[Federal Register: November 8, 2006 (Volume 71, Number 216)]
[Rules and Regulations]
[Page 65393-65409]
[DOCID:fr08no06-8]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 200 and 240

[Release Nos. 34-54684; IC-27542; File No. S7-11-05]
RIN 3235-AJ50

Amendments to the Tender Offer Best-Price Rules

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: We are adopting amendments to the language of the third-party
and issuer tender offer best-price rules to clarify that the provisions
apply only with respect to the consideration offered and paid for
securities tendered in a tender offer. We also are amending the third-
party and issuer tender offer best-price rules to provide that any
consideration that is offered and paid according to employment
compensation, severance or other employee benefit arrangements entered
into with security holders of the subject company that meet certain
requirements will not be prohibited by the rules. Finally, we are
amending the third-party and issuer tender offer best-price rules to
provide a safe harbor provision so that arrangements that are approved
by certain independent directors of either the subject company's or the
bidder's board of directors, as applicable, will not be prohibited by
the rules. These amendments are intended to make it clear that the
best-price rule was not intended to capture employment compensation,
severance or other employee benefit arrangements. We are also making a
technical amendment to correct a cross-reference in the rules that
govern the ability to delegate authority for purposes of granting
exemptions under the best-price rule.

DATES: Effective Date: December 8, 2006.

FOR FURTHER INFORMATION CONTACT: Brian V. Breheny, Chief, or Mara L.
Ransom, Special Counsel, Office of Mergers and Acquisitions, Division
of Corporation Finance, at<PHONE_NUMBER>.

SUPPLEMENTARY INFORMATION: We are adopting amendments to Rule 13e-4 \1\
and Rule 14d-10 \2\ under the Securities Exchange Act of 1934 \3\ and
making certain technical changes to a delegated authority rule that is
affected by the amendments to the best-price rule.\4\
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    \1\ 17 CFR 240.13e-4.
    \2\ 17 CFR 240.14d-10.
    \3\ 15 U.S.C. 78a et seq.
    \4\ 17 CFR 200.30-1.
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I. Background

A. Introduction and Summary

    On December 16, 2005, we proposed changes to the issuer and third-
party tender offer best-price rules \5\ to make it clear that the best-
price rule generally was not intended to apply to compensatory
arrangements.\6\ We believed that these amendments were necessary to
alleviate the uncertainty

that the various interpretations of the best-price rule by courts have
produced. We also intended that the amendments would reduce a
regulatory disincentive to structuring an acquisition of securities as
a tender offer, as compared to a statutory merger, to which the best-
price rule does not apply.\7\ We received 11 comment letters on the
proposed amendments.\8\ In general, commenters supported our proposed
changes to the tender offer best-price rule and believed that the
proposed changes, if adopted, would meet our objectives. We did,
however, receive a number of comments with regard to specific aspects
of the proposed changes. The changes we adopt today are, in most
respects, consistent with those proposed on December 16, 2005, but
include certain revisions made in response to concerns raised by
commenters.
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    \5\ For purposes of this release, unless otherwise indicated,
our references to the ``tender offer best-price rule'' or the
``best-price rule'' are intended to refer to both Exchange Act Rule
13e-4(f)(8)(ii) (17 CFR 240.13e-4(f)(8)(ii)) and Exchange Act Rule
14d-10(a)(2) (17 CFR 240.14d-10(a)(2)).
    \6\ Amendments to the Tender Offer Best-Price Rule, Release No.
34-52968 (Dec. 22, 2005) [70 FR 76116] (the ``Proposing Release'').
    \7\ Statutory mergers are also known as ``long-form'' or unitary
mergers, the requirements of which are governed generally by
applicable State law.
    \8\ The public comments we received are available for inspection
in our Public Reference Room at 100 F Street, NE., Washington DC
20549 in File No. S7-11-05, or may be viewed at http://www.sec.gov/rules/proposed/s71105.shtml
.

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    The amendments to the best-price rule will change the language of
the rule to clarify that the provisions of the rule apply only with
respect to the consideration offered and paid for securities tendered
in a tender offer. The amendments are premised on our view that the
best-price rule was never intended to apply to consideration paid
pursuant to arrangements, including employment compensation, severance
or other employee benefit arrangements, entered into with security
holders of the subject company, so long as the consideration paid
pursuant to such arrangements was not to acquire their securities.\9\
Accordingly, the amendments provide that consideration offered and paid
according to employment compensation, severance or other employee
benefit arrangements entered into with security holders of the subject
company of a tender offer, where the arrangements meet certain
requirements, are not prohibited by the best-price rule.
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    \9\ See the definition of ``subject company'' at Exchange Act
Rule 14d-1(g)(7) (17 CFR 240.14d-1(g)(7)).
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    The amendments also provide for a non-exclusive safe harbor, which
states that arrangements, and any consideration offered and paid
according to such arrangements, that are approved by either a
compensation committee of the subject company's board of directors or a
committee performing similar functions, regardless of whether the
subject company is a party to the arrangement, are not prohibited by
the best-price rules. Alternatively, if the bidder is a party to the
arrangement, the arrangement may be approved by either a compensation
committee or a committee performing similar functions of the bidder's
board of directors.\10\ In order to satisfy the safe harbor, we have
provided certain alternatives for bidders or subject companies, as
applicable, that do not have a compensation committee or that are
foreign private issuers.\11\
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    \10\ See the definition of ``bidder'' at Exchange Act Rule 14d-
1(g)(2) (17 CFR 240.14d-1(g)(2)).
    \11\ See the definition of ``foreign private issuer'' at Rule
405 of the Securities Act of 1933 (17 CFR 230.405).
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    The principal changes from the proposals, as discussed in detail
below, are:
     For purposes of the exemption and the safe harbor, the
persons who may enter into an employment compensation, severance or
other employee benefit arrangement have been expanded to include all
security holders of the subject company, as opposed to only employees
and directors of the subject company;
     The requirements of the exemption have been modified;
     The approval of the directors of the subject company will
satisfy the safe harbor requirements, regardless of whether the subject
company is a party to the arrangement;
     A special committee of the board of directors of the
subject company or the bidder, as applicable, comprised solely of
independent members and formed to consider and approve the arrangement
may approve the arrangement and satisfy the safe harbor requirements if
the subject company's or bidder's board of directors, as applicable,
does not have a compensation committee or a committee of the board of
directors that performs functions similar to a compensation committee
or if none of the members of those committees is independent;
     The approving directors do not need to determine that the
arrangements meet the additional requirements of the compensation
arrangement exemption to qualify for the safe harbor;
     The safe harbor provides certain accommodations for
foreign private issuers;
     A new instruction provides that a determination by the
board of directors that the board members approving an arrangement are
independent in accordance with the provisions of the safe harbor will
satisfy the independence requirements of the safe harbor; and
     The exemption and safe harbor are included as part of the
issuer, as well as third-party, best-price rule.

B. History of the Best-Price Rule and the Reasons for Today's
Amendments

    Section 14(d)(7) of the Exchange Act \12\ requires equal treatment
of security holders.\13\ Based on the objectives of the Williams Act
\14\ and the protections afforded by Section 14(d)(7), the Commission
adopted Rules 13e-4(f)(8) and 14d-10 in 1986.\15\ These rules codified
the positions that both an issuer tender offer and a third-party tender
offer must be open to all holders of the class of securities subject to
the tender offer (commonly referred to as the ``all-holders rule'') and
that all security holders must be paid the highest consideration paid
to any security holder (commonly referred to as the ``best-price
rule'').\16\ The rules provided that no one may ``make a tender offer
unless: (1) [T]he tender offer is open to all security holders of the
class of securities subject to the tender offer; and (2) [t]he
consideration paid to any security holder pursuant to the tender offer
is the highest consideration paid to any other security holder during
such tender offer.'' \17\
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    \12\ 15 U.S.C. 78n(d)(7).
    \13\ The statute and rules governing third-party tender offers
apply to tender offers for more than 5 per cent of any class of any
equity security registered pursuant to Section 12 of the Exchange
Act, or any equity security of an insurance company that would have
been required to be registered but for the exemption contained in
Section 12(g)(2)(G) of the Exchange Act, or any equity security
issued by a closed-end investment company registered under the
Investment Company Act of 1940. See Section 14(d)(1) of the Exchange
Act.
    \14\ Pub. L. No. 90-439, 82 Stat. 454 (1968).
    \15\ See Amendments to Tender Offer Rules: All-Holders and Best-
Price, Release No. 34-23421 (July 17, 1986) [51 FR 25873].
    \16\ Id.
    \17\ Exchange Act Rules 13e-4(f)(8) (17 CFR 240.13e-4(f)(8)) and
14d-10(a) (17 CFR 240.14d-10(a)).
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    Since the adoption of these rules, the best-price rule has been the
basis for litigation brought in connection with tender offers in which
it is claimed that the rule was violated as a result of the bidder
entering into new agreements or arrangements, or adopting the subject
company's pre-existing agreements or arrangements, with security
holders of the subject company.\18\ When ruling on these best-price
rule claims, courts generally have employed either an ``integral-part
test'' or a ``bright-line

test'' to determine whether the arrangement violates the best-price
rule.
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    \18\ See, e.g., Epstein v. MCA, Inc., 50 F.3d 644 (9th Cir.
1995), rev'd on other grounds sub nom.; Matsushita Elec. Indus. Co.
v. Epstein, 516 U.S. 367 (1996); Lerro v. Quaker Oats Co., 84 F.3d
239 (7th Cir. 1996); Walker v. Shield Acquisition Corp., 145 F.
Supp.2d 1360 (N.D. Ga. 2001).
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    The integral-part test states that the best-price rule applies to
all integral elements of a tender offer, including employment
compensation, severance and other employee benefit arrangements or
commercial arrangements that are deemed to be part of the tender offer,
regardless of whether the arrangements are executed and performed
outside of the time that the tender offer formally commences and
expires.\19\ Courts following the integral-part test have ruled that
agreements or arrangements made with security holders that constituted
an ``integral part'' of the tender offer violate the best-price
rule.\20\
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    \19\ See Epstein, 50 F.3d 644; Perera v. Chiron Corp., 1996 U.S.
Dist. LEXIS 22503 (N.D. Cal. 1996); Padilla v. MedPartners, Inc.,
1998 U.S. Dist. LEXIS 22839 (C.D. Cal. 1998); Millionerrors Inv.
Club v. General Elec. Co., 2000 U.S. Dist. LEXIS 4778 (W.D. Pa.
2000); Maxick v. Cadence Design Sys., Inc., 2000 U.S. Dist. LEXIS
14099 (N.D. Cal. 2000); McMichael v. United States Filter Corp.,
2001 U.S. Dist. LEXIS 3918 (C.D. Cal. 2001); Karlin v. Alcatel,
S.A., 2001 U.S. Dist. LEXIS 12349 (C.D. Cal. 2001); Harris v. Intel
Corp., 2002 U.S. Dist. LEXIS 13796 (N.D. Cal. 2002); Cummings v.
Koninklijke Philips Elec., N.V., 2002 U.S. Dist. LEXIS 23383 (N.D.
Cal. 2002); In re: Luxottica Group S.p.A., 293 F. Supp.2d 224 (E.D.
N.Y. 2003).
    \20\ Id.
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    The bright-line test, on the other hand, States that the best-price
rule applies only to arrangements executed and performed between the
time a tender offer formally commences \21\ and expires.\22\
Jurisdictions following the bright-line test have held that agreements
or arrangements with security holders of the subject company do not
violate the best-price rule if they are not executed and performed
``during the tender offer.'' \23\
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    \21\ See Exchange Act Rule 13e-4(a)(4) (17 CFR 240.13e-4(a)(4))
and Exchange Act Rule 14d-2 (17 CFR 240.14d-2) (relating to
procedures for formal commencement of tender offers).
    \22\ See Lerro, 84 F.3d 239; Gerber v. Computer Assoc. Int'l,
Inc., 303 F.3d 126 (2d Cir. 2002); In re: Digital Island Securities
Litig., 357 F.3d 322 (3d Cir. 2004); Walker v. Shield Acquisition
Corp., 145 F. Supp.2d 1360 (N.D. Ga. 2001); Susquehanna Capital
Group v. Rite Aid Corp., 2002 U.S. Dist. LEXIS 18290 (E.D. Pa.
2002); Katt v. Titan Acquisitions, Inc., 244 F. Supp.2d 841 (M.D.
Tenn. 2003).
    \23\ Id.
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    These differing interpretations of the best-price rule have made
using a tender offer acquisition structure unattractive because of the
potential liability of bidders for claims alleging that compensation
payments violate the best-price rule.\24\ This potential liability is
heightened by the possibility that claimants can choose to bring a
claim in a jurisdiction that recognizes an interpretation of the best-
price rule that suits the claimant's case. These differing
interpretations do not best serve the interests of security holders and
have resulted in a regulatory disincentive to structuring an
acquisition of securities as a tender offer, as compared to a statutory
merger, to which the best-price rule does not apply. We believe that
the interests of security holders are better served when all
acquisition structures are viable options.\25\ We intend for the
amendments we are adopting today to alleviate this regulatory
disincentive.
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    \24\ Commenters cited the judicial interpretations as one reason
for the decline in the use of tender offers and some indicated that
they do not recommend the use of tender offers if other acquisition
structures are available. See, e.g., the letters from the American
Bar Association, Business Law Section, Committee on Federal
Regulation of Securities (``ABA''); Cravath, Swaine & Moore LLP,
Davis Polk & Wardwell, Latham & Watkins LLP, Simpson Thacher &
Bartlett LLP, Skadden, Arps, Slate, Meagher & Flom LLP, Sullivan &
Cromwell LLP, and Wachtell, Lipton, Rosen & Katz (``Law Firm
Group''); and Association of the Bar of the City of New York,
Special Committee on Mergers, Acquisitions and Corporate Control
Contests (``NYCBA'').
    \25\ As we indicated in the Proposing Release, at the time we
adopted Regulation M-A (17 CFR 229.1000-229.1016) we stated that
``[o]ur goals in proposing and adopting these changes are to * * *
harmonize inconsistent disclosure requirements and alleviate
unnecessary burdens associated with the compliance process * * *
'').
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C. Overview of the Proposed Amendments

