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Securities Exchange Act of 1934
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Re: |
The Korea Fund, Inc. |
Dear Mr. Berman:
We are responding to your letter dated July 1, 2005 addressed to Brian V. Breheny and Pamela Carmody, as supplemented by telephone conversations with the staff of the Office of Mergers and Acquisitions in the Division of Corporation Finance, with regard to your request for exemptive relief from Rule 13e-4(f)(8) under the Securities Exchange Act of 1934 (the "Exchange Act"). Our response is attached to the enclosed photocopy of your letter to avoid having to recite or summarize the facts set forth in your letter. Unless otherwise noted, capitalized terms in this letter have the same meaning as defined in your letter.
Based on the representations in your letter but without necessarily concurring in your analysis, the U.S. Securities and Exchange Commission hereby grants an exemption from Rule 13e-4(f)(8) to permit the Fund to require that Japanese Holders who participate in the Offers to immediately sell the Portfolio Securities that they receive in the Offers through their Korean Intermediaries. In granting this exemption, we note that if Japanese Holders were allowed to retain the Portfolio Securities, under Japanese securities laws, each issuer of the Portfolio Securities would be required to file a registration statement in Japan. We further note that the Fund, in conducting the Offers, will otherwise comply with all applicable provisions of Rule 13e-4.
The foregoing exemption is based solely on the representations and the facts presented in your letter dated July 1, 2005, as supplemented by telephone conversations with the Commission staff. The relief is strictly limited to the application of the rules listed above to this transaction. You should discontinue this transaction pending further consultations with the staff if any of the facts or representations set forth in your letter change.
We also direct your attention to the anti-fraud and anti-manipulation provisions of the federal securities laws, including Section 10(b) and 14(e) of the Exchange Act, and Rule 10b-5 thereunder. The participants in this transaction must comply with these and any other applicable provisions of the federal securities laws. We express no view on any other questions that may be raised by the proposed transaction, including but not limited to, the adequacy of disclosure concerning and the applicability of any other federal or state laws to the proposed transaction.
For the Commission,
By the Division of Corporation Finance
Pursuant to delegated authority,
Mauri L. Osheroff
Associate Director
Division of Corporation Finance
July 1, 2005
Brian V. Breheny, Chief
Pamela Carmody, Special Counsel
Office of Mergers and Acquisitions
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
The Korea Fund, Inc.
Dear Mr. Breheny and Ms. Carmody:
We are writing on behalf of The Korea Fund, Inc. (the "Fund") in connection with proposed in-kind repurchase offers to be made by the Fund to holders of its common stock, as described below. The Fund is a diversified, closed-end management investment company incorporated under the laws of the State of Maryland that seeks long-term capital appreciation through investment in securities, primarily equity securities, of Korean companies. Fund shares have been traded on the New York Stock Exchange since August 22, 1984. As of June 15, 2005, at least 45% of Fund shares were held by institutional investors.
I. Requested Exemptive Relief
We respectfully request that the Securities and Exchange Commission (the "Commission"), pursuant to the authority delegated in Rule 13e-4(h)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), exempt the Fund's in-kind repurchase offers from the provisions of paragraph (f)(8) of Rule 13e-4 of the Exchange Act on the basis that compliance is not necessary or appropriate in the public interest or for the protection of investors. We seek this exemption to allow the Fund to require holders of Fund shares that are resident in Japan ("Japanese Holders"), as a condition to participating in the repurchase offers, irrevocably to instruct their Korean brokers or custodians ("Korean Intermediaries") that the securities they would otherwise be entitled to receive in the in-kind repurchase offers be sold on their behalf, thereby ensuring compliance with Japanese securities laws. The Fund, when conducting its in-kind repurchase offers, will otherwise comply with all applicable provisions of the Exchange Act.
II. Proposed Structure of the Offers
The Fund proposes to conduct an initial in-kind repurchase offer (the "Initial Offer") for 50% of the Fund's outstanding shares at a price equal to 98% of the net asset value per share as of the day after the date such offer expires. The Fund also proposes to conduct six subsequent semi-annual in-kind offers (the "Subsequent Offers" and, together with the Initial Offer, the "Offers"), each for 10% of the Fund's then outstanding shares, if the Fund's shares trade on the New York Stock Exchange at an average weekly discount from net asset value greater than 5% during a 13-week measuring period ending the last day of the preceding half-year. Payment for any shares tendered for repurchase in response to the Offers would be made in-kind through a pro rata distribution of the portfolio securities held by the Fund at such date (the "Portfolio Securities"), subject to the exclusion of certain types of portfolio securities, as discussed in more detail below. If, during the Offers, a greater number of shares are tendered for repurchase than the amount of shares that the Fund has offered to repurchase, each participating shareholder will receive a pro rata share of the distribution in proportion to the total shares accepted for repurchase by the Fund.
