On March 27, 2007, the US Securities and Exchange Commission (the "SEC") issued a release adopting new rules by which a foreign private issuer may terminate its Section 12(g) registration and Section 15(d) reporting obligations under the Securities Exchange Act of 1934, as amended (the "Exchange Act").1 The final rules were adopted in substantially the form as reproposed in December 2006.2 The new rules become effective on June 4, 2007, which will enable eligible foreign private issuers to immediately deregister and suspend their reporting obligations prior to the filing deadline for the annual report on Form 20-F for the year ending December 31, 2006.
In adopting new Rule 12h-6, the SEC established two alternative quantitative benchmarks for the deregistration of the equity securities of foreign private issuers: (i) a new trading volume benchmark and (ii) a revised version of the 300-holder benchmark contained in the prior rules. The new rules also provide for the termination of reporting obligations with respect to debt securities of a foreign private issuer.
The following are highlights of the main provisions of the new rules and the most significant changes since the December 2006 reproposal, which are discussed in further detail in this memorandum:
- Trading volume benchmark: Five percent of worldwide volume. A foreign private issuer is permitted by the new rules to terminate its Exchange Act registration and reporting obligations regarding a class of equity securities, assuming it meets the other conditions of Rule 12h-6, if the average daily trading volume of the subject class of its securities in the United States has been five percent or less of the worldwide average daily trading volume of such securities for a recent twelve-month period. Under the final rules, an issuer would measure its US trading volume as a percentage of worldwide trading volume, rather than trading volume in its primary trading market, as originally reproposed.
An issuer must include both on-exchange and off-exchange transactions when determining its US trading volume. However, the final rules also permit the inclusion of off-exchange transactions when calculating worldwide trading volume if the trading volume information is reasonably reliable and does not duplicate other trading volume information.
- Twelve-month ineligibility periods. If a foreign private issuer has delisted a class of equity securities from a national securities exchange or an automated inter-dealer quotation system in the United States, or has terminated a sponsored American Depositary Receipt facility, and, at the time of such delisting or termination, it exceeded the trading volume benchmark, the issuer must wait at least twelve months from the time of that delisting or termination before it can terminate its Exchange Act registration and reporting obligations in reliance on the trading volume benchmark. These waiting periods do not apply to an issuer that delisted from a national exchange or terminated a sponsored ADR facility prior to March 21, 2007, the date on which the SEC adopted the new rules.
- Alternative 300-holder benchmark. A foreign private issuer may still qualify for deregistration using the 300-holder benchmark from the prior rules. However, where the prior rules required issuers to "look through" the accounts held by brokers, banks and other nominees on a worldwide basis to calculate the number of US resident holders, under the new rules this inquiry is limited to brokers, banks and other nominees located in the United States, the issuer's jurisdiction of incorporation, legal organization or establishment, and, if different, the jurisdiction of its primary trading market.
- Permanent termination of reporting obligations. A foreign private issuer deregistering securities under Rule 12h-6 may now permanently terminate its reporting obligations, and thereby avoid the "reporting trap" of the prior rules, by continuously publishing in English on its website the materials that it has or is required to make public pursuant to its home country law, it has or is required to publicly file with its primary trading market or that it has or is required to distribute to security holders. As an alternative to website posting, if the issuer's primary trading market has an electronic information delivery system that is generally available to the public, the issuer may satisfy the requirement by publishing such materials through that system.
Once an issuer's securities are deregistered and the issuer ceases its Exchange Act reporting, those securities are no longer eligible for trading on the NYSE, Nasdaq or any other public exchange in the United States and the issuer will no longer have ready access to the US public markets.
Trading volume benchmark: Five percent of worldwide volume
Rule 12h-6 establishes a new quantitative benchmark by which an eligible foreign private issuer can terminate its Exchange Act registration and reporting obligations with respect to a subject class of equity securities that does not depend on the size of the issuer or on the number of US record holders. The new test is based on relative trading volume, which the SEC staff viewed as a superior test because it is a "more direct measure of the issuer's nexus with the US market and because trading volume data is easier to obtain than public float or record holder data."3
Under the new rules, an issuer may terminate its Exchange Act registration and reporting obligations, assuming it meets the eligibility conditions (discussed below), if the average daily trading volume of the subject class of equity securities in the United States has been five percent or less of the average daily trading volume of that class of securities worldwide during a twelve calendar-month period that ended no more than 60 days before the filing date of Form 15F.
