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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.
Copyright
© 2007, Davis Wright Tremaine LLP.
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