Recently, the Staff of the Division of Corporation Finance of the Securities and Exchange Commission (the "SEC") issued new Compliance and Disclosure Interpretations ("CDIs") relating to foreign private issuers. This new guidance provides certainty regarding how to qualify as a foreign private issuer and answers more specific questions relating to filing requirements and the termination of Exchange Act registration.
Elaborating on the Definition of Foreign Private Issuers
Determining whether an entity qualifies as a foreign private issuer is often complicated, depending on the particular set of facts. In an effort to clarify any potential confusion, the Staff released new CDIs that expand on the definition of foreign private issuer provided in Securities Act 405 and Exchange Act Rule 3b-4(c). The rules define "foreign private issuer" as a corporation or other organization incorporated or organized under the laws of any foreign country, unless the issuer meets the following conditions as of the last business day of its most recently completed second fiscal quarter:
1. More than 50 percent of the issuer's outstanding voting securities are direc tly or indirectly owned of record by U.S. residents; and
2. One or more of the following is true:
a. The majority of the executive officers or directors are U.S. citizens or residents;
b. More than 50 percent of the issuer's assets are located in the United States; or
c. The business of the issuer is administered principally in the United States.
Through the new CDIs, the Staff provided additional insight on each condition set forth above.
Ownership of Voting Securities
For issuers that have multiple classes of voting stock with different voting rights, the Staff provides one of two methods in determining whether more than 50 percent of such issuer's voting securities are owned of record by U.S. residents. The issuer can either: (1) evaluate whether more than 50 percent of the voting power of the classes on a combined basis is owned by U.S. residents, or (2) make the determination based on the number of voting securities, and the issuer must use such determination methodology on a consistent basis.
The Staff considers a person who has permanent resident status in the United States to presumptively be a U.S. resident. However, individuals without permanent resident status may still be considered U.S. residents for purposes of this ownership prong. An issuer must decide what criteria it will use on a consistent basis to determine residency for such individuals. Examples of possible criteria include tax residency, nationality, mailing address, physical presence, location of a significant portion of their financial and legal relationships or immigration status.
Citizenship/Residency of Executive Officers and Directors
In determining whether the majority of the executive officers or directors are U.S. citizens or residents, an issuer must make this determination separately for each group, rather than treating the executive officers and directors as a single group. Essentially, the issuer must assess (i) the citizenship of the executive officers, (ii) the residency of the executive officers, (iii) the citizenship of the directors and (iv) the residency of the directors.
Furthermore, for those issuers that have two boards of directors, the Staff clarifies that the issuer should make this determination with respect to the board that performs functions most parallel to those handled by a U.S.-style board of directors. If the functions are divided among the two boards, the issuer may aggregate the members of both boards for purposes of determining t he majority of U.S. citizens or residents.
Location of Assets
In determining whether more than 50 percent of the issuer's assets are located in the United States, the Staff allows issuers to use the geographic segment information determined in the preparation of its financial statements. As an alternative, the Staff accepts any other reasonabl e methodology used on a consistent basis in evaluating the location and amount of its assets.
Administration of Business
In evaluating whether business is administered principally in the United States, the Staff provides that there is no determinative single factor or group of factors. Rather, the issuer must assess on a consolidated basis the location from which its officers, partners or managers primarily direct, control and coordinate the issuer's activities.
More specifically, the Staff also confirmed that if an issuer holds an annual or special meeting of shareholders or occasional meetings of the issuer's board of directors in the United States, this alone would not result in a determination that the issuer's business is administered principally in the United States.
Foreign Private Issuers and Offerings of Guaranteed Securities
The new CDIs answer questions surrounding the filing requirements for offerings or reporting obligations involving a parent foreign private issuer and its subsidiary that does not qualify as a foreign private issuer. In circumstances where a foreign private issuer either (i) guarantees securities of a subsidiary that is not a foreign private issuer or (ii) issues securities that are guaranteed or co-issued by one or more subsidiaries that do not qualify as foreign private issuers, both the parent and subsidiary may use an F-series registration statement (which is the form for foreign private issuers) to register an offering of securities and a Form 20-F (which have lesser disclosure requirements than Form 10-K for domestic issuers) to satisfy associated SEC reporting obligations, subject to certain conditions. An F -series registration statement and a Form 20-F are available if, pursuant to Rule 3-10 of Regulation S-X, both the parent and the subsidiary are eligible to present condensed consolidated financial information in the parent company's filings or narrative disclosure in lieu of such financial information, rather than separate financial statements of the subsidiaries.
Termination of Securities Registration Meaning of "Primary Trading Market"
Rule 12h-6 under the Exchange Act allows a foreign private issuer to terminate registration of a class of its securities subject to certain conditions. One condition is that the issuer has maintained a listing of this particular class of securities for at least 12 months prior to the proposed termination on one or more exchanges in a foreign jurisdiction that, either singly or together with the trading of the same class of securities in another foreign jurisdiction, constitutes the primary trading mark et for those securities. Primary trading market means that at least 55 percent of the trading in the particular class of securities took place in, on or through the facilities of a securities market or markets in a single foreign jurisdiction or in no more than two foreign jurisdictions during a recent 12-month period. The new CDIs clarify that for the European Union specifically, an issuer may consider all securities trading markets in countries that are part of the European Union as a single foreign jurisdiction.