negotiable; of secur- number of a fixed minimum the tender number maximum subject to a fixed ities, often purchased; of securities to be a rapid accumulation of a precede or accompany the company’s securities. large amount of SEC v. Ralston Purina Co See id See This list has been broadly adopted but is non-exhaustive. This list has been (3) the over a premium made at purchase to Offer (4) rather than that are firm, containing terms Offer (5) on offer being contingent the Consummating (6) only for a limited time period; Offer being open (7) subjected to pressure to sell; and Offerees being (8) of a purchasing program Public announcements , C. 79-1062A (N.D. Ohio June 11, 1979). also In that case, the [SEC] . 22. 23. Courts have weighed these factors according to “whether the these factors according to Courts have weighed the pro- persons [subject to the offer] needs particular class of whether a laws]” when determining tection of the [securities as a tender offer. transaction qualifies 2012] \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 7 26-FEB-13 14:17 not all of the factors discussed above need to be present for a not all of the factors discussed above court stated: “The [SEC] has not yet created an exact definition, but in this court stated: “The [SEC] has not yet created elements as being characteristic of case and in others, it suggests some seven were recently accepted as appropri- a tender offer . . . . These characteristics ately describing the nature of a tender offer. of a public company by the rapid and undisclosed purchase of a controlling of a public company by the rapid and undisclosed interest of the target company’s equity securities. Inc here . . . . The reason this last had listed an 8th characteristic not included was because publicity was not a fea- characteristic was left out undoubtedly ture of this transaction.” debt transactions, significant judgments must be made on a case-by-case ba- debt transactions, significant judgments should be considered a tender sis to determine if the proposed transaction offer. 47, 57 (2d Cir. 1985) (analyzing the tender offer rules and finding that “the question of whether a solicitation tender offer rules and finding that “the of §constitutes a ‘tender offer’ within the meaning turns on whether, 14(d) the totality of circumstances, there viewing the transaction in the light of appears to be a likelihood that unless the pre-acquisition filing strictures of that statute are followed there will be a substantial risk that solicitees will lack information needed to make a carefully considered appraisal of the proposal put before them”). the applicability of exemptions from registration under the Securities Act the applicability of exemptions from registration class of persons affected need the “should turn on whether the particular protection” of the Securities Act) 33082-nyb_9-1 Sheet No. 106 Side A 02/27/2013 10:49:33 Side A 02/27/2013 Sheet No. 106 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 106 Side B 02/27/2013 10:49:33 See , 4 In fac- The 28 27 ANDBOOK [Vol. 9:199 H criteria. Wellman OURSE the discretion the 25 Wellman 24 . C Legal Aspects of Public RAC P and redemption is pro- and redemption AND 26 , 774 F.2d 47, 57 (2d Cir. 1985) , 774 F.2d 47, 57 (2d . . L. test. situations arise These ORP .C note 17, at 550-51. NST Wellman supra . L. I note 24, at 855. If permitted by the terms of its debt Ford Lacy & David M. Dolan, See Repurchases of High Yield Debt Securities: Frequently Asked Repurchases of High Yield Debt Securities: NYU JOURNAL OF LAW & BUSINESS . supra RACTISING 49, 58 (1991). For listed examples of recent debt exchange Appendix F. P at 550 . L.J. Mann & Powers, Hanson Trust PLC v. SCM Corp Hanson Trust PLC infra US , 1939 B See See id See 853, 859-60 (Mar. 2012). In many situations, however, a proposed repurchase of a repurchase of a proposed situations, however, In many AUL 27. 28. 25. its debt securities is, however, Not every repurchase by a company of 24. 26. company will require that a Typically, a tender offer by a distressed P E ERIES offers, see considered a tender offer. cash posi- For example, a company with a strong year may choose to make small open- tion at the end of each quarter or fiscal of its debt securities from time to market or privately negotiated repurchases improve its financial ratios.time to reduce its debt-service costs and In most any of the eight cases, these small transactions do not contain Mark S. Bergman, Questions D S 206 offer, a tender to be considered transaction as a clearly qualifies very likely or debt securities company’s under the tender offer all or a substantial to eliminate company proposes where a of its debt securities portion of a class \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 8 26-FEB-13 14:17 (“[I]n any given case a solicitation may constitute a tender offer even though a solicitation may constitute a tender offer (“[I]n any given case some of the eight factors are absent.”). of debt For example, if a purchase of the same series of debt securi- securities is followed by a larger purchase treated as a single tender offer, re- ties, those transactions could jointly be jointly, met the gardless of whether they, individually or tors and are not considered tender offers. have concerns Some practitioners aggregated into a single so-called that small, repeated purchases could be “creeping tender offer.” be problem- Creeping tender offers are unlikely to restrictions there are on debt repur- atic for debt issuers because of how few chases. Bergman, or “call” its securities from time to securities, a company may also redeem rules. time without implicating the tender offer be tendered.very large percentage of the debt in question exchange of- In is a common requirement for fers, for example, 90% to 95% acceptance economic viability. allowed to courts in this area requires debt issuers to proceed to debt issuers requires this area in to courts allowed factors are present. if any of the with caution costly under the terms of the securities. hibited or more Debt Restructurings: Exchange Offers, Consent Solicitations and Tender Offers Debt Restructurings: Exchange Offers, Consent reasons for the transaction may include, for example, (i) the transaction may include, for example, reasons for the (ii) the avail- company to reduce its debt, need for a distressed the markets, terms or lower interest rates in ability of better or (iv) eliminate restrictive debt covenants, (iii) the need to where sub- in a leveraged transaction the sale of the company closing. existing debt is replaced at stantially all of the 33082-nyb_9-1 Sheet No. 106 Side B 02/27/2013 10:49:33 Side B 02/27/2013 Sheet No. 106 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 107 Side A 02/27/2013 10:49:33 30 see L. 207 31 . § 1.4 EG RACTISING ORNELL OURCES OF P S C . R , EC 29 S , 83 1912 AW L 79, 92 (Dec. 2011); . § 1.3 n.19 (2012). ODERQUIST , 1 . L ERIES EC S D. S S ARRY L ANDBOOK H The Work of the SEC , OURSE Judicial Reliance on Regulatory Interpretations in SEC Judicial Reliance on Regulatory Interpretations ODERQUIST ON THE . C S AZEN , HONORED IN THE BREACH THE IN HONORED Chapter 1: Approaching Securities Law, RAC Position of No-Action Letters Position of AW H will further analyze the Exchange statutes relevant to P L EE AND L infra, . L. Donna M. Nagy, HOMAS ECURITIES ORP T SEC Rulemaking: Administrative Authority and the Legal Authority and Administrative SEC Rulemaking: S See . C This section will briefly characterize each of these regula- This section will briefly characterize Like other federal administrative agencies, the SEC’s au- administrative agencies, the Like other federal (1) The U.S. Constitution; (2) Securities statutes; (3) materials given the force of law; Rules and other (4) releases; Policy and interpretive (5) SEC staff legal bulletins; (6) Interpretive and no-action letters; (7) The Manual of Telephone Interpretations; (8) Telephone interpretations; and (9) SEC staff comments on filed documents. SEC Regulatory Hierarchy: Rules, Opinions, and No-Action Rules, Opinions, Hierarchy: SEC Regulatory Letters 921, 933, 935-56 (1998) (“SEC rules, SEC orders, and SEC releases com- 921, 933, 935-56 (1998) (“SEC rules, SEC . NST B. 30. 31. Part III, 29. Gary M. Brown, EV EDERAL (2012). Professor Soderquist, however, notes that “[t]he hierarchy of much (2012). Professor Soderquist, however, for the person to whom an of this list is not completely set. For example, its place is higher on the list interpretive or no-action letter is addressed, than releases of general applicability.” generally No-Action Letters: Current Problems and a Proposed Framework No-Action Letters: Current Problems and a R prise what can be characterized as the official and formal side of the SEC’s prise what can be characterized as the the subordinate interpretive au- spectrum of interpretive authority,” while thority is made up of all lower-tiered forms of communication.). debt tender offers and how the statutes relate to the regulatory avenues dis- cussed here. tory mechanisms involving the SEC’s “interpretive authority” tory mechanisms involving the SEC’s regulatory tool, the no-action but will focus on one particular form of policy creation. letter, as a uniquely problematic L. I F thority is governed by and administered through several tiers by and administered through thority is governed statutory authority.of regulatory and The following hierarchy laws: constitutes the U.S. securities of regulatory authorities 2012] its structure carefully must a company cases, and other these rules. offer tender applicable with the comply to transaction 1. \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 9 26-FEB-13 14:17 33082-nyb_9-1 Sheet No. 107 Side A 02/27/2013 10:49:33 Side A 02/27/2013 Sheet No. 107 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 107 Side B 02/27/2013 10:49:33 . DMIN Sec- The A 32 33 [Vol. 9:199 , 59 Administrative Rules can ODERQUIST ON note 29, § 1.4;. S 38 , 41 note 29, § 1.3. supra supra or if they are held 39 Hazen, In addition to rules and In addition to rules Brown, 35 note 29, § 1.4[2][A]; Business Round- see also see generally Rules and regulations are binding Rules and regulations 37 34 , supra Sources of Federal Securities Law For example, because Rules 130 and For example, because , 36 note 29, § 1.4[2][A]. note 29 § 1.4[2][A]. For more on the Administra- note 29, § 1.4[2]. Hazen . note 29, § 1.3. note 29, § 1.3; NYU JOURNAL OF LAW & BUSINESS supra supra supra ODERQUIST see also supra supra Once passed, however, the rules are recorded in Once passed, however, the rules D. S . 40 . § 1.4 (2012). Hazen, Hazen, Hazen, Chamber of Commerce of the U.S. v. SEC, 412 F.3d 133 (D.C. Cir. Chamber of Commerce of the U.S. v. SEC, ARRY . L THE See id See generally id L See See See See 79, 83-84 (2007) (discussing the development of agency functions). 79, 83-84 (2007) (discussing the development . EC Rules and regulations, however, constitute a small part of Rules and regulations, however, The SEC’s rulemaking must comply with the Administra- The SEC’s rulemaking Rules and regulations are the primary mechanisms that the primary regulations are Rules and EV S 35. Brown, 36. 37. 34. Brown, 39. 41. 40. 32. 38. 33. 15 U.S.C. § 78(d)(1) (1987); L. R table v. SEC, No. 10-1305, slip op. (D.C. Cir. July 22, 2011) (commenting table v. SEC, No. 10-1305, slip op. (D.C. in failing to adequately that the SEC acted “arbitrarily” and “capriciously” assess the economic effects of a rule). tive Procedure Act, 60 Stat. 237 (1946), see Alan B. Morrison, tive Procedure Act, 60 Stat. 237 (1946), Agencies are Just Like Legislature and Courts—Except When They’re Not the SEC’s regulatory policies. SEC’s an- The majority of the tive Procedure Act and cannot exceed the authority delegated and cannot exceed the authority tive Procedure Act the rulemaking process. to the SEC governing 208 a. Phone Calls and Bulletins Releases, Regulations, Rules, obligations. legally binding SEC to establish allow the \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 10 26-FEB-13 14:17 the Federal Register and carry the force of law. the Federal Register and carry the 401(a) incorporate registration statements into the rules them- registration statements into the 401(a) incorporate become le- registration statement forms selves, thus the SEC’s standards. gally enforceable arbitrary. to promulgate rules regarding in- 2005) (noting that the SEC had authority failed to adequately consider costs dependence of mutual fund directors but of compliance); law and thus enforceable in court. law and thus enforceable carry are other SEC actions that similarly regulations, there law. the full force of tion 4 of the Exchange Act grants the SEC authority to create grants the SEC the Exchange Act tion 4 of laws. the statutory securities supplement rules that also be challenged if the SEC is found to have neglected finan- also be challenged if the SEC is found policies cial burdens associated with its SEC’s broad rulemaking authority allows the Commission to the Commission authority allows rulemaking SEC’s broad is the which “rules and regulations,” its staff to pass work with statutory aim of Congress. 33082-nyb_9-1 Sheet No. 107 Side B 02/27/2013 10:49:33 Side B 02/27/2013 Sheet No. 107 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 108 Side A 02/27/2013 10:49:33 , 209 Like Typi- securi- 50 49 de facto For example, the 47 Brown, supra note 29, § 1.3 Many releases, however, do however, Many releases, see also Orders and Interpretive/No-Action Letters Like other “nonauthoritative” Like other 43 44 The SEC also publishes a manual of The SEC also publishes a manual 51 law for securities lawyers, guiding the law for securities note 29, at 19. note 29, § 1.3. HONORED IN THE BREACH THE IN HONORED note 29, § 1.3. note 29, § 1.4[3] note 29, § 1.4[3]; supra , supra de facto supra supra supra Bulletins will frequently address ambiguities in a address ambiguities in Bulletins will frequently 46 Allen v. Admin. Review Bd., 514 F.3d 468, 478 (5th Cir. 2008) Allen v. Admin. Review Bd., 514 F.3d Brown, Similarly nonbinding, lawyers will also sometimes call lawyers will also sometimes Similarly nonbinding, 45 . . ODERQUIST Releases typically provide interpretations, supplemental interpretations, provide typically Releases Id See S See Id 48 note 29, § 1.3. phone interpretations are At many law firms, these Legal bulletins, like releases, are not legally binding on like releases, are not legally binding Legal bulletins, 42 51. For further discussion of the phone message process, see Brown, 43. Hazen, 44. 45. Brown, 46. 42. Hazen, 47. 50. 49. the least binding interpretive Oral communications are considered 48. supra often memorialized in memoranda that are shared with hundreds of lawyers in the firm. In some cases, the informal phone interpretations are shared (“Unlike a rule promulgated by the SEC . . . an SEC Staff Accounting Bulle- law.”) (internal quotations omitted) tin does not carry with it the force of (citations omitted). ST007 ALI-ABA 709, 713 (2011). the Commission but still form another body of the Commission 2012] of force have the do not which are “releases,” nouncements law. ties law. \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 11 26-FEB-13 14:17 method within the SEC. accorded “no The oral statements are not even on the staff because of their action” status and are not considered binding informal nature. Thomas S. Harman, statute or rule and thus provide clarity to market participants thus provide clarity to market statute or rule and with the securities laws. looking to comply of the law. the SEC to get an informal interpretation not interpret the law but instead merely announce new or up- announce new or instead merely the law but not interpret and regulations. dated rules information or other policy positions regarding a rule or other a rule or positions regarding or other policy information provision. legally enforceable cally, a market participant or her counsel will leave a voicemail cally, a market participant or her is sent to an individual with the SEC staff, then the message one to two days. staff member who will respond within and nonbinding SEC announcements, interpretive releases SEC announcements, and nonbinding have become interactions do not bulletins and releases, these telephone carry the force of law. first legal bulletin ever issued addressed the confidentiality of ever issued addressed the confidentiality first legal bulletin SEC regula- must submit to comply with disclosures an issuer tions. structuring of transactions and compliance with the rules con- and compliance with structuring of transactions cerned. 33082-nyb_9-1 Sheet No. 108 Side A 02/27/2013 10:49:33 Side A 02/27/2013 Sheet No. 108 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 108 Side B 02/27/2013 10:49:33 57 54 896 1019, . de jure note 29, AW 667, 680 , www.sec. [Vol. 9:199 . L GOV supra US . ERIES B S SEC , , 42 Most of these letters are Most of these letters Yet, for reasons that will Yet, for 55 53 OURSE HANDBOOK note 29, at 19-21. . C Because these letters are such supra RAC 58 , note 54, at 1042-42; Brown, P note 29, at 18 (“Although these policies and AND supra and, although these letters were not and, although The SEC No-Action Letter Process 56 L. ODERQUIST supra S , ORP note 29, § 1.3. Lemke, note 29, at § 1.4[4]. NYU JOURNAL OF LAW & BUSINESS . C note 30, at 938. note 29, at § 1.4[4]. NST supra supra see also supra 52 ODERQUIST supra L. I S Reliance on SEC Staff “No Action” Letters—A Shield or a Sword? See id; see also See Manual of Publicly Available Telephone Interpretations SEC no-action letters rank with phone calls as the least with phone letters rank SEC no-action 56. Hazen, 57. Brown, 58. 53. to IRS private letter rulings. No-action letters have been compared 55. because interpretive and This paper will not discuss this distinction 54. Thomas P. Lemke, 52. Hazen, RACTISING gov/interps/telephone.shtml (last modified Feb. 2, 2007). gov/interps/telephone.shtml (last modified See § 1.3. Nagy, 1031 (1987). identically under the law and often traditional no-action letters are treated traditional or interpretive. Richard are not even clearly categorized as either H. Rowe, (June 1995); interpretations do not have the force of law, as a practical matter they are often given almost that effect by a securities lawyer.”). P more broadly with the securities bar and become part of the “lore” of securi- more broadly with the securities bar and ties law. There are two types of no-action letters, with some being types of no-action letters, with There are two ac- that the staff would not recommend straightforward signals featuring an proposed transaction and others tion against the the securities laws. interpretation of struc- for new, innovative transactional Combining approval of the letters, no-action letters tures with the public availability law that lacks a clear have developed into an area of 210 asked commonly many featuring interpretations telephone questions. b. Letters: Introduction No-Action regulation. form of SEC persuasive that define the law’s power but produces real-world practices parameters for practitioners. \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 12 26-FEB-13 14:17 published until 1970, now all letters are publicly available. 1970, now all letters are publicly published until important tools in the SEC’s regulatory capacity, they create important tools in the SEC’s regulatory with debt tender offers today many of the problems associated of the problems discussed in and thus have generated many be discussed in the next subsection, it is also the most complex subsection, it is also in the next be discussed practitioners of SEC regulation for legal and significant form offers.structuring tender letters have little SEC no-action and do not even bind the Commission. precedential value compliance-oriented, 33082-nyb_9-1 Sheet No. 108 Side B 02/27/2013 10:49:33 Side B 02/27/2013 Sheet No. 108 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 109 Side A 02/27/2013 10:49:33 see 211 Often, be- 64 at 704-16. This back-and-forth 65 Any SEC response is Any SEC response 1895 (2d ed. 1961) (“[I]t is SEC responses to no- SEC responses 62 63 See, e.g., id. , http://www.sec.gov/answers/ EGULATION The SEC will, however, some- will, however, The SEC After a no-action request is re- After a no-action R 59 61 No Action Letters ECURITIES S HONORED IN THE BREACH THE IN HONORED , note 54, at 1031. OSS note 55, at 695-96. While there is no statutory authority, note 30, at 937. L note 30, at 943 (“[W]hen a no-action letter request involves supra 60 supra OUIS supra L 3 supra at 689-90. at 1041-42. Id. Id. See The basic purpose of no-action letters is to inform peti- of no-action letters is to inform The basic purpose No-Action Letters: Use and Purpose Letters: Use and No-Action [m]ost no-action letters describe the request, analyze the particular [m]ost no-action letters describe the request, applicable laws and rules, facts and circumstances involved, discuss action, concludes that the and, if the staff grants the request for no Commission take enforce- SEC staff would not recommend that the on the facts and represen- ment action against the requester based original letter. tations described in the individual or entity’s Nagy, 59. Rowe, 60. 61. Nagy, 62. letter process is that: The SEC’s characterization of the no-action 63. Lemke, 64. 65. no secret that Commission officials do not express opinions on close ques- no secret that Commission officials do tions of construction . . . without some clearance with the Commission.”); also a novel or highly complex issue or area of interpretation, the staff typically consults with the Commission prior to issuing a response.”). no-action letters are governed by SEC rules. no-action letters are governed by SEC rules. tioning parties that their proposed transaction will not foment their proposed transaction will tioning parties that response. an adverse SEC 2012] paper.this they but basis, no statutory have letters No-action an administrative of the bounds within as falling are regarded implicit authority. agency’s 2. \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 13 26-FEB-13 14:17 times use its own past no-action letters as (still nonbinding) letters its own past no-action times use “precedent.” process can go on for months before a formal no-action letter process can go on for months before ceived, an SEC staffer responds to a properly formed petition responds to a properly formed ceived, an SEC staffer in the under the particular facts presented by signaling that, take action not recommend that the SEC letter, the staff would as described. against the transaction U.S. Sec. & Exch. Comm’n, noaction.htm (last modified Sept. 21, 2012). action requests can be either (i) favorable, (ii) “no response can be either (i) favorable, (ii) action requests or (iii) unfavorable. on the merits,” publicly available, and the SEC publishes a monthly list of the and the SEC publishes a monthly publicly available, the SEC staff. most important letters written by place among the staff—andhind-the-scenes exchanges take who submitted the pe- between the staff and the legal counsel tition—before the final letter is issued. 