In addition to these proposed rule changes, we provide guidance or solicit commenters' views on the following issues:

A. Eligibility ThresholdDetermining U.S. Ownership

Business combination transactions are extraordinary events for target companies and their security holders. When U.S. persons hold a significant percentage of a target's securities in a crossborder business combination transaction, we believe U.S. tender offer and other rules should provide certain basic protections in transactions that will significantly impact their ownership interest in that target company.\51\ When U.S. persons do not hold a significant stake in the subject target class, we believe that by allowing the acquiror to conduct the transaction in accordance with the applicable foreign law, while including U.S. persons and treating them at least as favorably as all other target holders, U.S. persons are better protected than they would be if the acquiror chose to exclude them from the transaction so that the transaction would not be subject to U.S. regulations. \51\ We believe these protections are even more critical in crossborder tender offers, where home country law may not allow acquirors to eliminate minority security holders under the same circumstances as in the United States. For example, in some foreign jurisdictions, the ability of bidders to ``squeeze out'' target security holders remaining after a tender offer may be more limited than in the United States, where this generally will be accomplished whenever the bidder purchases a majority of target shares. See discussion in footnote 155 below. Therefore, a decision whether to tender into an offer and the procedural protections associated with that offer may be even more critical, because target security holders who remain after the offer may not be cashed out in a back end merger, as would be typical in the United States.

When we adopted the crossborder exemptions, we established a threshold eligibility test for use of the exemptions based on the percentage of target shares held by U.S. persons.\52\ The current test, based on the level of U.S. ownership in the target company, has worked well conceptually. However, we have become aware of certain difficulties that can make application of our threshold eligibility test problematic in practice, including issues that can arise when conducting both the lookthrough analysis for negotiated transactions and the alternate test for nonnegotiated deals, as discussed below. We believe the recommended changes will enhance the utility of the cross border exemptions because they will make it easier for bidders and issuers to determine whether they are eligible to rely on them. \52\ For rights offerings, eligibility to rely on Rule 801 is determined by the percentage of subject securities of the issuer held by U.S. persons. See Securities Act Rule 800(h).
1. Methods for Determining U.S. Ownership Under the Existing Cross Border Exemptions

a. Negotiated Transactions

As discussed above, under our current rules, eligibility to rely on the crossborder exemptions is determined in part by the percentage of U.S. beneficial holders of the relevant class of target securities.\53\ U.S. ownership of the target company is determined by reference to the target's nonaffiliated float \54\ and holders of greater than ten percent of the subject class are excluded from the calculation of U.S. ownership.\55\ Any securities held by the acquiror in the business combination transaction similarly are excluded from the
calculation.\56\
\53\ Note that in response to inquiries from U.S. bidders regarding the availability of Securities Act Rules 801 and 802 when there are no U.S. holders in the issuer (in a rights offering) or subject company (in an exchange offer or other business
combination), or when an offer is not extended to U.S. holders, the Division of Corporation Finance has taken the position that the crossborder exemptions do not apply unless there is at least one U.S. security holder of the subject class of securities. See Section II.C. Question 1 in the Third Supplement to the Division of Corporation Finance's Manual of Publicly Available Telephone Interpretations (July 2001), at http://www.sec.gov/interps/ telephone/phonesupplement3.htm. This is consistent with the intent of the exemptions: to facilitate the inclusion of U.S. security holders of foreign private issuers in business combinations and rights offerings.
\54\ We use ``float'' to refer to the aggregate market value of the subject securities held by nonaffiliates. See generally, the definition of ``Small Business Issuer'' in Securities Act Rule 405 [17 CFR 230.405] and the Note to that provision. We do not include in that definition securities held by persons or entities that individually own more than ten percent of the subject securities. \55\ See Instruction 2.ii. to Exchange Act Rules 13e4(h)(8) and (i), and 14d1(c) and 14d1(d). See also Securities Act Rule 800(h)(2).

\56\ Id.