    As we discussed in the Proposing Release, we do not believe that
the best-price rule should be subject to a strict temporal test because
such a test lends itself to abuse. However, we also do not believe that
all payments that are conditioned on or otherwise somehow related to a
tender offer, including payments under compensatory or commercial
arrangements that are made to persons who happen to be security
holders, whether made before, during or after the tender offer period,
should be subject to the best-price rule. Accordingly, we proposed
amendments to the best-price rule that did not follow the approach of
either the integral-part or the bright-line test. Instead, we proposed
to change the language of the best-price rule so that only
consideration paid to security holders for securities tendered into a
tender offer will be evaluated when determining the highest
consideration paid to any other security holder for securities tendered
into the tender offer.
    Our proposed amendments to the third-party tender offer best-price
rule also acknowledged that critical personnel decisions often are
required to be made concurrently with decisions regarding whether to
pursue a transaction with the subject company in a tender offer. We
believed, and continue to believe, that these decisions generally are
made independently from the consideration paid for securities tendered
in the tender offer. We therefore proposed a specific exemption from
the third-party tender offer best-price rule for consideration offered
and paid according to employment compensation, severance or other
employee benefit arrangements entered into with employees and directors
of the subject company of a tender offer where the amounts payable
under the arrangements meet certain requirements. We also proposed a
safe harbor to the exemption from the third-party tender offer best-
price rule for consideration offered and paid according to certain
employment compensation, severance or other employee benefit
arrangements that were approved by either the compensation committee or
a committee performing similar functions as the compensation committee
of the board of directors of either the subject company or bidder,
depending on which entity was a party to the arrangement.

II. Amendments to the Best-Price Rule

A. Amendments to the Basic Standard in Exchange Act Rules 13e-
4(f)(8)(ii) and 14d-10(a)(2)

1. Discussion
    We proposed amendments to the issuer and third-party best-price
rule to address the uncertainty that the various court interpretations
have produced while ensuring that the intent of the best-price rule--
equal treatment of security holders--is satisfied. The amendments
revise the best-price rule to state that no one may make a tender offer
unless ``[t]he consideration paid to any security holder for securities
tendered in the tender offer is the highest consideration paid to any
other security holder for securities tendered in the tender offer.''
The clause ``for securities tendered in the tender offer'' would
replace the clauses ``pursuant to the tender offer'' and ``during such
tender offer,'' as the rule previously read, to clarify the intent of
the best-price rule. Today, we adopt these changes as proposed.
2. Comments Regarding the Proposed Amendments to the Basic Standard in
Exchange Act Rules 13e-4(f)(8)(ii) and 14d-10(a)(2)
    Although commenters generally favored the proposals, certain
commenters expressed some concerns

regarding the proposed amendments.\26\ These commenters were of the
view that the proposed changes likely would alter the bright-line
precedent that has been established by courts. Specifically, one
commenter indicated that the removal of the phrase ``during the tender
offer'' would be used to argue that payments made at any time are for
``securities tendered in'' the tender offer, which would expand the
application and, therefore, the potential claims that could be made
under the best-price rule.\27\ We believe that the amendments we are
adopting today, as discussed in more detail below, will provide
sufficient certainty in assuring that payments made with respect to
compensatory arrangements will not be captured by the best-price rule
such that any temporal certainty that may previously have been present
under the ``bright-line test'' will no longer be necessary. As stated
above, we also do not believe that the best-price rule should be
subject to a strict temporal test, which could provide opportunities
for evasion of the rule.
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    \26\ See, e.g., letters from ABA; Dechert LLP (``Dechert''); and
Law Firm Group.
    \27\ Letter from Law Firm Group.
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    As we articulated in the Proposing Release, the flexible concept of
a tender offer is consistent with the purpose of the best-price rule,
in that it prevents bidders from impermissibly circumventing the rule
by limiting the application of the rule to stated dates.\28\ The best-
price rule was not intended to apply to all payments made to persons
who happen to be security holders of a subject company, whether made
before, during or after the formal tender offer period. Further, the
amendments that we are adopting today will remove the potentially
expansive concept of consideration paid ``pursuant to'' the tender
offer in order to focus the analysis as to whether the consideration to
which the best-price rule would apply was paid ``for securities
tendered in'' the tender offer.
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    \28\ See note 21 above.
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    In response to questions that we posed about whether employees and
directors who enter into arrangements with the bidder or subject
company and do not tender their securities into a tender offer will
avoid the strictures of the best-price rule as proposed, commenters
generally agreed that no violation of the best-price rule should occur
under these circumstances.\29\ Commenters believed that this outcome
was appropriate. We agree, because the best-price rule would not be
applicable in these instances.
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    \29\ See, e.g., letters from ABA; Jason A. Gonzalez
(``Gonzalez''); and Law Firm Group.
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B. Exemption for Consideration Offered and Paid Pursuant to
Compensatory Arrangements

1. Discussion
    We are adopting an amendment to the issuer and third-party best-
price rules so that consideration offered and paid pursuant to
employment compensation, severance or other employee benefit
arrangements that are entered into with security holders of the subject
company and that meet certain substantive requirements are not
prohibited by the best-price rules.\30\ We believe that amounts paid
pursuant to arrangements meeting the requirements of this provision
should not be considered when calculating the price paid for tendered
securities.
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    \30\ The exemption and safe harbor were proposed as amendments
to Rule 14d-10(c) of the third-party tender offer rules. The
exemption and the safe harbor are adopted as new Rules 14d-10(d)(1)
and 14d-10(d)(2), respectively, and Rules 13e-4(f)(12)(i) and 13e-
4(f)(12)(ii), respectively. Because we are inserting the exemption
and safe harbor into an existing subparagraph (and redesignating old
subparagraph (d) as (e), etc.), we are also making a technical
change to reflect this redesignation in the rules that govern the
ability to delegate authority for purposes of granting exemptions
under the best-price rule.
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    We have revised the proposed exemption for compensatory
arrangements that meet specified substantive requirements to address a
number of the comments received. We have expanded the persons who may
enter into an employment compensation, severance or other employee
benefit arrangement to include all security holders of the subject
company, as opposed to only employees and directors of the subject
company. We are also extending this exemption to issuer tender
offers.\31\ Finally, we have modified the requirements of the exemption
so that the amounts to be paid pursuant to an arrangement will have to
be ``paid or granted as compensation for past services performed,
future services to be performed, or future services to be refrained
from performing, by the security holder (and matters incidental
thereto)'' and may ``not [be] calculated based on the number of
securities tendered or to be tendered in the tender offer by the
security holder.''
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    \31\ The term ``issuer tender offer,'' as defined in Rule 13e-
4(a)(2) (17 CFR 240.13e-4(a)(2)), refers to a tender offer for, or a
request or invitation for tenders of, any class of equity security,
made by the issuer or an affiliate of such issuer of the class of
such equity security. For purposes of this release, all references
to ``subject company,'' as defined for purposes of the third-party
tender offer rules are intended to refer to ``issuer,'' for purposes
of the issuer tender offer rules. Similarly, all references to
``bidder,'' as defined for purposes of the third-party tender offer
rules are intended to refer to an ``issuer'' and ``affiliate,'' for
purposes of the issuer tender offer rules.
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2. Comments Regarding the Compensatory Arrangement Exemption
a. Parties to the Arrangement
    As proposed, the exemption would have applied to employment
compensation, severance or other employee benefit arrangements entered
into with employees or directors of the subject company. We solicited
comment regarding whether the exemption should be restricted to such
persons. Commenters believed that the exemption should be expanded and
suggested expansion of the exemption to encompass consultants,\32\
independent contractors,\33\ employees or directors of the bidder,\34\
and/or any security holder of the subject company.\35\ Commenters were
of the view that it would be appropriate to expand the class of persons
because arrangements entered into with the expanded class of persons
are, like those entered into with employees and directors, intended to
cover compensation for past services or incentives for future services
and not tied to the number of shares to be tendered.\36\ We agree and
have expanded the exemption to apply to any security holder of the
subject company. While, as a practical matter, the challenges to the
best-price rule to date have focused primarily on employment
compensation, severance and other employee benefit arrangements with
employees or directors of the subject company, we believe that the role
of the person who is a party to the arrangement is irrelevant.
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    \32\ See, e.g., letters from Law Firm Group and Shearman &
Sterling LLP (``Shearman'').
    \33\ Letter from New York State Bar Association, Business Law
Section, Committee on Securities Regulation (``NYSBA'').
    \34\ See, e.g., letters from Gonzalez and Society of Corporate
Secretaries & Governance Professionals, Securities Law Committee
(``SCSGP'').
    \35\ See, e.g., letters from ABA and Dechert.
    \36\ See, e.g., letter from SCSGP.
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b. Types of Arrangements Covered by the Exemption
    In the Proposing Release, we asked whether we should expand the
exemption to include commercial arrangements, in addition to employment
compensation, severance or other employee benefit arrangements. Several
commenters favored extending the exemption to commercial
arrangements.\37\ In doing so,

