Plaudits, Mostly, For FPI Deregistration Plan

The Securities and Exchange Commission’s proposal to clear a path for foreign private issuers to exit U.S. listings is winning plaudits from many corners of the business community, although some critics still say the plan has room for improvement.

Currently, FPIs only can exit the Securities Exchange Act registration and reporting regime if the class of their securities has fewer than 300 record-holders who are U.S. residents, making it tough for many to terminate their registration and reporting obligations, even when interest from U.S. investors is scant.

The SEC unveiled a re-proposal on FPI deregistration last December, which used thresholds based primarily on the percentage of U.S. holders, as well as trading volume. A public comment period on the measure ended last week, and more than two dozen interested parties sounded off—many hailing the new plans as dramatically better than previous ones proposed in December 2005. Typical were comments from the European Association for Listed Companies and the Union of Issuers Quoted in Europe, which lauded the new proposal as striking “the appropriate balance between issuer flexibility and U.S. investor protection.”

The proposed rule would allow foreign issuers, regardless of size, to terminate their Exchange Act registration and reporting obligations if the U.S. average daily trading volume (ADTV) of the subject class of securities has been no greater than 5 percent of the ADTV of that class of securities in the issuer’s primary trading market during the past 12 months, and its foreign primary market ADTV exceeds 55 percent of worldwide ADTV.

The SEC’s Office of Economic Analysis estimates that, based on 2004 data available for Form 20F filers, 28 percent of FPIs would meet the newly proposed deregistration criteria.

Most commenters also urged expediency, because if the SEC staff can get a final rule in front of commissioners before the end of the first quarter, calendar-year foreign issuers complying with Section 404 for the first time with reports due in June could exit the U.S. markets before then.

Several commenters, including the Securities Law Committee of the International Bar Association, EALIC, UNIQUE and the London office of the law firm Linklaters, suggested that the trading volume test should compare U.S. average daily trading volume to worldwide rather than primary market trading volume, to provide a more consistent measure of the importance of the U.S. trading market.

BusinessEurope, a lobby group formerly known as the Confederation of European Businesses, and members of the Paris office of the law firm Davis Polk & Wardwell also support the inclusion of worldwide trading volume in the denominator of the 5 percent ADTV calculation.

de Buck

“At a minimum, an issuer’s U.S. trading volume must be included in both the numerator and the denominator,” BusinessEurope Secretary General Philippe de Buck wrote. If neither worldwide trading nor U.S. ADTV are included in the denominator of the ADTV test, de Buck said the SEC should consider increasing the percentage of primary trading market volume represented by U.S. trading to 10 percent.

Other commenters suggested that the proposed 5 percent ADTV threshold is too low. Among them was Roslyn Hew, senior manager of corporate development and finance at Hong Kong-based i-Cable, who proposed a threshold of 15 percent. And Todd Malan, chief executive of the Organization for International Investment, also said “a significantly higher threshold could still capture a low level of U.S. investor interest in a foreign issuer’s securities.”

OFII favors basing the calculation on the number of securities traded, not the dollar value of trading volume, which it says would avoid “cumbersome currency calculations and complex issues, such as what exchange rate to use and when it would be set.” The group also says such a formula would be less costly than introducing currencies into the calculation.

OFII, along with others, also favors raising the 300 shareholder condition, which is intended to cover companies that wouldn’t meet the ADTV threshold. Noting that the number of U.S. shareholders has grown more than four-fold since that threshold was established in 1967, Malan says it “does not reflect the reality of today’s markets.”

Similarly, the IBA says the SEC “can and should” increase the thresholds for alternative record holders and debt-securities holders to a number “more in line with modern market conditions.”

Koehler

Robert Koehler, chairman and chief executive of SGL Carbon in Germany, suggested the alternative holder benchmark be raised to 3,000, while representatives from Davis Polk & Wardwell say it should be at least that high for deregistration of debt securities.

A number of commenters, including Big 4 accounting firm PricewaterhouseCoopers, suggested that the SEC eliminate a proposed one-year ineligibility period between delisting and deregistering for a company whose trading volume exceeded the 5 percent trading-volume benchmark prior to delisting. PwC says the ineligibility period “will simply operate as an unnecessary delaying mechanism” and won’t provide any ongoing investor protection.

Likewise, PwC said the SEC also should eliminate a proposed one-year delay after the termination of an ADR facility for a foreign private issuer to deregister. Linklaters also supported that change which called the delay a “speed bump” that unnecessarily penalizes FPIs that decide to exit the U.S. registration and reporting regime.

PwC further recommended that the SEC change the entrance requirements for becoming a registrant by adopting rules that exempt would FPIs from being required to register under section 12(g) of the Exchange Act. “A past decision by a foreign private issuer to become a registrant should not override that company’s current desire to deregister,” PwC wrote, adding that the decision by an FPI to become a registrant and subject itself to the Exchange Act reporting requirements “should be a voluntary decision.”

Leong

Meanwhile, Lincoln Leong, finance director at Hong Kong-based MTR Corp., says the streamlined counting method for determining the number of U.S. resident holders of an FPI’s debt and equity securities, which applies to the exit tests for deregistering, also should apply to the entrance test for registration.

Other Criticism

Even while noting that the changes are an improvement of the existing rules, some commenters say the SEC plan fails to do enough to encourage FPIs to register in the United States. The IBA committee called on the SEC to form a task force to streamline and modernize the U.S. system, which it says “now appears, from an international perspective, old-fashioned, overly complicated and difficult to understand.”

PwC also says “there needs to be more done” to encourage FPIs to become registrants. “We do not believe that changing the rules to allow more foreign private issuers to deregister will result in a significant increase in the number of foreign private issuers that will become registrants,” the PwC letter says.

Scott

Likewise, Hal Scott, director of the Committee on Capital Markets Regulation (more commonly known as the Paulson Committee, after Treasury Secretary Hank Paulson), expressed concern that the proposals “do not adequately address the disincentives” faced by FPIs looking to enter the U.S. public markets.

Noting that under the proposal, new entrants that want to terminate their registration and reporting obligations must fulfill conditions relating to benchmarks for U.S. trading volume or U.S. resident record-holders, as well as complete one year of prior Exchange Act reporting obligations and have one year of dormancy in U.S. registered offerings, Scott wrote: “Although the burdens imposed by these conditions may be necessary to protect U.S. investors in the case of existing issuers seeking to exit our market, the committee does not believe that they are necessary in the case of prospective new entrants.”

In its November 2006 interim report, the Paulson Committee recommended that the SEC permit foreign companies entering the U.S. public markets to provide in their offering documents that they have the right to deregister as long as they provide “adequate notice to U.S. investors and a reasonable transition period.”

To read comments on the SEC’s proposal and other related resources, see the box, above right.