On 22 December 2006, the US Securities and Exchange Commission (SEC) issued a proposal that, if adopted, will make it easier for non–US companies to terminate their SEC reporting and Sarbanes- Oxley obligations (the proposal).

The proposal is good news for non-US companies that have found that the benefits of their listings in the US are outweighed by the burdens imposed since the introduction of Sarbanes-Oxley in 2002

There is also good news for non-US companies that continue to find their US listings beneficial. Alongside the proposal, the SEC also proposed new guidance to reduce the burden of what has proved to be the most problematic and costly aspect of implementing Sarbanes- Oxley (section 404, which has been interpreted as requiring an audit of internal controls). In addition, earlier in December 2006, the SEC extended the deadline for implementing the section 404 requirements for newly public companies and smaller public companies.

Current deregistration regime Under existing rules, non-US companies can deregister their securities from the SEC (and so escape SEC reporting obligations) if they can establish that fewer than 300 US residents beneficially hold their shares and, in certain circumstances, they must stay below that threshold to avoid those obligations being reinstated.

As with US companies, they can also deregister if they can establish they have fewer than 300 holders of record worldwide (the recordholder test).

In practice, many companies find these tests difficult to satisfy. The SEC originally proposed relaxing the test for non- US companies at the end of 2005, but the initial proposal attracted criticism because it contained a complex spectrum of thresholds generally based on measuring US resident ownership relative to worldwide public float and, as a practical matter, would only have been available to a limited number of companies.

Deregistering equity securities Under the proposal, the recordholder test will remain intact but, in addition, equity securities of a non-US company will be eligible to be deregistered if each of the following conditions is met:

One-year reporting history. The company has been an SEC-reporting company for the past year and has filed all required reports, including at least one SEC annual report. A successor issuer (that is, a company that becomes subject to SEC reporting requirements following a business combination) will in certain circumstances be able to take into account the reporting history of the registered target in meeting the one–year reporting history requirement.

One-year dormancy. The company has not, subject to certain exceptions, made an SEC-registered offering on the US public capital markets for the past 12 months.

One-year non-US listing. The company has maintained a listing of the relevant equity securities for the past 12 months on a non-US exchange which either by itself or together with an exchange in one other non-US jurisdiction accounts for at least 55% of worldwide trading in those securities (the primary trading market). All trading in the US is counted, whether or not it is on an exchange, but only listed trading is counted in the non- US jurisdictions.

If its securities are eligible, the company must pass one of the following two tests relating to the securities to be deregistered: US trading volume 5% or less. Provided that the company has not, in the last 12 months, delisted the securities (unless, at the time of delisting and as measured over the preceding 12 months, it also met this 5% test) or terminated its American Depositary Receipt (ADR) facility, the average daily trading volume of the securities in the US during a recent 12-month period is 5% or less of average daily trading volume in the primary trading market.

Fewer than 300 US holders. There are fewer than 300 beneficial holders of the securities resident in the US. An easier method of counting US resident holders is proposed to simplify this test, but in practice these changes are not likely to mean that a significantly greater number of companies will pass it.

Deregistering debt securities

As originally proposed at the end of 2006, under the proposal, permanent deregistration of debt securities will be permitted where the company has provided all required periodic reports, including at least one annual report, and there are fewer than 300 beneficial holders of the debt securities resident in the US.

Deregistration practicalities

Under the proposal, a company will need to file a new deregistration form (Form 15F) certifying that it meets the requirements to deregister.

Deregistering companies must also publish a notice, at or before the time they file the Form 15F, to alert US investors to their deregistration and to the need in future to rely on electronically provided home country information. As now, companies listed on Nasdaq or the New York Stock Exchange will also need to delist from those exchanges before deregistering.

Effect of deregistration

Under the proposal, the effect of filing the Form 15F will be to suspend the company’s reporting obligations immediately with respect to the securities in question. Following a 90-day waiting period during which the SEC could object to the filing, the suspension will become a termination. This is a significant advantage over the current regime, under which reporting obligations are often only suspended.

It will be open to companies that have deregistered under the current regime to deregister again under the proposed new regime and terminate their obligations, provided that their SEC reporting obligations have not revived (and they are not otherwise required to register or report) and, in relation to equity securities, that they meet the one–year non-US listing requirement.

Modifications to the exemption from SEC reporting obligations for companies supplying home country information (available to non-US companies that are not listed in the US) will enable deregistering companies to avoid becoming subject to future SEC registration obligations.

Companies that have deregistered equity securities will immediately and automatically become eligible for this exemption, provided that they publish their home country information in English and electronically, for example, on their websites. The exemption will also be immediately available to companies deregistering debt securities, but only on application to the SEC.

The future

The SEC expects that the proposal will be adopted before SEC annual reports for 2006 become due (30 June 2007).

Companies that are already preparing their internal controls evaluations for section 404 purposes (due for the first time for many of them in June 2007) will have to decide whether they are comfortable suspending their efforts pending adoption of the proposal.

The SEC estimates that up to 25% of non-US companies currently filing annual reports could terminate their reporting obligations during the first year if the proposal is adopted.

While some of these companies will undoubtedly deregister, the combination of a simpler approach to deregistration and the SEC’s attempts to ease the regulatory burden of Sarbanes-Oxley may prompt some to wait and see whether the regulatory landscape will change sufficiently for the benefits of their US listings to outweigh the burdens.