commenters generally argued that it is not uncommon for security
holders of the subject company of a tender offer to enter into
commercial arrangements with the bidder and, absent a specific
exemption, such arrangements could be (and have been) challenged under
the best-price rule.\38\ Other commenters suggested that providing an
express exemption for employment compensation, severance or other
employee benefit arrangements but not providing a similar exemption for
commercial arrangements may undermine our objectives in adopting these
amendments.\39\
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    \37\ See, e.g., letters from ABA; Dechert; Intel Corporation
(``Intel''); NYCBA; NYSBA; SCSGP; and Securities Industry
Association, Capital Markets Committee (``SIA'').
    \38\ See, e.g., letters from Dechert, Intel and NYCBA.
    \39\ See, e.g., letter from NYSBA.
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    We do not believe that it is appropriate to provide a separate
exemption for commercial arrangements. As is reflected in an
instruction to the exemption, which is adopted as proposed,\40\ the
fact that the exemption extends to employment compensation, severance
or other employee benefit arrangements does not mean that an
arrangement of any other nature, including a commercial arrangement,
with a security holder should be treated as consideration paid for
securities tendered in a tender offer. This instruction should
alleviate the concerns raised by commenters about whether the perceived
exclusivity of the exemption will create an unintended inference.\41\
Also, because of the wide variety of potential commercial arrangements
that could be negotiated at the time of a tender offer we are presently
unable to craft a specific exemption for commercial arrangements--
unlike the language of the compensation arrangement exemption--that
could be tailored to be functional while assuring security holders of
the intended benefits of the best-price rule.
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    \40\ As noted in Section II.C.2.d., the instruction now applies
to both the exemption and the safe harbor.
    \41\ Further, the best-price rule does not apply if a security
holder refrains from tendering into a tender offer. See Section
II.A.2. above.
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    In the Proposing Release, we also asked whether we should consider
adopting a de minimis exception to the best-price rule whereby holders
of a certain percentage of securities of the subject company would be
exempt from the application of the best-price rule. Some commenters
were in favor of a de minimis exception, although the commenters had
differing views as to the percentage to be applied to the exception, to
whom the exception would apply and what types of arrangements should be
available under the exception.\42\ We determined that it would not be
appropriate to implement a de minimis exception because it could
undermine the protections of the best-price rule.
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    \42\ Letters from ABA; Law Firm Group; NYCBA; NYSBA; SCSGP; and
SIA.
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    In the Proposing Release, we also asked whether the proposed
exemption should provide a definition or provide examples of what we
mean when we refer to ``employment compensation, severance or other
employee benefit arrangements.'' Commenters were mixed in their
preference as to whether or not defining the phrase or offering
examples would be helpful, although most did not believe it would be
necessary.\43\ Some commenters expressed the view that if the phrase
was defined and an employment compensation, severance or other employee
benefit arrangement did not fall squarely within the definition or list
of examples, potential bidders might opt to use a transaction structure
other than a tender offer.\44\ Others stated that the phrase
``employment compensation, severance or other employee benefit
arrangement'' uses terms that are generally understood and an attempt
to define the phrase or provide examples would raise questions of
interpretation.\45\ We agree and generally believe that providing a
definition or a list of examples is not necessary and would invite
confusion.
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    \43\ See, e.g., letters from ABA; Intel; Law Firm Group; and
SCSGP.
    \44\ See, e.g., letter from Intel.
    \45\ See, e.g., letters from ABA and SCSGP.
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c. Additional Requirements of the Exemption
    We proposed that, for purposes of satisfying the exemption, the
amounts to be paid pursuant to an arrangement would have to relate
``solely to past services performed or future services to be performed
or refrained from performing, by the employee or director (and matters
incidental thereto)'' and could ``not [be] based on the number of
securities the employee or director owns or tenders.'' As we explained
in the Proposing Release, we included these requirements so that the
amounts paid pursuant to employment compensation, severance or other
employee benefit arrangements were based on legitimate compensatory
reasons.\46\ We also believed that it was not appropriate to permit the
exemption of any payments to be made that were proportional to or
otherwise based on the number of securities held by the security holder
because such a relationship between the payment and the securities
tendered presented the type of situation the best-price rule was
adopted to guard against.
---------------------------------------------------------------------------

    \46\ Proposing Release at Section II.B.1.
---------------------------------------------------------------------------

    Most of the commenters believed that excluding employment
compensation, severance or other employee benefit arrangements from the
application of the best-price rule would provide certainty and address
the issues raised by the current legal precedent.\47\ A number of
commenters suggested, however, that we remove the requirements of the
exemption.\48\ These commenters generally were concerned that the
courts would scrutinize whether the requirements were satisfied,
resulting in the substitution of one set of disputed facts for
another.\49\ Commenters also were concerned that it might be difficult
to determine whether or not the requirements have been met, given that
it would require the ability to discern the intent of the parties at
the time the arrangement was made.\50\ At least one commenter also
expressed the concern that the requirements might unnecessarily
circumscribe the availability of the exemption.\51\
---------------------------------------------------------------------------

    \47\ See, e.g., letters from Dechert; Law Firm Group; and NYCBA.
    \48\ See, e.g., letters from ABA; Dechert; Law Firm Group;
NYCBA; and SIA.
    \49\ See, e.g., letters from ABA; Dechert; Law Firm Group; and
SIA.
    \50\ See, e.g., letter from Dechert.
    \51\ See, e.g., letter from Shearman.
---------------------------------------------------------------------------

    We have considered these comments and determined to retain the
requirements with certain modifications. While we recognize that it may
be difficult to determine in all instances whether or not the
requirements have been satisfied, we believe making the exemption
available without the requirements might subject the exemption to
abuse. These requirements are designed to prevent the compensation
being paid or granted under an arrangement from being for securities
tendered in the tender offer.\52\
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    \52\ Some commenters asked us to confirm whether any
compensatory arrangement that is conditioned upon the security
holder, who is a party to the arrangement, tendering securities into
the tender offer would render the arrangement less likely to be one
that should fall within the exemption or whether it is objectionable
for the compensatory arrangement to be conditioned upon consummation
of the tender offer. We believe that conditioning an arrangement on
a security holder tendering securities into the tender offer would
most likely violate one or both of the requirements of the
exemption. We do not believe that conditioning an arrangement on the
completion or consummation of the tender offer, without any
requirements as to the security holder who is a party to the
arrangement tendering shares in the tender offer, is relevant to a
determination as to whether the exemption is available.

---------------------------------------------------------------------------

i. Requirement That the Amount Payable Under the Compensatory
Arrangement Is Being Paid or Granted as Compensation
    With respect to the first requirement, some commenters asked that
we remove the reference to ``solely'' in order to avoid language that
might unnecessarily circumscribe the availability of the exemption.\53\
We agree and have substituted the first clause that read ``relate
solely to'' with ``is being paid or granted as compensation for'' to
clarify that it was our intent to provide an exemption only for
employment compensation, severance or other employee benefit
arrangements for which there is a legitimate compensatory purpose.
---------------------------------------------------------------------------

    \53\ See, e.g., letters from SCSGP and Shearman.
---------------------------------------------------------------------------

    One commenter also asked that we consider using a term other than
``services'' to avoid the possibility that certain forms of
consideration, which may be paid or granted pursuant to the
arrangements, would not meet the requirements of the exemption.\54\ The
commenter was concerned that the use of the term ``services'' might
exclude those arrangements that called for compensation to be paid that
was unconventional, such as the purchase of assets owned or used by an
employee or director. We considered this concern and note that this
requirement is intended only to require that the consideration paid is
for services performed or to be performed or to be refrained from being
performed--not to restrict the forms of consideration to be paid under
an arrangement. We believe that the inclusion of the phrase ``and
matters incidental thereto'' also should provide flexibility to cover
other service-related compensation.
---------------------------------------------------------------------------

    \54\ Letter from NYCBA.
---------------------------------------------------------------------------

ii. Requirement That the Amount Payable Under the Compensatory
Arrangement Is Not Calculated Based on the Number of Securities
Tendered
    With respect to the second requirement, several commenters
expressed concern as to whether we intended for employment
compensation, severance or other employee benefit arrangements that are
in the form of equity-based awards to be captured by this
requirement.\55\ Because equity-based awards are almost always based on
the number of securities ``owned or tendered,'' commenters argued that
the grant of equity-based awards or the modification of previously
granted equity-based awards generally would fall outside of the
compensation arrangement exemption to the best-price rule by virtue of
failing to meet this second requirement. They suggested that we clarify
the intent of the requirement. For similar reasons, commenters also
suggested that we remove the reference to securities ``owned'' and
refocus the provisions of this requirement on securities ``tendered.''
\56\ We believe that we have addressed these concerns by adding the
word ``calculated'' before ``based'' and replacing ``owns or tenders''
with ``tendered or to be tendered'' so that the exemption now requires
that the arrangement ``not [be] calculated based on the number of
securities tendered or to be tendered * * * '' We believe these changes
address the concerns raised by commenters and clarify that we did not
intend for equity-based employment compensation, severance or other
employee benefit arrangements that are premised on legitimate
compensatory reasons to fall outside this exemption from the best-price
rule.
---------------------------------------------------------------------------

    \55\ See, e.g., letters from ABA; NYCBA; and SIA.
    \56\ See, e.g., letter from ABA.
---------------------------------------------------------------------------

C. Arrangements Approved by Independent Directors

1. Discussion
    We proposed a safe harbor from the third-party tender offer best-
price rule for consideration offered and paid according to employment
compensation, severance or other employee benefit arrangements entered
into with employees and directors of the subject company that are
approved by certain committees of the subject company's or bidder's
board of directors. As we stated in the Proposing Release, we believe
that the fiduciary duty requirements of board members, coupled with
significant advances in the independence requirements for compensation
committee members and recent advances in corporate governance, provide
safeguards to allow employment compensation, severance or other
employee benefit arrangements that are approved by independent
compensation committee members and groups of independent board members
to be exempt from the best-price rule.\57\ As proposed, this provision
would have operated as a safe harbor within the broader proposed
exemption that included the two requirements discussed above. As we
noted in the Proposing Release, we believed that providing such a safe
harbor would provide increased certainty to bidders and subject
companies in connection with the application of the best-price rule. We
also believed that the proposed safe harbor struck the proper balance
between the need for certainty in planning and structuring proposed
acquisitions and the statutory purposes of the best-price rule. Most of
the commenters agreed that providing the safe harbor was a good idea,
although some commenters suggested certain changes to the provisions of
the safe harbor to address issues on which we requested comment or that
commenters identified.\58\
---------------------------------------------------------------------------

    \57\ See, e.g., New York Stock Exchange, Inc. and National
Association of Securities Dealers, Inc. Order Approving Proposed
Rule Changes, Release No. 34-48745 (Nov. 4, 2003) [68 FR 64154] and
Section 303A.05 of the New York Stock Exchange's Listed Company
Manual (requiring the compensation committee to be comprised solely
of independent directors).
    \58\ See the discussion at Section II.C.2. below.
---------------------------------------------------------------------------

    We are adopting the safe harbor provision with certain
modifications. First, we added the safe harbor to both the issuer and
third-party tender offer best-price rules. Next, we amended the
language of the safe harbor so that arrangements can be approved by
either a compensation committee or a committee performing similar
functions of the subject company's board of directors, regardless of
whether the subject company is a party to the arrangement.
Alternatively, if the bidder is a party to the arrangement, the
arrangement may be approved by either a compensation committee or a
committee performing similar functions of the board of directors of the
bidder. In the case of issuer tender offers, arrangements must be
approved by either a compensation committee of the issuer's board of
directors or a committee performing similar functions, regardless of
whether the issuer is a party to the arrangement. Alternatively, if an
affiliate is a party to the arrangement, the arrangement may be
approved by either a compensation committee or a committee performing
similar functions of the board of directors of the affiliate. We are
also amending the safe harbor to allow a special committee of the
approving entity formed to consider and approve the arrangement to
approve the arrangement and meet the requirements of the safe harbor if
the approving entity does not have a compensation committee or a
committee of the board of directors that performs functions similar to
a compensation committee or if all the members of either of those
committees are not independent. All of the members of the committee
used to approve an arrangement must be independent, as defined.\59\ We
have

made certain accommodations to these requirements for foreign private
issuers, as discussed below.
---------------------------------------------------------------------------

    \59\ Therefore, it is not necessary for the entire compensation
committee of the bidder or subject company to approve the
arrangement and, in fact, a subcommittee of this committee may
approve the arrangement, so long as the subcommittee is comprised
entirely of members that are independent in accordance with the
requirements of the listing standards. See the related discussion at
Section II.C.2.b. and note 72 below.
---------------------------------------------------------------------------