When calculating US trading volume, the issuer must take into account all trading of the subject class of securities, including off-exchange transactions (such as trading in the Pink Sheets LLC and OTC Bulletin Board markets). When calculating worldwide trading volume, an issuer is permitted to include off-exchange transactions from sources that are reasonably reliable and not duplicative of other trading volume information, including those transactions that may occur through alternative trading systems. Such sources may include market vendors, commercial service providers and publicly available sources of market information.4
The SEC expects relevant off-exchange trading volume information to be readily available pursuant to current SEC regulations and EU directives.5 The new rules exclude convertible debt and equity-linked securities from the definition of "equity securities," and therefore from the trading volume calculations, recognizing that trading volume information regarding such securities is difficult for issuers to obtain.
Twelve-month ineligibility periods
The ability to deregister based on the trading volume test is subject to a twelve-month waiting period in two instances:
- Twelve-month ineligibility period following delisting. To avoid creating an incentive for a foreign private issuer to delist its securities from a national securities exchange or automated inter-dealer quotation system (such as NYSE or Nasdaq) in order to reduce US trading volume to qualify to deregister, Rule 12h-6 provides for a twelve-month waiting period to file Form 15F if the issuer did not satisfy the trading volume benchmark as of the date of delisting and during the twelve-month period preceding the date of delisting. As a result, a foreign private issuer that satisfies the trading volume condition would be able to delist and terminate its reporting obligations concurrently, while a foreign private issuer that does not satisfy the trading volume condition would able to delist, but would not be eligible to deregister and terminate its reporting obligations until at least twelve months after the date of delisting.6 The delisting initiates the waiting period regardless of whether the issuer's delisting was voluntary or involuntary.
- Twelve-month ineligibility period following termination of ADR facility. Rule 12h-6 provides that a foreign private issuer may not have terminated a sponsored ADR facility during the twelve-month period prior to filing Form 15F.7 The SEC included this condition in the final rules to encourage foreign private issuers to maintain their ADR facilities, even when they delist from a national securities exchange and terminate their US reporting obligations. The SEC noted its concern with the impact the termination of an ADR program could have on holders, including the imposition of fees and other charges, as well as unplanned tax consequences.
The adopting release contains a transition provision whereby waiting periods do not apply to an issuer that delisted from a national securities exchange or terminated a sponsored ADR facility prior to March 21, 2007, the date on which the SEC adopted the new rules.
Alternative 300-holder benchmark
As an alternative to the trading volume benchmark provision, Rule 12h-6 permits a foreign private issuer to terminate its Exchange Act reporting obligations regarding a class of equity securities if it has less than 300 record holders on a worldwide basis or who are US residents, so long as the issuer meets the rule's eligibility conditions. Under the prior rule, foreign private issuers were required to perform a look-through analysis on a worldwide basis, a method that some commenters argued had become inaccurate, difficult and costly.8 Under the new 300-holder standard, issuers are no longer required to look through the accounts of brokers, banks and other nominees on a worldwide basis to determine the number of US resident holders, but can limit the inquiry to brokers, banks and other nominees located in the United States, the issuer's jurisdiction of incorporation, legal organization or establishment, and, if different, the jurisdiction of its primary trading market. If an issuer aggregates the trading volume of two jurisdictions in order to meet the foreign listing eligibility condition discussed below, the foreign private issuer must perform a look-through analysis for US holders in both jurisdictions.
In performing this analysis, an issuer may rely on the assistance of independent service providers, but must count securities as owned by US residents when publicly filed reports of beneficial ownership or information that is otherwise provided to the issuer indicates the securities are held by US residents. Further, the SEC will allow an issuer that, after reasonable inquiry, is unable without unreasonable effort to obtain information about the residency of holders with securities held by nominees, to assume that the customers are the residents of the jurisdiction in which the nominee has its principal place of business.