The rules specify the manner in which a bidder in a negotiated transaction must determine which target securities are held by persons resident in the United States.\57\ They require the acquiror to ``look through'' securities held of record by nominees in specified jurisdictions to identify those held for the accounts of persons located in the United States.\58\ If after ``reasonable inquiry,'' the acquiror is unable to obtain information about the location of the security holders for whom a nominee holds, the rules allow the acquiror to assume that the customers are residents of the jurisdiction in which the nominee has its principal place of business.\59\ The relevant date for determining U.S. ownership is the 30th day before a benchmark date that varies with the type of transaction for which the exemption is sought.\60\
\57\ See Instruction 2 to Exchange Act Rules 13e4(h)(8) and (i), and 14d1(c) and (d); Securities Act Rule 800(h).
\58\ See, e.g., Instruction 2.iii. to Exchange Act Rules 14d 1(c) and 14d1(d) (instructing the bidder to limit its inquiry as to securities held in nominee form to nominees located in the United States, the subject company's jurisdiction of incorporation and the jurisdiction that is the primary trading market for the subject securities, if different from the target's jurisdiction of incorporation). We recently revised the rule pertaining to termination of registration to include a definition of ``primary trading market'' that may include trading in more than one foreign market. See Exchange Act Rule 12h6(f)(5) [17 CFR 240.12h6(f)(5)]. This does not change the meaning of ``primary trading market'' as used in the crossborder exemptions and in the instruction to the definition of foreign private issuer in Exchange Act Rule 3b4 and Securities Act Rule 405 [17 CFR 230.405]. An acquiror's or issuer's obligation to look through nominees in calculating U.S. ownership continues to be limited to the jurisdiction of the single, principal foreign trading market for the target's securities, if different from the target's jurisdiction of incorporation.
\59\ See Securities Act Rule 800(h)(3) and Instruction 2.iv. to Exchange Act Rules 13e4(h)(8) and (i), and 14d1(c) and (d). \60\ See Instruction 2.i. to Exchange Act Rules 13e4(h)(8) and (i), and 14d1(c) and (d) (specifying that U.S. ownership must be calculated as of the 30th day before commencement of a tender offer). For the Securities Act Rule 801 and 802 exemptions, see Rule 800(h) (stating that U.S. ownership must be calculated as of the record date for a rights offering or as of the 30th day before the commencement of an exchange offer or the solicitation for a business combination other than a tender offer).

b. NonNegotiated Transactions

In adopting the eligibility standard for negotiated transactions described in the preceding section, we recognized that the required lookthrough analysis would be more difficult for thirdparty offerors in nonnegotiated transactions because they would not have the cooperation of the issuer.\61\ In particular, obtaining information from nominees who hold for the account of others is difficult for thirdparty acquirors and may have the effect of alerting the market to a contemplated offer before the acquiror wishes to make
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its intentions known. For that reason, the crossborder exemptions include a presumption available for nonnegotiated or ``hostile'' transactions.\62\ The ``hostile presumption'' allows a thirdparty bidder in a nonnegotiated tender or exchange offer to assume that U.S. ownership in the target company is no more than ten percent or 40 percent, the thresholds for Tier I and Rule 802, and Tier II respectively, so long as average daily trading volume in the United States does not exceed ten percent or 40 percent of the average daily trading volume worldwide over a twelvemonth period ending 30 days before commencement, and the bidder has no reason to know that actual U.S. ownership is inconsistent with that figure (either based on the issuer's informational filings with the Commission or foreign regulators or based on the bidder's actual or imputed knowledge from other sources).\63\
\61\ See discussion in the CrossBorder Adopting Release, Section II.F.3.
\62\ We distinguish a ``hostile'' tender offer from one made pursuant to an agreement with the target company, which we refer to as a negotiated or recommended transaction.
\63\ See, e.g., Instruction 3.i.iv. to Exchange Act Rules 14d 1(c) and 14d1(d) (stating that the presumption is available unless the aggregate trading volume in the U.S. exceeds certain levels, or the bidder knows or should know that actual levels of U.S ownership exceed the ceiling for the applicable exemption). The instruction, as currently written, refers to the Nasdaq market and the trading volume of securities on the overthecounter (OTC) market as reported to the NASD, but since the adoption of Exchange Act Rules 14d1(c) and 14d1(d) and the corresponding instruction, the Nasdaq market has become an exchange, the NASDAQ OMX Group, Inc.
Additionally, the trading volume of securities on the OTC market is now reported to the Financial Industry Regulatory Authority, Inc., or FINRA, which was created through the consolidation of the NASD and the member regulation, enforcement and arbitration functions of the NYSE. We therefore propose a technical change to the rules to reflect these changes.
2. Current Eligibility Test for Negotiated Transactions

