Last month the US Securities and Exchange Commission (SEC) announced proposed amendments to rules under the Securities Exchange Act of 1934, which if adopted will liberalise the deregistration process for many “foreign private issuers”(ie non-US issuers) currently registered under the act, allowing them to terminate their ongoing reporting obligations and remove themselves 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 US public markets. The proposed amendments must be approved by the SEC before they take effect and are subject to a 60-day comment period ending on 28 February.
Existing deregistration requirements
Issuers that make an SEC-registered public offering of their debt or equity securities must register that class of securities under the Exchange Act. In addition, regardless of whether the issuer has made a US public offering, Exchange Act registration is a prerequisite to any US stock exchange listing or Nasdaq quotation and is also required for any foreign private issuer with more than 300 US-resident shareholders, and a certain minimal amount of assets, at the end of its fiscal year. As a result of such Exchange Act registration, the issuer becomes subject to that act’s ongoing reporting requirements as well as most provisions of Sarbanes-Oxley. Delisting a class of securities of a foreign private issuer from a US 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 Sarbanes-Oxley – is relatively straightforward. Under the current rules, however, deregistration is not.
Under the existing Exchange Act rules, a foreign private issuer may deregister a class of securities only if it establishes that it has less than 300 (or 500 for certain small companies) US resident holders of record, after making inquiry as to the number of US residents for whom securities are held by brokers, dealers, banks or nominees. In addition, under the current rules, any such issuer that deregisters successfully under the Exchange Act merely suspends its registration and does not permanently deregister. The foreign private issuer is required to resume its registration obligations under the Exchange Act, including its ongoing reporting obligations and the requirements of Sarbanes-Oxley, for any fiscal year if at the end of the preceding year it had more than 300 US resident holders of record.
The new proposal
Under the new Exchange Act Rule 12h-6 proposed by the SEC, any eligible foreign private issuer with a class of equity securities registered under the Exchange Act will be able to deregister that class of securities if either:
(i) those securities are held of record by less than 300 persons worldwide or by less than 300 US residents; or
(ii) its US resident shareholder base and, in certain cases, US trading volume fall below either of the following benchmarks:
- any foreign private issuer may deregister a class of its equity securities under the Exchange Act if it determines that US residents hold less than 5 per cent of the issuer’s worldwide public float; or
- any “well-known seasoned issuer” of equity securities (generally, any issuer with at least $700m (£397.4m) public equity float, which has been a registrant for at least one year and filed or submitted all materials required to be filed or submitted during the preceding 12 months) may deregister that class of equity securities if it determines that: its US daily trading volume represents no more than 5 per cent of the average daily trading volume of the securities in its primary market over the preceding 12 months; and US residents hold less than 10 of the issuer’s worldwide public float.
To be eligible to seek such deregistration of its equity securities pursuant to proposed Rule 12h-6, a foreign private issuer must meet the following conditions:
- it must have been in compliance with its Exchange Act obligations during the preceding two years and have filed at least two annual reports with the SEC;
- its securities must not have been sold in the US in a registered or unregistered offering (subject to very limited exceptions) during the preceding 12 months; and
- it must have maintained a public listing on an exchange in its home market for the preceding two years.
Under proposed Rule 12h-6, a foreign private issuer with a class debt securities registered under the Exchange Act would be able to terminate its Exchange Act registration if:
- the class of debt securities is held of record by less than 300 persons on a worldwide basis or by less than 300 US residents; and
- the issuer has been in compliance with its Exchange Act obligations and has filed at least one annual report with the SEC.
Under the proposal, once a foreign private issuer terminates its registration under the Exchange Act, it will be deregistered permanently unless it subsequently seeks to list a class of securities on a US securities exchange or Nasdaq, or if it subsequently makes a US public offering of a class of its securities. Further, under the proposed new rule, in determining the number of US-resident security holders and the number of securities held by US residents, foreign private issuers will be permitted to limit their inquiries of brokers, dealers, banks and nominees to such entities in the US, 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 SEC proposal goes some distance towards accommodating foreign private issuers who have been seeking to exit their Exchange Act registration or, perhaps more particularly, their Sarbanes-Oxley burdens, while continuing to balance the informational needs of the US public securities market. Nevertheless, for those foreign private issuers registered under the Exchange Act solely as a result of having accumulated too many US shareholders, without having accessed the US public markets or listed on a US stock exchange or Nasdaq, the proposal may not go as far as they had wished.
Alan Bannister is a partner at Gibson Dunn & Crutcher