The staff of the Division of Corporation Finance of the Securities and Exchange Commission (the SEC) recently issued interpretations clarifying various aspects of the definition of a “foreign private issuer” for US securities law purposes, as well as several other SEC rules applicable to non-US issuers. In particular, the SEC staff provided specific guidance regarding when a shareholder would be considered a “US resident,” when more than 50 percent of a company’s assets are located in the United States, when the majority of the company’s directors or executive officers are US citizens or residents, and when the business of the issuer is administered principally in the United States, in each case for purposes of determining a company’s status as a “foreign private issuer.”
Separately, the staff issued interpretations of the definition of a “qualified institutional buyer” for purposes of the safe harbor contained in Rule 144A and clarified certain issues relating to offshore offerings and resale transactions under Regulation S, which are discussed in our memorandum located here:
Interpretations relating to determining “foreign private issuer” status of an issuer
Companies that qualify as a “foreign private issuer” benefit from many special exemptions under the US securities laws. Among other things, foreign private issuers are not required to file quarterly reports on Form 10-Q or current reports on Form 8-K, are exempt from Section 16 beneficial ownership reporting and short swing profit rules, are exempt from the US proxy rules, benefit from relaxed tender offer rules, are not subject to the detailed compensation disclosure rules, can file financial statements prepared in accordance with IFRS as adopted by the International Accounting Standards Board or, if reconciled to US GAAP, local GAAP or non-IASB IFRS, are exempt from Regulation FD, and have a later deadline to file their annual report (on Form 20-F) than domestic companies. In addition, Regulation S (the securities law exemption for sales of securities outside the United States) provides greater flexibility in some aspects for foreign private issuers compared to domestic issuers.
In order to obtain these benefits, a company must satisfy the definition of “foreign private issuer” contained in the US securities laws. The SEC rules define a foreign private issuer as any corporation or other organization incorporated or organized under the laws of a foreign country (other than a foreign government), unless both of the following two tests are met as of the last business day of the issuer’s most recently completed second fiscal quarter (or, for a first time registrant, within 30 days of filing an initial registration statement with the SEC):
Shareholder Test: more than 50 percent of the outstanding voting securities of the issuer are directly or indirectly owned of record by “US residents”; and
- Business Contacts Test: any of the following apply:
the majority of the executive officers or directors are “United States citizens or residents”; or
- more than 50 percent of the “assets of the issuer are located in the United States”; or
the business of the issuer is “administered principally” in the United States.
The staff interpretations provide the following guidance with respect to the shareholder and business contacts tests of the foreign private issuer definition.
Determination of who is a “US resident” for purposes of the shareholder test. The staff has clarified what factors should be applied to determining whether an individual is a “US resident” for purposes of the shareholder test of the foreign private issuer definition. While a person who has permanent resident status in the United States (a green card holder) is presumed to be a US resident, individuals without permanent resident status may also be US residents for purposes of the foreign private issuer definition, based on various factors, including (i) tax residency, (ii) nationality, (iii) mailing address, (iv) physical presence, (v) the location of a significant portion of their financial and legal relationships, or (vi) immigration status. Foreign issuers must decide what criteria they will use to determine residency and apply the chosen criteria consistently without changing them to achieve a desired result.
In addition, one of the prerequisites of certain categories of Regulation S (offers and sales made outside the United States which are deemed exempt from US registration) is that such offers and sales are not made to a US person, which includes a “natural person resident in the United States.” The staff has clarified that the same factors as described above should be applied to determine the status of an individual as a "natural person resident in the United States."
Application of the shareholder test to foreign issuers with multiple classes of voting stock. The staff clarified that, in determining whether more than 50 percent of the voting securities of the issuer are owned by US residents, issuers with multiple classes of voting stock with different voting rights may choose one of the following two methods (as long as the chosen methodology is applied on a consistent basis). They may either (i) look to whether more than 50 percent of the voting power of their classes of voting stock on a combined basis is directly or indirectly owned of record by US residents, or (ii) determine whether the shareholder test is satisfied based on the number of voting securities.
