• SEC Proposes To Ease Exit of Foreign Private Issuers from the U.S. Public Securities Markets
  • January 10, 2007
  • Law Firm: Nixon Peabody LLP - New York Office
  • On December 22, 2006, the Securities and Exchange Commission released reproposed amendments1 to its current rules governing when a foreign private issuer2 may exit the registration and reporting requirements under the Securities Exchange Act of 1934.3 The reproposed rules revise the amendments to the same rules that the SEC originally proposed on December 23, 2005. The SEC decided to revise the originally proposed rules after representatives from foreign companies and foreign industry associations voiced their concern that the original proposed amendments did not go far enough to reform the exit requirements for foreign private issuers. The reproposed rules are intended to eliminate disincentives for foreign companies to register their securities in the U.S.

    Problems in the existing Exchange Act exit rules

    Under the current rules, a foreign private issuer of equity securities must generally certify, on a Form 15, that the subject class of securities is held of record by either (i) fewer than 300 residents in the U.S. or (ii) fewer than 500 residents in the U.S., provided that the issuer’s total assets have not exceeded $10 million on the last day of each of the issuer’s most recent three fiscal years.4 Commenters criticized a provision in the existing rules that generally requires companies to determine the number of U.S. resident shareholders by looking through the record ownership of all nominees on a worldwide basis and counting the number of separate accounts of customers resident in the U.S. for which the securities are held. They are further concerned that the “300 U.S. resident shareholder” standard is too easily exceeded by a foreign company that may have engaged in very little recent selling activity in the U.S. In addition, the fact that the existing rules merely suspend, rather than terminate, a company’s Section 15(d) reporting obligations may subject a foreign company, years after filing a Form 15, to renewed section 15(d) reporting obligations, without regard to its U.S. market activity, if it subsequently exceeds the 300 U.S. resident shareholder threshold.5

    Reproposed rule amendments

    The reproposed rules amend the deregistration and reporting compliance regulations that govern when foreign private issuers of equity and/or debt securities decide to delist their securities from U.S. exchanges.

    Exit rules for issuers of equity securities

    The reproposed rules enable a foreign private issuer, regardless of its size and number of U.S. holde rs of record , to terminate its Exchange Act registration and reporting obligations by filing a Form 15F,6 if the average daily trading volume (“ADTV”) of the subject class of equity securities in the U.S. has been 5 percent or less of the ADTV of the subject securities in the issuer’s primary trading market during a recent 12-month period. The ADTV is determined by (i) taking into account all U.S. trading of the issuer’s subject securities, whether occurring on a registered national securities exchange or elsewhere, as reported through the U.S. transaction reporting plan, and then (ii) dividing the issuer’s U.S. ADTV by the ADTV in the one or two jurisdictions that comprise the issuer’s primary trading market.

    Foreign private issuers that wish to delist their securities and concurrently file a Form 15F to deregister must have satisfied the trading volume benchmark as of the date of delisting, and as measured over the 12 months preceding the date of delisting. If a foreign private issuer does not meet the trading volume benchmark at the date of delisting, then it would not be eligible to file a Form 15F and terminate its Exchange Act registration and reporting obligations until one year after the date of delisting, assuming that, at the date of filing its Form 15F, its U.S. ADTV for the recent 12-month period subsequent to its delisting did not exceed 5 percent of the ADTV in the issuer’s primary trading market. Otherwise, the SEC was concerned that the reproposed rule could create an incentive for a foreign private issuer to delist its securities from a U.S. exchange to decrease its U.S. trading volume, given that the principal quantitative measure of the ADTV benchmark is based on a comparison of the trading volume in the U.S. to the foreign markets of a foreign private issuer’s equity securities.

    The reproposed rule introduces an additional requirement for foreign private issuers whose securities trade in the U.S. in the form of American Depositary Receipts (“ADR”). Under the reproposed rule, such issuers may only deregister and file a Form 15F in reliance on the new trading volume provisions if the issuer has not terminated any sponsored ADR facility within the 12-month period before filing the Form 15F. The SEC is concerned that the proposed rules may otherwise, as an unintended consequence, encourage foreign private issuers to terminate their ADR facilities.

    As an alternative to the proposed ADTV benchmark, the reproposed rule generally allows a foreign private issuer to terminate its Exchange Act reporting obligations for a class of equity securities if it has fewer than 300 record holders on a worldwide basis or fewer than 300 record holders resident in the U.S. The purpose of this provision is to enable issuers that would not meet the ADTV benchmark, but have fewer than 300 record holders, to qualify for termination under the reproposed rules.

