April 4, 2007
On March 27, 2007, the Securities and Exchange Commission (“SEC”) adopted new rules that will make it easier for foreign private issuers to terminate the registration of securities under Section 12(g), and their reporting obligations under Section 13(a) or 15(d), of the Securities Exchange Act of 1934 (“Exchange Act”). The new rules are largely in line with the SEC’s proposal issued on December 22, 2006, though several important points have been clarified in the final rule.
Under current rules, a foreign private issuer, even if delisted from the U.S. exchanges and experiencing little trading activity in the United States, could only exit from the SEC’s reporting requirements if it had fewer than 300 record holders who are U.S. residents. Under the new Rule 12h-6, a foreign private issuer may terminate its SEC registration and reporting obligations with respect to a class of equity securities if the trading volume for that class of securities in the United States (based on number of shares traded) has been 5% or less of the worldwide average trading volume of that class of securities for a recent 12-month period, assuming it meets the other conditions of Rule 12h-6.
While the trading volume test is broadly similar to that set forth in the December 2006 proposal, the SEC has modified the test in three respects in the adopted rule:
The 5% trading volume threshold will be calculated by comparing a foreign private issuer’s U.S. trading volume to its worldwide trading volume, rather than comparing it to trading volume in the foreign private issuer’s one or two primary markets as originally had been proposed.
Off-market trading (including transactions through alternative trading systems) will be counted worldwide, as long as the trading volume information regarding the off-market transactions is reasonably reliable and does not duplicate other trading volume information regarding the subject class of securities.
Convertible debt and other equity-linked securities will no longer be included in the definition of equity security for purposes of the trading volume calculation.
In addition to the 5% trading volume test, the new rule includes several conditions that must be satisfied in order for the issuer to benefit:
An issuer that delists in the United States prior to deregistering under Rule 12h-6 must meet the trading volume standard at the date of delisting or otherwise wait 12 months before it can proceed with deregistration, and an issuer that terminates an American Depositary Receipt facility must wait 12 months from such termination before seeking deregistration. The adopting release contains a transition provision which provides that these delisting and ADR termination conditions would not apply to an issuer that (i) delisted or (ii) terminated a sponsored ADR facility before March 21, 2007.
An issuer of equity securities must have been an Exchange Act reporting company for at least one year, have filed or submitted all Exchange Act reports required for the period, and have filed at least one Exchange Act annual report or special financial report pursuant to Rule 15d-2.
An issuer of equity securities must not have sold securities in a registered offering in the United States during the preceding 12 months, other than certain exempted securities offerings (such as offerings to the issuer’s employees, offerings by selling security holders in a non-underwritten offering, or offerings pursuant to a dividend or interest reinvestment plan).
An issuer of equity securities must have maintained a listing of the subject class of securities for at least a year in a foreign jurisdiction that, either singly or together with one other foreign jurisdiction, constitutes the primary trading market for the issuer’s subject class of securities.
The final rule also confirms that the trading volume test is not the only manner in which a foreign private issuer may deregister a class of securities. Specifically, foreign private issuers that have fewer than 300 record holders on a worldwide basis, or fewer than 300 record holders who are U.S. residents, and that meet the above conditions may also deregister a class of securities pursuant to Rule 12h-6. In this regard, the SEC’s final rule also provides that, instead of having 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 (as is required under the current rules), a foreign private issuer can limit its inquiry to brokers, banks and other nominees located in the United States, the issuer’s jurisdiction of incorporation, and, if different, the jurisdiction of its primary trading market.
Rule 12h-6 requires a foreign private issuer to file electronically on EDGAR a Form 15F certifying that it meets the requirements for terminating its Exchange Act registration and reporting obligations. The filing of the Form 15F will immediately suspend a foreign private issuer’s Exchange Act reporting obligations and commence a 90-day waiting period. If, at the end of this 90-day period, the SEC has not objected to the filing, the suspension will automatically become a termination of registration and reporting. If the SEC denies the deregistration filing, the foreign private issuer will have 60 days within which to bring its Exchange Act reporting obligations current.
In connection with its deregistration pursuant to Rule 12h-6, a foreign private issuer will be required to publish, either before or on the date it files its Form 15F, a notice in the United States (such as a press release) that discloses its intent to terminate its Section 13(a) or 15(d) reporting obligations. The issuer must also submit a copy of the notice, either under cover of a Form 6-K before or at the time of the filing of the Form 15F, or as an exhibit to the Form 15F.
Another important feature of the new rules is that a foreign private issuer that deregisters its securities under the Exchange Act now will be immediately eligible for the exemption from registration provided by Rule 12g3-2(b). This rule provides an exemption from the reporting requirements of the Exchange Act so long as the issuer perfects the exemption by submitting an application letter to the SEC and thereafter either publishes English language versions of its home country reports and financial statements on its web site or otherwise makes them available through an electronic information delivery system in its primary trading market.
It remains unclear whether a significant number of foreign private issuers will deregister pursuant to the new rules. According to the Office of Economic Analysis, approximately 29 percent of the 1,200 foreign private issuers with registered securities will meet the U.S. trading volume threshold under the new rules. While some eligible foreign private issuers may choose to deregister, any such decision should result from a comprehensive consideration of the benefits and the costs of maintaining such registration and corresponding listing in the United States. The SEC anticipates that this liberalized deregistration regime will prove attractive to foreign private issuers who might otherwise have sought to avoid becoming subject to the U.S. reporting requirements for fear of not being able to terminate such requirements at a later date.
The new rules will become effective on June 4, 2007. Thus, foreign private issuers with a December 31 fiscal year end have only limited time to assess whether they desire to, and would be eligible to, make a Form 15 filing prior to the filing of their upcoming annual report on Form 20-F due before the end of June 2007.
Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these new rules. Please contact the Gibson Dunn attorney with whom you work, or Brian J. Lane (202-887-3646, firstname.lastname@example.org), Kevin W. Kelley (212-351-4022, email@example.com), Michael J. Scanlon (202-887-3668, firstname.lastname@example.org), or Henry B. Michael (212-351-4040, email@example.com).
© 2007 Gibson, Dunn & Crutcher LLP
The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.