On August 27, 2008, the US Securities and Exchange Commission (SEC) proposed financial reporting changes that, if adopted, would significantly impact all US public companies. The SEC also voted unanimously to adopt a series of amendments that will impact a wide range of foreign private issuers. The following is a summary of the proposals made and amendments adopted:
- All US issuers. The SEC has proposed that all US public companies be required to use International Financial Reporting Standards (IFRS) instead of US GAAP by 2016, with larger companies being required to comply by 2014.
- All foreign private issuers. The new amendments require foreign private issuers to determine their foreign private issuer status once a year on the last business day of their second fiscal quarter, rather than making a determination of their status on a continuous basis as was previously required.
- Foreign private issuers subject to Exchange Act registration. The new amendments accelerate the filing deadline for annual reports on Form 20-F to 120 days after the end of the fiscal year and require additional disclosure in such reports.
- Foreign private issuers that rely on the Rule 12g3-2(b) exemption from Exchange Act registration. The new amendments replace paper submissions with electronic publication of information and add a condition that requires at least 55% of the average daily trading volume of the subject class of securities to have occurred on exchanges located within one or two non-US jurisdictions during the company's most recently completed fiscal year.
- Cross-border exemptions. The new amendments revise the exemptions for cross-border business combination transactions, tender offers and rights offerings for the first time since these exemptions were adopted, including revisions to the calculation of US ownership of a target company to provide greater flexibility in the timing of such calculation and to no longer exclude holders of more than 10% of the subject securities from such calculation.
The IFRS proposal, and the amended rules and their effective dates, are expected to be published in the next several days. Detailed memoranda discussing these topics will be distributed by White & Case LLP shortly after the releases are made available by the SEC.
Proposed Roadmap for Requiring the Use of IFRS by all US Issuers
The SEC has proposed that all US public companies be required to use International Financial Reporting Standards (IFRS) instead of US GAAP in the preparation of their financial statements filed with the SEC by 2016, with larger companies being required to comply by 2014. A limited number of very large US public companies could be permitted to switch to IFRS for fiscal years ending on or after December 15, 2009. This would apply only to a company that was among the 20 largest companies within its industry in the world and that had a large number of competitors already using IFRS. The SEC estimates that approximately 110 companies would qualify. Under the proposal, in 2011 the SEC would make a final decision on this change. The proposal includes a Roadmap which sets out several milestones that would have to be achieved before IFRS would become mandatory for all US public companies. These milestones include the level of IFRS training in the United States, and funding and improved accountability for the International Accounting Standards Committee Foundation.
Public comment on the proposed Roadmap should be received by the SEC no later than 60 days after its publication in the Federal Register, which should occur in the next several days.
Date for Assessment of Foreign Private Issuer Status
Foreign private issuers will be permitted to assess their eligibility to use the special forms and rules available to foreign private issuers once a year on the last business day of their second fiscal quarter, rather than making a determination of their foreign private issuer status on a continuous basis as was previously required. A foreign private issuer that determines that it no longer qualifies as a foreign private issuer as of the last business day of its second fiscal quarter would be required to file periodic reports and comply with the other obligations of a domestic issuer at the beginning of the subsequent fiscal year (including filing a Form 10-K with respect to the year in which the foreign private issuer determined that it no longer qualified as a foreign private issuer). This gives foreign private issuers six months to take the appropriate steps to become a domestic reporting company.
Foreign Issuer Reporting Enhancements
In addition to changing the timing for assessing foreign private issuer status as described above, the SEC also adopted various amendments to improve reporting by foreign private issuers (referred to by the SEC as "FIRE" — Foreign Issuer Reporting Enhancements):
- New annual report filing deadline. The new filing deadline for all annual reports on Form 20-F will be 120 days after the end of a company's fiscal year. The previous deadline for filing was 180 days after the fiscal year-end. The SEC did not adopt a proposed 90-day deadline for large foreign private issuers. The amendments will take effect for fiscal years ending on or after December 15, 2011.
- Enhanced Form 20-F disclosure. Annual reports on Form 20-F must disclose any changes or disagreements with a company's certifying accountant; fees, payments and other charges relating to ADRs; and home country corporate governance practices where a company elects to not follow the requirements of a US national securities exchange applicable to US companies. The SEC did not adopt its proposal to require financial information related to completed acquisitions that were significant at the 50% or greater level. The SEC has not yet indicated in which fiscal year these enhanced disclosures will take effect.
- Item 17 of Form 20-F. Companies that are establishing a trading market without raising new capital will no longer be able to provide only a limited US GAAP reconciliation under Item 17 of Form 20-F. Such companies will need to provide a full US GAAP reconciliation under Item 18 of Form 20-F. The limited US GAAP reconciliation permitted by Item 17 will remain available for third-party financial statements, such as those of an acquired company or an equity-method investee. This amendment will take effect for fiscal years ending on or after December 15, 2011.
- Going private transactions. Exchange Act Rule 13e-3 will be amended to reference the recently-adopted deregistration and termination of reporting rules applicable to foreign private issuers.