    Finally, regardless of whether a foreign private issuer seeks to terminate its registration and reporting obligations based on the ADTV benchmark or the alternative 300-record-holder condition, the reproposed rule requires the issuer of equity securities to have (i) had reporting obligations under Section 13(a) or Section 15(d) of the Exchange Act for at least the 12 months preceding the filing of a Form 15F, (ii) filed or furnished all reports required for this period, and (iii) filed at least one annual report pursuant to Section 13(a) of the Exchange Act.

    Exit rules for issuers of debt securities

    Under the reproposed rules, a foreign private issuer of debt securities may terminate its Exchange Act reporting obligations if (i) it has filed or furnished all reports required under Exchange Act Section 13(a) or Section 15(d), including at least one Exchange Act annual report, and (ii) it has its class of debt securities held of record by either fewer than 300 holders on a worldwide basis or 300 holders who are U.S. residents. This requirement is substantially similar to the requirements in the originally proposed rule.

    Revised counting method

    The reproposed rules allow a foreign private issuer that seeks to terminate its registration and reporting obligations of equity or debt securities based on the alternative 300-record-holder condition to use a modified counting method to determine the number of its U.S. resident holders. The issuer would no longer have to look through the accounts of brokers, banks, and other nominees on a worldwide basis to determine the number of its U.S. resident holders, but could instead limit its inquiry to brokers, banks, and other nominees located in the U.S.; the issuer’s jurisdiction of incorporation, legal organization, or establishment; and, if different, the jurisdiction of its primary trading market.

    Further, the reproposed rules provide that an issuer aggregating the trading volume of its securities in two foreign jurisdictions for the purpose of meeting the rule’s listing condition has to look through nominee accounts in both foreign jurisdictions (its primary trading markets) and in the U.S., as well as its jurisdiction of incorporation, if different from the two jurisdictions that comprise its primary trading market. If, after reasonable inquiry, an issuer cannot obtain information, without unreasonable effort, about the amount of securities held by nominees for the accounts of customers resident in the U.S., it may assume that the customers are the residents of the jurisdiction in which the nominee has its principal place of business. This presumption is similar to that used under the cross-border rules and the definition of a foreign private issuer.

    Application of termination requirements to successor issuers and prior Form 15 filers

    The rule, as reproposed, allows issuers that succeed to the Exchange Act reporting obligations of a predecessor company following a merger, consolidation, exchange of securities, acquisition of assets, or otherwise, to file a Form 15F to terminate those reporting obligations as long as the successor issuer meets the quantitative benchmark conditions and the other termination requirements outlined above.

    As requested by numerous commenters, the reproposed rules also extend to foreign private issuers that met the requirements for ceasing their Exchange Act reporting obligations under the existing rules. The SEC proposed to extend the benefits of the new exit regime to prior Form 15 filers.

    Comment period

    The SEC is soliciting comments on whether the reproposed rules would impose a burden on competition or whether they would promote efficiency, competition, and capital formation. Comments must be received on or before 30 days after publication in the Federal Register .

    1.       SEC Release No. 34-55005; International Series Release No. 1300.

    2.       As defined in Rule 3b-4(c), a foreign private issuer is a corporation or other organization incorporated or organized in a foreign country that either has 50 percent or less of its outstanding voting securities held of record by U.S. residents or, if more than 50 percent of its voting securities are held by U.S. residents, about which none of the following are true:

    1.       a majority of its executive officers or directors are U.S. citizens or residents;

    2.       more than 50 percent of its assets are located in the U.S.; and

    3.       the issuer’s business is administered principally in the U.S.

    3.       The SEC reproposes amendments to existing Commission Rules 30-1, Rule 101 of Regulation S-T, and Exchange Act Rules 12g3-2, 12g-4, and 12h-3. It also reproposes new Exchange Act Rule 12h-6 and Form 15F.

    4.       Exchange Act Rule 12g-4(a)(2).

    5.       See SEC Release No. 34-55005.

    6.    Similar to the current Rules 12g-4 and 12h-3, which require the filing of Form 15, reproposed Rule 12h-6 requires the filing of a form – Form 15F – by which an issuer would certify that it meets the conditions for ceasing its Exchange Act reporting obligations.