On March 27, 2007, the Securities and Exchange Commission ("SEC") adopted new Rule 12h-6, and made certain amendments to related rules, to make it easier for "foreign private issuers" to terminate their reporting obligations under sections 12(g), 13(a) and 15(d) of the Securities Exchange Act of 1934 ("Exchange Act"). The new rules will become effective on June 4, 2007. Although the new rules are substantially similar to changes proposed in December 2006, the SEC has included several technical refinements in the final rules. The significant amendments, including changes in the final rules as compared to the December 2006 proposal, are discussed below.
Current Rules and Reason for Change
Under current rules it is difficult for a foreign private issuer — that is, a foreign issuer that is not a foreign government and does not have a majority of its business in the United States or certain otherwise significant ties to the United States 1 — to terminate its registration and reporting obligations under the Exchange Act. In particular, under current rules, a foreign private issuer may deregister, and cease filing reports under the Exchange Act, only if its securities are held of record by fewer than 300 residents in the United States, which can be difficult and costly for foreign private issuers to determine. Further, under the current rules, a foreign private issuer may only merely suspend a duty to report, as opposed to permanently terminating such duty.
The amendments to the foreign private issuer deregistration rules were proposed due to the SEC's concern that it is difficult for a foreign private issuer to terminate its Exchange Act registration and reporting obligations even when there is little U.S. investor interest in the foreign private issuer's registered securities. Further, the SEC was concerned that the current process by which a foreign private issuer exits the Exchange Act registration and reporting system may discourage foreign private issuers from accessing U.S. public trading markets.
Trading Volume Test
Under new Rule 12h-6, a foreign private issuer may deregister equity securities by satisfying one of two threshold tests in addition to satisfying certain other requirements. A foreign private issuer will satisfy the threshold requirement and may deregister if either:
- the foreign private issuer's average daily U.S. trading volume over a 12-month period represents 5% or less of its average daily worldwide trading volume ("Trading Volume Test"); or
- the foreign private issuer's securities are held by no more than 300 U.S. residents or 300 shareholders worldwide ("300 Shareholder Test").
In the final rules, the SEC made several changes to the Trading Volume Test as compared to the December 2006 proposal. First, the Trading Volume Test as adopted compares a foreign private issuer's U.S. trading volume to its worldwide trading volume; in the December 2006 proposal the U.S. trading volume was compared to the issuer's trading volume in its primary market. Second, unlike the December 2006 proposal, under the new rules a foreign private issuer must include both on-exchange and off-exchange transactions in its calculation of U.S. average daily trading volume. Third, the new rules permit off-market trading to be included in the worldwide trading volume so long as the information for such off-market trading is "... reasonably reliable and does not duplicate such trading volume information regarding the subject class of securities." Finally, convertible and other equity-linked securities are not included in calculating either the U.S. or worldwide trading volume. The SEC stated that trading volume information concerning convertible and other equity-linked securities is more difficult to obtain than trading volume information for the underlying securities and, thus, an issuer should not include such securities in calculating the trading volume.
Alternative 300 Shareholder Test
As an alternative to the Trading Volume Test, the SEC retained the 300 Shareholder Test from the current rules, for both debt and equity securities. Although the 300 Shareholder Test was retained, the SEC adopted a revised counting method for issuers. Under the current rules, a foreign private issuer, on a worldwide basis, must consider the securities held by a broker, dealer, bank or nominee for the accounts of customers resident in the United States as held in the United States by the number of separate accounts for which the securities are held, which is also referred to as the "look through" counting method. Instead, to determine the number of the issuer's U.S. resident security holders, the issuer may now "... limit its inquiry to brokers, banks and other nominees located in the United States, the issuer's jurisdiction of incorporation, legal organization or establishment and, if different, the jurisdiction of its primary trading market." Further, the final rule provides:
... that, if, after reasonable inquiry, an issuer is unable without unreasonable effort to obtain information about the amount of securities held by nominees for the accounts of customers resident in the United States, it may assume that the customers are the residents of the jurisdiction in which the nominee has its principal place of business.
Under the revised counting method, for example, if a broker does not respond to an issuer's inquiry, the issuer may presume that all shares held by that broker are by residents within the broker's jurisdiction.
Additional Requirements to Deregister
To deregister, in addition to satisfying one of the two threshold tests, a foreign private issuer must: (1) be listed in one or more foreign markets that together represent at least 55% of its worldwide trading for a year prior to deregistration; (2) have at least a one-year SEC reporting history under the Exchange Act at the time of deregistration; (3) be current in all of its reporting obligations for such period; (4) have filed at least one Exchange Act annual report; and (5) file a Form 15F with the SEC, by which a foreign private issuer will certify that it meets the requirements to terminate its Exchange Act registration and reporting obligations. Further, with certain exceptions, the issuer's securities must not have been sold (including by selling stockholders in an underwritten offering) in the United States in a registered offering during the 12 months preceding the filing of its Form 15F, which is described as the "dormancy period."
