On March 27, the SEC announced in Release No. 34-55540 the adoption of rules that are intended to ease current restrictions on the ability of foreign private issuers to terminate the registration of their securities under the Securities Exchange Act of 1934 and to cease filing reports with the SEC.
The SEC acted out of a concern that the burdens and uncertainties associated with the current deregistration scheme have discouraged some foreign companies from accessing the U.S. public capital markets. The rule amendments would not change the rules that govern Exchange Act deregistration or termination of reporting obligations by U.S. issuers.
The new rules are the product of two rounds of proposals by the SEC. Many commenters criticized the initial proposals, which were published in Release No. 34-53020 (and discussed in our SEC Update of January 12, 2006), because they contained a number of burdensome termination requirements. The SEC responded by publishing revised proposals, which were announced in Release No. 34-55005 (and discussed in our SEC Update of January 9, 2007). Commenters generally supported the reproposed rules and offered a number of suggestions that were incorporated by the SEC into the final rules, which will become effective on June 4, 2007.
A foreign private issuer is a non-U.S. company that either has 50% or less of its outstanding voting securities held of record by U.S. residents or that has more than 50% of its outstanding voting securities held by U.S. residents and has no other specified nexus with the United States. Such an issuer may incur reporting obligations under one or more of Exchange Act Sections 15(d), 12(g), and 12(b), each of which imposes requirements for suspending or terminating those obligations. Under the current exit rules, a foreign private issuer seeking to terminate its Exchange Act reporting obligations not only has to terminate any U.S. listing on a national securities exchange, but also has to ensure that upon such a termination it has fewer than 300 U.S. resident security holders. As discussed in our prior SEC Updates, many foreign private issuers have found it difficult under the current rules to terminate their Exchange Act registration and reporting obligations despite the fact that there may exist relatively little interest in their U.S.-registered securities among U.S. investors. Moreover, foreign private issuers have been able only to suspend, rather than terminate, a duty to report arising under Section 15(d) of the Exchange Act, which is triggered by any registered offering of equity or debt securities in the United States.
New Deregistration Conditions
The centerpiece of the liberalized deregistration regime is a new Rule 12h-6 under the Exchange Act. Rule 12h-6 and related changes to existing rules (1) eliminate provisions that primarily condition a foreign private issuer’s eligibility to terminate its Section 12(g) registration on whether the issuer has fewer than 300 U.S. resident security holders and (2) allow termination, rather than suspension only, of the issuer’s Section 15(d) reporting obligations. Rule 12h-6 permits a foreign private issuer to terminate its Section 12(g) registration and terminate SEC reporting based on Sections 12(g) and 15(d) regarding a class of equity securities for which U.S. investor interest is small relative to non-U.S. investor interest and where there is a low expected risk that termination of registration and reporting will harm U.S. investors. The rule also allows a foreign private issuer to terminate its Section 15(d) reporting obligations regarding a class of debt securities once it has met the minimum Section 15(d) reporting requirement.
Trading Volume Standard
Rule 12h-6 incorporates a trading volume standard for deregistration that was advocated by many commenters on the reproposed rules. The new exit standard will enable a foreign private issuer to terminate its Exchange Act obligations regardless of the number of its U.S. resident security holders or the percentage of its securities held by U.S. residents. If the rule’s other conditions are met, this standard will permit a foreign private issuer, regardless of size, to deregister a class of equity securities where the average daily trading volume, or “ADTV,” of the securities in the United States over a recent 12-month period is 5% or less of the worldwide ADTV. The rule excludes convertible debt and other equity-linked securities from the ADTV calculation. The new ADTV standard differs from the trading volume standard in the reproposed rules, which compared the U.S. ADTV to the ADTV in the issuer’s primary trading market. Because a security’s worldwide trading volume is larger than its primary market trading volume, the new standard will make it easier to meet the 5% condition and thereby permit a greater number of foreign issuers to qualify for deregistration. The rule will permit issuers to include off-market transactions, including transactions through alternative trading systems, in calculating their worldwide ADTV (as well as their U.S. ADTV) so long as they can obtain reliable, non-duplicative information about such transactions.
