On August 27, 2008, the Securities and Exchange Commission (the “SEC”) adopted a number of rule amendments intended to update and enhance disclosure and filing requirements applicable to foreign private issuers (“FPIs”).1 The amendments were designed to make it easier for U.S. investors to obtain timely financial and other information about FPIs.2 The new rules are part of a series of SEC initiatives undertaken in light of recent market developments and new technologies to increase investor protection and promote cross-border capital flows, and include so-called “foreign issuer reporting enhancements” which, among other things: (i) change filing requirements under the Securities Exchange Act of 1934 (the “Exchange Act”) for FPIs (notably, following a three-year transition period, accelerating the filing deadline for annual reports on Form 20-F and generally eliminating the option to provide financial statements in accordance with Item 17 of Form 20-F); (ii) permit annual rather than continuous determination of FPI status and (iii) require additional disclosures by FPIs in certain SEC filings. The SEC also amended Exchange Act Rule 12g3-2(b), which provides an exemption to FPIs from registering a class of equity securities under Section 12 of the Exchange Act.3 The Rule 12g3-2(b) exemption can now be claimed automatically by an FPI meeting specified requirements as to: (i) maintenance of a listing in a “primary trading market” outside the U.S.; (ii) absence of current Exchange Act reporting obligations and (iii) electronic publication of non-U.S. disclosure documents.
Highlights of the foreign issuer reporting enhancements and the new Rule 12g3-2(b) amendments are discussed below.
Foreign Issuer Reporting Enhancements
The foreign issuer reporting enhancements include provisions that will, subject to certain transition periods: (i) accelerate the filing deadline for FPI annual reports on Form 20-F from six months to four months after the end of the fiscal year; (ii) enable foreign issuers to test eligibility to use special forms and rules available to FPIs once a year rather than continuously; (iii) require additional disclosures in certain FPI registration statements and in annual reports on Form 20-F and (iv) eliminate for the most part the availability of the limited U.S. GAAP reconciliation contained in Item 17 of Form 20-F and require FPIs to meet applicable U.S. GAAP reconciliation requirements pursuant to Item 18 of Form 20-F. The full text of the SEC’s final rules release concerning foreign issuer reporting enhancements is available on the SEC website at http://www.sec.gov/rules/final/2008/33-8959.pdf. The effective date is December 6, 2008.
Acceleration of Reporting Deadline for Annual Reports on Form 20-F. The reporting deadline for annual reports filed on Form 20-F by FPIs will be advanced from six months to four months after the FPI’s fiscal year-end. The new deadline will apply for fiscal years ending on or after December 15, 2011.
Annual Testing Permitted to Determine Eligibility to Use FPI Forms and Rules. Under the amendments as adopted, reporting foreign issuers will be permitted to assess their eligibility to use the special forms and rules available to FPIs once a year on the last business day of their second fiscal quarter, rather than on a continuous basis as is currently required. If an FPI determines that it no longer qualifies as an FPI on the last business day of its second fiscal quarter, it will be required to comply with the reporting requirements and use the forms prescribed for domestic companies beginning on the first day of the fiscal year following the determination date.4 In contrast, the SEC will permit a reporting company that qualifies as an FPI to use the FPI forms and reporting requirements beginning on the determination date on which it establishes its eligibility as an FPI.
Additional Disclosures Required in Certain Registration Statements and in Annual Reports on Form 20-F. FPIs will be required to include additional disclosures in certain registration statements and in their annual reports on Form 20-F, in accordance with the following timetable:
- Effective for fiscal years ending on or after December 15, 2008: FPIs with securities listed on a U.S. securities exchange must disclose significant differences in the applicable home jurisdiction corporate governance practices of the FPI compared to the corporate governance practices applicable to domestic companies under the relevant exchange’s listing standards.
- Effective for fiscal years ending on or after December 15, 2009: FPIs must disclose (i) changes in, and disagreements with, the FPI’s certifying accountant (these disclosures will also be required in FPI registration statements filed on Forms 20-F, F-1, F-3 and F-4) and (ii) fees and other charges paid by holders of American Depository Receipts (“ADRs”)5 to depositaries, as well as any payments made by depositaries to the FPIs whose securities underlie the ADRs.