33082-nyb_9-1 Sheet No. 109 Side A 02/27/2013 10:49:33 Side A 02/27/2013 Sheet No. 109 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 109 Side B 02/27/2013 10:49:33 70 have 68 [Vol. 9:199 note 54, at note 55, at 689- supra supra , http://sec.gov/news/ Lemke, Even this concession, See as a strong suggestion as a strong 71 69 72 SEC News Digest 66 and one SEC Commissioner and one 67 note 54, at 1033. note 30, at 944 (noting that Commission statements note 30, at 944 (noting that Commission NYU JOURNAL OF LAW & BUSINESS supra supra Salomon Bros. Inc., SEC No-Action Letter, 1990 WL 286946 Salomon Bros. Inc., SEC No-Action Letter, Merrill Lynch, Pierce, Fenner & Smith Inc., SEC No-Action Let- Merrill Lynch, Pierce, Fenner & Smith Inc., Lemke, Nagy, Separate Statement of Commissioner Fleischmann, Morgan Stan- Separate Statement of Commissioner Fleischmann, U.S. Sec. & Exch. Comm’n, at 950 n. 130. Also among the reasons for declining to respond, how- reasons for declining to respond, Also among the See Id. See See See, e.g., See accord, The SEC’s declining to respond can be levied for a num- to respond can be levied for The SEC’s declining At least one scholar At least 73 66. 67. 68. 69. 71. 70. types of no-action positions For discussion of specific and general 73. 72. with the following: “Be- The SEC typically ends its no-action letters ber of reasons, typically involving either (i) a failure to provide involving either (i) a failure ber of reasons, typically adjudicatory (ii) an issue that the SEC’s enough information, is develop- or (iii) an area of law that process should decide, ing. 212 published never formally is interaction and the is submitted, made public. or otherwise will not address favorable response significantly, a However, instead, the made by the requesting party; the legal arguments respondent will only inform the party that the staff respondent any SEC action. will not recommend \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 14 26-FEB-13 14:17 that the no-action letters should be given precedential value. should be given no-action letters that the however, is limited to the provisions enumerated and the facts to the provisions enumerated however, is limited requesting party. specified by the approving or reversing no-action letters from staff are informal and gener- approving or reversing no-action letters than being published in the Fed- ally made at Commission meetings, rather eral Register or the Code of Federal Regulations). pointed to the public availability of no-action letters, as well as letters, as well of no-action to the public availability pointed of a digest, publication the monthly ley & Co., Exchange Act Release No. 28,990, 48 SEC Docket 674 (Mar. 20, ley & Co., Exchange Act Release No. 28,990, 1991). 96. digest.shtml. see Rowe, that are uniquely persuasive or prominent, ter, 1993 WL 270676, at *9 (July 19, 1993) (“This no-action position is a staff ter, 1993 WL 270676, at *9 (July 19, 1993) position regarding enforcement action only and should not be understood to express any legal conclusions regarding the applicability of any provisions of the federal securities laws.”). (Oct. 1, 1990) (no action recommended “based on your representations, but (Oct. 1, 1990) (no action recommended your analysis”). without necessarily agreeing with all of and representations made in your cause this position is based on the facts facts or circumstances might re- letter, you should note that any different quire a different conclusion.represents the Further, this response only does not purport to express any staff’s position on enforcement action and legal conclusion on the questions presented.” 1032; 33082-nyb_9-1 Sheet No. 109 Side B 02/27/2013 10:49:33 Side B 02/27/2013 Sheet No. 109 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 110 Side A 02/27/2013 10:49:33 75 213 Sec- 81 Adverse responses Adverse 74 77 There is an appeals process for ad- There is an appeals 76 note 54, at 1035. HONORED IN THE BREACH THE IN HONORED There are two primary advantages to the There are two supra 79 note 30, at 951 5 U.S.C. §§ 701-06 (2010) (detailing rulemaking 551-59, supra at 1035 (citing Computer Language Res., SEC No-Action Let- at 1035 (citing Computer Language Res., at 1036-40. . This immediacy allows the SEC to react to new mar- This immediacy allows the SEC see also Lemke, Today, the no-action letter has become the primary Today, the no-action at 1034. This type of refusal further suggests that the no-action ; 80 78 Id. See id See See id. See id See id. Id. Because the no-action letter process does not require no- letter process does not require Because the no-action 74. 75. 76. 77. 78. Nagy, 79. 80. 81. tice, hearing, or any other regulatory hurdles, it has become any other regulatory hurdles, it tice, hearing, or to market to the SEC’s ability to respond increasingly central needs. 2012] rule or “an interpretive issued has already SEC is that the ever, for an issue. no-action” codifying release of no-action letters, value aware of the precedential Perhaps re- where any doubt conservative” is typically “more the SEC respond ad- the practice’s legality and will mains regarding versely to the request. \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 15 26-FEB-13 14:17 way the SEC has molded its rules and regulations to new mar- molded its rules and regulations way the SEC has ket conditions. ket needs without facing the protracted notice and comment ket needs without facing the protracted rule formation. periods that accompany, for example, verse responses through both the Commission and the courts, both the Commission and verse responses through a decision is unlikely. but overturning letters.SEC’s use of no-action First, and most important, is the process.timeliness of the no-action letter letter A no-action staff has formulated its re- can be issued as soon as the SEC sponse. letter should be regarded as having precedential value similar to a legally letter should be regarded as having precedential binding interpretation. ter, [1985-1986 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 78,185, 76,757- ter, [1985-1986 Transfer Binder] Fed. Sec. SEC No-Action Letter, [1985-1986 58 (Nov. 26, 1985); Kemper Fin. Servs., ¶78,182, 76,749-50 (Oct. 30, Transfer Binder] Fed. Sec. L. Rep. (CCH) Letter, [1985-1986 Transfer 1985); Cortland Fin. Group, SEC No-Action 76,741-42 (Sept. 26, 1985)). Binder] Fed. Sec. L. Rep. (CCH) ¶ 78,180, ond, as one scholar noted, the no-action letter “provides the ond, as one scholar noted, the the fuzzy standards often set SEC with an escape hatch from through litigated proceed- out in SEC releases or announced will more frequently explain their reasons for the decision, but for the decision, their reasons frequently explain will more rely decision and may to explain the has no obligation the SEC further comment. without discretionary authority upon its requirements for federal administrative agencies). 33082-nyb_9-1 Sheet No. 110 Side A 02/27/2013 10:49:33 Side A 02/27/2013 Sheet No. 110 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 110 Side B 02/27/2013 10:49:33 . EV , 969 L. R EE [Vol. 9:199 The use of . & L 85 ASH vacated as moot W , 47 note 54, at 1034. by allowing the Commission by allowing the 86 supra on the application of [the fed- application of [the on the 84 The SEC as a Bureaucracy: Public Choice, Institu- Lemke, see also This stems from the fact that, as nonbinding This stems from the fact that, as note 30, at 927 (citing Clemente Global Growth Fund, note 30, at 927 (citing Clemente Global NYU JOURNAL OF LAW & BUSINESS note 30, at 952. 87 at 950; supra supra Id. Because the securities laws contain broadly written broadly contain laws securities the Because This importance is not lost on the SEC. is not This importance The agency . Id 82 83 Courts have disagreed regarding how much deference no- Courts have disagreed regarding 85. No-Action, and Certain Ex- Expedited Publication of Interpretive, 86. Donald C. Langevoort, 82. Nagy, 83. 84. the precedential value of the The use of the term “source” suggests 87. Nagy, emption Letters, Securities Act Release No. 6764, [1987-1988 Transfer emption Letters, Securities Act Release 89,053-54 (Apr. 7, 1988). Binder] Fed. Sec. L. Rep. (CCH) ¶ 84,228, tional Rhetoric, and the Process of Policy Formulation no-action letters. that will And indeed, for a number of regulatory concerns the SEC has declined to grant no- lead counsel to request a no-action letter, unless the applicant has raised a new action letters regarding those concerns legal issue. 527, 530-31 (1990). 214 ings.” \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 16 26-FEB-13 14:17 to adjust its standards with minimal delay.to adjust its standards As this paper will the no-action the SEC may rely too much on show, however, with- modify bright-line issuer requirements letter, using it to actual law and accordingly modifying the out subsequently governing the transaction. a. Letters in Courts Use of No-Action the no-action letter’s im- action letters should receive, given apparatus.portance to the SEC’s regulatory of clarity The lack no-action letters is rooted surrounding transactions involving in this disagreement. of Even courts’ basic characterizations “law” to “rulings” to “infor- no-action letters range widely from mal opinions.” eral securities] laws” available to practitioners. eral securities] laws” but persuasive authority, the SEC’s interpretations through no- but persuasive authority, the SEC’s provisions that require interpretation and enforcement, the enforcement, and interpretation require that provisions their issuers and as a way to guide no-action letters SEC uses required for compli- specific criteria through more counsel ance. com- are “the most no-action letters that its has acknowledged secondary source prehensive Inc. v. Pickens, 705 F. Supp. 958, 965 n.2. (S.D.N.Y. 1989); Peck v. Grey- hound Corp., 97 F. Supp. 679, 680 (S.D.N.Y. 1951); NYC. Emp. Ret. Sys. v. Dole Food Co., 795 F. Supp. 95, 100 (S.D.N.Y. 1992), F.2d 1430 (2d Cir. 1992)). no-action letters also comports with the SEC’s general reluc- also comports with the SEC’s no-action letters rules tance to create bright-line 33082-nyb_9-1 Sheet No. 110 Side B 02/27/2013 10:49:33 Side B 02/27/2013 Sheet No. 110 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 111 Side A 02/27/2013 10:49:33 see — 215 note 89 United supra Nagy, see also have held that the no- have held that In no case, however, has 94 , , the court found that the , the court found 96 or “a considerable degree or “a considerable 91 Amalgamated Clothing & Textile Amalgamated Clothing although the SEC’s interpreta- 95 , 308 F. Supp. 810, 813 (S.D.N.Y. 1969); , 308 F. Supp. 810, 813 (S.D.N.Y. 1969); . note 30, at 983. by the interpretation, because the no- by the interpretation, because the note 30, at 987 (“[N]o-action letters can often supra HONORED IN THE BREACH THE IN HONORED supra bound United Mine Workers of Am. V. Pittson Co., No. C.A. 89- United Mine Workers of Am. V. Pittson note 30, at 928. to no-action letter interpretations. to no-action letter In note 30, at 981. Nagy, 92 note 30, at 982. Nagy, , N.Y.C. Emp. Ret. Sys. v. SEC, 45 F.3d 7, 13 (2d Cir. 1995). , N.Y.C. Emp. Ret. Sys. v. SEC, 45 F.3d supra supra at 884. (noting that the SEC’s interpretation can provide in- at 884. (noting that the SEC’s interpretation see also supra Other courts, seen in Other courts, seen Even where no-action interpretations are not ac- are interpretations no-action where Even . at 885. see also See, e.g. Amalgamated Clothing & Textile Workers Union v. Wal-Mart Stores, Inc. Amalgamated Clothing & Textile Workers Id See id 93 90 88 Federal district courts, however, are divided regarding the however, are divided regarding Federal district courts, Nagy, 88. Nagy, 89. 90. Nagy, 91. Brooks v. Standard Oil Co 92. Co., [1989-1990 Transfer United Mine Workers of Am. v. Pittson 94. 96. 95. 93.Fed. Sec. L. Rep. (CCH) ¶ Pittson, [1989-1990 Transfer Binder] leaves open the possibility that district courts could interpret that district courts the possibility leaves open Mine Workers of America v. Pittson Co. Mine Workers of America by an SEC despite the fact that it was drafted no-action letter, entity and its from the cognizant agency staffer, “emanate[d] by the and was thus due full deference chief legal advisor” court. Workers Union v. Wal-Mart Stores, Inc. Workers Union v. provide substantial insight into the meaning of the SEC’s ‘ordinary business exception.’”). amount of weight carried by SEC no-action letters.amount of weight Some weight” courts grant “controlling 2012] jurisdic- in some authoritative considered are still letters action tions. \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 17 26-FEB-13 14:17 also Binder], Fed. Sec. L. Rep. (CCH) ¶ 94,946, 24, 1989), 95,266 (D.D.C. Nov. opinion withdrawn by 821 F. Supp. 877 (S.D.N.Y. 1993). and that the consistency sight into the term “ordinary business operations,” of an agency’s position may influence the level of deference for no-action letters); tion may be persuasive nonetheless. a court held itself corded deference, their status is still unclear. their corded deference, as For example, to “need not” defer fact that a court notes, the one commenter letters—theno-action Second Circuit used in the standard action letter is “not an expression of agency interpretation to action letter is “not an expression which the court must defer,” of deference” 0962 NHJ, 1990 WL 711760 (D.D.C. May 21, 1990); 0962 NHJ, 1990 WL 711760 (D.D.C. May the appellate standard as “an option rather than an obliga- as “an option rather standard the appellate tion.” 30, at 983. 95,270 n.8; 33082-nyb_9-1 Sheet No. 111 Side A 02/27/2013 10:49:33 Side A 02/27/2013 Sheet No. 111 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 111 Side B 02/27/2013 10:49:33 , 99 GOV Ac- . SEC 101 , [Vol. 9:199 No circuit No , 45 F.3d 7, 13 . 97 although there are although 98 Roosevelt v. E.I. Du Pont de , 487 F.2d 1281, 1294 (2d Cir. . see also Indeed, the no-action letter has be- Indeed, the no-action 100 note 30, at 979-80 (describing recent case law on judi- note 30, at 979-80 (describing recent case law.” NYU JOURNAL OF LAW & BUSINESS note 30, at 924-25. note 55, at 759-60. Often, making use of no-action letters is not in- Often, making use of no-action supra supra supra 102 de facto Nagy, Gerstle v. Gamble-Skogino, Inc at 957 See See Id. Researching the Federal Securities Laws Through the SEC Website Because practitioners must adapt to market conditions to must adapt to market conditions Because practitioners 97. Rowe, 98. 99. 100. Nagy, 101. 102. http://www.sec.gov/investor/pubs/securitieslaws.htm (last modified Jan. 19, 2012). Nemours & Co. 958 F.2d 416, 427 n.19 (D.C. Cir. 1992) (reasoning that Nemours & Co. 958 F.2d 416, 427 n.19 letters because they are not Chevron deference is inapplicable to no-action Amalgamated Clothing & Textile “an agency adjudication or rulemaking”); n.3 (2d Cir. 1994) (noting that Workers Union v. SEC, 15 F.3d 254, 257-58 high level of judicial deference” no-action letters are not “entitled to the N.Y.C. Emp. Ret. Sys owed legally binding SEC regulations); (2d Cir. 1995) (finding that courts “need not” give no-action letters the (2d Cir. 1995) (finding that courts “need do legally binding SEC regulations). “same high level of deference” as they 216 authority. any legal carry does not letter action b. in the Legal Practice No-Action Letters become “a SEC no-action letters have serve their clients, source of \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 18 26-FEB-13 14:17 herently problematic due to the fact that most statutory law is herently problematic due to the discretion.broadly construed to grant the SEC for exam- So, cial deference to no-action letters); 1973) (holding that it is difficult to attach any significance to the distinction 1973) (holding that it is difficult to attach interpretation of a rule when between a rule and the SEC’s institutional the interpretation and so advised counsel to the issuer reasonably believed its client). come so integrated into the SEC’s regulatory framework that into the SEC’s regulatory framework come so integrated SEC reg- has treated official and unofficial at least one scholar authoritative for practitioners. ulations as equivalently sometimes exceptions to very well-established SEC policies. very well-established exceptions to sometimes court has yet adopted any form of automatic deference to the deference of automatic any form adopted has yet court let- such as no-action authorities regulatory SEC’s nonbinding ters. between le- have distinguished appellate courts Instead, let- such as no-action other issuances rules and gally binding legal weight, do not carry any ters that cording to the SEC itself, the securities laws have been SEC itself, the securities laws cording to the objectives,” establishing basic principles and “broadly drafted, to new market conditions by which allows the SEC to adapt fair and orderly mar- “engag[ing] in rulemaking to maintain regulations or creating kets and to protect investors by altering new ones.” 33082-nyb_9-1 Sheet No. 111 Side B 02/27/2013 10:49:33 Side B 02/27/2013 Sheet No. 111 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 112 Side A 02/27/2013 10:49:33 : , 217 RANSACTIONS T , 10 This letter must be grounded in 105 Guidelines for the Preparation of Closing Opinions Wait. . .What did I Just Say?: What Lawyers Need to HONORED IN THE BREACH THE IN HONORED Legal Opinion Letters: Overview C. 71, 80 (2008). 875, 875 (2002). . L. . Lillian Blackshear, US AW As part of this process—indeed, As part of this as its culmination— neither the client nor Specifically, the letter avers that Id. See . L 103 104 An attorney’s primary role in a debt tender offer is to role in a debt tender offer An attorney’s primary Legal opinion letters are an essential part of the securities Legal opinion letters are an essential . J. B US B 104. 105. 103. Comm. on Legal Ops., ENN the attorney drafts an opinion letter validating the transac- the attorney drafts an opinion be Concerned About When Issuing Third-Party Closing Opinions 57 T 2012] proposed issuer’s an whether regarding letter a no-action ple, to so as requirements disclosure to responsive is disclosure may allow an attorney disclosure misleading avoid a materially is drafted statute that the broadly the legal conclusion to adopt not violated. on a general staff interpretation This type of SEC a staff is distinct from disclosure requiring adequate standard test. bright-line with a specific on compliance interpretation has used its is important because the SEC This distinction that include a authority to adopt SEC rules broad rulemaking tender of- tests, such as those regarding number of bright-line as discussed in this paper.fer time periods Using the no-ac- is much dif- these bright-line tests tion process to circumvent gui- no-action letters to provide interpretive ferent from using ambiguous disclosure standards. dance on somewhat securities compliance with the oversee the transaction’s laws. \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 19 26-FEB-13 14:17 transaction process for an investment bank acting as an under- transaction process for an investment tion. the securities laws during the the transaction itself has violated course of the deal process. is charged with inter- enforceable law, and thus the attorney other enforceable legal provi- preting the relevant statutes and sions relevant to a given transaction. “no viola- Because this legal provisions, it is tion” opinion is reliant upon enforceable confronts the SEC’s regula- the area where legal counsel’s duty between the SEC’s practice tory approach, with differences creating a substantial ob- and their legally enforceable policies legal transactions. stacle for counsel to sanction otherwise 33082-nyb_9-1 Sheet No. 112 Side A 02/27/2013 10:49:33 Side A 02/27/2013 Sheet No. 112 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 112 Side B 02/27/2013 10:49:33 See . L.J. US B Clients [Vol. 9:199 §§ 1:3-1:4 109 ERKELEY ATTERS In the tender In the B while attorneys M 106 , 3 110 Due to the limits of Due to the limits ECURITIES 108 91 (2002). Market participants’ S THICS E ETTERS IN Price, Path, & Pride: Third-Party Closing Opinion EGAL L note 106, at 63. A Hobson’s Choice for Securities Lawyers in the Post- A Hobson’s Choice for Securities Lawyers in . J. L supra PINION EO G In all debt tender offer transactions the dealer man- In all debt tender offer transactions the note 106, at 102-07. NYU JOURNAL OF LAW & BUSINESS , O In securities transactions the legal opinion let- the legal opinion transactions In securities . , 16 supra 107 Lipson, ACOBS note 106, at 102-07. at 106-07. Jonathan C. Lipson, at 61-62 Both parties harbor dissatisfaction with the economic Both parties harbor dissatisfaction supra see also S. J Id. Id. See The rules governing opinion letter writing are thus cen- opinion letter writing are The rules governing 111 107. 109. Lisa H. Nicholson, 111. 108. opinion letters generally, see 8 Regarding the purpose and scope of 110. Lipson, 106. RNOLD 59, 62 (2005). (2008); the Obligation of Client Loyalty and Enron Environment: Striking a Balance Between Market Gatekeeper ager’s legal counsel is involved in structuring the transaction to comply with ager’s legal counsel is involved in structuring however, that provides the legal securities laws. It is the issuer’s counsel, the transaction will result in a opinion to the dealer manager as to whether debt tender offer transaction, this violation of the securities laws. In a typical to be more aggressive in structuring allows counsel for the dealer manager the issuer’s counsel that must for- the transaction because it is ultimately with securities laws. mally conclude that the transaction complies aversion to reasoned or incomplete opinions primarily follows from the let- aversion to reasoned or incomplete opinions to attorney—ater’s failure to shift liability from participant central function market participants’ perspective. of the opinion letter issuance from the Lipson, Practice Among U.S. Lawyers (A Preliminary Investigation) Practice Among U.S. Lawyers (A Preliminary A 218 offer. a tender in manager or dealer writer \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 20 26-FEB-13 14:17 ter is, from the attorney’s perspective, the end product of the end product perspective, the the attorney’s ter is, from of the transaction. legal structuring opinion letters’ use of administrative materials, deal structures of administrative materials, deal opinion letters’ use no-action let- legality, even if sanctioned by that are of unclear for the involved parties. ters, create problems refusal to relations, such that a law firm’s tral to client-attorney is function- a client with an opinion letter fully accommodate turning the client’s business away. ally the same as offer context, the dealer manager typically receives a legal receives typically manager the dealer context, offer (not from the dealer legal counsel from the issuer’s opinion to the dealer some protection counsel) providing manager’s illegally structured stemming from from liabilities manager transactions. often view these letters, particularly in the wake of the Enron letters, particularly in the wake often view these participants from liabil- scandal, as a way to shield the market letter turns out to be defec- ity if the deal fails and the opinion tive. often view opinion letters as a burdensome exercise that must letters as a burdensome exercise often view opinion the transaction, be satisfied to consummate 33082-nyb_9-1 Sheet No. 112 Side B 02/27/2013 10:49:33 Side B 02/27/2013 Sheet No. 112 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 113 Side A 02/27/2013 10:49:33 219 679, 694-97 113 Due to the this option is 117 NQUIRY 118 . I OC Value Creation by Business 67, 68 (2007). 