    Most of the commenters believed that providing the safe harbor
would create certainty in an otherwise uncertain environment caused by
the legal precedent that has evolved in this area.\60\ In this regard,
commenters were of the view that the safe harbor should provide as much
certainty as possible, while still retaining a certain amount of
flexibility so as to allow parties to be able to take advantage of
it.\61\ Commenters provided significant specific guidance regarding the
operation of the proposed safe harbor and offered suggestions regarding
the most effective means of accomplishing its purpose. The safe harbor
we are adopting today has been revised from the proposal to address the
following concerns, as discussed in further detail below:
---------------------------------------------------------------------------

    \60\ See, e.g., letters from ABA, Dechert and NYCBA.
    \61\ See, e.g., letters from Law Firm Group and NYCBA.
---------------------------------------------------------------------------

     The approval of the directors of the subject company will
satisfy the safe harbor requirements, regardless of whether the subject
company is a party to the arrangement; \62\
---------------------------------------------------------------------------

    \62\ Alternatively, as adopted, the safe harbor is available
where the arrangement is approved by the bidder's board of
directors, but only if the bidder is a party to the arrangement.
---------------------------------------------------------------------------

     A special committee of the board of directors of the
subject company or the bidder, as applicable, comprised solely of
independent members and formed to consider and approve the arrangement
may approve the arrangement and satisfy the safe harbor requirements if
the subject company's or bidder's board of directors, as applicable,
does not have a compensation committee or a committee of the board of
directors that performs functions similar to a compensation committee
or if none of the members of such committees is independent;
     Foreign private issuers may have the arrangement approved
by any members of the board of directors or any committee of the board
of directors authorized to approve the arrangement under the laws or
regulations of their home country, and the members of the board or
committee need not be independent in accordance with the U.S. listing
standards but must be independent in accordance with the laws,
regulations, codes or standards of their home country;
     The approving directors do not need to determine that the
arrangements meet the additional requirements of the compensation
arrangement exemption;
     A new instruction provides that a determination by the
board of directors that the board members approving an arrangement are
independent in accordance with the provisions of the safe harbor will
satisfy the independence requirements of the safe harbor; and
     We have expanded the safe harbor to apply to issuer, in
addition to third-party, tender offers.
2. Comments Regarding the Safe Harbor
a. The Committee Approval Required
i. Approving Party
    As proposed, for purposes of satisfying the safe harbor, an
arrangement would have needed to be approved by the applicable
committee of the board of directors of either the subject company or
the bidder, depending on whether the subject company or bidder is a
party to the arrangement. We requested comment on whether the safe
harbor could be modified to work better with State law protections.
Several commenters advocated that the safe harbor provide that the
arrangement may be approved by the applicable committee of the subject
company, regardless of whether the subject company is a party to the
arrangement.\63\ We agree with these comments and have followed this
approach in the amendments we are adopting. We believe the duties owed
by the subject company's board members to the security holders subject
to a tender offer provide certain protections of security holder
interests regardless of whether the subject company is a party to the
arrangement because the subject company's directors have a duty to act
in the best interests of the security holders of the subject company.
Also, this provides additional flexibility to parties wanting to take
advantage of the safe harbor; bidders that, for whatever reason, do not
have a compensation committee with independent directors will be able
to rely upon the safe harbor by allowing the subject company to approve
the compensation arrangement whether or not the bidder is a party to
the arrangement. The safe harbor adopted today also allows approval by
the applicable committee of the bidder's board of directors only if the
bidder is a party to the arrangement. The amendments to the issuer
tender offer rules follow a similar approach with respect to the
approval required by the directors of the issuer or an affiliate of the
issuer.
---------------------------------------------------------------------------

    \63\ See, e.g., letters from ABA; Dechert; Law Firm Group;
NYCBA; and SIA.
---------------------------------------------------------------------------

ii. Approving Body
    The proposed safe harbor would have allowed a compensation
committee or a committee performing similar functions comprised solely
of independent members of the board of directors to approve the
arrangement. The safe harbor adopted today includes this provision. In
the Proposing Release, we sought comment as to whether certain entities
(e.g., small business issuers, foreign private issuers) may not have
established compensation committees or committees performing similar
functions such that the safe harbor may not be available to them.
Commenters suggested we expand the approving body to include, among
others, the entire board of directors or another duly authorized
committee of the board.\64\
---------------------------------------------------------------------------

    \64\ See, e.g., letters from ABA; Dechert; Law Firm Group;
NYCBA; NYSBA; and SIA.
---------------------------------------------------------------------------

    In response to these comments, the safe harbor adopted today has
been expanded in two respects. First, the safe harbor allows a special
committee of the board of directors of the subject company or the
bidder, as applicable, comprised solely of independent members and
formed to consider and approve the arrangement, to approve the
arrangement and satisfy the safe harbor if the subject company's or
bidder's board of directors, as applicable, does not have a
compensation committee or a committee that performs functions similar
to a compensation committee or does have one of these committees but
none of its members is independent. The safe harbor adopted today also
has been expanded to allow foreign private issuers to obtain the
approval by any or all members of the board of directors or any
committee of the board of directors authorized to approve the
arrangement under the laws or regulations of the home country of the
approving party.
    We believe that expanding the safe harbor to include approvals by a
special committee comprised of independent directors and the
accommodation for foreign private issuers is appropriate for purposes
of the best-price rule. Allowing a special committee, in lieu of a
compensation or similar committee, to approve the compensatory
arrangement provides additional flexibility to parties who want to rely
on the safe harbor. Further, because the members of the special
committee would have to be independent, we believe the approval by a
special committee should not compromise investor protection.\65\
---------------------------------------------------------------------------

    \65\ State law also creates an incentive for board members to be
disinterested from the transaction. See, e.g., 8 Del. C. section 144
and Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983).

---------------------------------------------------------------------------

    The accommodation for foreign private issuers is appropriate
because those issuers may not have compensation or similar committees.
Deferring to the laws and regulations of the home country of foreign
private issuers makes it more likely that they will avail themselves of
the safe harbor and, consequently, conduct tender offers that will
include U.S. security holders.
b. Determining Independence
    In the Proposing Release, we solicited comment regarding the
appropriateness of relying on the independence standards for
compensation committee members as defined in the listing standards. One
commenter suggested that we rely upon State law duties of directors
because the approving body is already relying upon State law standards
of fiduciary duties in approving the arrangement.\66\ Other commenters
suggested that codifying an independence definition similar to other
definitions provided in some Exchange Act rules--as opposed to relying
upon a definition that is determined by reference to the listing
standards, as we have in other Exchange Act rules--would be a better
approach because this would provide a consistent definition.\67\ We
disagree and are adopting the provisions related to the independence
standards as proposed, with an accommodation for foreign private
issuers. We believe this approach is appropriate because the
definitions under the listing standards have previously been approved
by us and are consistent with the approach we have followed in the
past.\68\ In addition, the amendments, as adopted, clarify that a
director of a registered closed-end investment company is considered to
be independent if the director is not an ``interested person'' of the
investment company, as defined in Section 2(a)(19) of the Investment
Company Act of 1940.\69\ This clarification is necessary because
compensation committee listing standards typically do not apply to
registered investment companies.\70\
---------------------------------------------------------------------------

    \66\ See letter from Dechert.
    \67\ See, e.g., letter from Shearman, which refers to Rule 16b-
3(d), but we presume that the commenter is referring to the
definition of ``Non-Employee Director'' provided in Exchange Act
Rule 16b-3(b)(3) (17 CFR 240.16b-3(b)(3)).
    \68\ See, e.g., Item 407 of Regulations S-B and S-K (17 CFR
228.407 and 17 CFR 229.407) as adopted in Executive Compensation and
Related Person Disclosure, Release No. 33-8732A (Aug. 29, 2006) [71
FR 53158] and Self-Regulatory Organizations; New York Stock
Exchange, Inc. and National Association of Securities Dealers, Inc.
Order Approving Proposed Rule Changes, Release No. 34-48745 (Nov. 4,
2003) [68 FR 64154].
    \69\ 15 U.S.C. 80a-2(a)(19).
    \70\ See, e.g., Section 801 of the American Stock Exchange
Company Guide; NASDAQ Rule 4350(a)(2); and, Section 303A.00 of the
New York Stock Exchange's Listed Company Manual.
---------------------------------------------------------------------------

    The amendments do not require that the approving body of a foreign
private issuer be comprised of members that are independent as defined
in the listing standards. While foreign private issuers may rely on the
listing standards when determining independence for purposes of the new
rule, those issuers will have the alternative of determining the
independence of the members of the board or committee approving a
compensatory arrangement for purposes of the safe harbor in accordance
with home country laws, regulations, codes and standards. We believe
this accommodation is appropriate because foreign private issuers may
not be subject to the listing standard's independence provisions as
they relate to compensation committees and should be provided with the
flexibility to rely on home country laws, regulations, codes and
standards in adhering to independence standards. We recognize that
foreign private issuers may be subject to regulatory schemes and
structures that differ from those that apply to U.S. issuers and that
some of these schemes and structures may have a definition that is not
consistent with the definition of independence contained in U.S.
listing standards. Nevertheless, we are comfortable with this approach
and believe that it balances the premise of the safe harbor--approval
of arrangements by independent board members--against the potential
that local independence standards differ drastically from the listing
standard's definitions.
    We also received comments regarding the possibility that a member
of an existing compensation committee or a committee that performs
functions similar to a compensation committee may not be independent
for purposes of a particular tender offer.\71\ Recusal by a member of
the approving body from considering and approving the arrangement under
those circumstances in accordance with State or local law or the
listing standards would not eliminate the availability of the safe
harbor.\72\
---------------------------------------------------------------------------

    \71\ See, e.g., letter from SCSGP.
    \72\ A bidder or subject company's standing compensation
committee may include multiple board members, each of whom has
qualified as independent in accordance with the requirements of the
applicable listing standards. The safe harbor does not require that
each of the members of a company's standing compensation committee
participate in the consideration and approval of an arrangement.
---------------------------------------------------------------------------

    In the Proposing Release, we requested comment regarding whether
the language of the proposed amendments provided sufficient certainty
and clarity. Some commenters stated that the safe harbor should be
clarified to state that a conclusion by the board of directors that
each member of the approving committee is independent should be
sufficient to determine conclusively that such committee members meet
the applicable independence requirements.\73\ We have added an
instruction to the safe harbor that a determination by the bidder's or
the subject company's board of directors, as applicable, that the
members of the committee approving an arrangement are independent in
accordance with the provisions of the safe harbor will satisfy the
requirements of the safe harbor. We believe that clarifying this point
is consistent with the provisions of the safe harbor and the intent of
the best-price rule.
---------------------------------------------------------------------------

    \73\ See, e.g., letters from Law Firm Group and NYCBA.
---------------------------------------------------------------------------

c. Procedural Aspects of the Approval of Arrangements
    We proposed that, for purposes of satisfying the safe harbor, an
arrangement needed to be approved by the applicable committee as
meeting the additional requirements of the proposed compensation
arrangement exemption--specifically, that the amount to be paid
pursuant to a compensatory arrangement must ``relate[] solely to past
services performed or future services to be performed or refrained from
performing, by the employee or director (and matters incidental
thereto) and [may not be] based on the number of securities the
employee or director owns or tenders.'' We solicited comment on the
appropriateness of these requirements. Commenters believed that
requiring the committee to consider these additional factors was
unnecessary and could potentially lead to confusion regarding the
application of the safe harbor.\74\ We agree with these comments, and
the safe harbor adopted today does not require that the approving
committee consider these requirements. The language of the safe harbor
adopted today does require that the independent directors approve the
arrangement as an employment compensation, severance or other employee
benefit arrangement. We believe this procedural requirement is
necessary so directors understand that by approving an arrangement and
thereby satisfying the requirements of

the safe harbor, they are determining that the arrangement is
compensatory.\75\
---------------------------------------------------------------------------

    \74\ See the discussion at Section II.B.2.c. above.
    \75\ This procedural requirement is not intended to affect the
State law or listing standard approval or documentation requirements
for matters considered by the board of directors or committees of
the board of directors.
---------------------------------------------------------------------------