As part of the consideration to be paid upon repurchase, the Fund will pay cash in an amount that will represent that portion of the Fund's assets represented by cash equivalents (such as certificates of deposit, commercial paper and repurchase agreements) and other assets which are not readily distributable (including receivables and prepaid expenses), net of all liabilities (including accounts payable). In addition, the Fund will pay cash in lieu of fractional shares, securities held in its investment portfolio not amounting to round lots (or which would not amount to round lots if included in the in-kind payment), and accruals on such securities.
The Fund may round down the proportionate payment of each portfolio security to the nearest round lot amount and will distribute the remaining odd lot in cash. The Fund may also pay a higher pro rata percentage of equity securities to represent such items. In either case, each shareholder of record will receive cash and securities equal to the same dollar amount per share. The Fund will, from the respective dates of "termination" of the Offers, as defined in Rule 13e 4(a)(5) under the Exchange Act, until the respective dates of payment under the Offers (each, a "Payment Date"), maintain a percentage of the Fund's assets approximately equal to the portion of the consideration that the Fund reasonably expects will be paid in cash in assets that can be sold or disposed of in the ordinary course of business, at approximately the price at which the Fund has valued the investment, or in assets that mature by the Payment Date.1
The Fund contemplates that it would commence the Initial Offer on the terms discussed above as soon as reasonably practicable following the procurement of all necessary regulatory exemptions and approvals. The Fund also contemplates conducting the Subsequent Offers in the three calendar years following completion of the Initial Offer, if the Fund's shares trade on the New York Stock Exchange at an average weekly discount from net asset value greater than 5% during a 13-week measuring period ending the last day of the preceding six months.
Participation in the Offers will be entirely voluntary. None of the Fund, the Fund's board of directors or the Fund's investment adviser will make any recommendation to shareholders as to whether to participate in the Offers. Shareholders who do not elect to participate in the Offers will continue to hold all of their shares of the Fund.
On the Payment Date, Brown Brothers Harriman & Co., the Fund's custodian (the "Custodian"), will transfer each participating shareholder's pro rata share of the Portfolio Securities to a Korean Intermediary designated by the shareholder, as required by Korean law. All shareholders, except Japanese Holders, will instruct their Korean broker or Korean custodian either to hold the Portfolio Securities or to sell them for cash. Japanese Holders who choose to participate in the Offers will be required irrevocably to instruct their Korean Intermediaries to sell their pro rata share of the Portfolio Securities upon receipt.2
III. Reasons for the Offers
The Offers are designed to address the discount to net asset value at which the Fund trades and to address shareholder concerns. After consulting with the Fund's advisers, the board approved the proposals for the Offers in order to provide shareholders with immediate liquidity at close to net asset value for a substantial portion of their shareholdings.
The Offers, particularly the in-kind payments for tendered shares, will provide potential benefits to both participating and non-participating shareholders. These benefits arise from the Fund's closed-end fund structure, its investments in relatively less liquid securities that are traded primarily in the Korean market, which has a small capitalization relative to that of more developed markets, and its maintenance of relatively small cash positions. Benefits to shareholders may include:
The Fund believes that a principal benefit of structuring the Offers as in-kind offers will be the avoidance of a cascade of required distributions that would be associated with cash tender offers, as described below, and that would reduce the size of the Fund drastically, to a point where the Fund may well be no longer viable.
Inherent in the Fund's present portfolio is a large amount of unrealized appreciation. As of June 30, 2004, the Fund had net assets valued at $963,132,513 and net unrealized appreciation on investments of $543,498,800.
In order to generate sufficient cash to make the Offers for cash, the Fund would need to sell portfolio securities, thereby realizing capital gains. In order to preserve its "pass through" treatment under Subchapter M of the Internal Revenue Code (as well as to avoid a federal excise tax), the Fund must distribute to its stockholders each year, in qualifying distributions (essentially, ones made pro rata to all stockholders), substantially all its income and net capital gains. Payments made in cash tender offers would not count as qualifying distributions, since they would not be made pro rata to all holders because it is extremely likely that some stockholders would not participate in the offers.