239, 274-76 (1984); Mark C. . L. & S any attempts to protract US AW . L.J. L 119 A Primer on Opinion Letters: Explana- . J. B ALE Y , 21 ENN T , 94 : Ronald J. Gilson, 1 (2005). The Limits of Lawyering: Legal Opinions in Struc- The Limits of Lawyering: Legal Opinions in . Id. This approach is referred to as a “rea- This approach Kelly A. Love, EV The Hired Gun as Facilitator: Lawyers and the Suppres- The Hired Gun as Facilitator: Lawyers and the see also note 106, at 77. HONORED IN THE BREACH THE IN HONORED 116 note 106, at 65. This contention was supported by the RANSACTIONS . L. R T see also supra EX note 114, at 68. T , 9 supra and the liability structures imposed by the opin- by the imposed structures the liability and at 80. supra , 84 112 Opinion letters can offer two levels of approval, ei- two levels of letters can offer Opinion at 64-65; Lipson, at 67. Under the latter approach, the firm may offer an approach, the firm may offer Under the latter 114 Id. Id. See See id. Id. 115 Attorneys can, however, negotiate the amount of liability negotiate the amount can, however, Attorneys note 106, at 63-65; 115. Love, 116. 117. 118. 119. 113. Lipson, 114. 112. of opinion letters, see Lipson, For discussion of economic efficiency (1996); Steven L. Schwarcz, tured Finance Suchman & Mia L. Cahill, sion of Business Disputes in Silicon Valley opinion of surveyed attorneys, who believed that attorneys were “becoming opinion of surveyed attorneys, who believed when transactions failed,” and that increasingly attractive litigation targets form an important link in the attorney-produced opinion letters “would chain leading to liability.” tion and Analysis supra Lawyers: Legal Skills and Asset Pricing 2012] efficiency managing the letter’s letter by by issuing an opinion they incur scope. \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 21 26-FEB-13 14:17 ion letter requirement, and at least one commenter has sug- one commenter at least and letter requirement, ion controversial will become increasingly these letters gested that the future. transactions in in securities yet integral soned” opinion because it qualifies the opinion. soned” opinion because opinion that does not approve or disapprove of the transac- not approve or disapprove of opinion that does to other as- the firm limits its opinion tion outright; instead, letters but also discusses the no-action pects of the transaction the letter of qualities that violate supporting the transaction’s the securities laws. ther approving of a transaction in its entirety, or limiting the a transaction in its entirety, or ther approving of the opinion aspects of the transaction that opinion to the the securities are fully compliant with writer determines laws. the opinion process through discussion or qualification are the opinion process through discussion probably the least financially desirable for a client.probably the least financially desirable Financial be the most problematic as- inefficiency, moreover, may not pect of this form of opinion letter. hostility Because of clients’ to opinion letters as an obligation, fact that opinion letters’ cost-effectiveness relates the scope of letters’ cost-effectiveness relates fact that opinion in creating it, the opinion to the time involved 33082-nyb_9-1 Sheet No. 113 Side A 02/27/2013 10:49:33 Side A 02/27/2013 Sheet No. 113 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 113 Side B 02/27/2013 10:49:33 . Id. AW The . L US 120 B [Vol. 9:199 The clean , 425 U.S. 185, , 59 121 122 Ernst & Ernst v. Hochfelder For debt tender offers, attorneys For debt tender Legal Opinions in SEC Filings Like other opinions, “no violation” Like other opinions, 123 . (citing 125 Id note 106, at 76. note 106, at 62. In addition to the actual legal opinions NYU JOURNAL OF LAW & BUSINESS 395, 396-97 (2009). This statement on the adequacy of supra note 114, at 68. . AW supra . L that sanctions the transaction under the relevant that sanctions supra See generally Negative Assurance in Securities Offerings (2008 Revi- See generally Negative Assurance in Securities Lipson, US And, of course, firms willing to grant clean letters will possess a And, of course, firms willing to grant 124 B See id. Id. See Opinion letters generally establish: (1) the authority of establish: (1) letters generally Opinion 64 124. For a brief description of securities law opinion requirements, see 120. 121. Love, 122. 125. 123. Lipson, disclosure is called “negative assurance” and is not technically a legal opin- disclosure is called “negative assurance” as a “10b-5 opinion” in practice. ion, although it is commonly referred to of Section 10(b) and Rule 10b-5, 17 at 397. Because the antifraud provisions C.F.R. § 240.10b-5 (2012) (“Rule 10b-5”), also apply to tender offers, this language should be included raises the issue of whether negative assurance dealer manager. The main purpose in an issuer counsel opinion letter to a diligence” defense for an invest- of negative assurance is to establish a “due due diligence is not a defense ment bank acting as an underwriter. Because not normally provided by issuer’s to a 10b-5 claim, negative assurance is offer.counsel in connection with a debt tender sometimes Dealer managers that Rule 10b-5 requires “scienter” request negative assurance on the basis counsel will help to demonstrate and negative assurance from the issuer’s the absence of scienter. Task Force on Secs. Law Ops., 193 (1976) (describing scienter as the “intent to deceive, manipulate, or de- 193 (1976) (describing scienter as the “intent fraud or similar reckless conduct”)). 1505 (2004). 220 them. alienating may risk and clients from unwelcome transaction’s in the transaction; (2) the the client to engage the transac- the company; and (3) that enforceability against law. tion complies with \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 22 26-FEB-13 14:17 securities laws. the last of the three This opinion supports goals—legalaforementioned compliance—and the generates included of any of the individual opinions most market value letter. in the opinion comparative advantage against those firms who refuse to issue opinion let- comparative advantage against those firms ters validating noncompliant transactions. other approach sanctions a transaction without reservation. without transaction a sanctions approach other the approval of comprehensive this approach offers Because as a “clean opinion.” it is known transaction, “no violation” an opinion letter including a typically produce opinion opinion’s levels of certainty and standardization make it the make and standardization levels of certainty opinion’s for clients. letter type much-preferred included in an opinion letter, the letters often include or are accompanied included in an opinion letter, the letters of disclosure in the transaction by a separate letter addressing the adequacy documents. sion), 33082-nyb_9-1 Sheet No. 113 Side B 02/27/2013 10:49:33 Side B 02/27/2013 Sheet No. 113 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 114 Side A 02/27/2013 10:49:33 221 591, . AW 126 but may . L Legal Opinion US B , 53 easoning With these con- , at 662. 130 supra (including published (including which prevents attorneys which prevents 129 Comm. on Legal Ops., note 103, at 876. only the law only the note 126, at 600-01. 131 see also supra supra Third-Party “Closing” Opinions Custom also guides the degree of factual Custom also guides HONORED IN THE BREACH THE IN HONORED note 55, at 736-37. . 831, 832 (1998). In addition to only covering the law 127 AW supra . L US While custom governs the communications be- While custom B Rowe, 128 at 601. at 607. , 53 Id. See Id. The fundamental principles governing opinion letter writ- governing opinion principles The fundamental 128. 127. TriBar Op. Comm., 131. 130. Comm. on Legal Ops., 129. 126. TriBar Op. Comm., 661 (1998) (emphasis added); Principles of specified jurisdictions, a “no violation” legal opinion is understood, as a of specified jurisdictions, a “no violation” a reasonable lawyer would evaluate matter of custom, to cover only laws that as part of the transaction. TriBar Op. Comm., 2012] all areas cover comprehensively to not expected are opinions of law. viola- a “no Committee, TriBar by the as noted Instead, “addresses tion” opinion as to areas such only extends customary, but custom ing are commonly meaning of words and phrases the understood used in opinions. \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 23 26-FEB-13 14:17 and legal inquiry undertaken by an attorney to support a legal undertaken by an attorney to support and legal inquiry opinion. letters attorney in this format, legal opinion tween client and of law that is fairly rigid.adhere to a definition In the defini- “law” is de- the TriBar Opinion Committee, tions provided by at the state or decisional and regulatory law fined as “statutory, the local, level,” federal, but not from citing no-action letters in their legal analysis.from citing no-action Opinion so-called “market opinions,” letters also cannot incorporate rendering [the opinion] in which only reflect “that lawyers are law. other transactions” instead of actual rules and regulations of government agencies) of jurisdictions government agencies) regulations of rules and letter.” in the opinion specified for coverage that are straints, legally enforceable policies and procedures must re- straints, legally enforceable policies for those practices to be ac- flect general market practices using no-action letters. cepted by an attorney, which precludes are ambiguous, however, a In areas where the securities laws for legal r no-action letter may serve as a basis not be used as actual law. 33082-nyb_9-1 Sheet No. 114 Side A 02/27/2013 10:49:33 Side A 02/27/2013 Sheet No. 114 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 114 Side B 02/27/2013 10:49:33 . 654, EV [Vol. 9:199 . L. R US The Williams ENERAL AND . B 134 : G OLUM C Fraud on the Market: Analy- , 2011 TRUCTURING BSTACLES S III. O the interaction between a tender the interaction between 132 FFER note 17, at 554. Thus understanding the precise con- Thus understanding the precise O PECIFIC The Williams Act of 1968 S 133 supra Michael Hartzman et al., ENDER A. NYU JOURNAL OF LAW & BUSINESS T see also at 549; Id. With respect to debt tender offers, there are several issues offers, there to debt tender With respect Tender offer regulation in the United States began with Tender offer regulation in the ROBLEMS IN P 134. Securities Exchange Act of 1934 §§ codified at 13(d)-(f), 14(d)-(f), 133. 132. Mann & Powers, 15 U.S.C.A. §§ (the “Williams 78l, 78m(d)-(e) and 78n(d)-(f) (West 2012), Act”). and The Williams Act has been amended several times by Congress its rulemaking authority under the supplemented by the SEC pursuant to Exchange Act. The Williams Act is commonly understood to include rules adopted under the authority provided by Section 23(a) of the Exchange Act for the SEC to adopt rules and regulations “as may be necessary or appropri- ate to implement to the provisions of the [Exchange Act].” 672-73 (2011). 222 re- structures that and pricing tender offer timing related to and Section 14(e) under to varying interpretations main open Regulation 14E. some of the most sig- This section addresses that have issues under specific structures nificant interpretive has responded to market needs.arisen as the SEC As has al- susceptible debt securities are extremely ready been discussed, own finan- that are exogenous to the issuer’s to market forces cial position. purchases are so sensitive Because debt sales and rates, to prevailing interest \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 24 26-FEB-13 14:17 sis of the Efficiency of the Corporate Bond Market offer’s time window and its pricing structure can mean the dif- and its pricing structure can offer’s time window success and failure.ference between For example, one study increase in bond tender offer a one-percent found that in a by approxi- the percentage tendered the premium increases mately nine percent. tours—how of the SEC’s policies re- to operate at the margins garding the securities laws’ demands—is paramount both to value of an attorney’s input an optimal tender offer and the regarding the transaction. Act”). the Williams Act of 1968 (the “Williams Act intended to place the offeror and the security holder on Act intended to place the offeror to fears that both parties equal footing, and was a response 33082-nyb_9-1 Sheet No. 114 Side B 02/27/2013 10:49:33 Side B 02/27/2013 Sheet No. 114 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 115 Side A 02/27/2013 10:49:33 . 223 by AND V The see also 136 930, 932- 135 , 36 . EV L. R EE Of these factors, . & L 141 Tender Offers: Standing to Sue, ASH (ii) imposing require- (ii) imposing W 137 Investor Protection in Corporate Take- 37 The provisions of the Williams Act are of the Williams The provisions 139 HONORED IN THE BREACH THE IN HONORED 140 , 91st Cong. 6 (1970) (comments of Rep. Monogan); , 91st Cong. 6 (1970) (comments of Rep. Rulemaking Under Section 14(e) of the Exchange Act: the SEC Ex- Rulemaking Under Section 14(e) of the Exchange Regulation 14E, 17 C.F.R. § 240.14e-1 (2012). , . g . e and (iii) giving substantive antifraud protections to antifraud protections giving substantive and (iii) , See 1313, 1342 (1983). 138 . Not all Williams Act provisions apply to every tender offer. Act provisions apply to every tender Not all Williams EV 141. SEC Interpretation: Commission Guidance on Mini-Tender Offers 139. proration requirements in Sec- The substantive protections include 140. maintaining a cause of action For further discussion of standing and 136. Securities Exchange Act of 1934 § § 14(e), 15 U.S.C.A. 78n(e) (West 137. filing a Schedule TO with the The disclosure requirements include 138. 135. testimony at the time raises Specifically, though, most congressional and Limited Partnership Tender Offers [hereinafter Tender Offer Gui- 38 (1980). L. R tion 14(d)(6) of the Exchange Act, 15 U.S.C.A. §tion 14(d)(6) of the Exchange Act, 15 (West 2012); 78n(d)(6) §withdrawal rights in Rule 14d-7, 17 C.F.R. the best price 240.14d-7 (2012); rule in Rule 14d-10(a)(2), 17 C.F.R. § (2012); and the all- 240.14d-10(a)(2) §holders rule in Rule 14d-10(a)(1), 17 C.F.R. (2012). 240.14d-10(a)(1) under the Williams Act, see W. Jeffrey Edwards, Prohibited Practices, Reliance of Non-Tenderer, 2012). SEC, 17 C.F.R. § specific disclosures 240.14d-100 (2012), which must contain prescribed by the SEC. overs; Increase in ‘Regulation A’ Exemption: Hearing on H.R. 4285, S. 3431, and S. overs; Increase in ‘Regulation A’ Exemption: Fin. of the H. Comm. on Interstate and 336 Before the Subcomm. on Commerce and Foreign Commerce fears about “the defenseless position of shareholders and management of fears about “the defenseless position of target companies in a cash takeover bid.” The SEC has noted that the provisions of the Williams Act that that the provisions of the Williams The SEC has noted apply “depend[ conducting the offer, (ii) ] on: (i) the party the security is subject security, (iii) whether the nature of the Act, and (iv) Section 12 of the Exchange registered under five percent bidder would own more than whether or not the after the tender offer.” of the securities 2012] the transaction. or undermine obstruct means to had \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 25 26-FEB-13 14:17 David J. White, on Multiple Proration Pools ceeds Its Reach in Attempting to Pull the Plug holders of securities. holders the second (“the nature of the subject security”) is significant the second (“the nature of the subject part of the Exchange Act and are supplemented by detailed Act and are supplemented part of the Exchange authority, the SEC pursuant to its rulemaking rules adopted by to sue and public parties may have standing and both private under the Act. ments on the length of time tender offers must be held offers must be time tender the length of ments on open, Williams Act thus prohibits “fraudulent, deceptive or manipu- or deceptive “fraudulent, thus prohibits Act Williams tender offers connection with or practices” in lative acts (i) requiring extensive disclosure, extensive (i) requiring 33082-nyb_9-1 Sheet No. 115 Side A 02/27/2013 10:49:33 Side A 02/27/2013 Sheet No. 115 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 115 Side B 02/27/2013 10:49:33 , 142 —ap- 146 [Vol. 9:199 equity security which contains rules which contains 144 which contain antifraud and which contain antifraud 143 NYU JOURNAL OF LAW & BUSINESS and Regulation 14D, and (ii) Rule 13e-4 and Regulation 145 .” 15 U.S.C.A. § 78n(d)(1) (West 2012) (emphasis added). The The tender offer rules under the Williams Act form three the Williams offer rules under The tender 146. tender offer” to include “a tender Rule 13e-4 defines the term “issuer 144. 17 C.F.R. § 240.13e-4 (2012). 145. is stated generally in the stat- The filing requirement of Section 14(d) 143. 17 C.F.R. § 240.14e-1 (2012). An important distinguishing feature of 142. Changes in Control, 17 C.F.R. Rules Relating to Tender Offers and made by the issuer of such class of equity security or by an affiliate of such issuer.” 17 C.F.R. § (emphasis added). 240.13e-4(a)(2) (2012) The require- ments of Rule 13e-4 are then limited to issuer tender offers, including the obligation to file a Schedule TO included in Rule 13e-4(c)(2). offer for, or a request or invitation for tenders of, any class of offer for, or a request or invitation for ute, making it “unlawful for any person, directly or indirectly . . . to make a ute, making it “unlawful for any person, for tenders of, any class of an tender offer for, or a request or invitation equity security TO for a third-party tender offer specific requirement to file a Schedule 14d-3 of Regulation 14D. 17 C.F.R. under Section 14(d) is included in Rule § a tender offer . . . 240.14d-100 (2012) (stating that “[n]o bidder shall make date of the commencement of the unless as soon as practicable on the the [SEC] a Tender Offer Statement tender offer such bidder . . . [f]iles with on Schedule TO”). Regulation 14E is that it applies to all tender offers, as opposed to Regula- Regulation 14E is that it applies to all only to tender offers for equity tion 14D and Rule 13e-4, which each apply securities. § of the three cate- 240.14d-1 (2012). Regulation 14D is the most extensive gories of tender offer rules. dance], Exchange Act Release No. 43069, 2000 WL 34033799 (July 24, dance], Exchange Act Release No. 43069, 2000). 224 equity se- than differently treated are securities debt because Act. the Williams under curities Act Williams the entire While from are exempt debt securities equity securities, applies to Act requirements. some Williams Regulation 14D, 14(d) and groups: (1) Section primary Sec- disclosure; (2) filing and rules regarding which contain 14E, tion 14(e) and Regulation \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 26 26-FEB-13 14:17 procedural rules; and (3) Rule 13e-4, procedural rules; tender offers.applicable to issuer of the groups—(i) Two Sec- tion 14(d) 33082-nyb_9-1 Sheet No. 115 Side B 02/27/2013 10:49:33 Side B 02/27/2013 Sheet No. 115 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 116 Side A 02/27/2013 10:49:33 150 225 note with re- 151 See supra are only sub- are The antifraud 147 152 148 These prohibitions apply to These prohibitions 149 HONORED IN THE BREACH THE IN HONORED . stating in pertinent part: Id Regulation 14E and the statutory provisions of Section statutory provisions 14E and the Regulation Section 14(e) and Regulation 14E and Regulation Section 14(e) It shall be unlawful for any person to make any untrue statement of It shall be unlawful for any person to make fact necessary in order a material fact or omit to state any material light of the circumstances to make the statements made, in the or to engage in any under which they are made, not misleading, or practices, in connec- fraudulent, deceptive, or manipulative acts invitation for tenders, or tion with any tender offer or request or to or in favor of any solicitation of security holders in opposition any such offer, request, or invitation. 152. The rule-making authority of Section 14(e) is also similar to that pro- 149. 15 U.S.C.A. § 78n(e) (West 2012). 150. 151. Exchange Act § 10, 15 U.S.C.A. § 78j (West 2012). (“It shall be un- 148. requirements for issuer tender For example, the detailed disclosure 147. the Wil- distinction is not precisely accurate. Under The debt/equity vided by Section 10(b). It is important to note that the broad antifraud pro- vision of Section 10(b) and Rule 10b-5 also apply to tender offers, in addi- tion to the specific antifraud provisions of the Williams Act. lawful for any person, directly or indirectly . . . [t]o use or employ, in con- lawful for any person, directly or indirectly security registered on a national nection with the purchase or sale of any registered . . . any manipulative or securities exchange or any security not so of such rules and regula- deceptive device or contrivance in contravention or appropriate in the public tions as the [SEC] may prescribe as necessary interest or for the protection of investors.”). offers under Rule 13e-4, including the obligation to file a Schedule TO with offers under Rule 13e-4, including the obligation with respect to equity securities. the SEC, are limited to issuer tender offers for third-party tender offers Likewise, the similar disclosure requirements offers for equity securities. under Section 14(d) are limited to tender liams Act, if the debt securities in question are convertible into equity securi- securities in question are convertible into liams Act, if the debt offer must Section 12 of the Exchange Act, the tender ties registered under Section 14(d) of the Exchange Act, comply with the applicable provisions of to Section 14(e) of the Ex- Regulation 14D and Rule 13e-4, in addition change Act and Regulation 14E. 14(e) of the Exchange Act contain antifraud provisions Act contain the Exchange 14(e) of in manipulative acts” deceptive, and “fraudulent, prohibiting a tender offer. connection with provi- Section 14(e) is designed as a catch-all The language of to the catch- tender offer activities, similar sion for fraudulent 10 under the Exchange Act all provision of Section 2012] securities so debt securities, to equity ply only 1. \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 27 26-FEB-13 14:17 all tender offers, including tender offers for debt securities. including tender offers for debt all tender offers, 14(e) are de- Williams Act found in Section provisions of the ject to Section 14(e) and Regulation 14E. and Regulation 14(e) to Section ject spect to purchases and sales of securities. spect to purchases 33082-nyb_9-1 Sheet No. 116 Side A 02/27/2013 10:49:33 Side A 02/27/2013 Sheet No. 116 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 116 Side B 02/27/2013 10:49:33 153 [Vol. 9:199 Ironically, the 155 The antifraud provisions The antifraud 154 note 135, at 1343. NYU JOURNAL OF LAW & BUSINESS note 135, at 1342-43. supra supra White, See The SEC adopted Regulation 14E to provide basic proce- 14E to provide adopted Regulation The SEC But the SEC’s rulemaking under Section 14(e) has ex- But the SEC’s rulemaking under 155. 