SEC Adopts Liberalized Foreign Issuer Deregistration Rules based on a 5% U.S. Trading Volume Test

The Securities and Exchange Commission, at its March 21, 2007 open meeting, adopted long-awaited rules that will make it easier for foreign private issuers to deregister and terminate their SEC reporting obligations.

While the text of the new rule is not yet available, the Commission and its staff made clear at the open meeting that the final rule is substantially similar to the proposal made in December 2006, with a number of technical adjustments that were made in response to comments received by the Commission. The staff said that the rule should be effective by mid June (60 days after it is published in the Federal Register), so calendar year companies that meet the threshold can avoid filing a 2006 Form 20-F (for large accelerated filers, the first to require internal control reports under Section 404 of Sarbanes-Oxley).

Under the new deregistration rule, a company can deregister equity securities if its average U.S. trading volume over a 12-month period represents 5% or less of its worldwide trading volume, so long as it meets the other requirements described below. While the basic test is identical to the December 2006 proposal, the Commission has refined the test in three respects:

Like the December 2006 proposal, the final rule provides that companies that terminate their listings or ADR programs will have to wait one year before deregistering. In contrast to the proposal, however, the waiting period will only apply to companies that are above the 5% threshold when they terminate their ADR programs (this was true for terminating listings, but not ADR programs, in the proposal). There will also be a transition rule for companies that terminated listings or ADR programs during the year preceding the adoption of the rule.

The final rule retains a number of other provisions from the December 2006 proposal, including a requirement that a deregistering company be listed in one or two foreign markets that together represent at least 55% of its worldwide trading for a year prior to deregistration, that it have at least a one-year SEC reporting history at the time of deregistration, and that it not have sold securities in an SEC-registered offering for a year prior to deregistration. Companies that deregister are automatically eligible for the registration exemption of Rule 12g3-2(b), meaning that their deregistration will be permanent so long as they publish English versions of their home country reports and financial statements on their web sites.

Under the December 2006 proposal, a company could also deregister debt or equity securities if the securities were held by no more than 300 U.S. residents (based on improved “look-through” counting rules) or 300 holders worldwide (without applying “look-through” rules). While a number of comment letters suggested raising the threshold for debt securities, the SEC did not refer to any modification of the threshold during the open meeting.

It remains to be seen whether a significant number of foreign private issuers will use the new rules. Many of the largest European issuers have informally indicated that they intend to stay registered, at least for the time being. Many of these issuers will wait to see whether the SEC eliminates the U.S. GAAP reconciliation of IFRS financial statements (currently targeted for 2009), a change that would substantially reduce the costs of a U.S. listing. Several of the Commissioners expressed support for this objective during the open meeting.

The most significant practical impact may come from a provision of the new rule that allows companies that use their shares to acquire foreign SEC registrants to avoid registering themselves as “successor issuers” (assuming this provision remains in the final rule in the form proposed in December). This provision could facilitate cross-border M&A transactions that previously would have been blocked by the successor registration requirement.

Please feel free to contact any of your regular contacts at the firm or any of our partners and counsel listed under Capital Markets in the “Our Practice” section of our website if you have any questions.