Business Transactions Advisory
Rules for Foreign Private Issuer
De-Registration
A Regulatory Gift as Sarbanes-Oxley
Turns 5 Years Old
By Michael
C. Phillips and Ivy Grey*
[June 2007]
In response to the compliance regulatory load from the Sarbanes-Oxley
Act (SOX) and the changing global capital markets, too, the Securities
Exchange Commission (SEC) recently adopted new rules making it easier
for foreign private issuers1
to de-register as reporting companies in the United States. Effective
June 4, 2007, foreign private issuers may now permanently de-register
using new quantitative benchmarks to determine eligibility.
Among the stated purposes of the rule, the SEC hopes to encourage
foreign private issuers to initially and continue to list their
stocks in the U.S. market while reducing the regulatory burden under
the Exchange Act. In addition, the SEC hopes that the new rules
will provide better certainty to foreign private issuers that a
choice to leave the U.S. regulatory world will be a permanent rather
than a temporary result. Under the new rules, a foreign private
issuer may terminate, rather than merely suspend, Exchange Act reporting
obligations. Additionally, the new rules introduce the Average Daily
Trading Volume as an alternative to the 300 Record Holder threshold
making it easier for issuers to qualify for de-registration.
In this advisory:
To read the SEC’s final rule, click
here.
Background
While many can and do debate whether SOX has been good or bad for
capital markets, investor protection and the like, no one can seriously
debate that the compliance regulatory burden has been enormous and
a particular bane of smaller public companies, including public
companies that travel in international capital markets. For foreign
private issuers with the majority of their management and operations
similarly outside the United States and having some presence on
U.S. capital markets—whether that be a full listing on the
Nasdaq or NYSE or a smaller profile on the OTC—regulatory
issues can be especially frustrating and expensive as such companies
have to comply with different and sometimes conflicting requirements.
As a result, over the five years since SOX was birthed, more and
more foreign private issuers have avoided the U.S. capital markets
and regulatory environment entirely and those that have been here
previously have left.
On June 4, the (SEC) made that exit easier when it adopted new
rule 12h-6 (the “Rule”). The SEC believes that by making
it easier for foreign private issuers to terminate their reporting
status under the Exchange Act, more foreign private issuers will
initially enter and ultimately remain in the US trading markets,
thereby providing US investors with more investment opportunities.
While it remains to be seen whether that goal will be achieved,
it appears that the first objective has been met as companies are
lining up at the SEC to terminate their reporting status under the
Rule.
It is clear that SOX—and in particular the internal controls
provisions under Section 404—has been a large deterrent to
foreign companies listing stocks in the United States. It has also
provided a large and increasing impetus to leave the United States
when the size of the company’s trading presence in the United
States is relatively small—and the ability to secure necessary
capital can be found in non-U.S. capital markets.
Attempts to avoid continued reporting obligations after a foreign
private issuer’s U.S. market trading activity drops below
a certain level have been likened to a visit to the Hotel
California—you can check out, but you can never leave.
Moving towards a more global economy, foreign private issuers view
the possibility of the reporting obligations under the Exchange
Act as daunting and a deterrent to listing in a U.S. market. Unsurprisingly,
in 2005 only one of the 25 largest initial public offerings (IPOs)
took place in a U.S. market. To illustrate further, London’s
Alternative Investment Market had 335 IPOs in 2005—doubled
its total in 2000—and NASDAQ dropped 65 percent to 126 over
the same period. The SEC hopes to reverse this trend and make U.S.
capital markets more desirable and increase investor choice by taking
steps, including the adoption of the Rule, that make the compliance
meal more palatable.
Most importantly, the new Rule provides an easier and more permanent
mechanism to terminate its reporting obligations under the Exchange
Act. Previously, a foreign private issuer could de-register only
if the number of U.S. shareholders was below certain thresholds—and,
more importantly, stayed that way. Regardless of the trading volume
in the United States, the difference between having one less
shareholder than the stated threshold and having one more
was enormously significant. In the case of having one more than
the threshold, (a) you could not avoid the reporting obligations
under the Exchange Act, and (b) even if you had less than the stated
threshold at one time and thus qualified for de-registration, you
could find yourself having to re-enter the Exchange Act reporting
world if the number increased beyond the threshold.
