SEC Proposes Changes to Foreign Private Issuer Reporting and Registration Requirements

At its open meeting on February 13, 2008, the SEC voted to propose a series of amendments to its filing, disclosure and registration requirements for foreign private issuers. Based on the description provided by the SEC staff, the proposed amendments would appear to have both positive and negative potential consequences for non-U.S. companies.

• On the positive side, the amendments would provide an automatic exemption from SEC registration for many non-U.S. companies that do not list or publicly offer securities in the United States, so long as they publish English versions of their home country annual reports and certain other documents on their websites. The current version of the exemption requires companies to submit an application to the SEC (which many companies do not do), and to submit paper copies of their home country documents to the SEC.
• On the other hand, the amendments would for the first time make eligibility for the exemption contingent on a company meeting substantive eligibility criteria: no more than 20% of its share trading volume can take place in the U.S. over-the-counter market, and it must maintaining a listing in its primary market. The current version of the exemption is available for all non-U.S. companies that do not list or publicly offer their securities in the United States.
• Additionally, the amendments would shorten the deadline for non-U.S. reporting companies to file their annual reports on Form 20-F, to 90 days after the end of a fiscal year for larger companies and 120 days for smaller companies. This proposal is likely to solicit significant comment, particularly in Europe where the home country reporting deadline is 120 days, as well as in other countries with home country reporting deadlines that are longer than the 90-day proposal.

The text of the proposed amendments is not yet publicly available, but should be published for public comment shortly. Once this occurs, it should be possible to assess more definitively the potential practical consequences of the amendments.

1. Amendments to the Rule 12g3-2(b) Exemption

Under Section 12(g) of the U.S. Securities Exchange Act of 1934 (known as the Exchange Act) and related rules, a foreign private issuer that has 500 or more security holders of record of a class of equity securities and more than US$10 million in total assets, and 300 or more U.S. resident holders at the end of its most recently completed fiscal year, must register that class under the Exchange Act unless an exemption is available. Exchange Act registration requires a company to comply with SEC reporting requirements, and with the Sarbanes-Oxley Act of 2002.

Registration under Section 12(g) is theoretically required even if a company does not list or publicly offer its securities in the United States. However, an exemption is available for such companies under SEC Rule 12g3-2(b). This is one of the rules that the SEC is now proposing to amend.

Rule 12g3-2(b) currently allows a non-U.S. company that has not listed or publicly offered securities in the United States to avoid registration by filing an application under the Rule and furnishing the SEC with English-language versions of certain material information (e.g., annual reports, financial statements, significant press releases) that the issuer makes public or is required to file in its home country. For most companies, the information must be submitted to the SEC in paper form.

The amendments would make the exemption automatically available to eligible companies, which would no longer have to file an application with the SEC. This is important because many companies that are potentially subject to Section 12(g) registration do not file exemption applications, and thus are technically required to register under the Exchange Act. The SEC traditionally has not enforced this requirement strictly, but its existence has created controversy, particularly at the time of the merger of the New York Stock Exchange and Euronext, which some thought would vastly increase the number of companies meeting the Section 12(g) threshold for registration (a dubious proposition, but one that was widely reported in the European press).

Under the amendments, in order to maintain the exemption, a company must publish electronically (either on its website or on a publicly available electronic system) English translations of certain key documents, such as annual reports and financial statements, interim reports and financial statements, material press releases and certain other significant documents. Paper submission will no longer be required.

By eliminating the requirement to file an application and allowing website publication in place of paper submission, the amendments will effectively exempt vast numbers of non-U.S. companies from Section 12(g) registration, without any action on the part of those companies.

On the other hand, the SEC for the first time has proposed substantive eligibility requirements for Rule 12g3-2(b). Currently, any company that submits an application and submits the relevant documents to the SEC can use Rule 12g3-2(b) so long as it does not list or do a public offering in the United States. The proposed eligibility requirements are the following:

• The issuer has no active Exchange Act reporting obligations under Section 13(a) or 15(d) (this means essentially that the issuer has not listed or publicly offered securities in the United States).
• The U.S. trading volume for the subject securities is no greater than 20 percent of the worldwide trading volume for the issuer’s most recently completed fiscal year, or the issuer must be claiming the Rule 12g3-2(b) exemption in connection with its deregistration under Rule 12h-6.
• The issuer maintains a listing of the subject securities on one or more exchanges in its primary trading market (meaning one or two markets that represent at least 55% of its worldwide trading volume).

