Recently the U.S. Securities and Exchange Commission (the “SEC”) released final amendments to its executive compensation and related party disclosure rules (the “Final Rules”). The Final Rules primarily affect disclosure requirements applicable to domestic issuers. While the disclosure rules remain largely unchanged for foreign private issuers, the Final Rules will have some impact on their disclosure obligations. This memorandum summarizes the key changes introduced by the Final Rules in respect of foreign private issuers.
General rules of disclosure of executive compensation
The disclosure rules relating to executive compensation governing foreign private issuers remain fundamentally unchanged under the Final Rules. Home country rules of a given issuer have been and remain to be the basis of executive compensation disclosure for foreign private issuers that are reporting companies under the Securities Exchange Act of 1934. For example, pursuant to the requirements of Form 20-F:
- Foreign private issuers need to disclose executive compensation on an individual basis (rather than aggregate basis) only if:
(i) disclosure of each individual’s compensation is required by the issuer’s home jurisdiction; or
(ii) if the issuer otherwise publicly discloses individual information.
- If neither (i) nor (ii) above are applicable, disclosure of the executive and director compensation in the aggregate is sufficient.
Filing agreements as exhibits to Form 20-F
While the general disclosure requirements described above have not changed following the adoption of the Final Rules, there have been some changes to the rules regarding filing of the exhibits to Form 20-F. Prior to the adoption of the Final Rules, a foreign private issuer did not need to file compensatory plans, contracts or arrangements if the issuer was furnishing compensation information on an aggregate basis.
Under the amended rules, a foreign private issuer is required to file individual management contracts or compensatory plans, contracts or arrangements in which management or directors participate generally when:
- the issuer would be required to publicly file the management contract or compensatory plan, contract or arrangement (or a portion thereof) in its home country, or
- it otherwise publicly discloses the information. The focus of the revised instruction is filing agreements that contain information that has been publicly disclosed.
If a foreign private issuer files or discloses a portion of a relevant document in its home country or otherwise publicly discloses such portion of the document, then such an issuer will be required to file the relevant portion of the document as an exhibit to Form 20-F. The release makes it clear that it is sufficient in complying with the new rule, if the issuer files the part of the agreement that contains the disclosed information.
As explained in the adopting release, in the same way that executive compensation disclosure under Form 20-F largely mirrors the disclosure made under home country regulations (or voluntarily), the filing of management contracts or compensation plans as exhibits to Form 20-F will now mirror the public availability of such documents under home country regulations (or their public disclosure otherwise).
In light of the change in the rules, we would recommend that foreign private issuers review the requirements for filing individual management contracts and other benefit arrangements and documents as exhibits to Form 20-F when preparing the Form 20-F for next year.
Effectiveness and Transition
The Final Rules apply to annual reports on Form 20-F filed for fiscal years ending on or after December 15, 2006.
With respect to the registration statements (including pre-effective and post-effective amendments), the Final Rules are effective for those filed on or after December 15, 2006.