Among the more significant changes, the Rule introduces the Average
Daily Trading Volume as an alternative to the 300 Record Holder
threshold, making it easier for foreign private issuers to qualify
for de-registration. Other conditions include a 12-month prior reporting
condition, a 12-month dormancy period, and a foreign listing condition.
Finally, the Rule sets forth requirements for maintaining the exemption
obtained through the Rule. Each of these changes is discussed in
turn below.
A foreign private issuer may de-register a class of equity or debt
securities under section 12(g) of the Securities Exchange Act of
1934 and the corresponding duty to file reports required under 13(a).
The Rule permits a foreign private issuer of equity
securities to terminate its reporting obligations under either
section 13(a) or 15(d) of the Act by meeting a quantitative benchmark
designed to measure U.S. market interest for its equity securities
that does not depend on a head count of the issuer’s U.S.
security holders. The Rule also permits a foreign private issuer
of debt securities to terminate
its section 15(d) reporting obligations. Moreover, under the Rule,
a foreign private issuer that de-registers will not be involuntarily
drawn back into the reporting scheme.
What You Need to Know Now
- A foreign private issuer may terminate its reporting requirements
under the Securities Exchange Act of 1934 by filing a Form 15F.
- Filing the Form 15F suspends the issuer’s reporting obligations
under the 1934 Act and rules of the exchanges until the earlier
of (a) the request becomes effective or (b) the SEC rejects the
request.
- A foreign private issuer must satisfy and support the following
requirements in its Form 15F:
- The issuer must have had reporting obligations under 13(a)
or 15(d) for at least the 12 months preceding the filing of
Form 15F;
- The issuer must have filed at least one annual report while
it was registered;
- The issuer must not have effected a registered offering
in the United States for the 12 months preceding the filing
of the Form 15F (note that other than certain securities issued
such as those to employees and exempt offers are permitted);
and
- The issuer must have filed or furnished all reports required
for the 12-month period preceding the filing of Form 15F.
Equity Securities
Quantitative Benchmark Condition
The newly introduced Average Daily Trading Volume (ADTV) standard
looks to a 12-month period to calculate the ADTV. A foreign private
issue meets this threshold eligibility requirement if the U.S. ADTV
has been no greater than 5 percent of its worldwide trading volume.
A foreign private issuer must wait 12 months before filing its
Form 15F in reliance on the ADTV standard if the issuer has de-listed
its class of equity securities from a national securities exchange
in the United States, terminated a sponsored ADR facility or, at
the time of de-listing, the U.S. ADTV exceeded 5 percent of its
worldwide ADTV.
The rules retain the record holder benchmark as an alternative
to the trading volume benchmark with some significant changes in
counting methodology. The methodology is discussed in more detail
below.
Prior Reporting Condition
A foreign private issuer must have been subject to Exchange Act
reporting obligations for at least one year, be current in reporting
obligations for that period, and have filed at least one annual
report.
Dormancy Condition
Additionally, a foreign private issuer may not publicly sell securities
for at least 12 months preceding the Form 15F filing. The Rule permits
the unregistered sale of securities exempted under the Act during
this dormancy period.
Foreign Listing Condition
Finally, a foreign private issuer must have maintained a listing
in a primary market in its foreign jurisdiction for at least 12
months preceding the Form 15F filing. Primary trading market is
defined as a market where at least 55 percent of the trading takes
place. It may also be determined through aggregation. However, an
issuer may combine no more than two foreign jurisdictions and may
aggregate only within the same class of securities.
Maintaining 12g3-2(b) Exemption
Upon approval of the Form 15F, an issuer is automatically exempt
from reporting obligations. An issuer must electronically publish
specified home country documents in English in order to maintain
the exemption.