- A foreign private issuer seeking to terminate its Exchange Act registration of a class of equity securities under Section 12(g) of the Exchange Act, or to terminate its reporting obligations under Section 15(d) with respect to a class of equity securities, must satisfy the following additional conditions under Rule 12h-6:
- Minimum Exchange Act Reporting History. The foreign issuer must have filed or furnished all Exchange Act reports (including at least one annual report) required by Section 13(a) or 15(d) during the 12 months before it files a notice of termination with the SEC on new Form 15F.
- Absence of Registered U.S. Sales. The foreign issuer must not have conducted a capitalraising transaction in the United States involving sales of the equity securities in a registered offering under the Securities Act of 1933 during a 12-month “dormancy period” before it files the Form 15F. This condition is designed to deter a foreign issuer’s promotion of U.S. investor interest through recent registered capital-raising shortly before it exits the U.S. reporting system. As exceptions to the prohibition, the rule generally permits sales of registered securities to the issuer’s employees, by selling shareholders in a non-underwritten offering, upon the exercise of outstanding rights that have been granted on a pro rata basis to all security holders, pursuant to a dividend or interest reinvestment plan, or upon the conversion or exercise of outstanding convertible securities or transferable warrants. Further, because the dormancy condition is limited to registered offerings, it does not apply to sales in private offerings pursuant to Section 4(2), Regulation D, and Rule 144A under the Securities Act, rights offerings exempt under Securities Act Rule 801, or exchange offers exempt under Securities Act Rule 802, nor to sales of exempt securities under Section 3 of the Securities Act, including sales pursuant to plans or arrangements exempted under Section 3(a)(10).
- Foreign Exchange Listing. The foreign issuer must have maintained, for at least the 12 months before it files the Form 15F, a listing of the class of equity securities being deregistered on an exchange in a foreign jurisdiction that, either singly or together with one other foreign jurisdiction, constitutes the primary trading market for that class of securities. This listing condition increases the likelihood that non-U.S. securities disclosure documents will be available to U.S. investors when they make investment decisions about the issuer’s securities following the termination of its Exchange Act reporting obligations.
As an alternative to the trading volume benchmark, a foreign issuer may rely on the 300 record holder standard under Rule 12h-6. The alternative standard will permit the issuer to deregister a class of equity securities and terminate its reporting obligations if, on a date within 120 days before the issuer files its Form 15F, the class is held of record by fewer than 300 persons on a worldwide basis or by fewer than 300 U.S. residents. To simplify counting U.S. resident security holders, the SEC will allow the foreign issuer to use a revised “look through” counting method that limits the inquiry regarding the amount of securities represented by accounts of customers resident in the United States to brokers, dealers, banks, and other nominees located in the United States, the foreign issuer’s home country, and the issuer’s primary trading market, if different from its home country.
Filing of Form 15F and Public Notice
oreign private issuers will exit the Exchange Act reporting system by filing new Form 15F electronically with the SEC to certify their compliance with the requirements of Rule 12h-6. The form will require the issuer to disclose information about its Exchange Act reporting history, recent U.S. market activity, foreign listing and primary trading market, security record holders, and other specified matters. In addition, the issuer will be required to disclose the address of its Internet web site or the electronic information delivery system in its primary trading market on which it will publish the information required by Rule 12g3-2(b), as discussed below. Filing of the form will have to be preceded or accompanied by a public notice of the issuer’s intention to terminate its registration or reporting obligations that is broadly disseminated in the United States and filed with the SEC on Form 6-K or as an exhibit to Form 15F. Suspension of the foreign issuer’s reporting obligations will occur immediately upon filing of the form unless the waiting period discussed below applies. Termination of the foreign issuer’s registration and reporting obligations will occur automatically 90 days after it files Form 15F unless the SEC objects. The SEC may accelerate termination at its discretion.
One-Year Waiting Period
The SEC expressed concern in the reproposing release that use of a trading volume standard might create an incentive for a foreign private issuer to decrease its U.S. trading volume in order to delist its securities from a U.S. exchange, particularly in cases where the issuer had a relatively active U.S. market for its securities before the delisting. Accordingly, consistent with the reproposed rule, final Rule 12h-6 seeks to deter an issuer from excluding U.S. investors from investing in its securities when U.S. market interest in the securities is still significant. It requires an issuer that has either delisted a class of equity securities from a U.S. exchange or terminated a sponsored American Depositary Receipts (ADR) facility on or after March 21, 2007 at a time when the U.S. average daily trading volume of its securities exceeded 5% of its worldwide ADTV to wait at least 12 months before terminating its Section 12(g) registration or Section 15(d) reporting obligations on the basis of the trading volume benchmark.