As a result, if the Fund were to make a large cash tender offer for its shares, the Fund would have to pay out, not only the cash needed for the tender offer, but also the cash needed to distribute the realized capital gains. The Fund would be required to sell additional securities to raise the cash for these distributions. This would trigger realization of more capital gains which, in turn, would trigger a need for more distributions to stockholders. The Fund has estimated that a single cash tender offer for 50% of the Fund's shares would result, over the course of a few years, in the Fund shrinking, as a result of this cascade, from $963 million (net assets as of June 30, 2004) to $103 million. Additional cash tenders would exacerbate this problem.
Such a reduction in size would be detrimental to the Fund and its shareholders. The Fund would lose the benefits it derives from economies of scale. This would be reflected in a substantial increase in its expense ratio, since it would have fewer assets to cover fixed and variable expenses, and may result in the Fund's being no longer viable.
This cascade of distributions would not be triggered in the Offers, because the Offers will be made only if the Fund obtains a ruling from the U.S. Internal Revenue Service to the effect that the Offers do not involve realization of capital gains by the Fund.
IV. Discussion
As described above, Japanese Holders who wish to participate in the Offers must irrevocably instruct their Korean Intermediaries to sell their shares of the Portfolio Securities for cash as soon as the shares are received. Because all other participating shareholders will have the right to retain their Portfolio Securities indefinitely, it may be argued that Japanese Holders and non-Japanese Holders are not afforded equal right to elect among each of the types of consideration offered, in violation of Rule 13e-4.
Among other things, Rule 13e-4(f)(8) under the Exchange Act prohibits an issuer from making a tender offer unless "the 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." Rule 13e-4(f)(10) provides that:
The Fund desires to permit Japanese Holders to have the opportunity to participate in the Offer; such participation would not be feasible, as practical matter, unless Japanese Holders are required to order their Korean Intermediaries to sell the Portfolio Securities that they receive in the Offers. Allowing participating Japanese Holders to retain their portion of the Fund's portfolio securities would create significant burdens under Japanese securities laws, both for the Fund and for each issuer of the Fund's Portfolio Securities.
Granting relief to allow the participation of Japanese Holders is consistent with the policies underlying Rule 13e-4 as well as prior relief. The Commission Release promulgating amendment to Rule 13e-4 (Release No. 34-23421, July 11, 1986) noted that "a few commentators suggested that the Commission also should provide for exceptions from the requirement that all alternative forms of consideration be offered when:…a United States bidder makes an exchange offer to United States security holders but wishes to offer only cash to non-resident foreign security holders." The release continued: "In view of the very limited number of such offers, the Commission does not believe a specific exemption is necessary or appropriate. The Commission, however, will consider an application for exemptive relief…in such situations."
Japanese Regulations3
The Fund has been advised by Japanese counsel that, under Japanese securities laws, each issuer of Portfolio Securities must file a securities registration statement if Japanese Holders receive such Portfolio Securities in the Offers. (The issuers would be required to file registration statements even though it is the Fund, rather than the issuer, making the Offer.) There are no exemptions from the registration requirement available to the Fund. Once an issuer files a registration statement, that issuer will be subject to continuous disclosure requirements under Japanese securities laws. This would constitute a substantial burden, particularly in light of the small percentage of Fund shares held by Japanese Holders. As of February 15, 2005, approximately 1.3% of the Fund's shares were held by Japanese Holders.
The Financial Services Agency of Japan (the "FSA") has indicated to Japanese counsel that no filing of registration statements will be required if Japanese investors have only the option of receiving cash in exchange for their shares. However, a cash offer to even a small portion of shareholders would create the cascade of required distributions that the Fund seeks to avoid. The FSA has indicated, however, that Japanese laws will not require registration statement filings if Japanese Holders are required to sell the Portfolio Securities they receive in the Offers outside of Japan.
Broad Participation
Granting the requested relief will permit the Fund to make available to its Japanese Holders the opportunity to participate in the Offers and to sell their Fund shares in transactions that should enable them to receive close to net asset value (subject to price fluctuations of Portfolio Securities on the Korean market). By requiring Japanese Holders wishing to participate in the Offers to give Korean Intermediaries irrevocable instructions to sell the shares they receive in the Offer, they will be able to participate in the Offers in a manner consistent with Japanese securities laws and derive substantially similar benefits from the Offers to those available to other Fund shareholders.