    In response to our request for comment, many commenters expressed
the view that committee approval of specific arrangements, as compared
to approval of plans or programs, with security holders of a subject
company should not be required by the proposed safe harbor.\76\ We have
not made changes in response to these comments, as we believe they are
inconsistent with a basic premise of the safe harbor, which is that
individuals vested with the fiduciary responsibility for approving
compensation arrangements will consider and approve arrangements with
security holders of the subject company of a tender offer and,
therefore, the best-price rule need not apply. Based on this premise,
directors would need to have knowledge of the specific arrangements
with security holders and the related tender offer when the approval is
given. Of course, the corporate procedures for obtaining and
documenting such approval remain matters of State law and the
requirements of the safe harbor do not limit the ability of the
independent directors to approve multiple specific arrangements or
stock grants generally.
---------------------------------------------------------------------------

    \76\ See, e.g., letters from ABA; Intel; Law Firm Group; NYCBA;
SCSGP; and Shearman.
---------------------------------------------------------------------------

    Many commenters requested that the timing of the required approval
of arrangements by the committee and the ability of committees to
reapprove or ratify arrangements originally approved before the
consideration of a specific transaction or the effectiveness of these
rule changes be clarified. We have not proposed changes to the safe
harbor to address these comments, as we do not believe it is necessary
to address such procedural issues in the rule itself. We do note,
however, that the revised best-price rule states that ``[t]he
consideration paid to any security holder for securities tendered in
the tender offer [shall be] the highest consideration paid to any other
security holder for securities tendered in the tender offer'' and, as
such, approval pursuant to the provisions of the safe harbor would need
to be received before the consideration is paid in the tender offer. We
also note that the requirements of the safe harbor do not prohibit
ratification of arrangements provided that the tender offer
consideration has not been paid yet.
d. Challenges to the Applicability of the Safe Harbor
    Commenters requested clarification of the proposed safe harbor to
provide that any finding of a violation of fiduciary duties by the
board would not nullify the application of the safe harbor.\77\ We have
not adopted changes to the safe harbor to address these comments. A
violation of State law fiduciary duties would not have any impact on
the availability of the safe harbor, as remedies are generally
available for such allegations under State law.
---------------------------------------------------------------------------

    \77\ See, e.g., letters from Intel and SIA.
---------------------------------------------------------------------------

    We have also expanded the application of the proposed instruction
that no inference should be drawn that consideration paid pursuant to
arrangements other than compensation arrangements, such as commercial
arrangements, constitutes consideration paid for securities tendered in
the tender offer. The adopted instruction now relates to both the
exemption and the safe harbor. The fact that directors approve an
arrangement as an employment compensation, severance or other employee
benefit arrangement in order to meet the requirements of the safe
harbor should not raise an inference that consideration paid or to be
paid pursuant to other arrangements that may be entered into with
security holders of the subject company constitutes consideration paid
for securities tendered in a tender offer.
    We also received comments about whether the language of the safe
harbor was potentially ambiguous and whether the safe harbor was self-
operating.\78\ In order to address these comments, we adopted the
exemption and the safe harbor as new sections of the third-party and
issuer best-price rules.\79\ We also amended the language of the safe
harbor so that it is clear that the negotiation, execution and
amendment of, and any payments made or to be made or benefits granted
or to be granted according to, arrangements approved pursuant to the
safe harbor are not prohibited by the best-price rule.
---------------------------------------------------------------------------

    \78\ See, e.g., letter from Dechert.
    \79\ See note 30 above.
---------------------------------------------------------------------------

e. Application of the Safe Harbor to the Issuer Best-Price Rule
    In the Proposing Release, we proposed to add the safe harbor to the
third-party best-price rule but did not propose an analogous safe
harbor to the issuer best-price rule. To date it does not appear that
claims of a violation of the best-price rule have been made under the
issuer tender offer rules. Commenters, however, were unanimous in their
request that we extend the safe harbor to the issuer best-price
rule.\80\ They reasoned that the need to enter into employment
compensation, severance or other employee benefit arrangements also
arises during issuer tender offers because similar issues of severance
and retention often are present, especially in restructuring and
recapitalization transactions.\81\ Commenters also believed that there
appeared to be no compelling reason to distinguish between the issuer
and third-party best-price rules, especially because doing so might
have unintended consequences.\82\ We agree and the amendments we are
adopting today add the safe harbor to the issuer best-price rule at
Rule 13e-4(f)(12).
---------------------------------------------------------------------------

    \80\ See, e.g., letters from ABA; Dechert; Gonzalez; Intel; Law
Firm Group; NYCBA; NYSBA; Perkins Coie LLP (``Perkins''); SCSGP;
Shearman; and SIA.
    \81\ See, e.g., letters from ABA; Intel; and SCSGP.
    \82\ See, e.g., Law Firm Group; SCSGP; and SIA.
---------------------------------------------------------------------------

 III. Paperwork Reduction Act

    We have not prepared a submission to the Office of Management and
Budget under the Paperwork Reduction Act of 1995 because the proposals
do not impose any new recordkeeping or information collection
requirements, or other collections of information requiring the
approval of the Office of Management and Budget.

IV. Cost-Benefit Analysis

A. Background

    On December 16, 2005, we proposed amendments to the best-price rule
to clarify that the best-price rule applies only with respect to the
consideration offered and paid for securities tendered in a tender
offer. We also proposed that the rule exclude employment compensation,
severance and other employee benefit arrangements between subject
company employees or directors and the subject company or bidder from
the application of the best-price rule, as long as the compensatory
arrangements meet certain requirements. Finally, we proposed an
accompanying safe harbor to the exemption for those compensatory
arrangements that were approved by a compensation committee (or a
committee performing similar functions) of either the bidder or the
subject company, depending upon who was a party to the arrangement.
    We are adopting the amendments substantially as proposed. First, we
are adopting the amendment to the language of the best-price rule that
clarifies that the provisions of the rule apply only with respect to
the consideration offered and paid for securities tendered in a tender
offer. We also are amending the third-party and

issuer tender offer best-price rules to provide that any consideration
that is offered and paid according to employment compensation,
severance or other employee benefit arrangements entered into with
security holders of the subject company that meet certain requirements
will not be prohibited by the rules. Finally, we are amending the
third-party and issuer tender offer best-price rules to provide a safe
harbor provision so that arrangements that are approved by the
independent directors of either the subject company's or the bidder's
board of directors, as applicable, will not be prohibited by the rules.
    We expect that these amendments will make it clear that the best-
price rule was not intended to capture compensatory arrangements. The
amendments also are intended to alleviate the reluctance bidders and
subject companies have expressed in planning and structuring
transactions as tender offers due to differing judicial interpretations
of the best-price rule that have been rendered by courts to date. We
also want to diminish a regulatory disincentive against structuring
transactions as tender offers, as compared to statutory mergers, to
which the best-price rule does not apply. We recognize that the
amendments may create costs and benefits to parties engaging in tender
offers and to the economy as a whole. We have identified those costs
and benefits below.

B. Benefits

    The amendments to the rule will benefit investors most directly
through their intended effect of lowering the costs of tender offer
transactions that arise from the risk of litigation under the current
case law. Bidders and subject companies are expected to respond with
increased tender offer activity as a result of choosing to structure an
acquisition as a tender offer, rather than a statutory merger. Some
benefits from lower litigation-related costs are expected to arise in
each instance, depending on the cost of the litigation risk that would
be borne otherwise. This cost would likely continue to persist as a
regulatory obstacle in the absence of the amendment; such cost would
deter the use of tender offers relative to statutory mergers and the
conduct of acquisitions as tender offers that would not occur
otherwise. The magnitude of the benefit from the amendment will thus
partly depend on the magnitude of the substitution into tender offers
and any tender offer-related increase in acquisition activity
generally. In the Proposing Release, we requested comment on the
magnitude of these and other potential benefits of the proposed
amendments. We received no direct response to this request. Commenters
also did not indicate that the judicial interpretations of the best-
price rule were preventing potential acquisitions from proceeding in
any form. Commenters did indicate that the judicial interpretations of
the best-price rule were causing transactions to proceed as statutory
mergers, as opposed to tender offers. Accordingly, we do not expect the
amended best-price rule to materially impact the number of transactions
that occur overall, but rather the form in which the transaction takes
place.\83\
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    \83\ Under the assumption that the amendments do not have a
material impact on the number of overall acquisitions conducted
annually, an estimate of the potential increase in tender offers can
be obtained from an estimate of the potential decline in statutory
mergers, expressed as a fraction of the total. For example, if 5% of
the transactions that would otherwise be conducted as statutory
mergers will now be conducted as tender offers, an estimated 35.7%
increase in the number of tender offers might result annually (based
upon the number of statutory mergers and tender offers that have
taken place over the last 10 years).
---------------------------------------------------------------------------

    The comments that we received on the proposed amendments are
consistent with the view that benefits would occur through a reduction
in the litigation-related cost of conducting tender offers, leading to
an increased incentive to undertake tender offers. As to the regulatory
incentives to conduct statutory mergers as compared to tender offers,
one commenter indicated that the economic efficiencies of using tender
offers, as compared to mergers, have been lost because of the potential
liability associated with conducting a tender offer that may be subject
to a lawsuit where a compensatory arrangement is involved.\84\ This
commenter endorsed the objectives of the amendments to the best-price
rule. Several commenters also indicated generally that the amendments
would meet the objectives of the best-price rule.\85\ Others expressed
their support by indicating that the amendments would provide clarity
and certainty to participants in tender offers, particularly regarding
the perceived litigation risk that has been present in the best-price
rule.\86\ Almost all of the commenters suggested additional changes to
the amendments, particularly with respect to the exemption and safe
harbor from the best-price rule.
---------------------------------------------------------------------------

    \84\ See, e.g., letter from Law Firm Group (citing the benefit
of the relatively shorter amount of time that it takes to conduct a
tender offer (30 days) as compared to mergers (90-120 days)).
Similar support for the fact that tender offers, as compared to
mergers, provide the benefit of time can be found in the letters
from ABA, Dechert and SIA. Other benefits of tender offers include
the fact that management support is not necessary for the bidder to
acquire the target company (i.e., individuals make their own
investment decision) and control by a bidder may be obtained without
necessarily purchasing all of the outstanding securities of the
target company. See Eleanor M. Fox and Byron E. Fox, Corporate
Acquisitions and Mergers (2006 ed.) at 5E-6.
    \85\ See, e.g., letters from ABA and NYCBA.
    \86\ See, e.g., letters from Dechert; SCSGP; and Shearman.
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    The litigation-related costs that the amendment would eliminate
stem from diverging court interpretations of the best-price rule that
have emerged in the past decade. The best-price rule has been
interpreted as requiring, in some courts, that the amounts paid
pursuant to compensation arrangements be included as part of the
consideration paid to security holders in the tender offer either
because the compensation was offered or paid during a tender offer and,
in other courts, because the compensatory arrangement constituted an
``integral part'' of the tender offer. These interpretations have made
parties reluctant to structure acquisitions as tender offers for fear
of exposure to potential liability. We believe it is appropriate to
amend the best-price rule to clarify this point now, rather than to
wait and see how the courts might interpret the rule in the future.
These amendments are thus intended to eliminate a regulatory obstacle
to the use of tender offers as a viable alternative to statutory
mergers for parties who wish to conduct an acquisition. We believe that
the interests of security holders are better served when all
acquisition structures are viable options.\87\
    We recognize that the application of our exemption and safe harbor
is limited to compensatory arrangements. Parties who wish to enter into
arrangements that are not compensatory in nature may continue to be
reluctant to engage in tender offers. In these situations, parties may
choose to engage in a statutory merger, as opposed to a tender offer,
to accomplish an acquisition because the litigation risk continues to
be too great. While we do not intend for arrangements entered into with
security holders that are not compensatory to be presumed to be in
violation of the best-price rule,\88\ we also believe that it is
appropriate to limit our exemption and safe harbor to arrangements that
are compensatory in nature.
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    \87\ A disincentive against structuring transactions as tender
offers has potential negative consequences to acquirors and security
holders. See prior note 84 for a discussion of some of the benefits
of tender offers.
    \88\ The rule, as adopted, includes the proposed instruction to
this effect.