a. Concerns

Although we believe the current tests for determining eligibility to rely on the crossborder exemptions generally have worked well, changes in several areas would be appropriate to address timing and informational restrictions that have impeded the application of the current exemptions. Many of these problems relate to the threshold eligibility determination for negotiated transactions.

In particular, the requirement that U.S. ownership be calculated as of the 30th day before the commencement of a tender offer or exchange offer, or before the solicitation for other kinds of business combination transactions \64\ presents practical difficulties for acquirors in certain jurisdictions. In some countries, the lookthrough analysis we require for negotiated transactions takes longer than 30 days to perform.\65\ Numerous acquirors have advised us that in some jurisdictions, it is not possible to calculate U.S. ownership as of a set date in the past. In others, information about the location of target security holders is only published at fixed intervals.\66\ Additionally, the exact date of commencement is not within the control of the acquiror in some jurisdictions.\67\ In recognition of these problems, issuers have sought guidance from the staff regarding the date of calculating U.S. ownership for purposes of determining eligibility to rely on the crossborder exemptions. The staff has stated that, where the 30th day before commencement is impracticable for reasons outside of the acquiror's control the acquiror may use the date within the 30day period before commencement that is as close as possible to the 30th day.\68\ However, the staff continues to receive inquiries from acquirors who cannot definitively use a date within the 30 days before commencement because of logistical problems in the time needed to conduct the mandated lookthrough analysis, or because of the regulatory review process.\69\ In the case of an exchange offer where the acquiror will issue securities in exchange for target securities, more than 30 days may be needed to prepare offering materials and complete the regulatory review process.
\64\ See Securities Act Rule 800(h)(1), Instruction 2.i. to Exchange Act Rules 13e4(h)(8) and 13e4(i), and Instruction 2.i. to Rules 14d1(c) and 14d1(d).
\65\ See, e.g., Serono S.A. (September 12, 2002) (``Serono S.A.'') (stating that approximately six to eight weeks is necessary to complete a lookthrough analysis to obtain information about the level of U.S. beneficial ownership of a French company).
\66\ See Section II.E. Question 8 in the Third Supplement to the Division of Corporation Finance Manual of Publicly Available Telephone Interpretations (July 2001), at http://www.sec.gov/ interps/telephone/phonesupplement3.htm.
\67\ In some foreign jurisdictions, for example, a bidder is obligated to commence an offer within a certain number of days of receiving home country regulatory approval of its offer materials. As noted above, bidders cannot always obtain information about U.S. ownership as of a date in the past; rather, they can request that information only as of a current date going forward 30 days to the anticipated date of commencement. When the date of commencement is uncertain, it becomes difficult for offerors to comply with our rules.
\68\ See Section II.E. Question 7 in the Third Supplement to the Division of Corporation Finance Manual of Publicly Available Telephone Interpretations (July 2001), at http://www.sec.gov/ interps/telephone/phonesupplement3.htm.
\69\ For example, shares of listed French companies are not certificated and the majority of such shares are held in bearer form, meaning that the only ownership records for such shares are maintained by Euroclear France, the French clearing system. It generally takes more than 30 days to request and analyze the position listing known as a ``TPI report.'' See, e.g., Alcan, Inc. (October 7, 2003) (``Alcan'') and Equant N.V. (April 18, 2005) (``Equant N.V.'') and footnote 65 above.