Determination of whether the majority of the issuer’s executive officers or directors are US citizens or residents. With respect to determining whether the majority of the issuer’s executive officers or directors are “United States citizens or residents,” the staff confirmed that this determination requires four separate evaluations: (i) the citizenship status of executive officers, (ii) the residency status of executive officers, (iii) the citizenship status of directors and (iv) the residency status of directors. The evaluation must be made separately for each group (as opposed to treating the executive officers and directors collectively as a single group).
For foreign issuers with a two-tier board structure, the staff confirmed that this determination must be made with respect to the board that performs the functions most similar to those undertaken by a US-style board of directors. If functions are divided between the two boards, issuers are permitted to aggregate the members of both boards for purposes of calculating the majority.
Determination of whether more than 50 percent of an issuer’s assets are located outside the United States. The staff confirmed that in determining whether more than 50 percent of their assets are located outside the United States, issuers can use the geographic segment information contained in the footnotes to their financial statements as well as any other reasonable methodology applied on a consistent basis.
Determination of whether the issuer’s business is administered principally in the United States. The staff confirmed that there is no single factor or group of factors that are determinative for evaluating whether the issuer’s business is administered principally in the United States. In conducting analysis under this prong of the business contacts test, the staff said that each foreign issuer must assess on a consolidated basis the location from which its officers, partners or managers primarily direct, control and coordinate its activities. The mere fact that the issuer holds an annual or special shareholder meeting or occasional meetings of its board of directors in the United States would not, absent other factors, necessarily result in a determination that the issuer’s business is administered principally in the United States.
In its 2013 publication “Accessing the US Capital Markets – A Brief Overview for Foreign Private Issuers,” the staff indicated that, in evaluating where their business is principally administered, foreign issuers could consider various factors, including the locations of their: (i) principal business segments or operations, (ii) board and shareholders’ meetings, (iii) headquarters and (iv) most influential key executive officers (potentially a subset of all executive officers).
Interpretations relating to the annual report on Form 20-F
Determining the deadline for filing a Form 20-F annual report. The annual report on Form 20-F of foreign private issuers must be filed within four months after the end of the issuer’s fiscal year. The staff has clarified that, where the last day of the issuer’s fiscal year is the last day of a month, its annual report on Form 20-F is due four complete months after that day (for example, a February 28 fiscal year end results in a Form 20-F due date of June 30). If the last day of the issuer’s fiscal year is other than the end of a month, the deadline for its annual report on Form 20-F falls on the same day four months ahead (for example, a February 20 fiscal year end would result in a Form 20-F due date of June 20).
Incorporation by reference of previously filed information into the annual report on Form 20-F. The staff has confirmed that a foreign private issuer may incorporate by reference into its annual report on Form 20-F information that has been previously filed with the SEC, subject to limitations contained in Exchange Act Rule 12b-23 (which addresses incorporation by reference generally). Foreign private issuers that choose to use this option are required to identify with specificity the information that is being incorporated by reference.
Reduced disclosures in the Form 20-F of a wholly owned subsidiary of a foreign private issuer. When a domestic company is required to file an annual report on Form 10-K, the SEC rules provide that such company’s Form 10-K is subject to significantly less onerous disclosure requirements if the company is a wholly owned subsidiary of a US reporting company which has filed all of its own required periodic reports and has not had a material default on the payment of debt for 36 months, among other requirements, pursuant to General Instruction I to Form 10-K.
The staff has confirmed that the same accommodation applies to the comparable information requirements in Form 20-F of a wholly owned subsidiary of a foreign private issuer, so long as the wholly owned subsidiary includes a prominent statement on the cover page of its Form 20-F that it is filing the form with reduced disclosure because it and its parent satisfy the requirements for reduced disclosure applicable in the context of a Form 10-K.