In a change from the December 2006 proposal, under the final rule the issuer may be listed on multiple exchanges within a single jurisdiction. The final rule further differs from the December 2006 proposal in that an issuer must have only a one-year reporting history as opposed to a two-year reporting history and need only have filed one annual report as opposed to two. Further, the new rules permit an issuer to use a "special financial report" filed pursuant to Exchange Act Rule 15d-2 as an Exchange Act annual report. A "special financial report" furnishes certified financial statements for the foreign private issuer's last full fiscal year or other period and must meet the requirements of the necessary form for the issuer's annual report.
A foreign private issuer is also required to publish a notice announcing its intent to terminate its Exchange Act registration and reporting obligations under Rule 12h-6 prior to or at the time of filing Form 15F. The notice requirement includes an issuer of equity or debt securities, including a successor issuer (discussed below), and excludes prior Form 15 filers (discussed below).
Termination of Listing or Sponsored ADR Facility — Potential One-Year Delay for Deregistration
In an effort to reduce any incentive for foreign private issuers to delist from a U.S. exchange or an automated inter-dealer quotation system for the specific purpose of decreasing its U.S. trading volume, the final rule requires that, if an issuer's securities have been delisted within one year prior to filing a Form 15F, the foreign private issuer must satisfy the Trading Volume Test as of the date of the delisting and for the preceding 12 months. Thus, a foreign private issuer that fails to satisfy the Trading Volume Test on the date of delisting may not terminate its Exchange Act registration and reporting obligations until it meets the Trading Volume Test for at least 12 months following the delisting. In contrast, if a listed foreign private issuer satisfies the Trading Volume Test, such issuer may simultaneously delist from its listing and terminate all Exchange Act registration and reporting requirements.
The final rule also provides that an issuer that has terminated a sponsored ADR facility must wait one year before deregistering. Although this condition is similar to that proposed in the December 2006 proposal, it differs in that, under the final rule, the waiting period will apply only to an issuer that does not satisfy the Trading Volume Test when it terminates its ADR program. The final rule also clarifies that an issuer is required to calculate the trading volume of its ADR facilities in terms of the number of securities represented by such facilities.
The SEC adopted a transition rule for an issuer that delisted or terminated its sponsored ADR facilities prior to March 21, 2007. Under the transition rule, an issuer that, prior to March 21, 2007, delisted from a national securities exchange or inter-dealer quotation system in the United States or terminated a sponsored ADR facility may file a Form 15F based on the Trading Volume Test even if, at the time of such delisting or termination, the issuer's average daily U.S. trading volume represented more than 5% of its average daily worldwide volume for the preceding 12 months.
A non-Exchange Act reporting foreign private issuer which acquires an Exchange Act reporting foreign private issuer may immediately file for termination from its new Exchange Act reporting obligations so long as such successor issuer meets the foreign listing, dormancy and either threshold test described above, and the acquired company's reporting history satisfies Rule 12h-6's prior reporting conditions. The final rule for successor issuers is similar to the December 2006 proposal; however, under the final rule, successor issuers must meet the requirements for deregistration under the new Rule 12h-6 relating to equity securities registrants. This will make it easier for a foreign private issuer to terminate its registration and reporting obligations despite an acquisition of a foreign private issuer that has registration and reporting obligations.
Prior Form 15 Filers
A foreign private issuer that, prior to the effective date of Rule 12h-6, filed a Form 15 for the purpose of obtaining suspension or termination from its Exchange Act Reporting obligations will be eligible under Rule 12h-6 to terminate its Exchange Act Reporting so long as certain conditions are met. To receive this benefit for equity securities, the foreign private issuer must:
- satisfy the listing requirement under Rule 12h-6 as described above;
- satisfy either threshold test described above; and
- file a Form 15F.
To receive this benefit for debt securities, the foreign private issuer must:
- satisfy Rule 12h-6's record holder provision as applicable to debt securities; and
- file a Form 15F.
Automatic Suspension Upon Filing
Upon filing a Form 15F, a foreign private issuer's Exchange Act reporting obligations will be automatically suspended so long as the issuer provides English versions of its home country documents, as required by Rule 12g3-2(b), on its website or on another electronic information delivery system that is generally available to the public in the issuer's primary trading market. If the SEC raises no objections to the termination of the issuer's reporting obligations, at the end of a 90-day waiting period the suspension will become a full termination of the reporting obligations. This automatic suspension also applies to a successor issuer and prior Form 15 filers.
Amendments to Rule 12g-4 and 12h-3
In light of new Rule 12h-6, the SEC believes that a minimal number, if any, of foreign private issuers will use current Rules 12g-4 or 12h-3 to terminate their registration of a class of securities or to suspend their reporting duty. Rules 12g-4 and 12h-3 currently allow a foreign private issuer to terminate registration of its securities and suspend its reporting duty if:
... the class of securities is held by less than 300 U.S. residents or by 500 U.S. residents and the issuer has had total assets not exceeding $10 million on the last day of each of its most recent three fiscal years.
Since the requirements of 12h-6 make it easier for a foreign private issuer to terminate its Exchange Act registration and reporting obligations, as compared to Rules 12g-4 and 12h-3, the SEC has adopted amendments to eliminate such related provisions of Rules 12g-4 and 12h-3.