The reference date for assessing U.S. ownership under the cross border exemptions also creates logistical problems in certain cases. The current exemptions key the determination of U.S. ownership to the date of commencement of the tender offer or the commencement of the solicitation for other types of business combinations, or to the record date for a rights offering.\70\ If the announcement of the transaction predates the commencement by more than 30 days, an acquiror will not know with certainty when it announces a transaction whether it will be eligible to rely on the crossborder exemptions at all, or whether it will be eligible for Tier I/Rule 802 or Tier II. The staff has been advised that this is problematic in some foreign jurisdictions because by law, the announcement must provide detailed information about the transaction, including information about how U.S. target security holders will be treated.\71\ Even where such information is not legally required at the time of announcement, issuers may wish to inform target security holders and the market at large of this information. \70\ See Securities Act Rule 800(h)(1), Instruction 2.i. to Exchange Act Rules 13e4(h)(8) and (i), and Instruction 2 to Exchange Act Rules 14d1(c) and (d).
\71\ The staff has been contacted by counsel for bidders in certain European countries with concerns about calculating U.S. ownership as of the date specified under current rules, where an announcement of the transaction must be made more than 30 days before commencement and under home country regulation the
announcement must include detailed information about the treatment of U.S. target holders.

In addition, keying the lookthrough analysis to commencement creates a discrepancy for purposes of the exemption from Rule 14e5. Rule 14e5 generally prohibits purchases of target securities outside of a tender offer from the date of announcement of that offer through its expiration.\72\ Tender offers conducted in reliance on the Tier I exemption are exempt from the application of Rule 14e5.\73\ However, because Rule 14e5 applies from the date of announcement of the tender offer, a bidder will not necessarily know at the time of announcement whether it will qualify for the crossborder exemptions as of the 30th date before commencement.
\72\ Exchange Act Rule 14e5 [17 CFR 240.14e5]. We propose to extend this exemption to encompass Tier IIeligible tender offers. \73\ Exchange Act Rule 14e5(b)(10)(i).

Finally, from time to time the suggestion is made that excluding holders of greater than ten percent of the
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subject securities disproportionately elevates the levels of U.S. ownership in target companies. In the 1998 CrossBorder Proposing Release, we proposed to exclude from the calculation of U.S. ownership securities owned by nonU.S. target holders who individually held more than ten percent of the subject class, on the grounds that such large investors were affiliates and the securities they held were not part of the target's public float.\74\ When the exemptions were adopted, they excluded securities held by both U.S. and nonU.S. persons holding greater than ten percent of the target company's securities because of commenters' concerns that excluding only large nonU.S. holders, as originally proposed, would skew the U.S. ownership percentages upward.\75\ We continue to receive feedback from various
constituencies, however, that exclusion of large holders results in reduced eligibility to rely on the crossborder exemptions. We would be interested in commenters' views on this requirement under our current rules and whether it should be modified or eliminated.
\74\ See 1998 CrossBorder Proposing Release, Section II.H.2. \75\ See CrossBorder Adopting Release, Section II.F.2.
Request for Comment

We believe that by revising the eligibility tests for negotiated crossborder business combination transactions as proposed, we would eliminate many of the issues that have arisen. As discussed above, the first problem with the current test is the requirement that U.S. ownership be calculated as of a single, specified date. Accordingly, we propose that acquirors be permitted to calculate U.S. ownership within a specified 60day range rather than using a single date.\76\ This approach is consistent with the position taken by the staff interpretively in considering timing issues in the crossborder context.\77\ It also would provide greater flexibility where the timing of a transaction is driven by market forces or a regulatory process that is, to some extent, outside the control of the acquiror. \76\ As discussed below, we also propose to change the reference point for calculation of U.S. ownership from commencement to announcement. We are not currently proposing a change to the requirement to calculate as of the record date for rights offerings. See Rule 800(h)(1).
\77\ See, e.g., Section II.E. Questions 6, 7 and 8 in the Third Supplement to the Division of Corporation Finance Manual of Publicly Available Telephone Interpretations (July 2001), at http:// www.sec.gov/interps/telephone/phonesupplement3.htm.