Rule 13e-4(f)(8)
The Staff has, in the past, granted relief from Rule 13e-4(f)(8) to enable all shareholders to participate in an offer, but with different types of consideration, where foreign regulation would impose an undue burden. For example, in E.I. du Pont (June 17, 1999), the Staff granted relief from Rule 13e-4(f)(8), allowing du Pont to limit participation in an exchange offer to "U.S. Persons" and simultaneously to conduct a much smaller cash tender offer only for "non-U.S. Persons," when "extending the Exchange Offer to non-U.S. Persons would create a nightmare situation of trying to comply with local securities laws" (such as those requiring the translation of an entire S-4 registration statement into French, Spanish and Japanese). As discussed above, this would certainly be the case if issuers of Fund portfolio securities would be required to file registration statements in Japan.
The Fund's situation is analogous to those in which relief has been granted under Rule 14d-10 (Rule 13e-4's analog for third party tender offers) to enable all shareholders to participate in an offer, but with different types of consideration. The relief requested by the Fund is substantially similar to relief that the Commission has granted in situations in which U.S. shareholders were offered cash as consideration while their foreign counterparts received securities, due to foreign regulatory issues. See Alberta Energy Co. Ltd (June 19, 1989) (granting relief from Rule 14d-10(a) and (c) to permit U.S. citizens to receive cash and Canadian citizens to receive convertible preferred subordinated debentures or convertible preferred shares of a Canadian company in a tender offer for common shares, convertible subordinated debentures and convertible preferred shares of a Canadian company, when ownership of such securities by U.S. citizens was prohibited by Canadian law).
The relief requested by the Fund is also similar to relief that the Commission has granted in situations in which U.S. shareholders were offered a choice of consideration while their foreign counterparts received cash, due to U.S. regulatory issues. See Hallwood Energy Partners LP (March 9, 1990) (granting relief from Rule 14d-10(a) and (c) to allow non-U.S. citizens to receive cash consideration instead of limited partner interests involving the development of federal land, in an exchange offer by an American company, when U.S. law prohibits non-U.S. citizens from holding an interest in oil and gas leases on federal lands and offshore areas).
Finally, the staff has been particularly sensitive in somewhat analogous contexts where, to avoid both U.S. and foreign regulatory issues (such as when the offeror wants to avoid registering the offered securities in two countries), a company making an offer appoints a trustee or broker in the country where the securities were issued and instructs the trustee or broker to sell those securities on behalf of U.S. participants as soon as possible after the termination of the offer. As with such "vendor placements," the Fund's Japanese Holders who choose to participate in the Offers will never directly receive Portfolio Securities; such Portfolio Securities will be sold on their behalf by a Korean broker and the proceeds from such sale will be remitted to the Japanese Holders. All other shareholders will have the option of having their shares sold upon receipt or retaining their shares indefinitely. See TABCORP Holdings Limited (Aug. 20, 1999) (involving an exchange offer by an Australian corporation for all shares of another Australian corporation); Airline Industry Revitalization Co. Inc. (Sept. 9, 1999) (involving an exchange offer by a Canadian corporation for all the outstanding shares of another Canadian corporation); and Singapore Telecommunications Limited (May 15, 2001) (involving an exchange offer by a Singapore company for all the outstanding shares of an Australian company); in each case allowing non-U.S. security holders to retain shares and U.S. security holders to receive only cash and not retain shares when securities were not registered in the U.S. (under Section 5 of the Securities Act of 1933 and Rule 14d-1, and with relief from Rule 14e-5, respectively).
V. Summary
For the reasons set forth above, we hereby request, on behalf of the Fund, that the Staff exempt the Offers from compliance with Rule 13e-4(f)(8), pursuant to 13e-4(h)(9) under the Exchange Act.
Please do not hesitate to contact Kenneth Berman (202-383-8000; kberman@debevoise.com) or me (212-909-6000, wdregner@debevoise.com) if you have any questions about this matter.
Sincerely yours,
/s/ William D. Regner
William D. Regner
http://www.sec.gov/divisions/corpfin/cf-noaction/koreafund070105.htm
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