Interpretations relating to issuers and guarantors of debt securities
SEC rules generally require that every issuer of a registered security that is guaranteed, and every guarantor of a registered security, must include its own financial statements in the applicable registration statement registering the security and/or guarantee. However, the SEC has specified five cases in Rule 3-10 of Regulation S-X where separate financial statements of each issuer and each guarantor are not required. For example, where an operating subsidiary issues securities and its parent guarantees those securities, the registration statement, parent company annual report and parent company quarterly report need not include financial statements of the issuer if the issuer is 100 percent owned by the parent company guarantor, the guarantee is full and unconditional, no other subsidiary of the parent guarantees the securities, and the parent company’s financial statements include, in a footnote, condensed consolidating financial information with separate columns for the parent company, the subsidiary issuer, any other subsidiaries of the parent on a combined basis, consolidating adjustments and the total consolidated amounts. Similarly, where a parent company issues securities and one of its subsidiaries guarantees those securities, the registration statement, parent company annual report or parent company quarterly report need not include financial statements of the subsidiary guarantor if the subsidiary guarantor is 100 percent owned by the parent company issuer, the guarantee is full and unconditional, no other subsidiary of the parent guarantees the securities, and the parent company’s financial statements include in a footnote condensed consolidating financial information with separate columns for the parent company, the subsidiary guarantor, any other subsidiaries of the parent company on a combined basis, consolidating adjustments and the total consolidated amounts.
The staff has confirmed that when a parent foreign private issuer issues securities that are guaranteed or co-issued by one or more subsidiaries that are not foreign private issuers, or when a foreign private issuer guarantees securities issued by a subsidiary that is not a foreign private issuer, the same accommodations described above will also apply – the parent company guarantor issuer and subsidiary guarantor or co-issuer, and the parent company guarantor and subsidiary issuer are permitted to use a registration statement on Form F-1 or F-3 to register the offering of the securities and an annual report on Form 20-F with respect to ongoing reporting obligations.
Therefore, if the parent guarantor (foreign private issuer) and subsidiary issuer (domestic) are eligible to present condensed consolidating financial information in the parent company’s filings and the parent qualifies as a foreign private issuer, the parent company can use Form F-1 or F-3 to register the offering of guarantees and guaranteed securities that are issued by a domestic or foreign subsidiary that is not a foreign private issuer, and use Form 20-F with respect to any reporting obligations associated with such registration statement. Similarly, when a parent foreign private issuer issues securities guaranteed or co-issued by one or more subsidiaries that do not themselves qualify as a foreign private issuer, the parent and subsidiary can register the offering on a Form F-1 or F-3 when they are eligible to present condensed consolidating financial information (or narrative disclosure in lieu thereof).
Interpretation relating to successor registrants
Exchange Act Rule 12g-3 addresses various scenarios involving a merger, consolidation or similar transaction where securities not registered with the SEC are issued to the shareholders of a company whose securities are registered with the SEC – in these situations the acquirer automatically succeeds to the Exchange Act reporting obligations of the target company. The staff has clarified that if a non-reporting foreign private issuer acquires a reporting foreign private issuer using shares as consideration in a transaction exempt from registration under the Securities Act, the acquirer will be required to file a Form 6-K announcing the succession. Such filing will need to be done on EDGAR using the Form 8-K submission type that is appropriate to the specific transaction. Thereafter, the foreign private issuer should make all other Exchange Act filings as appropriate.
Interpretation relating to termination of reporting obligations by a foreign private issuer
A foreign private issuer can terminate the registration of a class of its securities under Section 12(g) of the Exchange Act, and can terminate its reporting obligations with respect to a class of equity securities under Section 15(d) of the Exchange Act, if certain conditions specified in Exchange Act Rule 12h-6 are satisfied. Among other things, the foreign private issuer is required to certify to the SEC that it has maintained a listing of securities for at least the preceding 12 months on one or more foreign exchanges that constitute the primary trading market for the issuer’s securities. The “primary trading market” for these purposes means that at least 55 percent of the trading in the issuer’s securities on a worldwide basis took place in a single foreign jurisdiction or in not more than two foreign jurisdictions during a recent 12-month period. The staff has clarified that for purposes of applying the above definition, issuers may consider all securities trading markets in countries that are part of the European Union as a single foreign jurisdiction.
The authors wish to thank Evgeniya Berezkina for her assistance in the preparation of this client alert.