Additional Eligibility Requirements
In addition to meeting one of the two quantitative benchmarks described above, a foreign private issuer seeking to deregister under Rule 12h-6 must meet each of the following three eligibility conditions:
One-year reporting requirement
The issuer must have had reporting obligations under Section 13(a) or Section 15(d) of the Exchange Act for at least twelve months preceding the filing of Form 15F, filed or furnished all reports required during this period, and filed at least one annual report on Form 20-F.
One-year dormancy requirement
The issuer must not have sold securities in the United States in a registered offering under the Securities Act of 1933, as amended (the "Securities Act"), during the twelve months preceding the filing of its Form 15F, other than securities issued:
- to the issuer's employees, as broadly defined in Form S-8;
- by selling security holders in non-underwritten offerings;
- upon the exercise of outstanding rights granted by the issuer if the rights are granted pro rata to all existing security holders of the class of the issuer's securities to which the rights attach;
- pursuant to a dividend or interest reinvestment plan; or
- upon the conversion of outstanding convertible securities or the exercise of outstanding warrants.
Sales of securities in the United States that are exempt from registration, including pursuant to Rule 144A, would not be prohibited under the one-year dormancy requirement.
Foreign listing condition
Rule 12h-6 requires that, for at least the twelve months prior to the filing of its Form 15F, the issuer must have maintained a listing of the subject class of securities on an exchange in a foreign jurisdiction which, singly or together with one other foreign jurisdiction, constitutes the primary trading market for the issuer's subject class of securities. "Primary trading market" is defined to mean that at least 55 percent of the trading in the issuer's subject class of securities took place in, on or through the facilities of a securities market or markets in no more than two foreign jurisdictions during a recent twelve-month period. The average daily trading volume for the issuer's securities in at least one of the two foreign jurisdictions must have been larger than the average daily trading volume in the United States for the same class of the issuer's securities. The purpose of this condition is to ensure that there is a non-US jurisdiction that principally regulates and oversees the issuance and trading of the issuer's securities and the issuer's disclosure obligations to investors.
Rule 12h-6 also enables a foreign private issuer to file Form 15F and terminate its Exchange Act reporting obligation regarding a class of debt securities if the issuer:
- has a class of debt securities held of record by less than 300 holders either on a worldwide basis or who are US residents;
- has filed or furnished all reports required under Section 13(a) or Section 15(d) of the Exchange Act; and
- has filed or furnished at least one Exchange Act annual report.
The new five percent trading volume benchmark may not be used by issuers seeking to terminate reporting obligations for debt securities. However, for purposes of meeting the 300-holder test, the revised "look-through" counting method, the ability to rely on independent information services providers and the presumption in certain instances that the customers of nominees are residents of the jurisdication in which the nominee has its principal place of business, as discussed above regarding equity securities, will also apply to debt securities.
Permanent Termination of Reporting Obligations
Under the existing exit rules, a foreign private issuer who was subject to the Exchange Act reporting obligations pursuant to Section 15(d) based on the filing of a registration statement, but who subsequently deregistered the relevant class of securities, could only suspend and not terminate its Section 15(d) reporting obligations. Thus, the previous rules created a "reporting trap" for Section 15(d) filers whereby even after deregistering, the foreign private issuer would have to continually monitor the number of its shares held by US residents, and could once again become subject to the Exchange Act reporting requirements if at the end of any fiscal year that number exceeded 300 US resident holders.
Under Rule 12h-6, once an eligible foreign private issuer files a Form 15F to deregister with the SEC, the suspension of Exchange Act reporting obligations takes effect immediately. Thereafter, under new Rule 12g3-2(e), a foreign private issuer can permanently avoid reporting obligations, and will no longer have to monitor the number of its US resident or worldwide holders, by:
- publishing on a continuous basis in English on its website the materials that it is required to publicly file on its primary trading market; or
- if the foreign private issuer's primary trading market has an electronic information delivery system that is generally available to the public, publishing such materials through that delivery system.
It is intended that a foreign private issuer that regularly posts corporate information on its website would be able to maintain this exemption.
New Form 15F
A foreign private issuer seeking to terminate its registration and reporting obligations must file new Form 15F on EDGAR.9 In the Form 15F filing, the issuer is required to certify that:
- it meets all of the conditions for termination of its reporting obligations as provided in Rule 12h-6; and
- there are no classes of securities, such as registered debt securities, other than those that are the subject of Form 15F for which the issuer has reporting obligations.