While we propose to provide greater flexibility as to the date on which U.S. ownership in the target company may be assessed, we remain concerned about the possibility that a date for calculation would intentionally be chosen to present less than a representative picture of the target security holder base. The instructions to the cross border exemptions make it clear that the exemptions are not available for any transaction or series of transactions that technically comply with our rules but are, in fact, part of a plan or scheme to evade them in practice.\78\
\78\ See General Note 2 to Securities Act Rules 800, 801 and 802, Instruction 4 to Exchange Act Rules 13e4(h)(8) and 13e4(i), and Instruction 5 to Exchange Act Rules 14d1(c) and 14d1(d).

As discussed above, another logistical problem with the cross border exemptions centers on the use of commencement as the triggering event for the calculation of U.S. ownership. We now propose to require that U.S. ownership be calculated within a 60day period before the public announcement of the crossborder tender offer or business combination transaction.\79\ For these purposes, public announcement generally means the same as in Instruction 5 to Rule 14d2(b)(2).\80\ By using announcement instead of commencement as the triggering event for purposes of the calculation, we hope to enable acquirors planning crossborder transactions to determine at an earlier point how they will treat U.S. holders.
\79\ See proposed revisions to Securities Act Rule 80 0(h)(1), Instruction 2.i. to Exchange Act Rules 13e4(h)(8) and (i), and Instruction 2.i. to Exchange Act Rules 14d1(c) and (d).
\80\ Instruction 5 to Exchange Act Rule 14d2(b)(2) [17 CFR 240.14d2(b)(2)] states that `` `public announcement' is any oral or written communication by the bidder, or any person authorized to act on the bidder's behalf, that is reasonably designed to, or has the effect of, informing the public or security holders in general about the tender offer.''

This change also would allow the application of the exemptions to be based on the characteristics of the target security holder base before it is influenced by the announcement of the transaction.\81\ Further, it would permit acquirors to meet home country requirements, which may mandate that the acquiror include information about the treatment of U.S. holders in the announcement of the transaction. In addition, it would encourage bidders to provide the markets and target security holders with valuable information at an earlier stage in the transaction process, including alerting investors who may acquire the target company's securities after the announcement whether they will have the full protections of Regulations 14D and 14E.
\81\ See Section II.E. Question 6 in the Third Supplement to the Division of Corporation Finance Manual of Publicly Available Telephone Interpretations (July 2001), at http://www.sec.gov/ interps/telephone/phonesupplement3.htm (discussing the rationale for why the staff has permitted announcement to be used as the reference point for calculating U.S. ownership in ``preconditional offers'' conducted under U.K. or Irish law).

Where U.S. ownership levels do not permit the acquiror to rely on the Tier I exemption or Rule 802, calculating the level before announcement would provide more time to plan and put together the necessary offering materials. For those who plan to rely on the Tier II exemption, the proposed change would afford more time to determine and seek any necessary
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exemptive or noaction relief. In addition, because announcement also is the triggering event for application of Rule 14e5, this change would further harmonize Tier I and Tier II relief as it relates to that provision. However, we are aware that for some business combination transactions, several weeks or months may elapse between the time of announcement and commencement of the transaction, because of home country regulatory review or other reasons. The target security holder base, including the percentage of those securities held by U.S. persons, may change significantly between announcement and commencement. We do not propose to change the relevant date for calculation of U.S. ownership for rights offerings. Issuers will continue to calculate U.S. ownership as of the record date for a rights offering.\82\ Because issuers control the record date for rights offerings and generally have greater access to information about their own security holders, the test for calculating U.S ownership for rights offerings has not been the subject of requests for relief. Therefore, we do not propose to change that test today.

\82\ See Securities Act Rule 800(h)(1).

The existing crossborder exemptions provide that where one acquiror is eligible to rely on a particular crossborder exemption based on the level of U.S. ownership in the target, a second acquiror who makes an offer for the same target company may rely on the same exemption.\83\ We do not propose to change this result with the rule modifications we propose today. We believe it provides an important safeguard to place competing transactions on an equal footing with respect to calculation of U.S. ownership and eligibility to rely on applicable crossborder exemptions.
\83\ See, e.g., Exchange Act Rule 14d1(d)(1)(ii). The second bidder may choose not to rely on the same exemption as the first bidder. See also CrossBorder Adopting Release, Section II.F.1. Request for Comment

