On 21 March 2007, the SEC unanimously adopted amendments to the rules governing when non-US issuers may deregister under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”) and, accordingly, terminate its reporting obligations. The adopted rules, published on the SEC’s website on 27 March 2007, were effective as of 4 June 2007 and constitute a significant liberalisation of the current rules and the revised rules proposed by the SEC in December 2005. The adopted rules are substantially identical to the reproposed rules published by the SEC on 22 December 2006.
The adopting release reiterated the SEC’s commitment to protecting US investors, promoting capital formation in the US and making US markets more attractive to non-US companies. The amended rules are intended to better serve the needs of both non-US issuers and US investors by providing a clearly defined exit process, which is expected to encourage participation in US markets and increase investor choice.
Under the current rules, deregistering with the SEC is difficult and requires that a non-US issuer’s securities are neither listed on a US exchange nor held by more than 300 US residents. In determining the number of US beneficial owners, the current rules require an issuer to annually perform the expensive and increasingly burdensome process of looking through the accounts of brokers, banks and other nominees on a worldwide basis. In today’s global securities markets, such requirements often prevented issuers from exiting the Exchange Act reporting system even when there was relatively little US investor interest in its US registered securities.
The revised Rule 12h-6 permits a non-US issuer to terminate its Exchange Act registration and periodic reporting obligations for a class of equity securities if the following conditions are satisfied:
- Benchmark tests
(a) Trading volume test – the US average daily trading volume (“ADTV”) of the subject class of securities has been no greater than 5% of the worldwide ADTV during the 12 month period ending within 60 days prior to filing its application for deregistration; or
(b) Alternative 300 holder condition – the issuer has fewer than 300 record holders on a worldwide basis who are US residents.
- 12-month reporting condition – the issuer has been a SEC reporting company for the preceding 12 months and filed or furnished all required reports, including at least one annual report and all other required forms.
- One-year “dormancy” requirement – the issuer has not sold equity or debt securities in the US in a registered offering during the preceding 12 months (the adopted rules permit sales during the previous 12 months pursuant to Section 4(2), Regulation D, Rule 144A, Rules 801 and 802 and Section 3).
- Primary market listing condition – the issuer has maintained a listing of its equity securities for the preceding 12 months on an exchange in its primary trading market, which is defined as a non-US exchange (or the aggregate of two such exchanges) that accounts for at least 55% of worldwide trading of the relevant equity securities that took place during a recent 12-month period (in the instance where two markets are aggregated, one market must be larger than the US market for such securities).
- Publication requirement – the issuer must publicly announce its intention to deregister on or before the date the issuer deregisters with the SEC by filing Form 15F. The issuer must publish the notice through a means reasonably designed to provide broad dissemination of the information in the US and a copy of such notice must be submitted to the SEC, either under cover of a Form 6-K or as an exhibit to Form 15F.
Potential waiting period
Before a non-US issuer may deregister equity securities in reliance on the trading volume test, a non-US issuer must wait 12 months from the date it has:
- delisted from a US exchange; or
- terminated a sponsored ADR facility; and
- if the US ADTV of the subject class of securities exceeded 5% of its worldwide ADTV for the 12 months preceding the delisting or termination of the ADR facility.
US average daily trading volume benchmark
The adopted rules permit an issuer to include off-market transactions, including transactions through alternative trading systems, when calculating its worldwide ADTV for a class of equity securities; provided that the trading volume information is reasonably reliable. In addition, for purposes of the trading volume benchmark, the definition of equity securities excludes convertible debt and other equity-linked securities. Alternative 300 holder benchmark Under the adopted rules, issuers relying on the 300-holder standard may use a modified version of the “look-through” counting method provided under Exchange Act Rule 12g3-2(a) when determining the number of its US resident security holders. Issuers may limit their “look-through” inquiries for purposes of Rule 12h-6 to brokers, dealers, banks and other nominees located in the US, the issuer’s jurisdiction of organisation and the jurisdiction of its primary trading market. If after reasonable diligence, the issuer is unable without unreasonable effort to obtain information about the identity and residence of the underlying security holders, the issuer may assume that the security holders reside in the jurisdiction where the nominees have their principal place of business. Issuers may also rely in good faith on data from thirdparty providers when collecting security holder information.
Mechanics for deregistration
An issuer must file a Form 15F with the SEC certifying that at the date of filing it meets the conditions for terminating its Exchange Act registration and reporting obligations. The filing of such form automatically suspends the issuer’s Exchange Act reporting obligations and, provided the SEC does not object within 90 days of the filing, the suspension automatically becomes a permanent termination.
An issuer who applied for deregistration under the current rules will be eligible to use Form 15F to permanently terminate its Exchange Act reporting obligations, provided such issuer meets the primary market listing condition and either the trading volume or alternative 300-holder condition.
An issuer, who succeeded to the reporting obligations of another company as the result of a business combination, will be able to use the adopted rules provided it meets each of the conditions for deregistration and, in satisfying the 12-month reporting condition, the successor will be permitted to use the reporting history of the acquired company. However, an issuer who succeeds to the reporting obligations of another company as the result of a business combination effected through a US registered offering, will have to fulfil the prior reporting condition without reference to the acquired company’s reporting history.
Rule 12g3-2(b) amendments
The adopted rules significantly extend the availability of the exemption contained in Rule 12g3-2(b) allowing issuers, regardless of the number of their US security holders, to avoid Exchange Act registration so long as they are not listed on a US exchange and they provide home market disclosure to the SEC in English. Upon an issuer’s termination of its reporting obligations under Rule 12h-6, such issuer may immediately claim the Rule 12g3-2(b) exemption, provided that such issuer publishes its home market documents in English on its website or on another publicly available electronic information delivery service.
Rather than submitting home market documents in paper to the SEC, an issuer that already has or will be granted a Rule 12g3-2(b) exemption may fulfil its ongoing disclosure obligations under Rule 12g3-2(b) by publishing its home market documents on its website or on another publicly available electronic information delivery service.
Deregistration of debt securities
A non-US issuer may terminate its Exchange Act reporting obligations by filing a Form 15F in respect of a class of debt securities where the issuer has:
- filed or furnished all reporting required under Exchange Act 13(a) or Section 15(d), including at least one Exchange Act annual report; and
- the debt securities are held of record by less than 300 holders either on a worldwide basis or fewer than 300 persons residing in the US, as determined in accordance with the aforementioned revised counting method.