In addition, the issuer will have to provide information supporting its determination that it meets Rule 12h-6's eligibility requirement. If the issuer uses the trading volume benchmark to qualify for deregistration, the issuer will be required to disclose the sources of trading volume information it used to determine its calculations. If information regarding trading volumes was obtained from multiple sources, the issuer will have to disclose its reason for using multiple sources. The issuer must also disclose the address of its website or of the electronic information delivery system in its primary trading market on which it will publish the information required to comply with Rule 12g3-2.
The filing of Form 15F immediately suspends the issuer's reporting obligations, and the suspension becomes a permanent termination if the SEC does not object within 90 days after the filing of Form 15F. The foreign private issuer must also publish, either on or before the date that it files its Form 15F, a notice in the United States that discloses its intent to terminate its Exchange Act reporting obligations. The notice would have to be broadly disseminated, such as through a press release, and must be provided to the SEC either under cover of a Form 6-K or as an exhibit to Form 15F.
A foreign private issuer contemplating deregistration should take into consideration certain other important factors prior to delisting or filing a Form 15F to deregister:
Although an issuer may be eligible to deregister and meet the quantitative benchmarks discussed above, it should review its various contractual obligations to ensure that it is not otherwise obliged to remain registered with the SEC. An issuer considering delisting or terminating a sponsored ADR program should also confirm that doing so will not trigger any events of default or violate any other covenants under any agreements.
Employee benefit plans
Before filing Form 15F, a foreign private issuer would have to file a post-effective amendment to terminate the registration of remaining unsold securities under any Securities Act registration statements, including any shares registered under Form S-8. After its deregistration becomes effective, a foreign private issuer would be able to rely on Rule 701 of the Securities Act, subject to the rules' various restrictions and limitations, with respect to unsold securities that had previously been covered by the Form S-8 registration statement.10
Primary market requirements
An issuer should consult with local counsel in its other trading markets to determine what effect SEC deregistration will have on its rights and obligations in those markets. For example, some regulatory regimes exempt issuers who are registered in the US from complying with certain obligations, and after the effectiveness of Form 15F, such issuer would no longer be able to take advantage of such exemptions.
1 - See SEC Release No. 34-55540 (March 27, 2007) available at http://www.sec.gov/rules/final/2007/34-55540.pdf.
2 - See SEC Release No. 34-55005 (December 22, 2006) available at www.sec.gov/rules/proposed/2006/34-55005.pdf.
3 - See SEC Release No. 34-55540 (March 27, 2007) at page 7.
4 - While Rule 12h-6 does not mandate or expressly specify acceptable information sources for determining average daily trading volume, the issuer will be required to disclose trading volume sources when filing its Form 15F to deregister.
5 - Rule 601 of Regulation NMS (17 CFR 242.601) requires every national securities exchange to file a transaction reporting plan regarding transactions in listed equity and NASDAQ securities. In addition, EU Directive 2004/39/EC (MiFID), which is scheduled to become effective in November 2007, will require reporting of off-market transactions, thereby making such information readily available.
6 - In order for an issuer to delist a class of securities from a national securities exchange the issuer must file an application to delist on Form 25 with the SEC. The issuer must give the exchange ten-days' prior written notice of the application and contemporaneously publish a public notice and post the notice on its website. Delisting becomes effective ten days after filing Form 25.
7 - When an ADR facility is terminated, holders generally have the option to make arrangements to hold the underlying security. Holders who are unwilling or unable to make the necessary arrangements will have their investment cashed out (the underlying securities will be sold into the home market and the net proceeds remitted to the former ADR holder).
8 - See SEC Release No. 34-53020 (December 23, 2005) p. 11.
9 - Edgar is the Commission's Electronic Data Gathering, Analysis and Retrieval System.
10 - Rule 701 provides an exemption from registration for the issuance of shares under a written benefit plan, subject to certain volume and other limitations and restrictions. See 17 CFR 230.701 and SEC Release No. 34-7645 (April 7, 1999) available at http://www.sec.gov/rules/final/33-7645.htm for more information.
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