Requiring U.S. GAAP Financial Statement Reconciliation Pursuant to Item 18 of Form 20-F. The new amendments eliminate the option to provide financial statements according to Item 17 of Form 20-F in annual reports and registration statements filed on that form. Under the amendments, Form 20-F and registration statement forms available to FPIs under the Securities Act (Forms F-1, F-3 and F-4) will require the disclosure of financial information according to Item 18 of Form 20-F for registration statements filed under both the Exchange Act and the Securities Act, as well as for annual reports on Form 20-F. An FPI that currently prepares its financial statements according to Item 17 of Form 20-F will be required to prepare statements pursuant to Item 18, commencing with its first fiscal year ending on or after December 15, 2011.6
Changes to FPIPI Exemption Requirements under Exchange Act Rule 12g3-2(b)
Other new amendments also change eligibility and disclosure requirements under Exchange Act Rule 12g3-2(b), which provides an exemption to an FPI from registering a class of equity securities under Section 12 of the Exchange Act if, among other requirements, the FPI furnishes to the SEC on an ongoing basis specified non-U.S. disclosure documents.7 The Rule 12g3-2(b) exemption also enables a qualified FPI to have a class of its equity securities traded on a limited basis in the over-the-counter market in the U.S. while avoiding the Exchange Act’s periodic reporting requirements and provisions of the Sarbanes-Oxley Act of 2002. (FPIs remain subject to the requirement to register their securities under the Exchange Act in order to have them listed on a national securities exchange or quoted on the OTC Bulletin Board.) Among other changes, the amendments eliminate the formal application process for establishing the exemption and replace the current paper-based process for submitting non-U.S. disclosure documents with a mandated electronic publishing requirement.8
Many FPIs will be automatically exempt under Rule 12g3-2(b) as a result of the amendments; in fact, an FPI can be exempt without even being aware of it, which can result in unintended consequences for the FPI. Notably, banks will no longer need to obtain cooperation from the FPI before establishing an unsponsored ADR facility, since under the amendments the SEC will permit a depositary to establish an ADR program and file a related registration statement on Form F-6 with the SEC, if the depositary determines on a reasonable, good-faith basis that the FPI is eligible for the Rule 12g3-2(b) exemption. The implications of this include possible additional U.S. investor interest in the FPI’s securities, and consequent increase in ownership of the FPI’s securities, that an unsponsored ADR could create.
Under the amended rule, which became effective on October 10, 2008, an FPI automatically will be able to claim the Rule 12g3-2(b) exemption without having to submit a written application to the SEC as long as the FPI meets specified requirements (discussed more fully below) as to: (i) maintenance of a listing of its equity securities on one or more non-U.S. exchanges in its “primary trading market” as defined in the amended rule; (ii) absence of current Exchange Act reporting obligations and (iii) electronic publication of non-U.S. disclosure documents. However, unlike the scheme applicable to the rule prior to the amendments, if the FPI fails to comply with the specified requirements it will lose availability of the Rule 12g3-2(b) exemption and will need to either find another exemption from Exchange Act registration or register the securities under the Exchange Act. The full text of the SEC’s final rules release concerning exemption from registration under Section 12(g) of the Exchange Act for FPIs is available on the SEC website at http://www.sec.gov/rules/final/2008/34-58465.pdf.
Requirements for Exemption. To claim the Rule 12g3-2(b) exemption under the amended rule, and to continue to be eligible for the exemption once claimed, an FPI must meet the following three requirements:
- Foreign Listing Requirement. An FPI must maintain a listing of the subject class of securities on one or more exchanges in a foreign jurisdiction that, either singly or together with the trading of the same class of the FPI’s securities in another jurisdiction, constitute the “primary trading market” for the securities. The amendments define “primary trading market” to require that at least 55% of the trading in the subject class of equity securities on a worldwide basis took place in, on or through the facilities of a securities market or markets in a single foreign jurisdiction or in no more than two foreign jurisdictions during the FPI’s most recently completed fiscal year. The amendments further provide that if an FPI aggregates the trading volume of the subject class of equity securities in two foreign jurisdictions for this purpose, the trading volume in at least one of those two foreign jurisdictions must be greater than the trading volume in the U.S. for such securities. According to the SEC, the purpose of this requirement is to assure that there is a non-U.S. jurisdiction principally regulating the trading of the FPI’s securities and the issuer’s disclosure obligations to investors.
Under pre-amendment requirements, an FPI could claim the Rule 12g3-2(b) exemption without regard to trading volume of the subject class of equity securities in the U.S. or any foreign exchange. As a result of the listing requirement as specified in the amended rule, some currently qualifying FPIs, which do not maintain a foreign listing or whose principal foreign trading volume comprises less than 55% of their worldwide trading volume, will no longer qualify for the Rule 12g3-2(b) exemption and would need to do so by the end of the three-year transition period for the amended rule or lose their current exempt status, as discussed below.