The result is that some companies that are currently eligible for the Rule 12g3-2(b) exemption could lose their exemption (the rule will provide a three-year transition period for those companies). Similarly, a company could become exempt under Rule 12g3-2(b) and subsequently lose its eligibility.

The number of companies in this situation is likely to be limited, although it also remains to be seen whether companies will be able to demonstrate as a practical matter that their U.S. trading volume is below the 20% threshold, given the difficulty in obtaining reliable information on U.S. over-the-counter trading volume of non-U.S. securities. It also is possible that the listing requirement will create difficulty for some companies, although most companies that need the exemption would ordinarily be listed abroad.

The new rule could have another unintended effect by making the shares of many non-U.S. companies eligible for unsponsored American Depositary Receipt facilities. U.S. banks are allowed to establish such facilities for shares of any company that is exempt under Rule 12g3-2(b), without the authorization of the company. By extending the exemption automatically to large numbers of companies, the amendments will make the shares of those companies eligible for unsponsored ADR facilities (and potentially increase their U.S. trading volume), unless the SEC changes the rules governing those facilities.

2. Changes to Form 20-F and Other Rules

The SEC has also proposed changes to Form 20-F, the form used by non-U.S. companies that are subject to Exchange Act reporting, as well as certain related rules.

The most important amendment is a proposal by the SEC to shorten the deadline for filing annual reports on Form 20-F, from the current six months after the end of a fiscal year, to 90 days for large accelerated filers and accelerated filers, and to 120 days for all other issuers (the change would take effect after a two-year transition period). The 90-day deadline is shorter than the home country reporting deadline in many countries, including in the European Union, as well as many countries in Latin America and Asia.

During the SEC’s open meeting, the Director of the Division of Corporation Finance, John White, acknowledged that the 90-day deadline might be an issue for many companies, and indicated that he expected to receive comments on this point. This might be an indication that the 90-day proposal is simply an opening position that could change following the comment period. If not, there is a significant likelihood that the deadline will cause many large non-U.S. companies to consider deregistration.

The other proposed changes are more technical in nature, although some of them could raise issues depending on the details that will appear in the text of the proposals. These changes include the following:

• The SEC’s “going private” rules under Rule 13e-3 would be amended to cover share repurchases, tender offers and proxy solicitations that are intended or would be reasonably likely to render a foreign private issuer eligible to deregister its securities under the SEC’s recently adopted foreign private issuer deregistration rules.
• The disclosure requirements in Form 20-F would be amended to eliminate the instruction to Item 17 of Form 20-F that allows certain issuers to omit segment data from their US GAAP reconciliation.
• Issuers would be required to determine their foreign private issuer status once a year on the last day of their second fiscal quarter rather than on a continuous basis as currently required, and would provide a transition period for companies that lose foreign private issuer status (without the amendment, companies theoretically must test their status every day and must start reporting as a U.S. company immediately if they lost their foreign private issuer status).
• In addition to the above proposals, the SEC voted to solicit comment on whether Form 20-F should be amended to:
• Require disclosure of financial information for completed acquisitions that are significant at the 50% or greater level under the applicable significance tests set forth in Regulation S-X. The SEC did not say whether the required information would include full financial statements of the acquired company under Rule 3-05 of Regulation S-X, or pro forma financial statements under Article 11 of Regulation S-X.
• Require all mandated U.S. GAAP reconciliations to be prepared under Item 18 of Form 20-F, except for third party financial statements, which could continue to be prepared under the more limited reconciliation requirements in Item 17 of Form 20-F.
• Require disclosure of significant differences between a company’s corporate governance practices and U.S. exchange requirements from which foreign issuers are largely exempt. Listed companies are already required by exchange rules to publish this information in their Form 20-F annual reports or on their websites. The effect of the SEC’s proposal would be to require Form 20-F disclosure.
• Require disclosure regarding fees, payments and other charges relating to American depositary receipts.
• Require disclosure regarding changes in and disagreements with the issuer’s certifying accountant.
  
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