At an open meeting yesterday, the Securities and Exchange Commission (SEC) voted to approve rules that would enable certain foreign private issuers to terminate permanently their registration and reporting obligations under the Securities Exchange Act of 1934, as amended (Exchange Act), closing what some foreign issuers have called the “Hotel California” – you may check in, “but you can never leave.”
Chairman of the SEC, Christopher Cox, indicated his belief that these measures will mark a further opening of the U.S. capital markets, which, despite their intent to make an exit easier for foreign issuers, will hopefully have the effect of encouraging more foreign issuers to access the U.S. capitals, safe in the knowledge that a departure, should that be desirable, will not be unreasonably difficult.
John White, Director of the Division of Corporation Finance at the SEC, when questioned, replied that he did not expect to see a great many departures this year as a result of these new rules.
The text of the final rules and interpretive guidance are not available yet, and, accordingly, the descriptions provided in this special alert are based on SEC press releases and statements made by the commissioners and staff at the open meeting. We will distribute a more comprehensive summary once the text of the final rules and interpretive guidance become available.
Foreign Private Issuer Deregistration
In December 2005, the SEC proposed new rules regarding the termination of the registration and reporting requirements of foreign private issuers. The proposal would have enabled a foreign private issuer meeting specified requirements to terminate its registration and reporting requirements under the Exchange Act. After receiving numerous comments, the SEC determined to repropose the rules focusing the requirement for deregistration on the trading volume of a foreign private issuer’s securities in the United States.
On March 21, 2007, the SEC adopted the reproposed rules substantially in the form in which they were proposed in December 2006. Specifically, the final rules would permit a foreign private issuer to terminate its registration and reporting requirements under the Exchange Act if the following conditions are met:
• the average daily trading volume of the class of securities in the United States is equal to 5 percent or less of the average daily trading volume of the class of securities in securities markets worldwide during a recent 12-month period;
• the issuer has maintained a listing of the class of securities in a foreign jurisdiction that constitutes the primary trading market for the class of securities;
• the issuer has been an Exchange Act reporting company for at least one year, has submitted all Exchange Act reports for such period and has filed at least one annual report; and
• the issuer has not sold its securities in a registered offering in the United States (with some exceptions) during the preceding 12 months.
If an issuer delists its securities from a securities exchange or terminates an American Depositary Receipts program in order to reduce its trading volume below the 5 percent threshold, then it will be required to wait 12 months before seeking to deregister based on the new rule.
To maintain permanent termination of registration and reporting requirements under Rule 12g3-2(b) of the Exchange Act, the foreign private issuer must publish its material home country documents on its Web site in English. Foreign private issuers can claim this exemption immediately upon termination of Exchange Act reporting as described above.
The final rules differ from the proposed rules in two limited, but significant areas:
• The trading volume benchmark of 5 percent is measured against worldwide trading volume.
As proposed, the measurement would have only been against the issuer’s primary trading market. The staff of the SEC noted many public comments emphasizing the increased number of issuers whose equity securities are traded on multiple exchanges and in multiple markets, further reflecting the globalization of the equity securities markets.
• The worldwide trading volume will include trading in off-exchange markets. As proposed, off-exchange trading would have been included in calculating the 5 percent benchmark in the United States, but not in worldwide trading. Given the increased off-exchange trading worldwide, and in the interest of parity, off-exchange trading will be included in both sides of the equation provided such off-exchange worldwide trading is based on reliable information and is not duplicative of on-exchange trading.
The SEC expects to publish the final rules within a few weeks in the Federal Register, and 60 days thereafter they would become effective, essentially by mid-June. This will provide foreign private issuers who use the calendar year as their fiscal year the opportunity to deregister before their annual report on Form 20-F is due for fiscal year 2006 on June 30, 2007.