153. White, 154. to public and private compa- The provisions of Regulation 14E apply nies and to tender offers for registered and unregistered securities. Certain nies and to tender offers for registered 14E, such as tender offers for “ex- tender offers are exempt from Regulation empt securities” as defined by the Section 3(a)(12) of the Exchange Act. Exempt securities under Section 3(a)(12) include government and munici- pal bonds, among other specified securities. 122 and related text regarding negative assurance letters under Rule 10b-5 122 and related text regarding negative in the context of debt tender offers. 226 use its the SEC that intending Congress with broadly, fined or “fraudulent” such as terms to define authority rulemaking those rules. the statute under and enforce “deceptive” in- all tender offers, for almost to investors dural protections those for debt securities. cluding \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 28 26-FEB-13 14:17 of Regulation 14E are in some instances so unclear that they so unclear that some instances 14E are in of Regulation gathering (and thus expensive information lead to disclosures for full com- that may be unnecessary and disclosure drafting) pliance. 14E does not require any For example, Regulation TO re- statement such as the Schedule specific disclosure 14D and Rule 13e-3.quired under Regulation But the broad of material 14(e) prohibiting the omission language of Section liability with tender offers and potential facts in connection tender of- leads most companies conducting under Rule 10b-5 an offer to to prepare and distribute fers for debt securities purchase. the same information These disclosures include issuer tender in a Schedule TO for an that would be required offer subject to Rule 13e-4. this offer Unlike a Schedule TO, with the SEC or subject to to purchase document is not filed SEC review. disclosures and assessing tended beyond demanding certain misleading.when those disclosures are materially On the 14E incorporates some other end of the spectrum, Regulation lines.strictures that are governed by bright define Regulations prescribe the time periods the timing and pricing of a tender, how pricing structures a tender must be open, and outline fraudulent. must be structured to avoid being existence of bright lines creates much deeper inconsistencies existence of bright lines creates than the aforementioned and confusion for legal practitioners disclosure obligations. 33082-nyb_9-1 Sheet No. 116 Side B 02/27/2013 10:49:33 Side B 02/27/2013 Sheet No. 116 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 117 Side A 02/27/2013 10:49:33 160 227 INANCE F Because 157 ORPORATE C , AUGHLIN L As will be seen, the SEC, As will be seen, C M 158 The SEC defines a “business day” for . OSEPH . & J note 17, at 554. R Rule 14e-1(a) requires tender offers to requires tender Rule 14e-1(a) , J 826 (4th ed. 2006). 156 supra HONORED IN THE BREACH THE IN HONORED that the requirement would not facilitate that the requirement would not AWS 161 L OHNSON Regulation 14E and Timing Requirements and Timing 14E Regulation J. J Because prices for debt securities are tied closely Because prices for debt securities B. 159 ECURITIES AND THE HARLES S C Id. For tender offers in debt capital markets, the most prob- capital markets, offers in debt For tender Rule 14e-1(a) prohibits anyone conducting a tender offer Rule 14e-1(a) prohibits anyone conducting Twenty Business Day Requirement Twenty Business Day 161. All-Holders and Best-Price, Se- Amendments to Tender Offer Rules; 160. Mann & Powers, 159. 17 C.F.R. § 240.14e-1 (2012) 156. 17 C.F.R. § 240.14e-1 (2012). 157. 158. curities Act Release No. 6,653, Exchange Act Release No. 23,421, Investment Company Act Release No. 15,199, 51 Fed. Reg. 25873 (July 11, 1986). Though the cited release discusses 14e-1(b) (the ten-day requirement), the release had a collateral effect on 14e-1(a) because a tender offer open for tender offers as the time period from 12:01 a.m. through 12:00 midnight. tender offers as the time period from open through midnight on the 20th Therefore, a tender offer must remain business day. 17 C.F.R. § 240.13e-4(a)(3) (2012). fluctuations in those benchmark interest rates cause fluctua- fluctuations in those benchmark securities.tions in the prices of the debt it ex- This makes the proper pricing tremely difficult for anyone to determine days in advance.for a debt tender offer twenty business The after Rule 14e-1(a) was staff of the SEC recognized soon adopted in 1986 2012] \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 29 26-FEB-13 14:17 lematic provisions of Regulation 14E are the timing require- 14E are provisions of Regulation lematic Rule 14e-1. ments of to the interest rates of benchmark U.S. Treasury securities, to the interest rates of benchmark be held open for at least twenty business days, and Rule 14e- days, and Rule twenty business open for at least be held ten open for at least to be held tender offers 1(b) requires per- price or in the in the tender offer a change days following sought in the tender offer. centage of securities from holding it “open for less than twenty business days from from holding it “open for less than published or sent to security the date such tender offer is first holders.” responding to market needs, almost immediately sought to cir- needs, almost immediately responding to market offers, but requirements for debt tender cumvent the timing problems to addressing the issue left further their method of be resolved. 1. debt purchases are unusually time-sensitive, the Williams Act are unusually time-sensitive, the debt purchases exception all debt tender offers until the initially exempted March 1, 1986. was rescinded on 33082-nyb_9-1 Sheet No. 117 Side A 02/27/2013 10:49:33 Side A 02/27/2013 Sheet No. 117 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 117 Side B 02/27/2013 10:49:33 OHN- J See [Vol. 9:199 The staff 165 securities law, providing securities certainty. In a series of no- 162 de jure legal and note 158, at 13, 35-36. de facto supra , NYU JOURNAL OF LAW & BUSINESS notes 163-64 and accompanying text. . Salomon Bros. Inc., SEC No-Action Letter, 1986 SEC No-Act. . Salomon Bros. Inc., SEC No-Action Letter, the SEC staff stated that it would not pursue en- that it would not pursue the SEC staff stated AUGHLIN L 163 In allowing these shortened tender offers, the staff shortened tender offers, the In allowing these clarity at the cost of clarity at the cost SON . Subsequent to the 1986 Salomon Brothers no-action letter, the . Subsequent to the 1986 Salomon Brothers C See, e.g See infra Id 164 The SEC’s response to the exemption’s removal, using the exemption’s response to The SEC’s Based on Salomon Brothers’ experience, Issuer Debt Tender Of- Based on Salomon Brothers’ experience, of seven to ten calendar fers are generally held open for a period including the percentage days depending on a number of factors, the principal amount of of debt held by individual debtholders and debt that the issuer desires to retire. Extending the period during open increases the which an Issuer Debt Tender Offer remains or decrease during the likelihood that interest rates will increase tender offer period. Both the issuer and its debtholders will be ex- posed to additional interest rate risk in these circumstances. Be- cause interest rates can move against a debtholder during the tender offer period, a debtholder has a disincentive to tender his & M , SEC No-Action Letter, 1986 WL 66561 (Mar. 26, 1986); First Boston , SEC No-Action Letter, 1986 WL 66561 . 165. 162. 164. 163. Letter, 1986 SEC No-Act. LEXIS Salomon Bros. Inc., SEC No-Action Corp., SEC No-Action Letter, 1986 WL 65408 (Apr. 17, 1986); Kidder, Corp., SEC No-Action Letter, 1986 WL WL 66825 (May 5, 1986); Shearson Peabody & Co., No-Action Letter, 1986 1986 WL 67463 (Dec. 3, 1986). Lehman Bros. Inc., SEC No-Action Letter, 1914 (Mar. 12, 1986). in no-action letters for SEC granted relief in almost identical circumstances Corporation, Kidder Peabody & Goldman, Sachs & Company, First Boston Incorporated. Goldman, Sachs & Company, and Shearson Lehman Brothers Co LEXIS 1914 Mar. 12, 1986). by Salomon The staff of the SEC was influenced in the staff response letter: Brothers’ explanation, which it repeated action letters beginning with a request from Salomon Brothers with a request from Salomon action letters beginning in 1986, practical forcement action against issuers or investment banks acting as against issuers or investment banks forcement action non-converti- that conduct tender offers for dealer managers ten calendar that remain open for seven to ble debt securities by Rule 14e- twenty business days required days instead of the 1(a). open for less than twenty. less than ten days is, by definition, also 228 that the determined and thus markets capital debt efficient to all strictly be applied not should requirement twenty-day for debt securities. tender offers illus- obligations, legally binding relief to abrogate no-action structure can create regulatory the Commission’s trates how between tension \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 30 26-FEB-13 14:17 recognized that tender offers for non-convertible debt securi- tender offers for non-convertible recognized that highly sensi- equity self-tenders and are ties differ from typical fluctuations in interest rates. tive to short-term 33082-nyb_9-1 Sheet No. 117 Side B 02/27/2013 10:49:33 Side B 02/27/2013 Sheet No. 117 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 118 Side A 02/27/2013 10:49:33 229 the comply with 166 no-action letter also shows how the letter also shows no-action HONORED IN THE BREACH THE IN HONORED 167 of the twenty day requirement and is not provid- of the twenty day requirement Salomon Brothers Salomon vertible, investment-grade debt securities of a vertible, investment-grade series; particular class or that debt security; that debt secur- record and beneficial holders of participate, in- ity a reasonable opportunity to on an expe- cluding dissemination of the offer open for less dited basis if the offer is to be held than ten calendar days; and the issuer’s se- sponse to other tender offers for curities. Id. Id. The SEC’s no-action issuance presents two serious legal The SEC’s no-action issuance presents The (1) for cash any and all non-con- Offer to purchase (2) record and beneficial holders of Be open to all (3) Be conducted in a manner designed to afford all (4) of or in re- Not be conducted in anticipation debt early. As a result, if interest rates decline during the tender less debt than it intended. offer period, the issuer may retire much during the tender offer If, on the other hand, interest rates rise debt than it intended.period, the issuer may retire much more In with a substantial poten- either case, the issuer will be confronted tial mismatch between the principal amount of debt it retires and the principal amount of debt it intends to issue in the refunding. 166. 167. concerns.giving an First, and most obviously, the SEC is not interpretation way to ing the letter recipient an alternative law. recipient Instead, the Commission is informing the letter the Regulation is violated, so that it will not take action once long as the four criteria are met. day rule Because the twenty 2012] would holders debt non-institutional individual noted that also be- offer simply a tender in participate likely to be more not days twenty business stayed open for tender offer cause the calendar days. seven to ten rather than \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 31 26-FEB-13 14:17 SEC’s letter-writing process can blur the distinction between can blur the process SEC’s letter-writing letters. and interpretive no-action the SEC staff In the letter, similar to the in an in-depth legal analysis appears to engage of a case.courts’ disposition sets forth criteria that The letter offer without to conduct a shortened tender must be satisfied enforcement action.attracting an SEC According to the let- offers must: ter, shortened tender 33082-nyb_9-1 Sheet No. 118 Side A 02/27/2013 10:49:33 Side A 02/27/2013 Sheet No. 118 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 118 Side B 02/27/2013 10:49:33 , 169 AUGHLIN L [Vol. 9:199 C letter noted & M Salomon OHNSON J no-action letter, viewed no-action In the 1990 letter, the Staff stated that In the 1990 letter, Salomon Brothers Salomon 168 letter mandates dissemination of the tender letter mandates dissemination of NYU JOURNAL OF LAW & BUSINESS 170 Salomon . Id note 158, at 13-40. 1999 The one formal no-action letter was issued in Thus so long as an issuer is able to meet the five criteria Thus so long as an issuer is able Second, the 1986 Second, 169. 170. just one exception in a writ- Although the staff of the SEC has made 168. 1990 WL 286946 (Oct. 1, Salomon Bros. Inc., SEC No-Action Letter, supra and related to high-yield bonds of approximately 100 Brazilian corporations. Goldman, Sachs & Co., Brazilian Liquidity Transaction Co., and Banco Na- cional de Desenvolvimento Economico e Social, SEC No-Action Letter, 1999 SEC No-Act. LEXIS 546 (May 10, 1999). ten no-action letter, one commentator has noted that the staff “has been ten no-action letter, one commentator relief in connection with offers for willing in some instances to grant oral non-investment-grade or split-rated securities.” 1990). This fifth condition has remained since the 1990 Salomon no- This fifth condition has remained action letter. its debt tender offer in as described above, it may complete little as one calendar week. for less If the offer is held open the third requirement from than ten calendar days, however, the 1986 230 (or Commission open to is not that standard bright-line is a would be, rule written broadly as a more interpretation court) law in violation of the the recipient letter leaves the no-action to certainly be able that it will almost the knowledge but with without SEC intervention. proceed \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 32 26-FEB-13 14:17 it “believes that Issuer Debt Tender offers for cash for any and Debt Tender offers for cash it “believes that Issuer of a par- investment grade debt securities all non-convertible, that differ series may present considerations ticular class or for a class or or partial issuer tender offers from any and all debt.” securities or non-investment grade series of equity offer materials on an expedited basis.offer materials on an expedited exactly It is not clear to disseminate tender offer what procedures are required but the materials on an expedited basis, in the context of subsequent letters, shows how much power letters, shows of subsequent in the context without exercise through no-action letters the SEC staff can oversight.normal regulatory letter is While the 1986 no-action no- investment grade debt, in a subsequent not restricted to staff added Brothers in 1990 the SEC action letter to Salomon a shortened rating as a fifth condition to an investment grade tender offer period. that a typical issuer tender offer for debt securities is com- that a typical issuer tender offer tender offer materials are menced by a press release and that 33082-nyb_9-1 Sheet No. 118 Side B 02/27/2013 10:49:33 Side B 02/27/2013 Sheet No. 118 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 119 Side A 02/27/2013 10:49:33 231 Then, 171 Williams Act policies remains. and issuers want to take advan- 173 de jure letter, however, presents very different and HONORED IN THE BREACH THE IN HONORED Salomon de facto 172 Id. See id. Comparing the 1986 Salomon letter’s suggestions regard- letter’s suggestions the 1986 Salomon Comparing The 1986 172. 173. 171. Salomon Bros. Inc., SEC No-Action Letter, 1986 SEC No-Act. LEXIS 1914 (Mar. 12, 1986). considerations. Rule 14(e)-1(a) clearly requires a bright-line, with the SEC regu- twenty-day time frame to be in compliance lations. to circum- The 1986 letter does not provide reasons merely informs the recipient vent the time frame; instead, it that no action will be taken. presented But the requirements an expedited time frame have in the 1986 letter that allow for become common practice, 2012] day. the same holder registered to each mailed of the 20-day procedures to its treatment ing dissemination governing the SEC has unsettled the law rule shows how tender offers. requirement offers The tender offer materials only offers where the twenty day rule interpretive discretion to not prosecute a violation.the SEC the option In matters for compli- of adequate disclosures such as the determination provision to letter may interpret the required ance, a no-action is in full are protected and that the issuer ensure that investors the law.compliance with or regulation is only pro- If a statute then or “misleading” disclosures, tecting against “fraudulent” at letter, even if not legally enforceable, the SEC’s no-action for an attorney and her cli- least provides reasonable guidance complies with the law. ent to determine that the transaction \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 33 26-FEB-13 14:17 tage of the SEC’s position and enjoy greater financial flexibil- tage of the SEC’s position and enjoy offer.ity regarding the timing of the in pricing Small shifts rates can lead to an offer- information or prevailing interest markets, so these timing ing’s success or failure in the debt an issuer maintaining a level requirements may be integral to are availing themselves of playing field with competitors who accordingly. While issu- the SEC staff’s position and benefiting of these opportunities, the ers insist upon taking advantage gap between shortly following the tender offer’s commencement, “broker- commencement, offer’s tender the following shortly by are contacted institutions usually and depositary age houses of in- dissemination to expedite their . . . in order telephone of beneficial owners tender offer to concerning the formation the debt.” 33082-nyb_9-1 Sheet No. 119 Side A 02/27/2013 10:49:33 Side A 02/27/2013 Sheet No. 119 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 119 Side B 02/27/2013 10:49:33 See In 176 174 [Vol. 9:199 reality of Regulation reality de facto Therefore, at least where the Therefore, at least 175 note 17, at 547 n.2 (“[I]ncreasing the tender offer NYU JOURNAL OF LAW & BUSINESS supra notes 162-65 and accompanying text. See supra Another Williams Act timing requirement similarly reveals requirement Williams Act timing Another sought of securities being of the class the percentage soliciting or the dealer’s offered or the consideration in a tender offer unless such tender fee to be given from for at least ten business days offer remains open is of such increase or decrease the date that notice sent or given to security holders. first published or posi- the SEC staff has taken a no-action As noted above, The increased flexibility the SEC has provided for the ten- The increased flexibility the SEC Ten Business Day Requirement Business Ten 174. 17 C.F.R. § 240.14e-1(b) (2012). 175. 176. for example, where an issuer’s It could also become important, a divide between the practical, between the practical, a divide its actual requirements.14E and 14e-1(b) prohibits Rule from changing: tender offers debt to tender offers for investment-grade tion with respect completed in the entire offering to be securities, allowing days. seven to ten calendar 232 2. \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 34 26-FEB-13 14:17 tender offer is so successful that the issuer desires to substantially increase tender offer is so successful that the issuer in the tender offer.the volume of securities it intends to buy Although it increase the price when they seems logical that companies would frequently they need to raise the price to and their dealer managers recognize that this practice is not common. purchase the desired volume of securities, Mann & Powers, price is actually very uncommon. Our conversations with liability manage- ment professionals indicate that tendering firms aggressively avoid acquiring a reputation of being soft when faced with bondholder resistance.”). conditions of the 1986 line of no-action letters are satisfied, an 1986 line of no-action letters are conditions of the as seven cal- the extension period to as little issuer may reduce endar days.greater diffi- This ten-day requirement runs into notably the various culties in some specific pricing structures, forms of fixed-spread tender offers. length can The period’s to determine the tender be critical where a formula is used are not fixed until after price, and the variables of the formula of the tender offer. some period following the launch those circumstances, the issuer must extend the tender offer those circumstances, the issuer ten business days remain period, if necessary, so that at least before expiration of the offer. the same difficulties as the day requirement, however, faces required twenty-day window. to Maintaining the flexibility the ten-day rule is integral price structures in ways that violate 33082-nyb_9-1 Sheet No. 119 Side B 02/27/2013 10:49:33 Side B 02/27/2013 Sheet No. 119 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 120 Side A 02/27/2013 10:49:33 233 The 178 179 Of course, true com- 181 note 20, at 799. HONORED IN THE BREACH THE IN HONORED , supra Specific Structures for Debt Tender Offers Specific Structures C. LONAKER S In a “fixed-spread” tender offer, the tender offer price tender offer, the tender offer In a “fixed-spread” Because the nominal price of the tender offer could Because the nominal price of the Id. Id. See 177 Following the issuance of the 1986 no-action letters re- Following the issuance of the 1986 Issuers have sought to insulate themselves from interest to insulate themselves from Issuers have sought 180 Fixed-Spread Tender Offers Fixed-Spread Tender 180. 181. Although this pricing structure violates the letter of 14e-1(b), it does 178. 