On September 23, 2008, the Securities and Exchange Commission (“SEC”) issued new rules governing public reporting obligations of foreign private issuers in the United States. The SEC historically has provided eligibility and disclosure accommodations to foreign private issuers reflecting differences in national laws and accounting regulations. In conjunction with its recent moves toward acceptance of International Financial Reporting Standards (“IFRS”), the SEC now has modernized key testing and disclosure provisions applicable to foreign private issuers.
Testing for Foreign Private Issuer Status and Canadian MJDS Filings
Although an entity organized outside the U.S. is considered a foreign issuer, additional tests are necessary to confirm foreign private issuer status, such as not having a majority of shares held by U.S. residents. Under the new SEC rules, effective December 6, 2008, foreign private issuers will be able to assess their eligibility once a year on the last business day of their second fiscal quarter (rather than on a continuous basis as currently required). This date aligns testing for foreign private issuer status with testing for domestic accelerated filer status.
If a foreign private issuer no longer qualifies as a foreign private issuer (on the last business day of its second fiscal quarter), it would be required to comply with the reporting requirements of domestic issuers beginning on the first day of the fiscal year following the determination. Therefore, the foreign private issuer would have at least six months’ advance notice that it must comply with the reporting requirements otherwise applicable to domestic issuers under the Securities Exchange Act of 1934 (the “Exchange Act”) such as the Section 14 proxy rules, the Section 16 reporting requirements, and key disclosure provisions including executive compensation.
In turn, a foreign issuer that determines that it qualifies as a foreign private issuer will now be permitted to use the forms and rules available to foreign private issuers immediately. The foreign private issuer would maintain that eligibility through the next fiscal year’s second quarter testing date.
Canadian issuers utilizing the multijurisdictional disclosure system (“MJDS”) also will need to test their foreign private issuer status as of the last business day of their second fiscal quarter. However, for purposes of filing an Annual Report on Form 40-F, eligible Canadian issuers must also continue to test their MJDS status at the end of their fiscal year as required by the form. For purpose of MJDS offering documents under the Securities Act of 1933, eligibility is tested upon filing. As a result, a Canadian issuer that loses its foreign private issuer status as of the end of the second fiscal quarter will immediately lose the ability to use MJDS forms, yet may continue to use the traditional Forms F-1, F-3, and F-4 through the remainder of the fiscal year.
Accelerating the Reporting Deadline for Annual Reports on Forms 20-F and 40-F
The reporting deadline for annual reports filed by foreign private issuers on Form 20-F has been shortened to four months after the issuer’s fiscal year-end (from the current six months). This deadline is regardless of any home country jurisdiction filing date. The SEC believes that (a) most foreign jurisdictions require annual reports within at least four months after fiscal year end, and (b) there will be minimal accounting burden upon foreign private issuers given the elimination of U.S. GAAP reconciliation coupled with adoption of IFRS. As a result of the accelerated deadline, investors may be better able to compare contemporaneously the performance of foreign and domestic issuers. (For MJDS filers, the Annual Report on Form 40-F will remain due on the same day it is filed in Canada.) The new four month due date of Form 20-F becomes effective after a three year transition period starting with fiscal years ending on or after December 15, 2011 (i.e., the year after most foreign private issuers will adopt IFRS.)
Streamlining Items 17 and 18 Financial Statements Requirements
Requiring Segment Data Disclosure in Item 17 – The SEC will remove the instruction to Item 17 of Form 20-F that currently permits foreign private issuers to omit segment data from their financial statements prepared in accordance with GAAP. To permit time to develop internal procedures, foreign private issuers must comply with the amendment beginning with their fiscal years ending on or after December 15, 2009.
Eliminating the Ability to Utilize Item 17 – Commencing with annual reports in fiscal years ending on or after December 15, 2011, foreign private issuers will not be permitted to file their financial statements in accordance with Item 17 of Form 20-F. (However, foreign private issuers may continue to utilize Item 17 for third party financial statements, such as in connection with a business combination.) Item 17 of Form 20-F currently is available to foreign private issuers (i) registering securities only under the Exchange Act without conducting a public offering, (ii) filing their annual report, and (iii) issuing special types of non-capital raising securities. Generally, Item 17 permits a more limited reconciliation to GAAP than Item 18. Commencing in approximately three years, Item 18 will be the sole means by which foreign private issuers may file financial statements. By that time, the SEC expects that most foreign private issuers will have shifted to IFRS without the need to reconcile to GAAP.
Adding New Disclosure Provisions
Auditor Changes and Disagreements – New Item 16F of Form 20-F will require foreign private issuers to report any changes in and disagreements with their certifying accountant. Essentially, this disclosure mirrors that which domestic issuers must report on Form 8-K and other filings pursuant to Item 304 of Regulation S-K. Prior to Item 16F, only the New York Stock Exchange required its listed foreign private issuers to notify the public of a change in auditors on Form 6-K. The new SEC rule now will require all foreign private issuers to disclose changes in and disagreements with auditors in the Form 20-F as well as Forms F-1, F-3, and F-4. Foreign private issuers must comply with Item 16F beginning in fiscal years ending on or after December 15, 2009.
Differences in Corporate Governance Provisions – For foreign private issuers with shares listed on a U.S. exchange, new Item 16G in Form 20-F will require a summary of significant ways in which the issuer’s corporate governance practices differ from those followed by U.S. companies under the exchange’s listing standards. Although U.S. exchanges typically require similar information already, the exchange standards permit this disclosure to be made on a website. With Item 16G, foreign private issuers must provide this disclosure in the annual report. Foreign private issuers must comply with Item 16F beginning in fiscal years ending on or after December 15, 2008.
ADR Fees and Payments – Under New Item 12.D.3 of Form 20-F, foreign private issuers’ annual reports must disclose information about the fees and other charges paid in connection with American Depositary Receipts (“ADRs”) facilities. This disclosure applies to annual reports as well as initial registration statements on Form 20-F. The disclosure will be on a per payment, not aggregate, basis. To allow depositaries to prepare for this new ADR transparency, foreign private issuers are not required to comply with Item 12.3.3 until fiscal years ending on or after December 15, 2009.
Aligning Rule 13e-3 Going Private Rules
Rule 13e-3 under the Exchange Act contains disclosure and filing obligations that public reporting companies, including foreign private issuers, must consider in deregistering or delisting a class of shares. In March 2007, the SEC adopted Rule 12h-6 permitting foreign private issuers to terminate their reporting obligations by meeting a quantitative benchmark designed to measure relative U.S. market interest for their equity securities. To lend consistency, the new Rule 13e-3 specifically will include the “effect” of “causing” a foreign private issuer to terminate reporting under Rule 12h-6. As a result, a security holder of a foreign private issuer that is deregistering pursuant to Rule 12h-6 will have one last opportunity to obtain and consider information about the foreign private issuer from the issuer’s going private transaction filing on Schedule 13e-3. This amendment becomes effective December 6, 2008.