Under Rule 12h-6, a foreign private issuer of a class of debt securities may terminate its Exchange Act reporting obligations only if (1) it has filed or furnished all reports required by Section 13(a) or 15(d) (including at least one annual report), and (2) if, on a date within 120 days before the issuer files its Form 15F, the debt securities were held of record by fewer than 300 persons on a worldwide basis or by fewer than 300 U.S. residents.
Rule 12h-6 will allow successor foreign private issuers to rely on an acquired company’s Exchange Act reporting history for purposes of Rule 12h-6’s prior reporting condition. Successor issuers are companies that have succeeded to another company’s Exchange Act registration and reporting obligations pursuant to Rule 12g-3 or 15d-5 though a merger, consolidation, exchange of securities, or certain other transactions. The new rule would enable the successor issuer to qualify immediately for termination of its Exchange Act obligations without having to file an Exchange Act annual report, so long as it meets the other requirements of Rule 12h-6.
Prior Form 15 Filers
A foreign private issuer that has filed a Form 15 before June 4, 2007 (the effective date of Rule 12h-6) suspending or terminating its Exchange Act reporting obligations will be able to obtain the benefits of Rule 12h-6 if it files Form 15F and satisfies the rule’s 5% trading volume or alternative 300-holder condition and, if it is an equity securities issuer, the rule’s foreign listing requirement.
Availability of Exemptions Following Deregistration
Amended Rule 12g3-2(b)
The SEC has amended Rule 12g3-2 to make the rule’s exemption from Section 12(g) registration available to a foreign private issuer immediately upon termination of the issuer’s Exchange Act registration and reporting obligations under Rule 12h-6. The purpose of the amendment is to provide U.S. investors with access to material information about an issuer of equity securities following its termination of reporting under Rule 12h-6. The exemption currently afforded by Rule 12g3-2(b) is not available to an issuer if, in the prior 18 months, the issuer had any securities registered under Section 12(g), or at any time if an issuer has an active or suspended reporting obligation under Section 15(d). As a condition to the immediate application of the rule, a foreign private issuer will have to publish electronically English translations of the home-country materials the issuer will be required to furnish to the SEC on a continuous basis under Rule 12g3-2(b). Publication will have to occur either on the issuer’s Internet web site or through an electronic information delivery system that is generally available to the public in the issuer’s primary trading market. At a minimum, the issuer will have to publish its annual report (including or accompanied by annual financial statements), any interim reports that include financial statements, press releases, and all other communications and documents sent directly to the holders of each class of securities to which the exemption relates.
Securities Act Rule 701
Rule 701 under the Securities Act provides an exemption from registration for offerings of securities pursuant to compensatory plans and contracts. By its terms, the rule is available to any issuer that is not subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act. According to the SEC, a foreign private issuer “would appear to satisfy this condition of Rule 701” upon the termination of its registration and reporting obligations under Rule 12h-6. Before filing Form 15F, the issuer should file a post-effective amendment to its Securities Act registration statements on Form S-8 to deregister any remaining unsold securities issuable under its compensatory benefit plans.
The regulatory barriers encountered by foreign private issuers in connection with deregistration under the Exchange Act and termination of their related reporting obligations have provoked vigorous criticism by representatives of foreign companies and foreign industry associations.
These representatives have argued that the current deregistration regime, together with other aspects of U.S. securities law compliance, have had a chilling effect on the willingness of foreign companies to list securities or engage in registered offerings in the United States. The adoption of Rule 12h-6 should significantly expand the number of foreign private issuers eligible for deregistration, based on the SEC’s estimate that as many as 25% of Form 20-F filers could terminate their Exchange Act reporting obligations under the new rule. It remains to be seen whether the new rule and related amendments, without additional relief for foreign private issuers under the Exchange Act reporting system, will encourage foreign issuers to enter the U.S. public capital markets and thereby accept SEC reporting obligations.