Where a thirdparty tender offer is not made pursuant to an agreement between the bidder and the target company, the current cross border exemptions allow a bidder to presume eligibility to rely on the exemptions based on a test outlined in our rules, which focuses on information readily available to the bidder.\84\ The hostile presumption was adopted in recognition of the difficulties third parties face in obtaining information about U.S. ownership without the cooperation of the target company.\85\ Because issuers have greater access to information about their own security holders, the hostile presumption is not available for issuer tender offers.
\84\ See Securities Act Rule 802(c) and Instruction 3 to Exchange Act Rules 14d1(c) and 14d1(d).

\85\ See CrossBorder Adopting Release, Section II.F.3.

The eligibility standard for hostile transactions is based in part on the trading volume of the target's securities in the United States, as compared to worldwide trading volume, over a 12month period.\86\ However, the presumption of U.S. ownership derived under the trading volume element of the test is qualified by information about U.S. ownership reported in the target's most recent annual report filed with the Commission or its home country regulators.\87\ In addition, the bidder cannot rely on the hostile presumption if it knows or has reason to know that the actual level of U.S. ownership of the subject securities exceeds the relevant thresholds for Tier I and Tier II.\88\ Knowledge or ``reason to know'' may come from sources other than reports filed with the Commission or the target's home country regulator and disqualifies the bidder from being able to rely on the crossborder exemptions.
\86\ Securities Act Rule 802(c)(2) and Instruction 3.ii. to Exchange Act Rules 14d1(c) and 14d1(d). Trading volume in the hostile presumption is not calculated in the same way as the average daily trading volume used for purposes of deregistration and the threshold proposed for Rule 12g32(b). The trading volume in the hostile presumption is calculated using a 12calendarmonth period ending 30 days before commencement of the offer, although we propose to change this calculation to a 12calendarmonth period ending no later than 60 days before announcement of the offer, as discussed below.
\87\ Securities Act Rule 802(c)(3) and Instruction 3.iii. to Exchange Act Rules 14d1(c) and 14d1(d).
\88\ Securities Act Rule 802(c)(4) and Instruction 3.iv. to Exchange Act Rules 14d1(c) and 14d1(d).

These elements of the hostile presumption have resulted in certain issues in practice. First, acquirors appear to be uncertain about what constitutes ``reason to know'' with respect to the level of U.S. ownership of the target, other than information reported in filings with the Commission or the home country regulators. Acquirors have expressed uncertainty about whether they have any obligation, and if so, the extent of their obligation to seek out information about U.S. ownership levels. Questions also arise as to the timing of that knowledge. For example, because average daily trading
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volume is calculated as of the 12calendarmonth period ending 30 days before commencement,\89\ acquirors often are unsure of whether their actual or imputed knowledge of U.S. ownership similarly should be as of that date.
\89\ Securities Act Rule 802(c)(2) and Instruction 3.ii. to Exchange Act Rules 14d1(c) and 14d1(d).

It also is possible that targets may use the reporting and knowledge elements of the hostile presumption defensively. For example, targets that learn of a possible hostile offer could file reports preemptively with the Commission stating a percentage of U.S. ownership that precludes the hostile bidder's reliance on certain exemptions, or they may contact the bidder's counsel directly to assert levels of U.S. ownership that disqualify the bidder from relying on Tier I and Rule 802 in particular.\90\ In the latter case, bidders have asked whether such an assertion as to U.S. ownership must be substantiated (and if so, how) in order to preclude reliance on the hostile presumption. Even when a target has filed a periodic report with the Commission indicating a certain percentage of U.S. ownership as a defensive measure, we have seen targets reduce those

FOR FURTHER INFORMATION CONTACT

Christina Chalk, Senior Special Counsel, or Tamara Brightwell, Senior Special Counsel, at (202) 551 3440, in the Division of Corporation Finance, and Elizabeth Sandoe, Branch Chief, at (202) 5515720, in the Division of Trading and Markets (for questions relating to the proposed changes to Rule 14e5), U.S. Securities and Exchange Commission, 100 F Street, NE., Washington, DC 205493628.