---------------------------------------------------------------------------

    Depending upon the jurisdiction in which a best-price rule claim
has been brought, the potential costs to bidders as a result of certain
of the judicial interpretations of the best-price rule have been
substantial. An intended benefit of our amendments will be to assist
parties in reducing their exposure to potential costs arising from
allegations of best-price rule violations. These potential costs
include, among others, the cost of litigation to defend against alleged
violations of the best-price rule.\89\ We believe bidders will be less
likely to be subject to a claim because our amendments provide an
exception to the best-price rule for compensatory arrangements without
the loss of the basic protections that the rule is designed to provide
to security holders.
---------------------------------------------------------------------------

    \89\ In sixteen published judicial opinions over the last ten
years, approximately half were decided in favor of the plaintiff
with the other half being decided in favor of the defendant.
Extrapolating from these opinions, we assume an average of three
claims per year are brought, that one claim is settled per year,
that the costs of defending all three actions would total no more
than $10 million per year (based on the staff's estimate of
attorney's fees), and that the costs associated with settling one
such action would be $15 million (based on historical data). See,
e.g., Technology Briefing Software: Computer Associates Ordered to
Pay $11 Million, The N.Y. Times, Sept. 6, 2002 at C6 and $18.25
Million Settlement Approved in Litigation Resulting From Take-Over,
Securities Class Action Reporter, March 15, 2006 at 17. Based on
these assumptions, the annual cost savings would be approximately
$25 million.
---------------------------------------------------------------------------

C. Costs

    The best-price rule prohibits certain conduct in connection with a
tender offer. In this regard, the amendments to the best-price rule do
not add any new requirements. Rather, the amendments clarify that
certain conduct is not prohibited by the rule and add means by which
parties can comply, via an exemption or a safe harbor provision, with
the rule. Continued compliance with the best-price rule can be achieved
in the same manner and by the same persons responsible for compliance
under the rule in effect before our amendments today. Reliance upon the
exemption or the safe harbor, however, may entail additional costs. We
discuss these additional costs below. We do not believe these costs are
substantial.
    The amendments seek to modify the language of the existing best-
price rule to remove the reference to ``during.'' Some commenters have
indicated that the effect of this change would be to expand the
potential timeframe in which litigants could argue that a best-price
rule violation has occurred.\90\ If the commenter's concerns were
realized, it is possible claims that the best-price rule has been
violated might continue to be brought, only under a different,
potentially more expansive, theory. We do not believe that a temporal
limitation in the best-price rule is appropriate because such a strict
timeframe might lend itself to abuse. Further, we believe that the
amendments providing for the exemption and the safe harbor to the best-
price rule provide sufficient certainty to parties desiring to engage
in a tender offer such that any concern regarding continued litigation
under the best-price rule as a result of the removal of ``during'' is
reduced.
---------------------------------------------------------------------------

    \90\ See, e.g., letters from ABA; Dechert; and Law Firm Group.
---------------------------------------------------------------------------

    The exemption and the safe harbor adopted today provide that,
presuming certain requirements are met, consideration paid pursuant to
certain arrangements will not be prohibited by the best-price rules.
Parties may be able to challenge whether the provisions of the
exemption or the safe harbor have been met. Complying with the
conditions of the exemption and safe harbor, therefore, may be a cost
of complying with the best-price rule.
    To the extent parties choose to rely upon the safe harbor, bidders
and/or subject companies, in the case of third-party tender offers, or
issuers and/or affiliates, in the case of issuer tender offers, may
need to take extra steps--such as obtaining approval of the
compensatory arrangement by directors--to comply with the safe harbor.
However, most bidders, issuers, affiliates and subject companies are
already required to have a compensation committee or a committee
performing similar functions, so the cost of forming, organizing and
convening a committee should be a cost that already is being incurred
by most bidders, issuers, affiliates or subject companies. Companies
without such a committee will incur a cost, most likely in the form of
legal fees.
    Further, bidders, issuers, affiliates or subject companies may
already have their compensation committee or a committee performing
similar functions approve specific employment compensation, severance
or other employee benefit arrangements in the ordinary course of
performing its duties. These bidders, issuers, affiliates or subject
companies would not incur additional costs to comply with the amended
best-price rule and, even if they are not already engaging their
committees to perform this function, the costs should be limited to the
time and expense associated with reviewing the specific arrangement and
holding a meeting of the committee. With respect to subject company
approval, it is possible that subject company directors may already be
reviewing arrangements executed in connection with negotiated
acquisitions \91\ in order to meet their State law fiduciary duties
when considering and determining whether to recommend the transaction
to the security holders of the subject company.\92\
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    \91\ See, e.g., Item 1012(a) of Regulation M-A (17 CFR
229.1012(a)), which requires a statement as to whether the subject
company is advising security holders in a third-party tender offer
to accept or reject the tender offer or to take other action.
    \92\ See, e.g., letters from ABA and SIA.
---------------------------------------------------------------------------

    To the extent parties choose to rely upon the exemption, we
recognize there may be similar costs associated with adhering to the
exemption. While we have not dictated the manner or method by which we
expect the parties to meet the requirements of the exemption, we expect
that, at the very least, it will take the parties time to make a
determination as to whether the compensatory arrangement meets the
requirements of the exemption. The time it takes for the parties to
make this determination is a cost but we believe that the cost should
be minimal.
    Under the amendments, some compensatory arrangements may qualify
for the safe harbor provision with approval by a committee of the
bidder's board. Since the bidder's board does not typically owe a
fiduciary duty to security holders of the subject company, the
amendments could impose costs on security holders of the subject
company by making it possible for transactions to occur without
safeguards associated with directors' fiduciary duties. However, such
costs are likely to be limited because they would be dependent upon the
ability of security holders of the subject company to anticipate such
transactions and contract in advance of the transaction with
management, employees, or other security holders of the subject
company. In addition, such costs may be limited to the extent that
other rights of action, such as litigation in State courts, exist for
security holders in the subject company.
    Finally, the rule may introduce costs associated with new
litigation risks. It is possible that the amended best-price rule will
simply shift the litigation to State law; security holders may claim
that directors have breached their fiduciary duties in approving the
compensatory arrangement.\93\ In

addition, or alternatively, they may claim that the provisions of the
exemption or safe harbor were not satisfied. Whether a successful claim
can be made against members of the board of directors for breach of
their fiduciary duties or for failure to satisfy the provisions of the
exemption or safe harbor is uncertain. As a result, the potential costs
associated with identifying the alleged illegal behavior and bringing a
claim of liability could be imposed on potential plaintiffs. We note
that commenters, when asked about shifting litigation to State law
issues, did not object, so long as no remedy would be available under
the best-price rule.\94\
---------------------------------------------------------------------------

    \93\ We requested comment about whether this potential outcome
should impact the structure of the amendments to the best-price
rule. Certain commenters noted that the fiduciary duties owed by the
bidder's directors to the bidder's security holders would guide
their actions and, therefore, provide some level of protection. See,
e.g., the ABA letter.
    \94\ See, e.g., letters from Law Firm Group and NYCBA.
---------------------------------------------------------------------------

D. Small Business Issuers

    Although the amended rules apply to small business issuers, we do
not anticipate any disproportionate impact on small business issuers.
Like other issuers, small business issuers should incur relatively
minor compliance costs, and should find it unnecessary to hire extra
personnel. It is possible that the safe harbor, for the reasons
mentioned above, will cause small business issuers in particular to
incur some cost due to the establishment of an appropriate approving
body and the time and expense of reviewing the compensatory arrangement
and convening a meeting. This is because small business issuers are
less likely to have the pre-existing infrastructure in place. But we do
not believe that these costs are unreasonable in order to ensure that
the purpose of the best-price rule is met. Further, the exemption and
safe harbor available under the amended rules are non-exclusive methods
of complying with the best-price rule so any additional costs incurred
are voluntary.
    The issues of equal treatment among security holders in the context
of tender offers affect small business issuers as much as they affect
larger issuers. Thus, we do not believe that applying the amendments to
small business issuers would be inconsistent with the policies
underlying the small business issuer disclosure system.

V. Consideration of Burden on Competition and Promotion of Efficiency,
Competition and Capital Formation

    Section 3(f) of the Exchange Act \95\ and Section 2(c) of the
Investment Company Act \96\ require the Commission, whenever it engages
in rulemaking, to consider or determine if an action is necessary or
appropriate in the public interest and to consider whether the action
would promote efficiency, competition, and capital formation. In
addition, Section 23(a)(2) of the Exchange Act requires the Commission,
when making rules under the Exchange Act, to consider the impact such
rules would have on competition.\97\ Exchange Act Section 23(a)(2)
prohibits the Commission from adopting any rule that would impose a
burden on competition not necessary or appropriate in furtherance of
the purposes of the Exchange Act.
---------------------------------------------------------------------------

    \95\ 15 U.S.C. 78c(f).
    \96\ 15 U.S.C. 80a-2(c).
    \97\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    The amendments to the best-price rule are intended to improve
market efficiency by providing greater clarity to bidders, subject
companies and security holders as to the situations in which compliance
with the best-price rule has been met. Courts rendering decisions
arising from allegations of a violation of the best-price rule have
differed in their approach to resolving these claims and the resulting
uncertainty has left parties who want to engage in a tender offer
unsure about how to proceed. The amendments are intended to clarify the
application of the best-price rule where employment compensation,
severance or other employee benefit arrangements have been or are
expected to be entered into in contemplation of an acquisition of
securities that is structured as a tender offer. Specifically, the
amendments provide for an exemption and a safe harbor provision from
the best-price rule for certain arrangements that either meet certain
requirements or that are approved by independent directors. The
resulting clarity should make the determination as to whether to engage
in a tender offer a more viable one for bidders, issuers, affiliates
and subject companies, resulting in a positive effect upon market
efficiency.
    As to the impact on competition, the amendments to the best-price
rule are intended to have a positive impact on competition among the
alternative mechanisms for completing acquisitions. Bidders desiring to
acquire another entity by conducting a tender offer would have the
benefit of the amendments to the best-price rule that delineate the
instances in which the negotiation or execution of employment
compensation, severance or other employee benefit arrangements would
not run afoul of the requirements of the best-price rule. Previously,
the existence of compensatory arrangements might have caused parties to
hesitate before engaging in a tender offer in order to weigh the
potential benefits of the acquisition carefully against the potential
for liability for a best-price rule violation. Ultimately, the parties
may have declined to pursue a tender offer as an alternative to a
statutory merger in completing the transaction. The amendments,
however, are designed to alleviate the need to hesitate and, therefore,
increase competition between these alternative acquisition mechanisms.
Having more acquisition structures available to parties contemplating
an acquisition is a positive effect of the rule upon competition.
    We acknowledge the possibility that, because bidders, issuers,
affiliates and subject companies may desire to take advantage of the
safe harbor to the best-price rule where arrangements approved by an
appropriate approving body of directors meet the requirements of the
safe harbor and therefore consideration paid pursuant to such
arrangement are not prohibited by the rule, those bidders, issuers,
affiliates and subject companies may need to reevaluate whether they
have an approving body and adequate policies and procedures in place to
take advantage of the safe harbor. Such an evaluation could place a
limitation on the ability of the parties to move quickly and
efficiently in pursuing an acquisition, which could diminish the
beneficial effect on market efficiency and competition. We believe,
however, that the approval of directors is an important step in the
availability of the safe harbor and, therefore, any increased efforts
or costs that need to be expended to comply with the safe harbor are
appropriate to provide equal treatment of security holders. Further, we
believe that we have provided sufficient flexibility in the operation
of the safe harbor to ease this potential impact. We also have provided
an exemption that does not require director approval.
    The amendments should promote capital formation, as they are
intended to significantly reduce the uncertainty caused by the varying
judicial interpretations of the best-price rule. The clarifications to
the best-price rule are expected to have the effect of alleviating
regulatory disincentives to structuring an acquisition of securities as
a tender offer, as compared to a statutory merger, where the best-price
rule is inapplicable. It is difficult to estimate the magnitude of
these effects, if or when they would occur, and the extent to which
they will be offset by the costs of the amendments, nor have we
received comments on their likely magnitude.

