On March 27, 2007, the Securities and Exchange Commission (the “SEC”) published new rules under the Securities Exchange Act of 1934 (the “Exchange Act”), which go into effect on May 26, 2007, to allow foreign private issuers (“FPIs”) an easier exit from the Exchange Act reporting regime. These amendments come after many months of proposals, reviews and comments, and were much supported by both securities lawyers and public issuers throughout the process, even as the details were being refined.
New Exchange Act Rule 12h-6 allows an FPI to terminate its registration under Section 12(g) of the Exchange Act, as well as its reporting requirements under Sections 13(a) and 15(d), if it can show that U.S. investors have a minimal interest in its equity securities and meet certain other conditions. This exemption will be applied for under the cover of the new Form 15F.
According to the adopting release, the SEC hopes that easing the exit requirements will actually encourage non-participating foreign issuers to enter the U.S. capital markets. In the past, some FPIs have been hesitant to access the U.S. capital markets for fear that they might not be able to get out from under the registration requirements if the market proved unattractive for their securities. The SEC believes that the new rules allow FPIs an appropriate exit from the U.S. system when they have minimal interest shown by U.S. markets, but also continue to protect U.S. investors’ interests in learning about the issuer before the issuer can exit the system. For example, the new rules ensure that an FPI has filed at least one annual report; prevent the issuer from exiting the system within a year of issuing securities, delisting from an exchange, or terminating an ADR program; ensure that the issuer is listed on at least one foreign exchange so that U.S. investors can look to the disclosure documents required by that jurisdiction; and require the issuer to continue to provide certain documents required by its home jurisdiction after deregistration.
What are the key elements for deregistration?
The most important change in the new rules from the original proposal is that deregistration will be based on average daily trading volume (“ADTV”), instead of public float. The main conditions for deregistration for FPIs are as follows:
• The ADTV for the FPI’s equity securities in the United States is not more than 5 percent of its worldwide ADTV and has not been more than 5 percent for the preceding 12-month period.
• The calculation of worldwide ADTV may include off-market transactions, including alternative trading systems, so long as the trading volume information regarding such off-market transactions is reasonably reliable and does not duplicate other trading volume information regarding the subject class of securities.
• In lieu of the above ADTV limitation, the FPI’s registered equity securities are held by fewer than 300 U.S. record holders.
• During the preceding 12 months, the equity securities have been listed on one or more exchanges in one or two foreign jurisdictions, which jurisdiction or jurisdictions constitute the primary trading market for those securities.
• The FPI has at least one year of Exchange Act reporting, is current in its reporting obligations for that period and has filed at least one annual report, although any untimely filings during this period are not preclusive.
• Debt securities issuers (including convertible debt and other equity-linked securities issuers) must meet the reporting requirements and have fewer than 300 U.S. holders to deregister and terminate Exchange Act reporting and are not permitted to rely on the ADTV standard.
• Finally, the FPI must publish a notice, such as a press release, prior to or at the time of filing the Form 15F to announce its intention to terminate its Exchange Act reporting duties and must file such notice either under a Form 6-K before filing the Form 15F or as an exhibit to the Form 15F.
To determine ADTV, an FPI need only look to the trading volume information published under an effective transaction reporting plan, under NASD rules, or as otherwise reported by a national exchange. Should the FPI rely on the fewer-than-300-holders standard, the issuer need only count holders named by reasonably-obtainable sources (such as banks, brokers, dealers, etc.) in the United States, the home jurisdiction and the one or two foreign jurisdictions that comprise the issuer’s primary trading market. Furthermore, FPIs can rely on the services of independent information providers to make such determinations under this alternative standard.
The rules also allow successor-issuers to benefit from meeting these conditions. Following a merger, consolidation, exchange of securities or acquisition of assets, a successor-issuer can terminate reporting obligations of another issuer under Rule 12g-3 or 15d-5 if the successor-issuer meets the requisite conditions of Rule 12h-6. The successor-issuer may look to the other issuer’s history in determining whether it meets the reporting requirement, but it must rely on its own foreign listing history and U.S. ADTV.
What, if any, restrictions apply to the above conditions?
A key restriction on deregistration under the new rules is the so-called “dormancy condition,” which prevents an FPI from selling securities in the United States in a registered offering under the Securities Act, except as specified, during the 12 months preceding its Form 15F filing.
Equally as important is the restriction that, if an FPI has delisted a class of its equity securities from a national securities exchange or automated inter-dealer quotation system in the United States, or terminated a sponsored ADR program, and if the U.S. ADTV exceeded 5 percent of its worldwide ADTV during the 12 months preceding the delisting or termination, the FPI must wait 12 months after delisting or terminating before it can file the Form 15F and must continue to meet the requirements of Rule 12h-6 during that time.
Are there any obligations after filing for deregistration?
Immediately upon terminating its registration and reporting obligations under Rule 12h-6, an FPI will be exempt from reporting under Rule 12g3-2(b). In order to maintain its Rule 12g3-2(b) reporting exemption, an FPI must publish in English on its website (or through some electronic information delivery system generally available to the public in its primary trading market) documents required to be published in its home country, as specified in Rule 12g3-2(b) under the Exchange Act.
What is required on the Form 15F?
The new Form 15F allows an FPI to apply for deregistration under the Rule 12h-6 exemption. Upon filing the form, the FPI’s reporting obligations are suspended and a 90-day waiting period begins, at the end of which time all reporting obligations are terminated unless the SEC poses some objection. If the SEC objects or if the FPI withdraws, the issuer would be required to become current in its reporting within 60 days of that time.
Form 15F requires the following information:
• Exchange Act reporting history;
• information about the issuer’s most recent registered offering;
• identification of the foreign exchanges upon which the FPI is listed and where the primary trading market is (up to two jurisdictions);
• trading volume data and how it was determined, or the number of worldwide or U.S. record holders;
• the date the notice was published;
• the website address or other electronic delivery information system that will be used to publish the Rule 12g3-2(b) required documents; • a certification that the issuer meets all of the conditions for terminating Exchange Act reporting; and
• a certification that there are no classes of securities, other than those that are the subject of the Form 15F, for which the issuer has Exchange Act reporting obligations.
What if a foreign private issuer has already delisted from an exchange or terminated its ADR facility or has already filed a Form 15F?
An FPI who previously delisted a class of equity securities from a national exchange or quotation system or terminated an ADR facility may still avail itself of the Rule 12h-6 exemption even if its U.S. ADTV was greater than 5 percent during the 12 months preceding the delisting or termination, as long as it meets the other Rule 12h-6 conditions. The waiver of the 5 percent requirement only applies if the delisting or termination occurred prior to March 21, 2007, the day that the SEC announced at an open meeting that it would adopt these proposed rules.
An FPI that has previously filed a Form 15 can deregister under Rule 12h-6 by meeting the foreign listing requirement, satisfying either the ADTV or record holder standard and filing a Form 15F. If the FPI is a debt issuer, it need only meet the record holder standard and file a Form 15F.
The SEC believes that these new rules will benefit U.S. investors by bringing new foreign issuers to the U.S. markets now that the major objection to registering in the United States has been removed, while safeguarding U.S. investors’ interests by ensuring that sufficient information about the foreign issuer has been and will continue to be made available. Furthermore, the SEC does not anticipate that the new rules will lead to a major exodus of currently registered foreign private issuers. The SEC estimates that as many as 351 FPIs could be eligible to deregister under the new rules within the first year of their effectiveness, but this potential decrease would be offset by a number of new FPI registrants. Deregistration would allow FPIs to significantly reduce their costs of compliance, which would be a significant benefit to investors, including U.S. investors.