179. 1990 WL 286946 (Oct. 1, Salomon Bros. Inc., SEC No-Action Letter, 177. not necessarily violate its spirit. Rule 14e-1(b) was enacted not to prevent pricing that is ambiguous yet mutually understood (as is the case with fixed- 1990). a. Investment-Grade Debt Brothers proposed a fixed- garding Rule 14e-1(a), Salomon grade debt tender of- spread pricing method for investment fers. rate risk by delaying setting the price for the security in ques- setting the price for the security rate risk by delaying tion. 2012] markets. capital to debt to has chosen the SEC because But these transactions letters, no-action through its policies adjust the SEC takes action illegal whether speaking, still are, strictly or not.against them the no-ac- an issuer’s perspective, From ini- been desirable rule may have for the ten-day tion process tially. is at best un- of the transaction ultimate legality But the untenable. at worst completely clear and ambiguity may This in these for the attorneys involved have serious consequences and con- at least expose them to liabilities transactions, or may of promul- connected to the SEC’s use cerns that are directly carry any legal weight. gations that do not 1. \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 35 26-FEB-13 14:17 vary on a daily basis throughout the tender offer period, the vary on a daily basis throughout bright-line rule by never set- pricing structure undermines the tling its actual price until near closing. on the date of (or the date preceding) the tender offer is de- on the date of (or the date preceding) fixed percentage over the termined by reference to a stated Treasury security. current yield on a benchmark U.S. SEC staff has also given guidance regarding the application of SEC staff has also given guidance pricing formulas, which Rule 14e-1(b) to such fixed-spread tender offer price on a daily may be deemed to change the the day. basis or, in some cases, throughout 33082-nyb_9-1 Sheet No. 120 Side A 02/27/2013 10:49:33 Side A 02/27/2013 Sheet No. 120 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 120 Side B 02/27/2013 10:49:33 [Vol. 9:199 211, 216-23 According . EV The SEC and the 183 . U. L. R T . S LA F Steven M. Davidoff, , 34 See 184 NYU JOURNAL OF LAW & BUSINESS 182 vertible, investment grade debt securities of a vertible, investment series; particular class or that debt security; a daily newspa- Security as reported each day in per of national circulation; that debt secur- record and beneficial holders of participate, in- ity a reasonable opportunity to on an expe- cluding dissemination of the offer open for less dited basis if the offer is to be held than ten calendar days; securities are ac- of the debt securities after such cepted for payment; and the issuer’s se- sponse to other tender offers for curities. Id. Id. The staff concluded that fixed-spread tender offers were that fixed-spread tender offers The staff concluded (1) for cash any and all non-con- Offer to purchase (2)of record and beneficial holders Be open to all (3) the Benchmark Provide information regarding (4) to afford all Be conducted in a manner designed (5) tendering holders Ensure prompt payment to all (6) of or in re- Not be conducted in anticipation 183. 184. 182. Salomon Bros. Inc., SEC No-Action Letter, 1990 WL 286946 (Oct. 1, 1990). (2007). Failure of Federal Takeover Regulation spread pricing), but instead to prevent “Saturday Night Specials,” where an spread pricing), but instead to prevent on a company’s equity immediately offeror would gain a substantial toehold before launching its tender offer. 234 in a perpetually result would rule the ten-day with pliance thus continually and never settles price since the tender, open ten-day timer.resets the was whether fixed- The issue, then, of Rule 14e-1(b), used at all in light could be spread pricing ten an additional offer be open that a tender which requires amount of considera- change in the days following a business tion offered. six criteria were met.permissible when Because this six-factor a custom- in a no-action letter, it has become test was created for the is- having any actual legal weight ary standard without involved in the transaction. suer or other parties \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 36 26-FEB-13 14:17 to the SEC, the fixed-spread tender offer must: to the SEC, the 33082-nyb_9-1 Sheet No. 120 Side B 02/27/2013 10:49:33 Side B 02/27/2013 Sheet No. 120 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 121 Side A 02/27/2013 10:49:33 & 185 235 OHNSON J However, 186 Goldman, Sachs & Co., Brazil- note 15, at 951; and See also Appendix A. supra infra Edwards, HONORED IN THE BREACH THE IN HONORED See 189 note 158, at 13-40. and has been unwilling to broadly extend its no- and has been unwilling to broadly supra , 188 The SEC staff has determined that tender offers for The SEC staff has determined Id. Id. 187 Since this no-action letter, fixed-spread pricing has be- has pricing fixed-spread letter, this no-action Since tender no-action relief for fixed-spread When providing AUGHLIN L C 187. 188. 189. has provided informal no-ac- In limited circumstances, the SEC staff 186. 1990 WL 286946 (Oct. 1, Salomon Bros. Inc., SEC No-Action Letter, 185. For recent examples, see M tion relief to companies conducting fixed-spread tender offers for non-in- tion relief to companies conducting fixed-spread vestment grade debt. 1990). ian Liquidity Transaction Co., and Banco Nacional de Desenvolvimento Eco- ian Liquidity Transaction Co., and Banco 1999 SEC No-Act. LEXIS 546 (May nomico e Social, SEC No-Action Letter, formal no-action relief).10, 1999) (in which the SEC staff provided In the Goldman Sachs no-action request letter, the authors noted that “we under- stand that the staff has granted oral relief in connection with fixed spread tender offers for non-investment grade debt provided that, among other things, the yield to maturity of the Benchmark United States Treasury secur- 2012] debt securities. for self-tenders in issuer very common come all not available for however, is methodology, This pricing offers.debt tender managers ad- and the dealer Many issuers of the debt securities characteristics find that the vising them to tender offer fails of the proposed or the structure at issue to has been willing which the SEC conditions under meet the pricing. relief to use fixed-spread grant formal no-action But to “legalize” has used the no-action process because the SEC to govern practice, the Commission is able the fixed-spread com- without normal (and extensive) that territory informally rulemaking. parties involved in formal ments from concerned b. Grade Debt Non-Investment the advan- debt, the SEC staff noted offers of investment-grade this pricing and holders of debt of using tages to issuers to all parties. formula to reduce interest rate risk \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 37 26-FEB-13 14:17 action position to fixed-spread tender offers for non-invest- action position to fixed-spread ment grade debt. investment grade debt securities may present considerations investment grade debt securities non-investment grade debt that differ from tender offers for securities the no-action relief in the Salomon Brothers subsequent no- the no-action relief in the Salomon offers for investment grade action letters was limited to tender debt. 33082-nyb_9-1 Sheet No. 121 Side A 02/27/2013 10:49:33 Side A 02/27/2013 Sheet No. 121 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 121 Side B 02/27/2013 10:49:33 U. , 103 ee also , 58 [Vol. 9:199 Some scholars, Bondholder Coercion: The 191 Debt Tender Offer Techniques note 190, at 1210-11. . 846, 881 (1991) (observing that supra EV . L. R note 17, at 548, and text accompanying and at most the only unique and at most Otherwise, in areas such as cove- Who’s Being Greedy? A Theoretical and Empiri- note 133, at 672-73. 192 193 OLUM C supra supra There are two primary distinctions flow- two primary There are Coffee & Klein, , 91 note 189 at 1216-17. See 190 NYU JOURNAL OF LAW & BUSINESS supra Hartzman, , Lewis S. Peterson, 1207, 1211 (1991). . John C. Coffee, Jr. & William A. Klein John C. Coffee, Jr. & William A. Klein Mann & Powers, But because the risk of bankruptcy should be priced But because the risk of bankruptcy EV see also 505, 534 (1991) (arguing that “regulators should not impose blan- 505, 534 (1991) (arguing that “regulators See See id. See, e.g. See 194 Non-investment grade debt differs from investment-grade from debt differs grade Non-investment The second difference is much more controversial and, if is much more controversial The second difference L.J. . L. R 194. 193. a very serious one to make The threat of bankruptcy is, however, 191. 192. 190. . HI ALE note 17; against bondholders due to how much a bankruptcy will reduce the value of the debt being held. C “‘coercive’ debt tender offers . . . have had little coercive effect”); s Coffee & Klein, cal Examination of Holdouts and Coercion in Debt Tender and Exchange Offers cal Examination of Holdouts and Coercion in Problem of Constrained Choice in Debt Tender Offers and Recapitalizations Problem of Constrained Choice in Debt Tender ket regulations on a group of potentially coercive restructurings that are al- ket regulations on a group of potentially L. Bab, ready failing at significant rates”); Andrew and the Problem of Coercion ity used to price the transaction is measured two days prior to expiration.” ity used to price the transaction is measured Id Y 236 in is company tendering that the probability in its higher debt distress. financial \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 38 26-FEB-13 14:17 “weapon” that issuers of high-yield debt will typically possess is of high-yield debt will typically “weapon” that issuers the threat of bankruptcy. nant stripping and exit consents (further discussed below), nant stripping and exit consents grade debt issuers both investment-grade and non-investment the bonds of their restric- are always incentivized to strip tions. why this should be an SEC into the interest rate, it is unclear concern. argu- In addition to the weaknesses of the coercion however, have argued that coercion is not a major problem that coercion is not a major however, have argued offers, with debt tender ing from the company’s likely distress. the company’s ing from first is as uncon- The non-investment probably innocuous: as it is also troversial (in- to reflect the interest rate carries a higher grade debt on its obligation. will default risk that the company creased) to as “high- grade debt is referred This is why non-investment yield” debt. of investment that the differing types true, more suggestive treated differently.grades should be A distressed company bond- to use coercive measures to pressure may be more likely finan- their securities in an effort to alleviate holders to tender reducing indebtedness. cial pressures by 33082-nyb_9-1 Sheet No. 121 Side B 02/27/2013 10:49:33 Side B 02/27/2013 Sheet No. 121 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 122 Side A 02/27/2013 10:49:33 199 237 there is no there 195 , Goldman, Sachs & See, e.g. 197 Rather than determining the Rather than determining (London), Nov. 21, 2005, at 18. 198 IMES The investors in the high-yield mar- in the high-yield The investors . T IN 196 note 20, at 799-800. F 200 , HONORED IN THE BREACH THE IN HONORED note 192, at 882 (institutions that invest in high-yield note 192, at 882 (institutions that invest , supra supra notes 2-7 and accompanying text. LONAKER specifying the fixed price to be added to the specifying the fixed price to be yield on the benchmark security; Bab, S See See See supra See Corporate Credit The SEC staff agreed not to take enforcement action in The SEC staff agreed not to take (1) security and Identifying the specific benchmark In 1993, Merrill Lynch proposed this new method for the Lynch proposed this new method In 1993, Merrill Real-Time Fixed-Spread Tender Offers Real-Time Fixed-Spread , SEC No-Action Letter, Fed. Sec. L. Rep. ¶ 76,833 (Dec. 3, 1993). . 197. 199. Merrill Lynch, Pierce, Fenner & Smith Inc., SEC No-Action Letter, 200. 198. Inc., SEC No-Action Letter, Merrill Lynch, Pierce, Fenner & Smith 195. 196. Fed. Sec. L. Rep. ¶ 76,709 (July 19, 1993). Co debt are “highly sophisticated and knowledgeable in the field”). debt are “highly sophisticated and knowledgeable Fed. Sec. L. Rep. ¶ 76,709 (July 19, 1993). Subsequent no-action letters facts. were also issued regarding almost identical real-time fixed-spread offerings that met a list of conditions real-time fixed-spread offerings with the normal require- and disclosure requirements along offer.ments for a typical fixed-spread real-time Specifically, comply with the six above-dis- fixed-spread tenders offers must tender offers as well cussed criteria governing all fixed-spread as: pricing of debt tender offers. pricing of debt tender of- extended the permitted fixed-spread The SEC has further rate is set at the time of the ferings to include offers whose time before or after the tender instead of a set date and tender. fixed- This type of transaction is called a “real-time spread tender offer.” 2012] of acceptance in the an increase been has also there ment, debt. grade non-investment earlier, discussed As 2. \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 39 26-FEB-13 14:17 ket are generally very sophisticated and able to exert signifi- and generally very sophisticated ket are that of tender offers in the context over issuers cant influence as favorable. do not view the investors tender price by reference to a benchmark U.S. Treasury secur- to a benchmark U.S. Treasury tender price by reference of the debt or date preceding the tender ity as of the date, could use a staff was asked whether issuers security, the SEC the yield of that was a stated fixed price over tender offer price tendered. at the time the security was a benchmark security longer a stigma associated with high-yield debt compared to debt compared with high-yield stigma associated longer a grade debt. investment 33082-nyb_9-1 Sheet No. 122 Side A 02/27/2013 10:49:33 Side A 02/27/2013 Sheet No. 122 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 122 Side B 02/27/2013 10:49:33 [Vol. 9:199 201 As with the daily The dealer man- 203 note 158, at 830. 202 supra , AUGHLIN L C & M NYU JOURNAL OF LAW & BUSINESS OHNSON J see also have been payable under the offer based on the on offer based the under been payable have preced- immediately reference yield applicable offer; of the ing commencement informa- current yield offer to establish ing the security; the benchmark tion on price to be paid for the ten- late the purchase and dered securities; and the resulting nominal mark security the debt securities will be ac- purchase price of basis by contacting the cessible on a real-time or a toll-free number. dealer manager ; Id. Id. In addition to the disclosures necessary in the tender of- disclosures necessary in the tender In addition to the (2) that would price purchase nominal the Stating (3)used dur- source to be the reference Indicating (4) methodology to be used to calcu- Describing the (5) the current yield on the bench- Indicating that In a waterfall tender offer, the issuer makes an offer to In a waterfall tender offer, the Waterfall Tender Offers 202. Merrill Lynch, Pierce, Fenner & Smith Inc., SEC No-Action Letter, 203. 201. Fed. Sec. L. Rep. ¶ 76,709(July 19, 1993). fer materials, the SEC staff also requires the dealer manager in SEC staff also requires the dealer fer materials, the records debt tender offer to maintain a real-time fixed-spread tenders, the current yield on showing the date and time of the of tender and the purchase the benchmark security at the time yield. price of the security based on that 238 \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 40 26-FEB-13 14:17 purchase a maximum amount of debt securities from more purchase a maximum amount securities.than one class or series of debt lists the The issuer they will be accepted and bonds in the order of priority that up to the maximum amount then accepts tendered securities at the lower priority levels. by eliminating securities tendered as a “waterfall” because only The offering is thus referred to exceeds the lowest tier when the total amount of the offering offering “spill over” into the of requested securities will the fixed-spread tender offers, the staff of the SEC limited its no- fixed-spread tender offers, the staff debt tender offers for in- action relief to real-time fixed-spread vestment grade debt. 3. ager must confirm this information with the tendering security ager must confirm this information day. holder no later than the next business 33082-nyb_9-1 Sheet No. 122 Side B 02/27/2013 10:49:33 Side B 02/27/2013 Sheet No. 122 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 123 Side A 02/27/2013 10:49:33 239 207 Appendix C. infra 205 HONORED IN THE BREACH THE IN HONORED Waterfall tender offers have become com- become have offers tender Waterfall 204 This condition may be satisfied for the series in- This condition 206 Likewise, it is not clear that fixed-spread pricing is availa- clear that fixed-spread pricing Likewise, it is not Like the other topics addressed in this section, waterfall in this other topics addressed Like the 207. influence only the very bottom Theoretically, market factors could 206. Letter, Fed. Sec. L. Rep. ¶ Salomon Brothers Inc., SEC No-Action 205. For recent examples, see 204. of bonds outstanding with a For example, an issuer with five series classes to tender, in which case any and all of the securities tendered in classes to tender, in which case any and logic dictates that the issuer, in those classes would be accepted. However, amount that is less than the total making a tender offer for a maximum amount of securities outstanding in the subject classes, is not making the offer for any and all securities in each class. Based on this reasoning, any waterfall tender offer, even for investment grade securities, must be held open for at least twenty business days as required by Rule 14e-1(a). 79,643 (Oct. 1, 1990). total principal amount of $1 billion, evenly divided with $200 million per total principal amount of $1 billion, evenly million of its bonds. The issuer series, may desire to purchase only $500 like to retire based on interest determines the priority of the bonds it would informs the holders of the bonds in rates, maturity and other factors, then priority level of the five series. If the tender offer materials of the acceptance series, the issuer will accept all of $150 million of bonds are tendered in each priority levels, or $450 million, and the securities tendered in the top three the securities from the fourth prior- accept on a pro rata basis $50 million of any tendered securities in the fifth ity level. The issuer would not accept priority level. ble for waterfall tender offers.ble for waterfall fixed-spread tender offer, In a for a real- daily (or even more frequently the price fluctuates in the price tender offer) based on changes time fixed-spread security.of the benchmark 14e- Under a strict reading of Rule left open for would require that the offer be 1(b), each change an additional ten business days. letters Like the no-action letters granting relief from under Rule 14e-1(a), the no-action offers require that the Rule 14e-1(b) for fixed-spread tender . . . securities of a particular offer be made for “any and all 2012] tier of debt. next with the securities possible conflicts pose several tender offers laws. day require- the twenty business with respect to First, satisfy issuer cannot it seems that an Rule 14e-1(a), ment of offer that the letter requiring of the no-action the condition class and all” of the “securities of a particular be made for “any or series.” \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 41 26-FEB-13 14:17 cluded at the top of the priority list, but at some point further of the priority list, but at some cluded at the top for only a the tender offer is likely made down the waterfall of that class or series. portion of the securities mon in recent years. in recent mon 33082-nyb_9-1 Sheet No. 123 Side A 02/27/2013 10:49:33 Side A 02/27/2013 Sheet No. 123 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 123 Side B 02/27/2013 10:49:33 209 [Vol. 9:199 , (Soc. Sci. Re- Tender offers 211 http://papers.ssrn.com/ available at note 17, at 558. Of the tender offers with a The Decision to Repurchase Debt Consent Solicitations supra D. As discussed above with respect to the with respect above discussed As 208 NYU JOURNAL OF LAW & BUSINESS Appendix D for recent examples. According to a recent study, the most frequently According to a recent study, the 210 See infra The lack of clarity surrounding the twenty-day require- surrounding the twenty-day The lack of clarity the terms of debt securi- Consent solicitations to amend 209. 208. offers, see Salomon Bros. Inc., With respect to fixed-spread tender 211. Mann & Powers, 210. Timothy Kruse et al., SEC No-Action Letter, Fed. Sec. L. Rep. ¶ 79,643 (Oct. 1, 1990); with respect SEC No-Action Letter, Fed. Sec. L. Rep. Merrill Lynch, Pierce, Fenner & to real-time fixed price tender offers, see Sec. L. Rep. ¶ 76,709 (July 19, 1993). Smith Inc., SEC No-Action Letter, Fed. In most cases the issuer is attempting to eliminate covenants In most cases the issuer is attempting or that prevent the issuer that are considered too burdensome or defeasing all of the se- from taking actions like redeeming curities. 240 or series.” class \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 42 26-FEB-13 14:17 search, Working Paper No. G32, 2009), search, Working Paper No. G32, 2009), sol3/papers.cfm?abstract_id=1364846. cited reason for instituting a tender offer is to remove restric- cited reason for instituting a tender solicitation. tive covenants through a consent twenty business day requirement of Rule 14e-1(a), this condi- this Rule 14e-1(a), of requirement day business twenty respect to a waterfall be satisfied with not appear to tion does tender offer. pricing reasoning, fixed-spread Based on this fixed based on the the notional price available, but would be days be fixed ten security must the benchmark spread over the tender offer. expiration of before the of Rule and the ten-day requirement ment of Rule 14e-1(a) tender some issuers to structure waterfall 14e-1(b) has caused open for at price and holding the offer offers using a fixed days.least twenty business have structured water- Other issuers other ways, with fixed-spread pricing or in fall tender offers Rule 14e-1, as whether the requirements of making it unclear been met. staff no-action letters, have interpreted by SEC In managers possible that the issuers or dealer these cases, it is the SEC staff. oral no-action relief from have received informal unclear how lack of formal guidance leaves it Nevertheless, the tender offers under the the SEC staff would view waterfall tender offer rules. with tender offers. ties are often conducted in conjunction that include a consent solicitation average five restrictive cove- that include a consent solicitation stated motive, 63.4 percent were conducted to eliminate restrictive cove- nants. 