    We requested comment on these matters in the Proposing Release. We
received no comments in response to these specific requests, but some
comments touched on these issues. Commenters generally expressed
support for the proposal to amend the best-price rule, given the
structural impediments to the use of tender offers as a result of the
case law that has developed.\98\ They generally believed that the
amendments would provide clarity and greater certainty to the tender
offer process.\99\
---------------------------------------------------------------------------

    \98\ See, e.g., letter from Law Firm Group.
    \99\ See, e.g., letters from ABA and NYCBA.
---------------------------------------------------------------------------

VI. Final Regulatory Flexibility Act Analysis

    This Final Regulatory Flexibility Act Analysis has been prepared in
accordance with the Regulatory Flexibility Act. This analysis relates
to proposed revisions to the tender offer best-price rule under the
Exchange Act to clarify that the rule applies only with respect to the
consideration offered and paid for securities tendered in an issuer or
third-party tender offer and should not apply to consideration offered
and paid according to employment compensation, severance or other
employee benefit arrangements entered into with security holders of the
subject company. The amendments provide an exemption and safe harbor
from the strictures of the best-price rule for arrangements that meet
certain criteria or that are approved by independent directors,
respectively.

A. Reasons for the Proposed Amendments

    The best-price rule was adopted originally to provide fair and
equal treatment of all security holders of the class of securities that
are the subject of a tender offer by requiring that the consideration
paid to any security holder is the highest paid to any other security
holder in the tender offer. We proposed amendments to the best-price
rule on December 16, 2005. The amendments we adopt today are, in most
respects, consistent with the proposed amendments but include certain
revisions made in response to concerns raised by commenters. The
objectives of the changes are as follows:
    First, we want to make it clear that compensatory arrangements
between security holders and the subject company or bidder are not
captured by the application of the best-price rule. We believe that
amounts paid pursuant to employment compensation, severance or other
employee benefit arrangements should not be included in the
consideration paid for tendered securities. These payments are made for
a different purpose, to provide compensation in exchange for services
rendered or in connection with severance or similar events.
    Second, since the adoption of the best-price rule, it has been the
basis for litigation brought in connection with tender offers in which
it is claimed that the best-price rule was violated as a result of the
bidder in a tender offer entering into new, or adopting the subject
company's pre-existing, employment compensation, severance or other
employee benefit arrangements with security holders of the subject
company. In the process of resolving these claims, courts have
interpreted the best-price rule in different ways. We are adopting
changes to the rule to alleviate the uncertainty that the various
interpretations of the best-price rule by courts have produced.
    Finally, we want to reduce the regulatory disincentive to structure
acquisitions of securities in the form of tender offers, as compared to
statutory mergers, to which the best-price rule does not apply. We
understand that the prospect of the uncertain application of the best-
price rule that has arisen as a result of the case law has made parties
averse to the use of tender offers as a means to accomplish
extraordinary transactions, and we believe the amendments to the rule
will reduce this aversion to the use of tender offers.

B. Significant Issues Raised by Public Comment

    An Initial Regulatory Flexibility Analysis was prepared in
accordance with the Regulatory Flexibility Act in connection with the
Proposing Release, and we solicited comments on any impact the proposed
changes might have on any aspect of our IRFA. We did not receive any
public comments that responded directly to the IRFA or that dealt
directly with the proposal's impact on small business issuers.

C. Small Entities Subject to the Proposed Rules

    The changes to the best-price rule will affect issuers that are
small businesses. Exchange Act Rule 0-10(a) \100\ defines an issuer,
other than an investment company, to be a ``small business'' or ``small
organization'' for purposes of the Regulatory Flexibility Act if it had
total assets of $5 million or less on the last day of its most recent
fiscal year. An investment company is considered to be a ``small
business'' or ``small organization'' if it, together with other
investment companies in the same group of related investment companies,
has net assets of $50 million or less as of the end of its most recent
fiscal year.\101\ These are the types of entities that we refer to as
small entities in this discussion. We estimate that there are
approximately 2,500 public issuers, other than investment companies,
that may be considered small businesses. We estimate that there are
approximately 230 investment companies that may be considered small
businesses. Of these 230 investment companies that may be considered
small businesses, we estimate that 94 are closed-end investment
companies, including closed-end investment companies electing to be
treated as business development companies, as defined in Section
2(a)(48) of the Investment Company Act,\102\ that may be affected by
the proposed amendments.
---------------------------------------------------------------------------

    \100\ 17 CFR 240.0-10(a).
    \101\ 17 CFR 270.0-10.
    \102\ 15 U.S.C. 80a-2(a)(48).
---------------------------------------------------------------------------

    The Commission received a total of 412 issuer and 141 third-party
tender offer schedules in its 2006 fiscal year. We estimate that half
of the 14 issuer tender offer schedules were filed by subject companies
that were small business issuers and the other half were filed by
investment companies that are small businesses as that term is defined
for purposes of the Regulatory Flexibility Act.\103\ We further
estimate that 18 of the third-party tender offer schedules received by
the Commission in its 2006 fiscal year were tender offers where the
target companies were small business issuers.\104\ We note that our use
of small business issuers is a broader category of issuers than small
entities. Therefore, we believe that the amendments are likely to
affect a limited number of small business issuers and, for the same
reason, an even smaller number of small entities that are reporting
companies.
---------------------------------------------------------------------------

    \103\ A small business issuer is defined as a company that,
among other things, has revenues of less than $25,000,000. See
Securities Act Rule 405 (17 CFR 230.405).
    \104\ No investment company that is a small business, as that
term is defined for purposes of the Regulatory Flexibility Act,
conducted a third-part tender offer in the 2006 fiscal year of the
Commission.
---------------------------------------------------------------------------

    We requested comment on the number of small entities that would be
impacted by our proposals, including any available empirical data. We
received no responses to our request.

D. Reporting, Recordkeeping and Other Compliance Requirements

    The amendments to the best-price rule are expected to result in
relatively small costs to all bidders and subject companies, large or
small. Even before

our proposed amendments, the best-price rule required bidders to pay
any security holder pursuant to the tender offer the highest
consideration paid to any other security holder for securities tendered
in the tender offer. Therefore, the changes to the best-price rule
should not impose significant additional costs, if any, and should not
require any specialized professional skills. The task of complying with
the changes could be performed by the same person or group of persons
responsible for compliance under the rules that were in effect before
today's amendments at a minimal incremental cost.
    We understand that the exemption and safe harbor from the best-
price rule may impose extra steps on the bidder and/or subject company
to comply with the exemption and safe harbor, and such compliance could
entail new costs. For example, with respect to the safe harbor for
compensatory arrangements that are approved by the directors of the
bidder or subject company, most bidders and subject companies already
are required to have a compensation committee or a committee performing
similar functions, so the cost of forming and organizing a committee
should be a cost that already is being incurred by the bidder or
subject company. This is particularly the case where the bidder or
subject company either has a class of securities listed on a registered
national securities exchange or on an automated inter-dealer quotation
system of a national securities association because the listing
standards of each generally impose certain requirements regarding the
formation and composition of the members of the board of directors and
its committees.
    Small entities or organizations may be less likely to have a class
of securities listed on a registered national securities exchange or on
an automated inter-dealer quotation system of a national securities
association. As a result, it is possible that small entities or
organizations will be less likely to have the pre-existing
infrastructure in place for a compensation committee or a committee
performing similar functions to approve employment compensation,
severance or other employee benefit arrangements. Such small entities
or organizations likely will incur additional costs to take advantage
of this safe harbor. The cost, however, should be limited to the
expense of organizing a committee, reviewing the specific arrangement
and holding a meeting of the committee. We believe these costs are
appropriate to promote equal treatment of security holders in the
application of the best-price rule.
    With respect to the exemption for compensatory arrangements that
meet certain requirements, all bidders or subject companies that choose
to avail themselves of this exemption will need to make a determination
as to whether the arrangement at issue meets the requirements. This
determination likely will entail additional costs, even if only in the
form of the additional time it will take to make this determination.
However, the amendments do not mandate any particular method or
procedure that a bidder or subject company must follow in making this
determination.
    Both the exemption and the safe harbor, however, are optional
provisions and serve as non-exclusive methods to ensure compliance with
the best-price rule. This means that bidders and subject companies that
are small entities or organizations will not be required to take
advantage of the provision, so any additional expenses that may be
incurred, if any, would be optional on the part of the small entity or
organization. We acknowledge, however, that the cost of foregoing the
application of the exemption or safe harbor might be significant if
there is a risk of potential liability where a compensatory arrangement
is found to violate the best-price rule and the cost of that violation
is expected to be greater than the cost of complying with the exemption
or safe harbor. In that circumstance, entities would be likely to
structure transactions as statutory mergers.

E. Agency Action To Minimize Effect on Small Entities

    The Regulatory Flexibility Act directs us to consider significant
alternatives that would accomplish the stated objectives while
minimizing any significant adverse impact on small entities or
organizations. In connection with the proposals, we considered the
following alternatives:
    1. Establishing different compliance or reporting requirements or
timetables that take into account the resources of small entities;
    2. The clarification, consolidation, or simplification of the
compliance or reporting requirements for small entities;
    3. The use of performance rather than design standards; and
    4. An exemption for small entities from coverage of the best-price
rule, or any part thereof, for small entities.
    We have considered a variety of reforms to achieve our regulatory
objectives. However, we believe that the original intent of the best-
price rule, to require equal treatment of security holders, would not
be served by a best-price rule that applied only to bidders and subject
companies of a certain size. Further, we believe that uniform rules
applicable to all bidders and subject companies, regardless of size,
are necessary to alleviate the uncertainty that the parties to tender
offers face. Therefore, the establishment of different requirements for
small entities would not be practicable, nor would it be in the public
interest. For similar reasons, the clarification, consolidation or
simplification of the compliance and reporting requirements for small
entities also would not be practicable.
    Although the best-price rule generally employs performance
standards rather than design standards, the amendments to the rule
would implement certain design standards in order to clarify that the
rule should not apply where employment compensation, severance or other
employee benefit arrangements are made or will be made or have been
granted or will be granted, as long as they have been approved by the
directors of an appropriate approving body of either the bidder or the
subject company. We intend for the implementation of design standards,
in this case, to be more useful to bidders and subject companies
because the circumstances in which the best-price rule would likely be
inapplicable will be delineated clearly. This should provide greater
certainty in the application of the rule and the enforcement of the
application of the rule. Therefore, implementing design rather than
performance standards in the application of the rule appears to be more
effective in promoting compliance with the rule, as amended.
    As discussed above, most bidders and subject companies that engage
in tender offers and are subject to the best-price rule are not small
entities or organizations, as defined for purposes of the Regulatory
Flexibility Act. Further, where small entities are bidders and/or
subject companies in the tender offer, the proposed changes to the
best-price rule, in general, and the invocation of the exemption or
safe harbor, in particular, impose minimal additional costs or burdens.
Therefore, exempting small entities from the best-price rule altogether
would not be justified in this context.

VII. Statutory Basis

    The amendments to the best-price rule are adopted pursuant to
Sections 3(b), 13, 14, 23(a) and 36 of the Exchange Act, as amended,
and Section 23(c) of the Investment Company Act, as amended. The
amendments to the Rules of Practice are adopted pursuant to

Section 19 of the Securities Act, as amended and Sections 4A, 19 and 23
of the Exchange Act, as amended.

VIII. Text of the Rules and Amendments

List of Subjects

17 CFR Part 200

    Administrative practice and procedure; Authority delegations
(Government Agencies).