Debt Securities
As adopted, the Rule will enable a foreign private issuer to terminate
its Exchange Act reporting obligations regarding a class of debt
securities. There are only two conditions a debt securities issuer
must satisfy before de-registering. They include (1) the 300 Record
Holder condition and (2) the prior reporting condition. An issuer
also must satisfy the “prior reporting condition” if
it issues debt or equity securities.
The Rules retain the 300 Record Holder standard for a debt securities
issuer as the quantitative standard. Increasing the threshold number
and adding a trading volume benchmark as an alternative were both
explicitly rejected in regards to debt securities.
Determining Record Holders
The Rule allows a modified “look through” counting
method to determine the number of U.S. resident security holders.
This reduces the required inquiry into the residency of the record
holders. Additionally, the Rule allows an issuer to rely on independent
information services providers for counting. To determine the primary
trading market, look to the rules set forth for calculating ADTV.
Furthermore, the Rule adopts a principal place of business presumption.
If, after reasonable inquiry, an issuer is unable to obtain information
about the amount of securities held by nominees for the U.S. resident
accounts, it may assume that the customers are residents of the
jurisdiction in which the nominee has its principal place of business.
Procedure for De-Registration
A foreign private issuer seeking to terminate its registration
and reporting obligations must file new Form 15F on EDGAR. The issuer
must provide information supporting its determination that it meets
the requirements.
Effectiveness
Filing a Form 15F immediately suspends an issuer’s Exchange
Act reporting obligations regarding the subject class of securities
and commences a 90-day waiting period. If at the end of this 90-day
period the SEC has not objected to the filing, the suspension will
automatically become a termination. The SEC may elect to make a
determination in fewer than 90 days or an issuer may request that
the commission accelerate the period. If the commission denies the
Form 15F, the issuer will have 60 days to file or submit all reports
that would have been required had it not filed the Form 15F.
Public Notice
An issuer must publish a notice announcing its intention to terminate
its reporting obligations under 12h-6 prior to or concurrently with
Form 15F.
De-Listing Waiting Period
An issuer must de-list before it can de-register. If the issuer
is currently listed on the NYSE or NASDAQ, it would first be required
to file a Form 25 with the SEC to de-list and terminate its reporting
obligations under 12(b) as well as satisfying certain other NYSE
and NASDAQ de-listing requirements. De-listing would become effective
10 days after the Form 25 is filed with the SEC. If an issuer meets
the ADTV standard, it may concurrently de-list from the exchange,
and de-register.
An issuer of equity securities is subject to a 12-month waiting
period under certain circumstances. To reduce any incentive for
foreign private issuers to de-list from a U.S. exchange for the
specific purpose of decreasing its U.S. trading volume, the final
rule requires that, if an issuer’s securities have been de-listed
within one year prior to filing a Form 15F, the foreign private
issuer must satisfy the Trading Volume standard as of the date of
the de-listing and for the preceding 12 months.
Conclusion
The Rule will principally benefit dually-listed companies because
the rules are conditioned upon having a primary trading market outside
the United States. Moreover, the ability to terminate rather than
suspend reporting obligations should decrease foreign unease about
registering with the SEC in the first place, thus increasing investor
choice. And, the alternative quantitative benchmarks should make
it easier to qualify. The SEC expects as many as 25 percent of Form
20-F filers to be eligible. However, the new Rule may have limited
applicability where American investors have purchased a significant
portion of the company’s shares through purchases made on
the issuer’s home country stock exchange.
FOOTNOTES
1 Foreign
private issues are defined roughly as companies that are incorporated
outside the United States, with the majority of their management
and operations similarly outside the United States and having some
presence on U.S. capital markets, whether that be a full listing
on the Nasdaq or NYSE or a smaller profile on the OTC.
*DWT Summer Associate
For more information, please contact:
This advisory is a publication
of the Business Transactions Group of Davis Wright Tremaine LLP.
Our purpose in publishing this Advisory is to inform our clients
and friends of recent legal developments. It is not intended, nor
should it be used, as a substitute for specific legal advice as
legal counsel may only be given in response to inquiries regarding
particular situations. Attorney Advertising. Prior results do not
guarantee a similar outcome. Thank you.
Copyright
© 2007, Davis Wright Tremaine LLP.
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