33082-nyb_9-1 Sheet No. 123 Side B 02/27/2013 10:49:33 Side B 02/27/2013 Sheet No. 123 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 124 Side A 02/27/2013 10:49:33 217 241 note 17 at 549. supra In this situation, if the con- Thus, like timing and pricing timing and like Thus, 216 Those that tender securities by Those that tender 212 215 Mann & Powers, HONORED IN THE BREACH THE IN HONORED See Appendix E. Separating the consideration in this way raises Separating the infra , 214 Rule 14a-2, 17 C.F.R. § 240.14a-2 (2012). As stated in Rule 14a-2, at 559. but to avoid antifraud concerns a consent solicitation concerns a consent antifraud but to avoid Id. See See, e.g. A consent solicitation does not require compliance with not require solicitation does A consent 213 212. 217. accepted by practitioners, and This interpretation of the rules is not 213. 216. rule” is not applicable to debt Because Rule 14d-10’s “best-price 215. 214. a consent solicitation in As discussed in a previous section, including 2012] non- in typical, per series to 1.1 opposed as per series, nants purchases. bond tendering \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 43 26-FEB-13 14:17 statement is normally distributed to debt holders as part of the distributed to debt holders statement is normally tender offer materials. offer is combined with When a tender consider- the issuer may offer additional a consent solicitation, offer con- in addition to the separate tender ation for consents sideration. issues under the tender offer rules.issues under the the consent In many cases, hold- in the tender offer period to encourage deadline is early to tender. ers of securities structures, policies surrounding consent solicitations are cen- solicitations are consent policies surrounding structures, offer. of a debt tender success or failure tral to the 14A of the Exchange Regulation proxy rules under the federal Act, in addition to receive the consent payment the early deadline offer consideration.the separate tender If the consent pay- part of the tender offer consideration, ment is considered the tender offer price on the then the issuer is both changing security holders differ- consent deadline and paying different ent prices in the tender offer. it is unclear whether the SEC staff or a court would have this view.it is unclear whether the SEC staff or In a solicitation, the consent payment typical tender offer that includes a consent consent by the early tender and is made only to holders that tender and consent deadline.is typically ten The early tender and consent deadline business days after launching the offer, with the final tender deadline twenty business days after launch. This typical structure complies with the twenty- day requirement of Rule 14e-1(a) and the ten-day requirement of Rule 14e- 1(b), even if the expiration of the consent payment is deemed a change in sent deadline is considered a change in the tender offer con- sent deadline is considered a change could run into the same sideration, then consent solicitations fixed-spread pricing. issues with respect to Rule 14e-1(b) under this interpretation should be tender offers, the different tender prices allowed. a tender offer also commands a premium on the bond issue, separate from a tender offer also commands a premium the covenant issuance. the federal proxy rules apply only to securities registered pursuant to Section the federal proxy rules apply only to securities 12 of the Exchange Act , 15 U.S.C.A. § 78a (West 2012). 33082-nyb_9-1 Sheet No. 124 Side A 02/27/2013 10:49:33 Side A 02/27/2013 Sheet No. 124 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 124 Side B 02/27/2013 10:49:33 [Vol. 9:199 9, 12 (Dec. note 240 and DVISOR 571, 609-10 (1992); . 218 AW Changes to the ba- Changes to the . L. A . L EC Modifying Debt Securities: The 220 US Doing a Debt Tender Offer and B are examples of funda- are examples of See generally infra requiring registration or requiring registration . & S 221 , 47 219 ORP C HE : T note 26, at 65. NSIGHTS I supra NYU JOURNAL OF LAW & BUSINESS , 21 Bryant B. Edwards & Jon J. Bancone, See Id. Lacy & Dolan, 222 Additionally, when the consent solicitation is done in con- Additionally, when the consent solicitation Another issue raised by consent solicitations is whether by consent solicitations is Another issue raised 222. 219. §§ Trust Indenture Act of 1939, 15 U.S.C. (2010). 77aaa-77bbbb 220. 221. to repay the principal These include, for example, the obligation 218. David Brittenham & Peter Loughram, amount, the interest rate, the redemption premium and the maturity date. 2007). see also Search for the Elusive “New Security” Doctrine accompanying text. nection with a tender offer, the holder’s ability to consent to nection with a tender offer, the tender offer consideration. would It is doubtful, however, that a transaction early tender and consent deadline is comply with these provisions where the tender deadline.extended without also extending the final reason for The this is straightforward:deadline is ex- when the early tender and consent extension of the final tended by even one day without a corresponding period before expiration after a tender deadline, there is no longer a ten-day change in the tender offer consideration. the proposed modifications to the debt securities will consti- to the debt securities the proposed modifications the Securities “sale” of new securities under tute an “offer” and Indenture Act Act and the Trust 242 transac- separate is a solicitation consent if the Alternatively, be unavailable may pricing fixed-spread then or offering, tion made offer not be that the no-action requirement due to the offering. with a separate in connection that are issues These case (as is the clearly noncompliant instead of are ambiguous windows). tendering with shortened this point, the SEC Up to for consenting that full payment “informally” stated has only with the securities laws. holders is consistent \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 44 26-FEB-13 14:17 sic financial terms of the security sic financial terms Consent Solicitation an exemption from registration.an exemption from principle, often referred This the terms doctrine,” is implicated when to as the “new security fundamental modified so that there is a of the security are of the investment. change in the nature in the nature of the investment.mental changes While each on a case-by-case basis, set of modifications should be analyzed covenants (other than simply stripping out the restrictive terms of the security) is those that relate to the basic financial the new security doc- generally not believed to implicate trine. 33082-nyb_9-1 Sheet No. 124 Side B 02/27/2013 10:49:33 Side B 02/27/2013 Sheet No. 124 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 125 Side A 02/27/2013 10:49:33 243 RACTISING P , 699 7, 21 (July-Aug. 1990). the “Dutch auction” ERIES 225 S From the issuer’s perspective, From the issuer’s ANDBOOK at 564. 223 H note 17, at 559 (the premium attached to a note 17, at 559 (the premium attached OURSE Exchange Offers and Debt Tenders . C see also id. note 15, at 952-53. supra Dutch Auction Tender Offers HONORED IN THE BREACH THE IN HONORED But, as with the other transactions de- But, as with the RAC P supra E. 224 AND There are two variants of the Dutch auction. There are two variants of the Dutch In at 564 (“as the firm evolves these covenants can subsequently at 564 (“as the firm evolves these covenants . L. 226 Alison Overseth, Edwards, ORP See See See id. . C There are instances, however, where an issuer’s desired There are instances, however, where NST 226. 223. Mann & Powers, 225. 224. L. I 2012] the re- tendering or her to his often tied is modifications the notes.lated con- from the holder prevents consent” “exit This with the security while still retaining to the changes senting terms.the modified the serves of these covenants The removal the to maximize and bondholders of both issuers interests a pre- receives as the bondholder value, insofar transaction’s re- frees itself from while the issuer the bond itself mium on new debt. strictions in issuing \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 45 26-FEB-13 14:17 scribed in this paper, the efficiencies of the present system ob- the efficiencies of the present scribed in this paper, may vio- these transactions, strictly speaking, scure the fact that set out by the regulations governing pricing late the rules and SEC. or abrogating the twenty As with fixed-spread pricing with a combining a consent solicitation day offer requirement, that the SEC to be a transactional form tender offer appears warranting formal ratification, instead of one tolerates without forms of the transaction rule adjustment to legalize various structure. re- The resulting incongruity between the practical a problematic legal land- ality and statutory provisions create the transaction. scape for the attorneys overseeing in a way that adheres to transaction structure can be altered the desired pricing advan- the securities laws while producing tages. Although its use may be limited, tender offer is an example of attorney innovation.tender offer is an example of attorney In a Dutch by the amount for auction tender offer, price is determined to sell their securities to which securities holders are willing the issuer. holders the opportunity to a Dutch auction, the issuer gives the restrictive covenants may impair its ability to rollover its may impair its ability the restrictive covenants adapt to mar- have the financial flexibility to debt or otherwise ket conditions. impose considerable costs”). bond featuring a $20 allotment for the consent solicitation is $14 per $1000 bond featuring a $20 allotment for the of the bond’s par value); 33082-nyb_9-1 Sheet No. 125 Side A 02/27/2013 10:49:33 Side A 02/27/2013 Sheet No. 125 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 125 Side B 02/27/2013 10:49:33 , but The Tender 230 A pure For ex- 227 1, 4 (Jan. [Vol. 9:199 229 228 231 DVISOR In a modified . L. A 233 EC James J. Junewicz, see This structure has also . & S 232 ORP C Appendix D. HE : T infra note 15, at 952-53; NSIGHTS Regulating Issuer Bids: The Case of the Dutch Auction Regulating Issuer Bids: The Case of the Dutch I note 225, at 21. supra note 24, at 859. , 10 supra NYU JOURNAL OF LAW & BUSINESS supra 133, 135 (2000). Edwards, L.J. Overseth, Anita I. Anand, See ILL See See id. Id. See G Because pure Dutch auctions involve setting a price at the Because pure Dutch auctions involve C M 230. 231. 232. Bergman, 233. For recent examples, see 228. 229. securities holders differently In the example, the issuer is treating 227. 1996). On the other hand, a broad interpretation of the antifraud rules of 1996). On the other hand, a broad interpretation find that discrimination against Section 14(e) and Regulation 14E could is prohibited. holders of debt securities in this manner based on the prices specified by the holders in the tender offer.based on the prices specified by the holders The best- 14E of the Exchange Act prohib- price rule of Rule 14d-10 under Regulation it requires that the consideration its pure Dutch auction tender offers as highest consideration paid to any paid to any security holder be equal to the other security holder. 17 C.F.R. § 240.14d-10 (2012). However, Rule 14d-10 have reasoned that it is applies only to equity securities and commentators auction tender offers for debt possible for issuers to conduct pure Dutch securities. 45 Offers for Debt Securities end of the offering period, issuers began structuring tender end of the offering period, issuers offers as “modified” Dutch auctions. 244 holders. by the specified a price at securities tender \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 46 26-FEB-13 14:17 become common for debt tender offers. become common for debt tender the “best price” rule under Rule 13e-4 prevents debt securities rule under Rule 13e-4 prevents debt the “best price” features from using this method. with any equity Dutch auction, the issuer gives securities holders the opportu- Dutch auction, the issuer gives securities at a price specified by the nity to either (i) tender securities issuer then accepts securities beginning at the lowest price un- lowest at the beginning securities then accepts issuer securities. volume of purchased its desired til it has debt $100 million of to buy only an issuer desires ample, if it may prepare million outstanding, out of $500 securities in- of the offer and the terms materials disclosing tender offer to tender. who want bids from holders viting price If holders prices rang- bonds tender their securities at of $125 million of holders of an $910 per $1000 bond, while ing from $900 to ranging from of bonds tender at prices additional $125 million all $100 mil- bond, the issuer will purchase $915 to $925 per prices to group at the lowest possible tender lion from the first $100 million.achieve the desired No purchases will be made specifying higher tender prices. from those holders structure, comply, depending on pricing Dutch auction might offers, laws for straight debt tender with the securities 33082-nyb_9-1 Sheet No. 125 Side B 02/27/2013 10:49:33 Side B 02/27/2013 Sheet No. 125 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 126 Side A 02/27/2013 10:49:33 239 245 AND- H ANDBOOK note 24, at H OURSE . C supra OURSE RAC However, the is- However, . C The advantage to The advantage P 236 RAC De-Levering Through Debt 237 AND P Id. Issuer Share Repurchases: Deriva- . L. AND note 227, at 134. ORP . L. Following the tender period, Following . C ORP supra 235 NST . C NST L. I L. I tender). HONORED IN THE BREACH THE IN HONORED 234 RACTISING P RACTISING P , 1653 9, 14 (Feb. 2008). Dutch auction tender offers can be struc- at 860-61. 238 BOOK . , 1792 ERIES Id Id. 113, 116 (Feb. 2010). For example, using the facts from the example The modified Dutch auction is an example of market par- auction is an example of market The modified Dutch S 239. has argued that Dutch auctions Interestingly, one Canadian scholar 238. Bruce K. Dallas & Vincent T. Cannon, 235. 236. 234. have priority in the event that These “non-competitive” tenders will 237. Spivey, Angela L. Fontana & Lucas E. ERIES should be exempted from any “best price” considerations because securities laws should distinguish equality of resulting compensation (the current pri- ority) from equality of opportunity (which, she argues, is the true aim of the securities laws in this area). Anand, tured with a range of fixed prices or, if the conditions are satisfied, with a tured with a range of fixed prices or, if range of fixed-spreads. appropri- In either case, the market determines the ate pricing details during the tender offer. tender offer Structuring a debt for an issuer compared to a pure in this fashion may be more expensive of antifraud or other claims that Dutch auction, but it eliminates the risk may arise with a pure Dutch auction format. above, in a modified Dutch auction the issuer would buy all $100 million of above, in a modified Dutch auction the $910 per bond, because that is the its desired debt securities at a price of achieve its desired $100 million vol- lowest price that will allow the issuer to ume. 860. there is a waterfall provision built into the offer.there is a waterfall provision built into the Bergman, tive Strategies S ticipants working around the Williams Act to structure a trans- around the Williams Act to structure ticipants working and seller. mutually beneficial to buyer action in a manner some of the Dutch auction clearly violates While the pure price rule, Act provisions, notably the best bright-line Williams compliant auction renders the offer fully the modified Dutch 2012] or (ii) the issuer by specified of prices a range within holders a as price (known any specified without securities their tender “non-competitive” \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 47 26-FEB-13 14:17 suer will pay the same price to each tendering security holder to each tendering pay the same price suer will price or below. at the final who tendered the issuer then pays the lowest price that will allow it to that will allow lowest price then pays the the issuer of securities. the desired volume purchase Buybacks holders of securities is that they get the highest price paid to is that they get the highest holders of securities to sell at a holder, even if they were willing any other security lower price. pays the lowest price At the same time, the issuer by the its desired securities as determined necessary to buy market. 33082-nyb_9-1 Sheet No. 126 Side A 02/27/2013 10:49:33 Side A 02/27/2013 Sheet No. 126 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 126 Side B 02/27/2013 10:49:33 [Vol. 9:199 note 158, at 13-40 (“For example, supra , Early Tender Premiums Early Tender AUGHLIN L C F. & M NYU JOURNAL OF LAW & BUSINESS Those who tender securities by the early deadline Those who tender Appendix E for recent examples. 240 OHNSON J See Unlike the above-discussed transaction structures, the fi- transaction above-discussed Unlike the The debt tender offer exemption from 14d-10 does not The debt tender offer exemption 240. Cox Communications, Inc. launched a tender offer on August 26, 2003 for Cox Communications, Inc. launched a principal amount (at maturity) of any and all of approximately $1.8 billion To the extent that the falling away of its outstanding discount debentures . . . the early tender premium on September 9 amounted to a change in the consideration offered, the offer would still comply with [the ten-day require- ment of] Rule 14e-1(b) because it would not expire until September 23.”); see also infra 246 of the transaction goals the fundamental undermining without structure. perva- simply (or perhaps is so uncontroversial nal structure to challenge. not been as open its legality has sive) that A securities may a tender offer for its debt company conducting pay an “early to tender by offering to encourage bondholders a specified to holders who tender before tender premium” deadline. \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 48 26-FEB-13 14:17 receive the premium payment in addition to the other tender payment in addition to the receive the premium offer consideration.is similar to a tender offer This structure premium pay- consent solicitation, where the combined with a part of the payment) may be considered ment (like a consent tender offer consideration.situation, the issuer is both In this deadline offer price on the early tender changing the tender prices in the security holders different and paying different tender offer. not appli- Because the best-price rule of 14d-10 is different tender prices under cable to debt tender offers, the this interpretation should be allowed. arise when offering an early mean, however, that issues do not tender premium. creates a Because the early tender deadline the tender offer change in the tender offer consideration, ten days under Rule 14e- must remain open for an additional 1(b). early tender In a typical tender offer structure with an is ten business days after premium, the early tender deadline twenty business days af- launch, with the final tender deadline ter launch. with the Structured this way, the offer complies 14e-1(a) and the ten-day re- twenty-day requirement of Rule quirement of Rule 14e-1(b). deadline Where the early tender the final tender deadline, is extended without also extending is violated without ex- however, the ten-day requirement 33082-nyb_9-1 Sheet No. 126 Side B 02/27/2013 10:49:33 Side B 02/27/2013 Sheet No. 126 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 127 Side A 02/27/2013 10:49:33 247 ACING F ONSEQUENCES C IV. RACTITIONERS P EGAL OMMERCIAL L HONORED IN THE BREACH THE IN HONORED C THICAL AND E 241 Lack of clarity regarding an issuer’s timing and pricing Lack of clarity regarding an issuer’s or outright vio- For issuers and the SEC, these ambiguities Issues may otherwise desire to have a shorter early tender to have a shorter otherwise desire Issues may 241. It is somewhat common to extend the early tender deadline without extending the final expiration date. obligations can delay beneficial refinancing transactions and, obligations can delay beneficial from being completed at in some cases, prevent transactions market conditions.all due to the rapid fluctuation of The SEC on a case-by-case basis with staff has offered no-action relief structures. Additionally, the respect to many debt tender offer guidance with respect to Commission has issued interpretive Act and Regulation 14E.Section 14(e) of the Exchange Yet structures remains either un- the legality of many transactional relation to the securities laws clear or clearly noncompliant in consequently come themselves, and many of these transactions concerned. with liabilities for many of the parties In fact, they are often lations are not inherently problematic. advantageous.transaction The issuer is able to execute the 2012] price sta- ten-day the to fulfill window tender offer the tending bilization. by extended is deadline early tender the When final extension of the corresponding day without a even one period before is no longer a ten-day there tender deadline, offer considera- change in the tender after a clear expiration tion. by ten days of example, nine days) followed offer deadline (for comply with the ten-day rule.price stability to Though little tender premi- made for the legality of early argument can be is fewer where the early tender deadline ums in structures does not take final expiration, the SEC than ten days before leav- violation of these timing requirements, action against the in practice. in doubt yet sanctioning their use ing their legality but leaves situation suits issuers quite well The result of this acceptable in to sanction practices that, while opinion writers opinion let- violate the law that constrains the market, clearly ters. \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 49 26-FEB-13 14:17 33082-nyb_9-1 Sheet No. 127 Side A 02/27/2013 10:49:33 Side A 02/27/2013 Sheet No. 127 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 127 Side B 02/27/2013 10:49:33 while [Vol. 9:199 242 In the con- 246 The stakes may, The stakes Former Commis- 243 247 note 141. Although this release supra note 30, at 950 (noting that the SEC expects that note 30, at 950 (noting that the SEC note 106, at 79. 245 NYU JOURNAL OF LAW & BUSINESS supra supra at 100-01. Nagy, Tender Offer Guidance, This risk is mitigated, however, by the fact that, often, however, by the fact that, This risk is mitigated, . See Id See See id. 244 Issuing these opinion letters is helped by the fact that the letters is helped by the fact Issuing these opinion 242. 243. 244. Lipson, 247. 245. 