SEC Proposes Liberalization of the De-registration Process in the U.S.

December 15, 2005

 The U.S. Securities and Exchange Commission (the "SEC") announced today that it is proposing amendments to rules under the Securities Exchange Act of 1934 (the "Exchange Act") which, if adopted, will liberalize the de-registration process for many foreign private issuers, allowing them to terminate their on-going reporting obligations under the Exchange Act and remove them from the burdens of the Sarbanes-Oxley Act. In addition to providing relief to existing registrants, the SEC believes the proposals should encourage foreign private issuers to access the U.S. public markets in light of the relaxation of the de-registration process.

Existing De-registration Requirements 

Registration under the Exchange Act is a prerequisite to any U.S. stock exchange listing or Nasdaq quotation, and as a result of that registration the issuer becomes subject to the Exchange Act ongoing reporting requirements as well as most provisions of the Sarbanes-Oxley Act. De-listing a class of securities of a foreign private issuer from a U.S. stock exchange or Nasdaq, a process which removes the securities from trading on that exchange and relieves the issuer from certain corporate governance requirements imposed by the exchange pursuant to the Sarbanes-Oxley Act, is relatively straightforward. Under the current rules, however, de-registration is not.

Under the existing Exchange Act rules, a foreign private issuer may de-register under that Act only if it establishes that it has less than 300 (or 500 for certain small companies) U.S. resident holders of record, after making inquiry as to the number of U.S. residents for whom securities are held by brokers, dealers, banks or nominees. In addition, under the current rules, any such issuer which successfully de-registers under the Exchange Act merely suspends its registration, and does not permanently de-register. The foreign private issuer is required to resume its registration obligations under the Exchange Act (including its ongoing reporting obligations and the requirements of the Sarbanes-Oxley Act) for any fiscal year if, at the end of the preceding year, it then had more than 300 U.S. resident holders of record.

New Proposal

Under new Exchange Act Rule 12h-6 proposed by the SEC today, any eligible foreign private issuer with a class of equity securities registered under the Exchange Act will be able to de-register that class of securities if it either satisfies the existing de-registration standards or if its U.S. resident shareholder base and, in certain cases, U.S. trading volume fall below either of the following benchmarks:

  • Any foreign private issuer may de-register a class of its equity securities under the Exchange Act if it determines that U.S. residents hold less than 5% of the issuer’s world wide public float; or 

  • Any "Well Known Seasoned Issuer" of equity securities (generally, any issuer with at least $700.0 million public equity float, which has been a registrant for at least one year and filed all materials required to be filed during the preceding 12 months) may de-register that class of equity securities if it determines that:

    • its U.S. daily trading volume represents less than 5% of the average daily trading volume of the securities in their primary market over the preceding 12 months, and

    • U.S. residents hold less than 10% of the issuer’s world wide public float.

The proposal will contain separate provisions for the de-registration of a class of debt securities.

To be eligible to seek such de-registration of its securities pursuant to proposed Rule 12h-6, a foreign private issuer will need to have been in compliance with its Exchange Act obligations during the preceding two years; must not have directly or indirectly offered its securities into the U.S. in a registered public offering during the preceding 12 months; and will need to have maintained a public listing on an exchange in its home market for the preceding two years. Under the proposal, once a foreign private issuer terminates its registration under the Exchange Act, it will be permanently de-registered, unless it subsequently seeks to list a class of securities on a U.S. securities exchange or Nasdaq or if it subsequently makes a U.S. public offering of a class of its securities.

Further, under the proposed new Rule, in determining the number of U.S. resident security holders and the number of securities held by U.S. residents, foreign private issuers will be permitted to limit their inquiry of brokers, dealers, banks and nominees to such entities in the U.S., the issuer’s jurisdiction of incorporation and the principal trading market, if different. The issuers will also be permitted to rely in good faith on independent sources of such information.

The proposed amendments must be approved by the SEC before they take effect and will be the subject of a comment period following publication in the Federal Register. Please contact any of the Gibson Dunn attorneys identified below if you wish to submit comments to the SEC or otherwise evaluate the effect of the proposed amendments.


Gibson, Dunn & Crutcher lawyers are available to assist clients in addressing any questions they may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work, or J. Alan Bannister (+44 (0) 20 7071 4240, [email protected]) in the firm’s London office; Kevin W. Kelley (+1 (212) 351 4022, [email protected]), Steven R. Finley (+1 (212) 351-3920, [email protected]), or Steven D. Guynn, (+1 (212) 351-2377 [email protected]) in the firm’s New York office; or Brian J. Lane (+1 (202) 887-3646, [email protected]) in the firm’s Washington, D.C. office; or Stewart L. McDowell (+1 (415) 393-8322, [email protected]) in the firm’s San Francisco office.

© 2005 Gibson, Dunn & Crutcher LLP