SEC Proposes Rule Changes to Ease Deregistration Process for Foreign Issuers
December 15, 2005
The Securities and Exchange Commission has proposed rule amendments designed to make it easier for foreign private issuers to deregister and terminate their SEC reporting obligations. The rule proposal is a response to a two-year campaign by organizations representing major European companies to reform the rules that currently make it almost impossible for most foreign companies to exit the U.S. market. Cleary Gottlieb has assisted the European organizations throughout the process.
Under the rule proposal, a foreign company that is listed in its home country would be able to terminate the SEC registration of its shares if it has been registered for two years, has filed all required SEC reports, has not offered its securities in the U.S. market for a year (including in a Rule 144A transaction or other private placement) and meets one of two quantitative tests:
· The first test, which is available to all companies, requires a deregistering company to have 5% or less of its public float held by U.S. residents.
· The second test, available only to well known seasoned issuers (generally companies with a market capitalization of at least $700 million) would increase this threshold to 10% for companies that have 5% or less of their worldwide trading volume in the United States.
The proposal represents a substantial change from the current rules, which generally allow deregistration of a foreign company only if it has fewer than 300 U.S. shareholders. Those rules were adopted in 1964 and last amended in 1983, and are ill-suited to a world where U.S. investors trade shares globally on electronic markets.
The proposed rule would also address two other problems with the current rules:
· It would effectively make deregistration of shares permanent. Deregistering companies would be immediately eligible for Rule 12g3-2(b), which exempts foreign companies from registration so long as they furnish to the SEC English versions or summaries of the documents that they publish in their home countries (the documents would have to be made available electronically under the new rules). Under the current rules, companies that deregister are not eligible for this exemption for at least 18 months, and in many cases are ineligible forever. Absent this exemption, a deregistering company must count its U.S. shareholders at the end of each fiscal year and renew its registration if it goes over the 300 U.S. shareholder threshold.
· It would make it easier for companies to determine their U.S. shareholder base. The current rules require foreign companies to “look through” banks and brokers worldwide to determine how many U.S. shareholders they have, a task that is impossible for many companies. The proposed rule would limit the “look through” requirement to banks and brokers located in the United States, a company’s home market and a company’s principal trading market (if different from the home market). It would also allow a company to rely on an independent service provider to determine its U.S. shareholder base.
While the rule proposal represents a significant improvement over the current rules, it is not clear how many foreign companies would be able to benefit from the new rule if it were adopted in its current form. The SEC estimates that 26% of all foreign companies would be eligible, although it is not clear how reliable this estimate is, particularly for large European companies.
Deregistration of bonds would continue to be subject to the 300-holder test (based on either worldwide or U.S. bondholders), with companies being required to file at least one annual report before becoming eligible. The SEC said that it believes this test does not cause the same problems for bonds that it does for shares. The rule proposal would make deregistration permanent, an improvement over the current rules that only suspend reporting obligations.
The text of the rule is not yet available, and many important details have not yet been disclosed. Most significantly, it would seem from the SEC’s statements at its open meeting that in calculating the “public float” threshholds, large U.S. institutions, known as QIBs, would be considered part of a company’s U.S. shareholder base, even though they often trade in the company’s home market. QIBs constitute a significant majority of the U.S. shareholders in most European foreign private issuers, and QIBs alone could put many issuers above the thresholds. The European organizations had proposed that they be excluded from any “public float” calculation, as the SEC has often stated that these investors do not need the protection of U.S. registration (for example, private offerings can be made to QIBs without registration).
It also remains to be seen whether the new “look-through” rules will be workable. While they will clearly be an improvement on the current system, they seem to be inspired by similar rules that apply to business combinations and rights offerings, which have often been difficult to use in practice. The SEC’s statements provide reason to believe that at least some of the shortcomings of these other rules may be addressed in the new proposal.
Comments on the rule proposal will be due 60 days after publication in the Federal Register. Assuming publication occurs soon, the comment period should end sometime in mid February 2006.
Questions regarding the SEC’s rule proposal may be addressed to your regular contacts at Cleary Gottlieb.
CLEARY GOTTLIEB STEEN & HAMILTON LLP