246. authority to the SEC, stating Section 14(e) gives broad rule-making antifraud provisions of Section 14(e) and Regulation 14E are of Section 14(e) and Regulation antifraud provisions to different interpretations. broad and subject 248 action, SEC enforcement of chance a negligible with \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 50 26-FEB-13 14:17 sioner Edward Fleishman referred to the conflict between the sioner Edward Fleishman referred only for the requesting party SEC’s position that the letters are however, be high for the issuer: negotiating the “no violation” issuer: negotiating be high for the however, struc- a transaction’s alter letter can dramatically opinion ture. attorneys will compromise and mold their opinion letters to and mold their opinion attorneys will compromise signing off the issuer’s desired end, effectively the contours of on a transaction. “most regulatory interpretations in no-action letters to extend beyond the “most regulatory interpretations in no-action issued” such that they are “gener- specific factual contexts in which they were parties”). ally applicable to similarly situated third of this subsection, by rules and “[t]he Commission shall, for the purposes reasonably designed to prevent, regulations define, and prescribe means deceptive, or manipulative.” 15 such acts and practices as are fraudulent, U.S.C.A. § 78n (West 2012). for less than five percent of a class of focuses on mini-tender offers, or offers partnership interests, it provides sev- securities, and tender offers for limited eral examples of tender offer practices that the SEC considers fraudulent, deceptive or manipulative under Section 14(e) and Regulation 14E. These interpretations can be useful to issuers and their advisors in structuring debt tender offers. text of tender offers for debt securities, the staff of the SEC has for debt securities, the staff of text of tender offers no-action on a case-by-case basis through provided guidance specific factual circumstances.letters addressing In addition, guidance on the an- the SEC has provided general interpretive and Regulation 14E on one tifraud provision of Section 14(d) mini-tender offers and tender occasion in a release addressing offers for limited partnership interests. the SEC is able to promulgate new policies responding to responding policies new promulgate able to SEC is the spares administrative in a way that market conditions changing maxi- the allowing the Commission effort while also cost and and discretion. of flexibility mal degree 33082-nyb_9-1 Sheet No. 127 Side B 02/27/2013 10:49:33 Side B 02/27/2013 Sheet No. 127 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 128 Side A 02/27/2013 10:49:33 251 249 248 the attorney has three pos- so the attorney is left with so the attorney 252 249 policies forces every law firm and policies forces The law firm’s reputation is tied not The law firm’s reputation is tied 250 note 106, at 86-87. note 29, § 1.7 and text accompanying note 29. HONORED IN THE BREACH THE IN HONORED de facto note 112, at 291 (stating that the opinion letter note 112, at 291 (stating that the opinion Commercial Playing Field Commercial supra supra supra at 77. No-Action Letters and Legal Opinions: Tilting the Opinions: Tilting Letters and Legal No-Action Brown, Gilson, Lipson, A. See See See See id. This “schizophrenia” on the SEC’s part has real conse- the SEC’s part on This “schizophrenia” First, the attorney can choose to issue opinion letters First, the attorney can choose 249. 248. Fleischman, Morgan Stanley & Separate Statement of Commissioner 250. 251. 252. Co., Inc., Exchange Act Release No. 28,990, 48 S.E.C. Docket 674 (Mar. 20, Co., Inc., Exchange Act Release No. 28,990, 1991). Understanding that opinion letters granting full legal cover- Understanding that opinion letters age are more desirable to clients, 2012] those rely upon parties other that expectation the SEC’s and schizophrenia.” of institutional a “kind letters as past \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 51 26-FEB-13 14:17 quences for practicing attorneys. for practicing quences debt tender offer In most issuer will the dealer manager nor the transactions, neither has is- transaction unless the issuer’s counsel proceed with a complies letter stating that the transaction sued an opinion securities laws, with the federal the choice of approving the transaction or losing not only a the transaction or losing the choice of approving other bus- but also potentially a client’s role in the transaction, iness as well. SEC’s legally enforceable The divide between the its regulations and sible responses to an issuer seeking to engage in a transaction sible responses to an issuer seeking securities laws but fully com- that may violate the letter of the plies with the SEC staff’s policies. compliant with the letter of solely where the transaction is fully the law.and poten- This approach amounts to refusing clients only to its ability to generate business, but also to the legiti- only to its ability to generate business, increasing the importance of macy of its opinion letters, thus the opinion letter process. adhering to clear guidelines in each attorney to confront this choice in the shadow of know- confront this choice in the shadow each attorney to are mini- or sanction, even if the chances ingly risking liability the professional obligation mal, or at least knowingly violating adhere to the law.to only approve transactions that Alongside also weigh the important the transaction itself, attorneys must the reputation of both the role opinion letters play in building attorney and her firm. “most prominently highlight[s] the reputational intermediary role played by [lawyers]”). 33082-nyb_9-1 Sheet No. 128 Side A 02/27/2013 10:49:33 Side A 02/27/2013 Sheet No. 128 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 128 Side B 02/27/2013 10:49:33 , LOOM- B , Tax Shelter [Vol. 9:199 David Glo- See , not hamper, the transaction-forma- , not hamper, the , Jan. 25, 2006, http://www.nytimes.com/2006/ Regarding both ethical and liability con- both ethical Regarding IMES Jenkins to Close after U.S. Agrees not to Prosecute facilitate 253 NYU JOURNAL OF LAW & BUSINESS N.Y. T or specifically limits the compliance to interpre- or specifically limits the compliance , (Mar. 29, 2007), http://legacy.utsandiego.com/news/busi- , 255 . IEGO Given market participants’ skepticism of the value or Given market participants’ skepticism Jenkins & Gilchrist to pay $76M, Shut Doors for Promoting Tax Shelters Jenkins & Gilchrist to pay $76M, Shut Doors BERG D See id AN 254 In direct contrast to the first possibility, a firm could issue to the first possibility, a firm could In direct contrast , Mar. 29, 2007, http://www.bloomberg.com/apps/news?pid=news 255. Under this approach, the opinion letter would include typical “no 253. 254. liability risk for a law firm in There is significant reputational and 01/25/business/25shelter.html. accusations The damage resulting from the firm’s bankruptcy. and public exposure ultimately led to the vin & Cynthia Cotts, ness/20070329-1344-taxshelters-lawfirm.html; Lynnley Browning, ness/20070329-1344-taxshelters-lawfirm.html; Inquiry Expands violation” opinion language, then add disclosure elsewhere in the letter stat- ing, for example, “we express no opinion as to the compliance of the tender offer with the provisions of Rule 14e-1(a) and (b) promulgated by the Secur- archive&sid=AMElpx5dib2w&refer=home. giving overly aggressive legal opinions. the In the context of tax opinions, liability and reputational harm law firm Jenkins & Gilchrist suffered massive to sanction illicit tax shelters. Macy due to the firm’s use of opinion letters Gordon, U-T S 250 transac- legitimate in otherwise engage to seeking tial clients will attorneys that other the likelihood given particularly tions, need. meet their \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 52 26-FEB-13 14:17 cost-efficiency of opinion letters, they will naturally desire a let- cost-efficiency of opinion letters, and grant them the highest ter that will both maximize value degree of legal protection. a middle A third option occupies and refusal of the issuer’s ground between open acceptance qualified opinion that either terms, where the firm will issue a noncompliant aspects of the does not specifically address the transaction siderations, this is the more conservative approach for a firm approach for a conservative this is the more siderations, are fully compliant and its attorneys that the firm and ensures face sanction. law and will not with the this conservative But to deal with clients price of refusing at the steep stance comes with SEC their deals in full compliance who want to structure staff policy. a client is attempting to Unlike a situation where are not them- laws, these transactions circumvent the securities use of the the issuers merely wish to make selves unethical; guidance—guidanceSEC’s nonbinding no- provided through action letters to tion process. for the transaction.a clean opinion The primary advantage to derive from the obvious benefit the firm will this approach is transac- relations, at least for an imminent improved client tion. 33082-nyb_9-1 Sheet No. 128 Side B 02/27/2013 10:49:33 Side B 02/27/2013 Sheet No. 128 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 129 Side A 02/27/2013 10:49:33 , 251 supra governing law note 126, at 607. supra HONORED IN THE BREACH THE IN HONORED Firms using this option may choose to in- choose may this option using Firms 257 256 TriBar Op. Comm., See The tension between approving and refusing to sanction approving and refusing to The tension between In rendering the no violation opinion set forth above, we have re- In rendering the no violation opinion on certain no-action lied, in the absence of binding legal authority, guidance provided by, the letters issued by, and other interpretive (the “Commis- staff of the Securities and Exchange Commission sion”). gui- You should be aware that no-action letters issued by, or are not official ex- dance provided by, the staff of the Commission but merely reflect the pressions of opinions of the Commission, involve administering views of staff members whose responsibilities the federal securities laws in question. Moreover, such no-action any court, governmental letters or guidance are not binding on any other person and will agency, including the Commission, or including the Com- not operate to bar any governmental agency, litigation with respect mission, or any other person from initiating to the matters addressed therein or herein. 257. 256. would include typical “no Under this approach, the opinion letter because it is both specific and transparent in how counsel is addressing the conundrum associated with reliance on SEC staff no-action letters. violation” opinion language, then add a paragraph of disclosure elsewhere violation” opinion language, then add in the letter stating, for example: This approach seems superior to the approach discussed in note 252, ities and Exchange Commission.”seen this type Although the authors have rare and dealer managers and their of language in practice, it is exceedingly opinion from issuer’s counsel. legal counsel typically seek a cleaner legal the perspective of issuer’s counsel, This language also poses problems from opinion on a transaction that tech- which is rendering a “no violation” of law nically violates law. 2012] in similar issued letters in no-action SEC staff of the tations circumstances. practicing to one another, such that any are inversely related some cost from the current situation.attorney suffers The more ethi- a firm is with its issuer clients, the more permissive adhering to the more restrictive a firm is in cal hazards it risks; advisors will law, the less issuers and financial the letter of the that firm for counsel.be willing to retain One might argue case for firms relationship has always been the that this inverse (or even of simply a part of the legal practice and clients and is general).doing business in the firm that engages in Indeed, their clients of the law to provide more creative interpretations \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 53 26-FEB-13 14:17 clude a discussion of the no-action letters supporting the supporting no-action letters discussion of the clude a the transaction. aspects of noncompliant the In any event, due to the require- is unclear of the third option propriety only discuss relevant opinion letters ment that the transaction. 33082-nyb_9-1 Sheet No. 129 Side A 02/27/2013 10:49:33 Side A 02/27/2013 Sheet No. 129 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 129 Side B 02/27/2013 10:49:33 259 ., Lipson, g [Vol. 9:199 . e , See 679, 679 (2012) (finding . And, as suggested by AW 261 . L US B , 67 1591, 1604-05 (2006). . The SEC and the Financial Industry: Evidence EV note 257, at 1598. . U. L. R Clean and qualified letters in this context Clean and qualified supra NYU JOURNAL OF LAW & BUSINESS ASH 258 W Stavros Gadinis, , 84 The SEC as a Lawmaker: Choices About Investor Protection in the Face The SEC as a Lawmaker: Choices About Investor Reich Family L.P. v. McDermott, Will & Emery, No. 101921-03, Reich Family L.P. v. McDermott, Will This fact may suggest that law firms could face simi- This fact may suggest that law See, e.g., See 260 While the SEC has not sanctioned attorneys or otherwise not sanctioned attorneys or While the SEC has note 106, at 84, 127 n.125 (discussing SEC actions against White & note 106, at 84, 127 n.125 (discussing 261. Langevoort, 259. have, in other contexts, held Even in limited opinion letters, courts 260. 258. in this context, see Donald C. For discussion of attorneys’ motives that big firms were treated much less harshly during SEC enforcement ac- that big firms were treated much less harshly tions than smaller firms). This fact may suggest that law firms could face similarly disparate treatment and lessens the predictive power of the no-ac- tion letters upon which firms rely. that equitable principles may render an attorney liable despite the limita- that equitable principles may render an tions. 2003 N.Y. Misc. LEXIS 2060 (N.Y. Sup. Ct. Oct. 10, 2003). SEC actions 2003 N.Y. Misc. LEXIS 2060 (N.Y. Sup. trial, but scholars have discussed against law firms are typically settled before and negotiations. some of the pre-settlement considerations supra trial). Case that were ultimately settled before From Enforcement Against Broker-Dealers Langevoort, of Uncertainty Though not often studied, at least one piece of very recent studied, at least one piece of Though not often different that the SEC will indeed treat scholarship suggests quite differently, discriminat- companies within the same field for example, size or capitaliza- ing against businesses based on, tion. 252 a up to should, perhaps flexibility and efficiency maximal with advantage. competitive have the point, (if intellectual But this the the same way in not apply in flexibility does not ethical) letter context. letter and opinion no-action Instead of creative and winners determining legal interpretation or efficient or as tools that may simply exist no-action letters losers, the practitioners.be utilized by legal may not practitioner’s reli- A actual law, is while knowing that they are not ance upon them, within parsing current law to fit a transaction far different than its boundaries. \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 54 26-FEB-13 14:17 are not separated by ingenuity or creativity; instead, they are by ingenuity or creativity; instead, are not separated regard for appetite for risk and relative separated by a party’s opinion letter obligations. no individual any of these structures, taken action regarding action. the possibility of adverse SEC firm should ignore larly disparate treatment and lessens the predictive power of larly disparate treatment and lessens firms rely. The possibility is the no-action letters upon which rate of SEC staffers—aperhaps exacerbated by the turnover “key institutional feature of the SEC.” Sarbanes-Oxley Act of 2002 the new liability rules following the 33082-nyb_9-1 Sheet No. 129 Side B 02/27/2013 10:49:33 Side B 02/27/2013 Sheet No. 129 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 130 Side A 02/27/2013 10:49:33 . 265 253 , 16 OLUM see also C 909, 922 . EV , 74 Because we Because As one prac- L. R 263 268 Some Thoughts on the Eco- ARDOZO For legal opinions, C 307, 312-13 (1989); . 266 EV , 15 . L. R US . B Legal Opinions in Securities Transactions Administrative Agency Obsolescence and Interest OLUM C note 29, at 28. note 29, at 29. And indeed, while a lawyer writing an And indeed, while a lawyer writing HONORED IN THE BREACH THE IN HONORED , 1989 Expanding Public Responsibilities of Securities Lawyers: An Expanding Public Responsibilities of Securities 267 supra supra , , the manner in which the SEC takes action can action takes the SEC in which manner the attorneys are left to either refuse to engage with refuse to engage are left to either attorneys 262 264 No-Action Letters and Legal Opinions: Liability Risks No-Action Letters . 375, 376-77 (1992). Jonathan R. Macey, at 28-29. ODERQUIST ODERQUIST . L Id. S S See . 412, 433 (1974). The liabilities associated with an attorney’s participation The liabilities associated B. EV ORP 264. enforcement policies, see For a further example of the SEC’s shifting 266. 267. Jr., Thomas L. Ambro & J. Truman Bidwell, 268. 262. No. 107-204, 116 Stat. 745. Sarbanes-Oxley Act of 2002, Pub. L. 263. 265. Analysis of the New Trend in Standard of Care and Priorities of Duties Analysis of the New Trend in Standard of Care Lewis D. Lowenfels, (1994). L. R Darrel A. Rice & Marc I. Steinberg, nomics of Legal Opinions J. C This sanctioning responsibility is accompanied by the attor- responsibility is accompanied This sanctioning rise to liabil- to protect the public, which gives ney’s obligation law. ities if the transaction violates the 2012] (“SarbOx”), not risk of sanction, small) to hazard the (admittedly clients or of the at- the knowledge that the conduct to mention bearing of his or her falls outside the bounds torney, as a professional, professional obligations. sanc- can be substantial because the attorney’s in a transaction forward. required for a transaction to go tion is generally \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 55 26-FEB-13 14:17 change dramatically after a given series of events. of given series after a dramatically change Typically, to as attempts the SEC’s reactions have characterized scholars from other agencies. capture” avoid “regulatory law firms face two forms of liability for issuing a faulty opinion law firms face two forms of liability letter. arising The first includes the basic monetary harms the securities laws; the sec- from actions against the firm under is the reputational harm ond and far more important harm the firm suffers. opinion letter may be committing an ethical violation, more opinion letter may be committing the transaction if the lawyer is serious problems may arise from as counsel. more integrated than acting solely Group Formation: A Case Study of the SEC at Sixty Group Formation: A Case Study of the SEC at titioner has noted, “a securities lawyer typically does not titioner has noted, “a securities accomplish a transaction, but merely advise clients on how to cannot know how the SEC’s enforcement policies will shift in policies will shift enforcement how the SEC’s cannot know the future, 33082-nyb_9-1 Sheet No. 130 Side A 02/27/2013 10:49:33 Side A 02/27/2013 Sheet No. 130 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 130 Side B 02/27/2013 10:49:33 , AW L Moreo- [Vol. 9:199 273 the advent ECURITIES S 270 Day v. Dorsey & Whitney, note 29, § 1.7. note 29, § 1.7 (discussing the See Ethics and Professional Responsibil- UNDAMENTALS OF F supra supra Case law suggests that a one-day Brown, 275 See These rules require attorneys represent- These rules require note 105, at 73. 271 note 29, § 1.7. NYU JOURNAL OF LAW & BUSINESS supra supra Becoming more fully integrated within the transac- the within integrated more fully Becoming The rules allow the SEC to sanction violators “as if the SEC to sanction violators The rules allow 274 269 272 So by issuing a flat opinion in any of the areas detailed So by issuing a flat opinion in Although there is scant case law in this area, there is scant case Although 275. Also, some factors do mitigate the risks involved in opinion letter 270. Blackshear, 271. “Standards of Professional Con- This mandate resulted in the SEC’s 274. forms of liability that can result For further discussion of the various 272. 17 C.F.R. §§ 205.1-7 (2012). 273. 17 C.F.R. § 205.6 (2012); Brown, 269. Brown, writing. First, more sophisticated opinion recipients lessen the burden for an attorney to establish adequate disclosure. at 749, 752 (Annual ALI-ABA Course of Study for Inside and Outside Coun- at 749, 752 (Annual ALI-ABA Course of 2010). sel, Printed Coursebook Ser. No. SR043, ity for Attorneys in Securities Transactions in duct for Attorneys Appearing and Practicing Before the Commission in the duct for Attorneys Appearing and Practicing Representation of an Issuer.” from opinion letters, see Robert B. Robbins, SEC’s rules and how they go beyond what is required by Section 307). SEC’s rules and how they go beyond what above, the law firm could be sanctioned so long as the viola- above, the law firm could be sanctioned tion was material. letter is The legal status of the no-action the SEC has not taken ac- paramount here: the mere fact that tendering windows with set- tion against, for example, nine-day is ten, does not legalize that tled prices where the standard transaction. whether Instead, the legal question will become that violation is material. 254 transac- in the participant active is an she usually he or rather tion.” \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 56 26-FEB-13 14:17 tion’s negotiation and structure can give rise to an even give rise to an structure can and tion’s negotiation for the attorney. of liability greater level ing issuers to report any material violations committed by the any material violations committed ing issuers to report of the is- director, employee, or agent issuer or an officer, suer. one of the federal securities laws.” they had violated of SarbOx has imposed an entirely new liability regime for par- regime for entirely new liability has imposed an of SarbOx and as accountants offering, such in a securities ties engaged attorneys. requires the SEC to create Section 307 of SarbOx lawyers rep- conduct for securities rules governing professional resenting issuers. ver, third parties will have a cause of action against any attor- will have a cause of action against ver, third parties where legitimating a fraudulent transaction ney involved in the trans- is sufficiently integrated into the attorney’s position action. 33082-nyb_9-1 Sheet No. 130 Side B 02/27/2013 10:49:33 Side B 02/27/2013 Sheet No. 130 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 131 Side A 02/27/2013 10:49:33 255 supra but With 276 278 Brown, should also be see also 279 V. “effectively eliminates 10b-5 liability for ONCLUSION C attorneys remain at the mercy of the remain at the attorneys Stoneridge note 106, at 107-108. 