17 CFR Part 240

    Reporting and recordkeeping requirements, Securities.

0
In accordance with the foregoing, the Securities and Exchange
Commission amends Title 17, chapter II of the Code of Federal
Regulations as follows:

PART 200--ORGANIZATION; CONDUCT AND ETHICS; AND INFORMATION AND
REQUESTS

0
1. The general authority citation for part 200, subpart A is revised to
read as follows:

    Authority: 15 U.S.C. 77o, 77s, 77sss, 78d, 78d-1, 78d-2, 78w,
78ll(d), 78mm, 80a-37, 80b-11, and 7202, unless otherwise noted.
* * * * *

0
2. Amend Sec.  200.30-1 (e)(11) by removing the phrase ``pursuant to
Rule 14d-10(e) (Sec.  240.14d-10(e) of this chapter)'' and by adding
the phrase ``pursuant to Rule 14d-10(f) (Sec.  240.14d-10(f) of this
chapter)'' in its place.

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934

0
3. The general authority citation for part 240 is revised to read as
follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i,
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5,
78w, 78x, 78ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4,
80b-11, and 7201 et seq.; and 18 U.S.C. 1350, unless otherwise
noted.
* * * * *

0
4. Amend Sec.  240.13e-4 by revising paragraph (f)(8)(ii),
redesignating paragraph (f)(12) as paragraph (f)(13) and adding new
paragraph (f)(12) to read as follows:

Sec.  240.13e-4  Tender offers by issuers.

* * * * *
    (f) * * *
    (8) * * *
    (ii) The consideration paid to any security holder for securities
tendered in the tender offer is the highest consideration paid to any
other security holder for securities tendered in the tender offer.
* * * * *
    (12)(i) Paragraph (f)(8)(ii) of this section shall not prohibit the
negotiation, execution or amendment of an employment compensation,
severance or other employee benefit arrangement, or payments made or to
be made or benefits granted or to be granted according to such an
arrangement, with respect to any security holder of the issuer, where
the amount payable under the arrangement:
    (A) Is being paid or granted as compensation for past services
performed, future services to be performed, or future services to be
refrained from performing, by the security holder (and matters
incidental thereto); and
    (B) Is not calculated based on the number of securities tendered or
to be tendered in the tender offer by the security holder.
    (ii) The provisions of paragraph (f)(12)(i) of this section shall
be satisfied and, therefore, pursuant to this non-exclusive safe
harbor, the negotiation, execution or amendment of an arrangement and
any payments made or to be made or benefits granted or to be granted
according to that arrangement shall not be prohibited by paragraph
(f)(8)(ii) of this section, if the arrangement is approved as an
employment compensation, severance or other employee benefit
arrangement solely by independent directors as follows:
    (A) The compensation committee or a committee of the board of
directors that performs functions similar to a compensation committee
of the issuer approves the arrangement, regardless of whether the
issuer is a party to the arrangement, or, if an affiliate is a party to
the arrangement, the compensation committee or a committee of the board
of directors that performs functions similar to a compensation
committee of the affiliate approves the arrangement; or
    (B) If the issuer's or affiliate's board of directors, as
applicable, does not have a compensation committee or a committee of
the board of directors that performs functions similar to a
compensation committee or if none of the members of the issuer's or
affiliate's compensation committee or committee that performs functions
similar to a compensation committee is independent, a special committee
of the board of directors formed to consider and approve the
arrangement approves the arrangement; or
    (C) If the issuer or affiliate, as applicable, is a foreign private
issuer, any or all members of the board of directors or any committee
of the board of directors authorized to approve employment
compensation, severance or other employee benefit arrangements under
the laws or regulations of the home country approves the arrangement.
    Instructions to paragraph (f)(12)(ii): For purposes of determining
whether the members of the committee approving an arrangement in
accordance with the provisions of paragraph (f)(12)(ii) of this section
are independent, the following provisions shall apply:
    1. If the issuer or affiliate, as applicable, is a listed issuer
(as defined in Sec.  240.10A-3 of this chapter) whose securities are
listed either on a national securities exchange registered pursuant to
section 6(a) of the Exchange Act (15 U.S.C. 78f(a)) or in an inter-
dealer quotation system of a national securities association registered
pursuant to section 15A(a) of the Exchange Act (15 U.S.C. 78o-3(a))
that has independence requirements for compensation committee members
that have been approved by the Commission (as those requirements may be
modified or supplemented), apply the issuer's or affiliate's definition
of independence that it uses for determining that the members of the
compensation committee are independent in compliance with the listing
standards applicable to compensation committee members of the listed
issuer.
    2. If the issuer or affiliate, as applicable, is not a listed
issuer (as defined in Sec.  240.10A-3 of this chapter), apply the
independence requirements for compensation committee members of a
national securities exchange registered pursuant to section 6(a) of the
Exchange Act (15 U.S.C. 78f(a)) or an inter-dealer quotation system of
a national securities association registered pursuant to section 15A(a)
of the Exchange Act (15 U.S.C. 78o-3(a)) that have been approved by the
Commission (as those requirements may be modified or supplemented).
Whatever definition the issuer or affiliate, as applicable, chooses, it
must apply that definition consistently to all members of the committee
approving the arrangement.
    3. Notwithstanding Instructions 1 and 2 to paragraph (f)(12)(ii),
if the issuer or affiliate, as applicable, is a closed-end investment
company registered under the Investment Company Act of 1940, a director
is considered to be independent if the director is not, other than in
his or her capacity as a member of the board of directors or any board
committee, an ``interested person'' of the investment company, as
defined in section 2(a)(19)

of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(19)).
    4. If the issuer or affiliate, as applicable, is a foreign private
issuer, apply either the independence standards set forth in
Instructions 1 and 2 to paragraph (f)(12)(ii) or the independence
requirements of the laws, regulations, codes or standards of the home
country of the issuer or affiliate, as applicable, for members of the
board of directors or the committee of the board of directors approving
the arrangement.
    5. A determination by the issuer's or affiliate's board of
directors, as applicable, that the members of the board of directors or
the committee of the board of directors, as applicable, approving an
arrangement in accordance with the provisions of paragraph (f)(12)(ii)
are independent in accordance with the provisions of this instruction
to paragraph (f)(12)(ii) shall satisfy the independence requirements of
paragraph (f)(12)(ii).
    Instruction to paragraph (f)(12): The fact that the provisions of
paragraph (f)(12) of this section extend only to employment
compensation, severance and other employee benefit arrangements and not
to other arrangements, such as commercial arrangements, does not raise
any inference that a payment under any such other arrangement
constitutes consideration paid for securities in a tender offer.
* * * * *

0
5. Amend Sec.  240.14d-10 by revising paragraph (a)(2), redesignating
paragraphs (d) and (e) as paragraphs (e) and (f) and adding new
paragraph (d) to read as follows:

Sec.  240.14d-10  Equal treatment of security holders.

    (a) * * *
    (2) The consideration paid to any security holder for securities
tendered in the tender offer is the highest consideration paid to any
other security holder for securities tendered in the tender offer.
* * * * *
    (d)(1) Paragraph (a)(2) of this section shall not prohibit the
negotiation, execution or amendment of an employment compensation,
severance or other employee benefit arrangement, or payments made or to
be made or benefits granted or to be granted according to such an
arrangement, with respect to any security holder of the subject
company, where the amount payable under the arrangement:
    (i) Is being paid or granted as compensation for past services
performed, future services to be performed, or future services to be
refrained from performing, by the security holder (and matters
incidental thereto); and
    (ii) Is not calculated based on the number of securities tendered
or to be tendered in the tender offer by the security holder.
    (2) The provisions of paragraph (d)(1) of this section shall be
satisfied and, therefore, pursuant to this non-exclusive safe harbor,
the negotiation, execution or amendment of an arrangement and any
payments made or to be made or benefits granted or to be granted
according to that arrangement shall not be prohibited by paragraph
(a)(2) of this section, if the arrangement is approved as an employment
compensation, severance or other employee benefit arrangement solely by
independent directors as follows:
    (i) The compensation committee or a committee of the board of
directors that performs functions similar to a compensation committee
of the subject company approves the arrangement, regardless of whether
the subject company is a party to the arrangement, or, if the bidder is
a party to the arrangement, the compensation committee or a committee
of the board of directors that performs functions similar to a
compensation committee of the bidder approves the arrangement; or
    (ii) If the subject company's or bidder's board of directors, as
applicable, does not have a compensation committee or a committee of
the board of directors that performs functions similar to a
compensation committee or if none of the members of the subject
company's or bidder's compensation committee or committee that performs
functions similar to a compensation committee is independent, a special
committee of the board of directors formed to consider and approve the
arrangement approves the arrangement; or
    (iii) If the subject company or bidder, as applicable, is a foreign
private issuer, any or all members of the board of directors or any
committee of the board of directors authorized to approve employment
compensation, severance or other employee benefit arrangements under
the laws or regulations of the home country approves the arrangement.
    Instructions to paragraph (d)(2): For purposes of determining
whether the members of the committee approving an arrangement in
accordance with the provisions of paragraph (d)(2) of this section are
independent, the following provisions shall apply:
    1. If the bidder or subject company, as applicable, is a listed
issuer (as defined in Sec.  240.10A-3 of this chapter) whose securities
are listed either on a national securities exchange registered pursuant
to section 6(a) of the Exchange Act (15 U.S.C. 78f(a)) or in an inter-
dealer quotation system of a national securities association registered
pursuant to section 15A(a) of the Exchange Act (15 U.S.C. 78o-3(a))
that has independence requirements for compensation committee members
that have been approved by the Commission (as those requirements may be
modified or supplemented), apply the bidder's or subject company's
definition of independence that it uses for determining that the
members of the compensation committee are independent in compliance
with the listing standards applicable to compensation committee members
of the listed issuer.
    2. If the bidder or subject company, as applicable, is not a listed
issuer (as defined in Sec.  240.10A-3 of this chapter), apply the
independence requirements for compensation committee members of a
national securities exchange registered pursuant to section 6(a) of the
Exchange Act (15 U.S.C. 78f(a)) or an inter-dealer quotation system of
a national securities association registered pursuant to section 15A(a)
of the Exchange Act (15 U.S.C. 78o-3(a)) that have been approved by the
Commission (as those requirements may be modified or supplemented).
Whatever definition the bidder or subject company, as applicable,
chooses, it must apply that definition consistently to all members of
the committee approving the arrangement.
    3. Notwithstanding Instructions 1 and 2 to paragraph (d)(2), if the
bidder or subject company, as applicable, is a closed-end investment
company registered under the Investment Company Act of 1940, a director
is considered to be independent if the director is not, other than in
his or her capacity as a member of the board of directors or any board
committee, an ``interested person'' of the investment company, as
defined in section 2(a)(19) of the Investment Company Act of 1940 (15
U.S.C. 80a-2(a)(19)).
    4. If the bidder or the subject company, as applicable, is a
foreign private issuer, apply either the independence standards set
forth in Instructions 1 and 2 to paragraph (d)(2) or the independence
requirements of the laws, regulations, codes or standards of the home
country of the bidder or subject company, as applicable, for members of
the board of directors or the

committee of the board of directors approving the arrangement.
    5. A determination by the bidder's or the subject company's board
of directors, as applicable, that the members of the board of directors
or the committee of the board of directors, as applicable, approving an
arrangement in accordance with the provisions of paragraph (d)(2) are
independent in accordance with the provisions of this instruction to
paragraph (d)(2) shall satisfy the independence requirements of
paragraph (d)(2).
    Instruction to paragraph (d): The fact that the provisions of
paragraph (d) of this section extend only to employment compensation,
severance and other employee benefit arrangements and not to other
arrangements, such as commercial arrangements, does not raise any
inference that a payment under any such other arrangement constitutes
consideration paid for securities in a tender offer.
* * * * *

    Dated: November 1, 2006.

    By the Commission.
Nancy M. Morris,
Secretary.
 [FR Doc. E6-18815 Filed 11-7-06; 8:45 am]

BILLING CODE 8011-01-P