- Non-Exchange Act Reporting Condition. The amendments retain the current requirement that the FPI seeking to qualify for the Rule 12g3-2(b) exemption not have any existing reporting obligations under Section 13(a) or 15(d) of the Exchange Act. (An FPI may be subject to Exchange Act reporting obligations if, for example, if has a class of securities listed on a U.S. national exchange.) The amended rule, however, eliminates the requirement that an FPI not have been subject to an Exchange Act reporting obligation at any time during the previous 18 months in order to qualify for the exemption. The amended rule also eliminates the requirement that an FPI must seek to qualify under the exemption within the statutory 120-day period following the end of its fiscal year for filing an Exchange Act registration statement. An FPI therefore is no longer required to wait until the end of its current fiscal year and the start of a new 120-day period before it may claim the exemption under Rule 12g3-2(b).
- Electronic Publishing of Non-U.S. Disclosure Documents. Under the amended rule, to claim the Rule 12g3-2(b) exemption,9 an FPI must have published, in English, on its website or through an electronic information delivery system generally available to the public in its primary trading market,10 information that, from the first day of its most recently completed fiscal year, the FPI:
- Has made public or been required to make public pursuant to the laws of the country of its incorporation, organization or domicile;
- Has filed or been required to file with the principal stock exchange in its primary trading market on which its securities are traded and which has been made public by that exchange; and
- Has distributed or been required to distribute to its security holders.11
As under the pre-amendment rule, the amended rule will require an FPI only to publish electronically information that is material to an investment decision regarding the subject securities. The SEC notes that such information would include, among other things, the FPI’s financial condition or results of operations, changes in its business, management or control, and transactions with directors, officers or principal security holders. Once claimed, in order to maintain the Rule 12g3-2(b) exemption, the FPI will be required to publish electronically the same information, using the same forms of delivery as specified above. Further, the FPI must publish the required materials “promptly”. The SEC did not define the term “promptly”, noting that it depends on the type of document and the time required to prepare an English translation if applicable, as discussed below.
The amended rule states that in order to claim or maintain the exemption the FPI must publish electronically, at a minimum, English translations of the following key non-U.S. disclosure documents if in a foreign language: (i) the FPI’s annual report, including or accompanied by annual financial statements; (ii) interim reports that include financial statements; (iii) press releases and (iv) all other communications and documents distributed directly to holders of each class of securities to which the exemption relates.12 FPIs should note that some publications, such as press releases concerning securities offerings, will require specialized review for compliance with U.S. as well as home jurisdiction regulatory requirements.
Duration of Rule 12g3-2(b) Exemption; Ongoing Compliance Required. Subject to the three-year transition period applicable to FPIs claiming the exemption prior to amendment of the rule, an FPI will lose the Rule 12g3-2(b) exemption if it no longer meets any of the above requirements (i.e., listing of subject class of securities on one or more exchanges in non-U.S. primary trading market, absence of Exchange Act reporting obligations, or compliance with electronic publication requirements). FPIs therefore must monitor compliance lest they lose their exempt status under the rule. An FPI that finds itself not in compliance with any of the conditions required to maintain the Rule 12g3-2(b) exemption must either re-establish compliance with the rule in a “reasonably prompt manner” or else register under the Exchange Act, unless it can qualify for another exemption from registration under that Act. The SEC declined to adopt any specific “cure” period during which such deficiencies could be remedied to avoid the registration requirement.
Application for Exemption No Longer Required; Paper Submissions to be Phased Out. If an FPI satisfies the amended rule’s conditions, it can automatically claim the Rule 12g3-2(b) exemption from Section 12(g) of the Exchange Act without submitting a written application to, or otherwise notifying, the SEC. An FPI is not required under the amended rule to publish any statement or otherwise disclose that it is claiming the benefit of the Rule 12g3-2(b) exemption, although it may choose to do so voluntarily.
FPIs currently relying on the 12g3-2(b) exemption had previously been permitted to submit the required materials to the SEC in paper format. Commencing three months after the October 10, 2008 effective date of the amended rule, the SEC will no longer accept paper submissions in satisfaction of the document publication requirement. An FPI that continues to make Rule 12g3-2(b) submissions in paper after this three-month period, and does not publish the submitted documents electronically as required, will no longer be able to claim the Rule 12g3-2(b) exemption.
Effective Date of Amended Rule 12g3-2(b); Three-Year Compliance Transition Period. Amended Rule 12g3-2(b) became effective on October 10, 2008. The SEC expects that most FPIs that currently claim the Rule 12g3-2(b) exemption under the pre-amendment rule will continue to be eligible under the amended rule. However, the rule amendments provide for a three-year transition period from the effective date during which FPIs currently claiming the exemption will continue to be exempt under Rule 12g3-2(b). By the end of the three-year transition period (October 10, 2011), FPIs that are currently exempt from Exchange Act registration requirements pursuant to pre-amendment Rule 12g3-2(b) but that do not meet the requirements of the amended rule must either achieve full compliance with amended Rule 12g3-2(b), find another exemption from Section 12(g) or file a registration statement under Section 12 of the Exchange Act.