277 HONORED IN THE BREACH THE IN HONORED supra Lipson, Press v. Chem. Inv. Serv. Corp., 166 F.3d 529, 538 (2d Cir. 1999) Press v. Chem. Inv. Serv. Corp., 166 F.3d Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 128 S. Ct. Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, See See See While market participants and the SEC may be comforta- While market participants , 21 F. App’x 530 (8th Cir. 2001). 276. 278. 279. For example, the disparate treatments of investment-grade and non- 277. note 29, § 1.7 (noting that No. 98-1425, 2001 U.S. Dist. LEXIS 26149 at *21 (D. Minn. Feb. 21, 2001), No. 98-1425, 2001 U.S. Dist. LEXIS 26149 aff’d ble with the present formal and informal regulation of debt formal and informal regulation ble with the present ex- and their law firms are increasingly tender offers, attorneys or even lia- breaches of ethical obligations posed to potential of an illegal securities transaction. bility for approval 2012] material, not be would timing tender’s in the change \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 57 26-FEB-13 14:17 SEC’s sanctioning authority under the Rules promulgated fol- promulgated under the Rules authority SEC’s sanctioning passage. lowing SarbOx’s eliminated in light of the broad acceptance by the capital mar- eliminated in light of the broad debt securities.kets and regulators of high-yield issues Other the SEC’s position, for could be resolved by formally clarifying qualifies as a fixed consid- example, that fixed-spread pricing 14e-10(b).eration for the purposes of Rule in Clear guidance nonspeaking secondary actors who have no duty to disclose information”). nonspeaking secondary actors who have other areas such as the waterfall tender offer or fixed-spread offer tender the waterfall such as areas other they strike at signifi- because be more problematic pricing may 10b-5 offer. Although aspects of the and access cant pricing repre- attorneys unavailable against appear to be actions now a company, senting investment grade debt are distinctions entirely maintained through no-ac- tion interpretations. the increasing volume of debt securities in the U.S. market, of debt securities in the the increasing volume some of the most common the lack of clarity surrounding transaction structures is more important. could im- The SEC of debt securities by revis- prove efficiency in the refinancing accepted no-action po- ing portions of Rule 14e to incorporate sitions. Some of the existing SEC positions of funds is not material for (explaining that a one-day delay in availability bills). deciding whether to purchase treasury party has no duty to disclose, there 761, 769 (2008) (finding that where a party’s representations and there- can be no presumption of reliance on that Rule 10b-5); fore no liability for a private action under 33082-nyb_9-1 Sheet No. 131 Side A 02/27/2013 10:49:33 Side A 02/27/2013 Sheet No. 131 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 131 Side B 02/27/2013 10:49:33 280 [Vol. 9:199 and was the first in a exemption for debt 282 de facto note 158. supra , note 109, at 94. Though Nicholson discusses this But the rule itself was never changed. But the rule itself was never Recasting the No-Action Letter Recasting AUGHLIN 281 L supra C 283 NYU JOURNAL OF LAW & BUSINESS A. & M at 100. Nicholson, Salomon Bros. Inc., SEC No-Action Letter, 1986 SEC No-Act. OHNSON See J See Id. The Commission could address the problems associated The Commission Where does this leave securities lawyers today in the con- lawyers this leave securities Where does Alternatively, the SEC could avoid passing bright-line Alternatively, the SEC could avoid 283. 280. 281. 282. LEXIS 1914 (Mar. 12, 1986). Because attorneys have the dual role of market facilitator have the dual role of market Because attorneys and market a great deal of their revenue) (which generates institutional they are supposed to be an gatekeeper (where or leave the client), they are forced to take check on their own po- structure and accompanying client’s desired transactional tential for liability. of ways.with no-action letters in a number Commis- First, the process as a bridge to a po- sion could use the no-action letter tential rule change. no-action Instead, the SEC has used the enacting its change more letter to effect change without later formally. was for- The 1986 Salomon Brothers no-action letter for straight-debt tender mulated 12 days after an exemption offers was removed from Rule 14e-1(a) 256 by and welcomed be beneficial would areas and other these markets. debt capital the letters?text of no-action would have one characterization As be balancing role of securities lawyers will it, the post-Enron one com- “market gatekeeping,” which “client loyalty” against leav- as a Hobson’s Choice for attorneys, menter characterizes needs. take or leave clients’ transactional ing attorneys to \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 58 26-FEB-13 14:17 The SEC could instead use the no-action letter to respond to The SEC could instead use the also having a policy that market needs, as it does today, while accepted practices into rule encourages enacting consistently or regulation. and use the no-action letters rules and regulations altogether provisions.as a guide for interpreting broader if For example, choice in the context of fraud or material misrepresentation, this characteri- choice in the context of fraud or material facing attorneys in the no-action zation accurately characterizes the choices context as well. series of letters that created a tender offerings. 33082-nyb_9-1 Sheet No. 131 Side B 02/27/2013 10:49:33 Side B 02/27/2013 Sheet No. 131 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 132 Side A 02/27/2013 10:49:33 257 HONORED IN THE BREACH THE IN HONORED Alternatives: Moving Forward by Looking Backward Alternatives: Moving B. The two possibilities discussed above need not be consid- discussed above need not be The two possibilities ered a comprehensive list or even a particularly persuasive ered a comprehensive list or even one. But for the purposes of Section 14(e), the Commission the statute to shape its future. could also look to the history of normative standard of SEC Instead of looking to some new control, the SEC could also policy formation or institutional that have caused these consider simply reversing its policies issues in the first place. to debt Rule 14e-1 did not apply tender offers until March 1, 1986. 12, the Then, on March campaign that fully abro- SEC began its extensive no-action gated the exemption’s removal. 25 years Today, more than the rule itself.later, the SEC has not changed this ap- While that would otherwise be proach has allowed many transactions have addressed whether the illegal to move forward, no studies and the practical realities conflict between the securities laws underwriters from engaging has prevented some issuers or more extensively in the debt markets.importance Given the transactions, the possibil- of opinion letters in shaping market arisen is at least possible, if ity that such a chilling effect has not probable. conse- Regardless of the extent of practical between the securities laws quences, protracted divergences weakens the force of the and the realities of securities practice securities laws themselves. This weakening serves neither mar- ket participants nor the SEC, and simply changing the rule 2012] of amount a “reasonable require to only were 14e-1(a) Rule as interpretation its simply adjust could the SEC then time,” no-action process. through the “reasonable” Although this which may bother to the SEC staff, more authority may grant the be able to use attorney would the practicing some critics, that today clearly off on transactions standard to sign broader requirement. exemption timing violate the Although this situ- participation optimal regarding democratic ation may not be the seri- process, it at least addresses in an agency’s regulatory the practicing attorneys today. Admittedly, ous burdens facing a higher de- would almost certainly require level of discretion relief, which from the SEC in its no-action gree of assurance discre- of the no-action letter’s entirely may require a recasting tionary status altogether. \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 59 26-FEB-13 14:17 33082-nyb_9-1 Sheet No. 132 Side A 02/27/2013 10:49:33 Side A 02/27/2013 Sheet No. 132 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 132 Side B 02/27/2013 10:49:33 [Vol. 9:199 NYU JOURNAL OF LAW & BUSINESS If these issues are not addressed, then the problems that then the issues are not addressed, If these 258 to reflect policy allow SEC would language to its pre-1986 back practice. actual focus of this paper—problemswere the to face due attorneys practice—may law and securities securities the incongruous es- seriousness.calate in and ethical commercial, liability, From its to ensure that surely do more the SEC could perspectives, interac- the type of attorney-client legal structure facilitates both law- efficiency and good faith from tions that promotes abiding parties. these goals, the securities However, to pursue characterize to reflect the practices that now laws must begin will be in the capital markets, or attorneys good-faith dealers structure liabilities resulting from a market left to bear the meanings. reality have increasingly different where legality and \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 60 26-FEB-13 14:17 33082-nyb_9-1 Sheet No. 132 Side B 02/27/2013 10:49:33 Side B 02/27/2013 Sheet No. 132 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 133 Side A 02/27/2013 10:49:33 259 FFERS the .75% U.S. Treasury Notes due June 15, 2014 the 1.125% U.S. Treasury Notes due June 30, 2011 the 3.125% U.S. Treasury Notes due May 15, 2019 the 4.00% U.S. Treasury Note due June 15, 2009 the 3.625% U.S. Treasury Note due January 15, 2010 the 2.875% U.S. Treasury Note due June 30, 2010 Treasury Notes due June 30, 2016 Treasury Notes due Treasury Notes 2014 February 28, the 1.75% U.S. Treasury Notes due May 31, 2016 O ENDER T PREAD -S $250,000,000 115 basis points over $732,928,000 100 basis points over $1,927,755,000 125 basis points over $176,645,00 50 basis points over $710,000,000 75 basis points over $250,000,000 less theamount tendered in 190 basis points over another series, up to the 2% U.S. Treasury an aggregate of Notes due February $500,000,000 15, 2012 another series, up toan aggregate of due Treasury Notes $500,000,000 February 28, 2017 IXED HONORED IN THE BREACH THE IN HONORED A – F PPENDIX Companies, Inc. amount tendered in the .875% U.S. A Date Issuer Amount Spread Fixed Closing July 2008 Pentair, Inc. $250,000,000 265 basis points over February2009 Kansas City Southern $1,214,167,000 125 basis points over the 3.25% U.S. July 2009 Freddie Mac $250,000,000 105 basis points over March2012 Worldwide Wyndham $250,000,000July 2011 Marsh & McLennan less the $800,000,000 85 basis points over 165 basis points over the .25% U.S. 2012] \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 61 26-FEB-13 14:17 33082-nyb_9-1 Sheet No. 133 Side A 02/27/2013 10:49:33 Side A 02/27/2013 Sheet No. 133 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 133 Side B 02/27/2013 10:49:33 [Vol. 9:199 the 3.625% U.S. the 3.625% Note due Treasury June 15, 2010 the 4.50% U.S. Treasury Note due September 30, 2011 the 4 7/8% U.S. Treasury Note due May 31, 2008 the 4.375% U.S. Treasury Note due December 31, 2007 the 3.25% U.S. Treasury Note due August 15, 2008 Treasury Note due February 15, 2009 Treasury Note due February 2036 the 3.25% U.S. the 3.25% due Treasury Notes 2009 January 15, Treasury Note due November 2009 Treasury Note due November 2016 February 2036 Treasury Note due February 2036 $2,500,000,000 20 basis points over $60,481,000$350,000,000 50 basis points over 35 basis points over $192,470,000 25 basis points over $300,000,000 85 basis points over NYU JOURNAL OF LAW & BUSINESS CorporationCorporation the 4.625% U.S. Treasury Note due April2006 Pioneer Natural Resources Company $175,000,000 80 basis points over the 4.500 U.S. October2006 North American Energy Partners Inc. $328,355,000 85 basis points over the 4.500% U.S. June 2007 CMS EnergyJanuary $265,315,0002007 Occidental PetroleumNovember 75 basis points over Bristol-Myers Squibb2006 $200,000,000 $75,596,000 Company 88 basis points over 88 basis points over the 4.500% U.S. the 4.500% U.S. June 2008 Rite Aid Corporation $409,000,000November Inc. TECO Energy, 2007 50 basis points over $221,587,000 28 basis points over the 4.625% U.S. 260 \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 62 26-FEB-13 14:17 33082-nyb_9-1 Sheet No. 133 Side B 02/27/2013 10:49:33 Side B 02/27/2013 Sheet No. 133 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 134 Side A 02/27/2013 10:49:33 261 the 5.375% U.S. Treasury Note due February 2031 Treasury Note due Treasury 2009 February 15, due Treasury Note 2015 November Treasury Note due February 2031 Treasury Note due February 2031 Treasury Note due May 15, 2006 $299,119,00 points over 85 basis HONORED IN THE BREACH THE IN HONORED International the 5.375% U.S. June 2005 Service Corporation $450,000,000 80 basis points over January2005 Del Monte Corporation $300,000,000 75 basis points over the 2.00% U.S. April2006 Tommy Hilfiger Inc. U.S.A., March2006 $362,000,000 Celulose Aracruz December $200,000,000 ING Group2005 75 basis points over 69 basis points over $200,000,000 U.S. the 4.500 78 basis points over the 4.500% U.S. the 5.375% U.S. 2012] \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 63 26-FEB-13 14:17 33082-nyb_9-1 Sheet No. 134 Side A 02/27/2013 10:49:33 Side A 02/27/2013 Sheet No. 134 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 134 Side B 02/27/2013 10:49:33 [Vol. 9:199 FFERS Price Per $1,000 Price O ENDER T $112,545,000 $1140.63 $150,000,000 $980–$1,000 UCTION A UTCH B – D NYU JOURNAL OF LAW & BUSINESS Company Company Ltd. Corporation Casino, LLC PPENDIX A Closing Date Issuer Amount Amount Principal February 2008April 2007 Pixelworks, Inc.April 2007March 2002 Avago TechnologiesDecember 2001 Saks Incorporated Friendly Ice Cream TranSwitch Corporation $50,248,000 $76,879,000 $740 $200,000,000 $1,060 $700 $100,000,000 $53,695,000 $1,043.05 $800 March 2009 Ford Motor CreditMarch 2009February 2009 Inc. Laureate Education, February 2009 Ltd. Intelsat, $500,000,000December 2008 Resources, Inc. PNM $40,000,000 $380–$470 Inc. Cell Genesys, $600 December 2008 International Flextronics $157,000,000December 2008 $250,000,000 $930 Liberty Media $375,000,000 $870 $47,800,000 $735–$817.50 December 2008 $400 Weyerhaeuser CompanyMarch 2008 $250,000,000 French Lick Resorts & $875 $285,000,000 $587.50 $150,000,000 $730-$780 July 2012March 2012April 2010 Fibria Celulose S.A.Group, Inc. Radian March 2009 Oil Corporation Marathon Celestica Inc. $67,989,000 $510,000,000 $146,480,000 $1060 $1046.02 $900 $105,560,000 $1039.94 262 \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 64 26-FEB-13 14:17 33082-nyb_9-1 Sheet No. 134 Side B 02/27/2013 10:49:33 Side B 02/27/2013 Sheet No. 134 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 135 Side A 02/27/2013 10:49:33 263 Number of Number FFERS O ENDER T ATERFALL HONORED IN THE BREACH THE IN HONORED C – W Limited Inc. Company Corporation PPENDIX A Closing Date Issuer Amount Classes/Series April 2005December 2004 Fairfax Financial Holdings Dole Food Company, Inc.December 2004 $150,000,000 Dana CorporationDecember 2003 $275,000,000 Qwest Communications 4 $3,000,000,000 3 $635,000,000 3 3 December 2008 YRC Worldwide Inc.October 2008 Charter Communications,June 2008 $100,000,000 $100,000,000April 2008 Colorado Interstate GasMarch 2008December 2007 Company The McClatchy 5 5 Temple-Inland Inc. HCA Inc. $100,000,000November 2007Group Unum $250,000,000November 2007 AES CorporationJune 2007 2 May 2007 $500,000,000 3 May 2006 Delhaize America Weyerhaeuser Company $1,240,000,000 $400,000,000 $500,000,000 2 UnumProvident $519,000,000 $1,100,000,000 3 7 3 6 2 $300,000,000 6 November 2011November Inc. Williams Companies, May 2010March 2010 $1,000,000,000May 2009 Corp. Lennar TECOMay 2009 8 Colonial Properties Trust Ventas, Inc. $250,000,000 $289,398,000 6 $550,000,000 3 $310,000,000 4 4 2012] \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 65 26-FEB-13 14:17 33082-nyb_9-1 Sheet No. 135 Side A 02/27/2013 10:49:33 Side A 02/27/2013 Sheet No. 135 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 135 Side B 02/27/2013 10:49:33 [Vol. 9:199 OLICITATIONS S governing the notes covenants and some events of default. nate some “events of default” provisions. ments and make other changes events of default. well as shortening minimum notice or redemptions from 30 days to 3 days. ONSENT C FFERS WITH O ENDER NYU JOURNAL OF LAW & BUSINESS tions, LLC and AlltelCommunicationsFinance, Inc. governing the notes to remove certain reporting require- IncorporatedGroup, Inc., JonesApparel GroupHoldings, Inc., Jones consent solicita- rate Apparel Group USA, ture governing the notes) $500,000,000 Inc., Nine West carve out for the tion only forFootwear Corpora-tion and Jones RetailCorporation notes to provide a governing the notes lien covenant for connection with a new senior secured liens incurred in credit facility Systems, Inc.Corp. covenants and some tive covenants, as D – T Date Issuer Amount Solicitation Consent Closing Description of PPENDIX February2009 Kansas City South-February All outstanding ern2009 Landry’s Restau-November Amend the notes 2008 IKON Office Solu- rants, Inc. All outstanding All outstanding tions, Inc. Amend indenture ($175,000,000) Amend indenture ($400,000,000) and the indenture ($225,000,000) the notes governing governing the notes March 2009 Alltel Communica- $190,000,000 Amend indenture February2009 Advanced Medical $250,000,000 Optics, Inc. Amend indenture governing the notes April 2012 NCO Group, Inc. $365,000,000February2010 McClatchy Co. Eliminate restrictive May 2009 $171,830,000 Ingles Markets,April 2009 Jones Apparel Eliminate restrictive Any and all $250,000,000 (sepa- Amend the inden- Amend indenture covenants and elimi- July 2012 Community Health $934,000,000June 2012 Medical Selected Eliminate restrictive $345,000,000 Eliminate all restric- A 264 \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 66 26-FEB-13 14:17 33082-nyb_9-1 Sheet No. 135 Side B 02/27/2013 10:49:33 Side B 02/27/2013 Sheet No. 135 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 136 Side A 02/27/2013 10:49:33 265 to eliminate or make less restrictive sub- stantially all of the restrictive covenants, certain events of default and related provisions governing the notes governing the notes and the waivers con- tained in the inden- tures to eliminate or mod- ify substantially all restrictive covenants, certain events of default and other provisions governing the notes, release the subsidiary guar- antees and release all the collateral securing the obliga- tions of the subsidi- ary guarantors under certain notes governing the notes governing substan- to eliminate the tially all of restrictive covenants and the covenants regarding mergers and consolidations, eliminate certain events of default and modify or eliminate other provisions, including provisions regarding defeasance HONORED IN THE BREACH THE IN HONORED July 2005Incorporated Saks $658,000,000January2005 Amend indentures Del Monte Corpora- $300,000,000 tion Unclear October2007 & Lomb Bausch $250,000,000 Amend indentures April 2007 iPCS, Inc. $290,000,000 Amend indenture governing the notes August2008June 2008 Ferro Corporation Aid Corporation Rite $150,000,000 $710,000,000 Amend indenture Amend indentures governing the notes September2008 Com- Clear Channel $750,000,000 munications Inc. Amend the notes the indenture and 2012] \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 67 26-FEB-13 14:17 33082-nyb_9-1 Sheet No. 136 Side A 02/27/2013 10:49:33 Side A 02/27/2013 Sheet No. 136 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 136 Side B 02/27/2013 10:49:33 [Vol. 9:199 tially all restrictive tially all covenants under notes indenture and NYU JOURNAL OF LAW & BUSINESS Inc. eliminate substan- May 2004 Sun Communities, $350,000,000 to Amend indenture 266 \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 68 26-FEB-13 14:17 33082-nyb_9-1 Sheet No. 136 Side B 02/27/2013 10:49:33 Side B 02/27/2013 Sheet No. 136 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 137 Side A 02/27/2013 10:49:33 267 Early Tender Early REMIUMS P ENDER T $337,000,000 less$337,000,000 the above tender $30 total, up to an aggregate total of $450,000,000 $308,000,000 $30 ARLY E – E HONORED IN THE BREACH THE IN HONORED PPENDIX A Corporation Company Inc. Trust Corporation Date Issuer Amount principal amount Closing Payment per $1,000 November2007 TECO Energy, Inc.June 2007 CMS Energy $300,000,000June 2005 Puget Sound Energy $20 $80,250,000 $360,000,000 $40 $20 November2008 Triad FinancialSeptember2008 Broadridge Financial Corporation September2008 River Rocket $90,000,000 $125,000,000 Solutions, Inc. July 2008June 2008 $30 Pentair, Inc. $50 Entertainment Authority May 2008 Visteon CorporationApril 2008 $150,000,000 Pulte Homes, Inc. The McClatchy $344,000,000March 2008 $30 Hillenbrand Industries, $250,000,000 $312,863,000 $40 $250,000,000 $250,000,000 $30 $30 $20 $25 April 2012 CenturyLink, Inc.February2012 Charter $575,000,000July 2011April 2009 CCS Corporation Communications, Inc. $30 Colonial PropertiesApril 2009 Ventas, Inc.March 2009 $312,000,000 $250,000,000 Cablevision Systems $334,000,000February $30 2009 $30 $952,490,000 Isle of Capri Casinos, $25 $310,000,000 $5–$27.63 $140,000,000 Inc. $30 $30 August2012 Illinois Ameren Company $400,000,000 $30 2012] \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 69 26-FEB-13 14:17 33082-nyb_9-1 Sheet No. 137 Side A 02/27/2013 10:49:33 Side A 02/27/2013 Sheet No. 137 33082-nyb_9-1 33082-nyb_9-1 Sheet No. 137 Side B 02/27/2013 10:49:33 [Vol. 9:199 FFERS O XCHANGE F – E Issuer (or Parent Issuer PPENDIX NYU JOURNAL OF LAW & BUSINESS A Inc. Inc. Group, Inc. Inc. Closing Date of Issuer) Amount Public/Private April 2002 Conseco, Inc. $2,540,299,000 Private February 2009December 2008 USA, L.L.C. Ashton Woods GMAC Financial ServicesDecember 2008 $125,000,000 CIT Group Inc. $17,500,000,000June 2008June 2008 Private Private Six Flags, Inc.February 2007 Charter Communications,January 2006 $1.500,000,000 Alcoa Inc. $500,000,000 Communications, Level 3 November 2003 Private Alamosa Holdings, Inc.June 2003 $1,230,272,000 $530,600,000 Private $750,000,000 Private Sea Containers Ltd. Private $1,500,000,000 Public Private $158,798,000 Public May 20122011November American International Paper Corporation Verso 2010December Snapple Dr. Pepper (abandoned) $2,500,000,000 $157,500,000April 2009 Group, Inc. Private Private Harrah’s Entertainment $600,000,000 $5,550,000,000 Private Private 268 \\jciprod01\productn\N\NYB\9-1\NYB104.txt unknown Seq: 70 26-FEB-13 14:17 33082-nyb_9-1 Sheet No. 137 Side B 02/27/2013 10:49:33 Side B 02/27/2013 Sheet No. 137 33082-nyb_9-1