Amendments to Rule 12g3-2(b) Exemption from Exchange Act Registration
The amendments to the Rule 12g3-2(b) exemption made the following significant changes:
- Electronic publication in lieu of paper submissions. Initial and ongoing paper submissions to the SEC are replaced by a requirement to electronically publish, in English, information on a company's Internet website or through another electronic information delivery system generally available to the public in its "primary trading market." The required information is substantially identical to what is currently provided in initial and ongoing paper submissions (i.e., information made public, filed or distributed to security holders pursuant to home country or securities exchange requirements). However, the amendments eliminate any requirement to submit a formal application to the SEC.
- Primary trading market outside of the US. A new condition requires the "primary trading market" for the subject class of securities to consist of securities exchanges located within one or two non-US jurisdictions. "Primary trading market" is defined to mean that at least 55% of the average daily trading volume in the subject class of securities occurred on securities exchanges within one or two non-US jurisdictions during the company's most recently completed fiscal year (and at least one non-US jurisdiction has a greater average daily trading volume than in the US).
- Prior Exchange Act reporting obligations. The amendments eliminate a rule that prohibited certain foreign private issuers from relying on Rule 12g3-2(b) if they had reporting obligations under Sections 13(a) or 15(d) of the Exchange Act anytime within the prior 18 months. As amended, the rule still requires companies to have no reporting obligations under Sections 13(a) or 15(d) of the Exchange Act during the period they are relying on the exemption.
The final amendments are substantially similar to the proposed amendments published in February 2008 as Release 34-57350, with the exception that a US trading volume test condition has been dropped, as advocated in a number of comment letters.1 As originally proposed, the US trading volume test had called for average daily trading volume in a foreign private issuer's subject class of securities in the United States to be no greater than 20% of the average daily trading volume of that class of securities on a worldwide basis for the same period.
The amendments establish a transition period to accommodate a currently exempt foreign private issuer that is unable to satisfy the new requirements of amended Rule 12g3-2(b) and becomes subject to Exchange Act registration as a result. Such a foreign private issuer will not be required to register its securities under the Exchange Act or make any related Exchange Act filings until three-years after the new amendments are effective. The amendments also establish a three-month transition period for purposes of the electronic publication requirement, during which the SEC will continue to process paper submissions.
The SEC will publish the final rule changes in the next several days and specify the effective date of the amendments.
Revisions to the Cross-Border Exemptions
The SEC amendments to the exemptions for cross-border business combination transactions, tender offers and rights offerings (the "Cross-Border Exemptions") are the first amendments to these exemptions since they were adopted in 1999. These amendments are intended to encourage the inclusion of US security holders in cross-border transactions on the same terms as other security holders.
The adopted amendments to the Cross-Border Exemptions include:
- New calculation of US ownership of a target company.
- An offeror may calculate US ownership of a target company as of a date within a 91-day range starting from 60 days before to 30 days after public announcement of the business combination. If the calculation cannot be made 60 days before public announcement, then the calculation can be made 120 days before public announcement. This is a vast improvement from both the current rule, which requires calculating US ownership of the target as of the 30th day before commencement of the transaction, and the original proposal, which allowed a date selected within a 60-day range before announcement of the transaction.
- Holders of more than 10% of the subject securities will no longer be excluded in calculating US ownership of a target company. Securities held by a bidder will continue to be excluded in calculating US ownership.
- If an offeror is unable to conduct the "look-through" analysis that is currently required to determine beneficial ownership, it can calculate US ownership by comparing the US average daily trading volume ("ADTV") of the subject securities with the worldwide ADTV. The offeror needs to take into account US ownership figures disclosed in public filings with the SEC, the home country regulator, and the primary trading market. The offeror also needs to consider other information on US beneficial ownership the offeror knows or should have reason to know. The SEC Staff gave two examples that would qualify as "unable" to conduct a look-through analysis: if such ownership information is only available twice a year (as is common in Japan) or if shares are held in bearer form (as is common in Germany).
- Expanded Tier I relief under Rule 13e-3. The Tier I exemption from Rule 13e-3 under the Exchange Act will be expanded to apply to all Tier I transactions regardless of transaction structure, including certain affiliate transactions not currently covered under the Cross-Border Exemptions, such as schemes of arrangement, cash mergers, or compulsory acquisitions for cash.
- Expanded Tier II relief.
- The Tier II exemption will be expanded to include tender offers for securities that are not registered under Section 12(b) of the Exchange Act.
- With respect to dual and multiple offer structures under Tier II, (i) multiple offers will be allowed abroad in conjunction with a US offer and (ii) the inclusion of non-US persons in the US offer and the inclusion of US persons in foreign offers will be allowed.
- Bidders will be allowed to suspend back-end withdrawal rights while tendered securities are counted and before they are accepted.
- Subsequent offering periods in Tier II offers may be extended beyond 20 US business days.
- Purchases outside of a tender offer. Existing "no-action" exemptive relief under Rule 14e-5 will be codified to allow purchases and arrangements to purchase securities of a foreign private issuer outside of tender offers conducted under the Tier II exemption, if certain conditions are met.
- Interpretive guidance. Interpretive guidance consistent with the proposing release will be published regarding the all-holders requirement under the Exchange Act and vendor placement arrangements.