In March 2007 the Securities and Exchange Commission adopted Rule 12h-6 under the Securities Exchange Act of 1934, revising the criteria for deregistration and termination of reporting obligations for foreign private issuers. Prior to the adoption of the new Rule, deregistration was difficult because the rules focused on the number of U.S. shareholders, regardless of how large their shareholdings were in relation to total shareholdings. Rule 12h-6 substituted a market-based test so that a foreign private issuer can qualify for deregistration if the average trading volume of the registered class of securities in the United States in the prior twelve-month period was no greater than 5% of the average trading volume of that class of securities on a worldwide basis for the same period. In addition, the foreign private issuer must have been in compliance with U.S. reporting requirements during the preceding twelve months; must have maintained a listing of that class of securities for at least the preceding twelve months on a foreign securities exchange that constitutes its primary trading market; and must not have sold securities in a registered offering during the twelve months preceding its deregistration.
The clamor for a more liberalized SEC rule arose primarily because of the concern of some foreign private issuers that compliance with U.S. disclosure requirements, and particularly with the requirements imposed by the Sarbanes-Oxley Act (SOX), was becoming increasingly costly.
A recent study published by Fisher College of Business of The Ohio State University examined 59 companies that utilized Rule 12h-6 to deregister equity securities and exit the U.S. markets. One of the objectives of the study was to examine whether SOX was a significant factor in the decision to deregister by determining whether the deregistering firms were adversely affected by SOX compared to other foreign firms listed on U.S. exchanges and, by examining stock price reaction to deregistering announcements and post-deregistering stock performance, to determine whether shareholders of deregistering companies benefited by deregistration.
The study concludes that, on average, there was no clear evidence that the 59 deregistering firms were more adversely affected by SOX than other foreign private issuers listed on U.S. exchanges. The study did determine that, on average, deregistering firms had poorer growth opportunities than other foreign firms with exchange listings and that these deregistering firms performed poorly prior to their deregistration announcements. Finally, the study found that deregistering firms did not benefit from their deregistration announcements and that to the extent stock price reaction was negative following a deregistration announcement, the negative reaction was greater for firms with higher growth potential. The authors of the study conclude that the “evidence supports the hypothesis that foreign firms list shares in the U.S. in order to raise capital at the lowest possible cost to finance growth opportunities and that, when those opportunities disappear, a listing becomes less valuable to corporate insiders so that firms are more likely to deregister and go home”. The implication is that SOX is less a determining factor in foreign company deregistration than is company performance and prospects.