In addition to its new proposals for compliance with Section 404, the Securities and Exchange Commission also tackled two other significant regulatory issues last month, approving plans to let companies disseminate proxy statements via the Internet and re-proposing changes to when a foreign private issuer can exit U.S. listings.
Currently, FPIs can only 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. That makes it difficult for many to terminate their registration and reporting obligations, even when interest from U.S. investors is scant.
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 of the subject class of securities has been no greater than 5 percent of the average daily trading volume of that class of securities in the issuer’s primary trading market during the past 12 months.
John White, head of the SEC’s Division of Corporation Finance, said the SEC staff could get a final rule in front of commissioners “before the end of the first quarter.” If so, he added, 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.
White said the revised proposal “should make the deregistration process less complicated and burdensome for foreign private issuers without sacrificing investors’ interests.” Based on data from 2004, the SEC says about 28 percent of FPIs would be eligible to withdraw under the proposed standard.
A previous delisting proposal issued in December 2005 used thresholds based primarily on the percentage of U.S. holders, as well as trading volume. The re-proposal unveiled last week recommends deregistration thresholds based solely on trading volume.
David Mittelman, an attorney at the law firm Reed Smith and former lawyer for the Division of Corporation Finance, says the proposal “reflects an easier-to-apply and easier-to-satisfy standard for foreign companies to terminate all U.S. reporting obligations.”
HIGHLIGHTS
Highlights of the SEC’s re-proposal concerning FPIs follows.
Trading Volume Standard
Reproposed Rule 12h-6 would:
permit an issuer, regardless of size, to terminate its Exchange Act registration and reporting obligations regarding a class of equity securities, assuming it meets all the other conditions of Rule 12h-6, if the U.S. average daily trading volume of the subject class of securities has been no greater than 5 percent of the average daily trading volume of that class of securities in the issuer's primary trading market during a recent 12 month period;
require an issuer that delists in the U.S. prior to deregistering under Rule 12h-6 to meet the trading volume standard at the date of delisting or else wait 12 months before it can proceed with deregistration in reliance on the trading volume standard; and
require an issuer that terminates an American Depositary Receipts facility to wait 12 months before seeking deregistration under Rule 12h-6 in reliance on the trading volume standard.
Other Conditions for Equity Securities Registrants
Reproposed Rule 12h-6 would also require an equity securities registrant to:
have been an Exchange Act reporting company for at least one year, to have filed or submitted all Exchange Act reports required for this period, and to have filed at least one Exchange Act annual report;
have not sold its securities in a registered offering in the United States, except for specified offerings, during the preceding 12 months, but would allow exempted securities offerings; and
have maintained a listing 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.
Expanded Scope of Rule 12h-6
Reproposed Rule 12h-6 would expand the scope of the originally proposed rule in two respects:
a foreign private issuer that terminated or suspended its Exchange Act reporting obligations under the current exit rules before the effective date of Rule 12h-6 would be able to achieve the benefits of termination under Rule 12h-6 as long as it met specified conditions; and
following a merger, acquisition or other similar transaction, a foreign private issuer that succeeded to the Exchange Act reporting obligations of another company could take into account the Exchange Act reporting history of its predecessor when determining whether it met the conditions for deregistration under Rule 12h-6.
Reproposed Rule 12g3-2(b) Amendments
The reproposed rule amendments would permit a foreign private issuer to claim the Rule 12g3-2(b) exemption:
immediately upon its termination of Exchange Act reporting under Rule 12h-6, rather than having to wait 18 months as is currently required; and
upon the condition that it publish in English its home country materials required by Rule 12g3-2(b) on its Internet website or through an electronic information delivery system that is generally available to the public in its primary trading market.
The reproposed rule amendments would further permit:
a non-reporting company that has received or will receive the Rule 12g3-2(b) exemption, upon application to the Commission and not pursuant to Rule 12h-6, to publish in English its required home country documents on its Internet website or through an electronic information delivery system in its primary trading market, rather than submitting them in paper to the Commission, as is currently required.
Source
SEC Votes To Repropose Rules Allowing Foreign Private Issuer Deregistration Under the Exchange Act (Securities And Exchange Commission; Dec. 13, 2006)
In the short run, Mittelman says, many small and dormant foreign companies will formally exit the U.S. reporting system, “but in the long-run, the attractiveness of U.S. markets to foreign companies should be enhanced to a limited degree.”
Rosen
Edward Rosen, a partner at the law firm Cleary, Gottlieb, Steen & Hamilton, describes the new FPI proposal as “a very significant positive development,” especially as a sign of the SEC’s awareness that it needs a strong regulatory framework for internationally active issuers. “I expect the proposal will be well-received abroad,” he says.
Comments on the re-proposal are due within 30 days of its publication in the Federal Register.
Dawn Of The e-Proxy Era
Equally far-reaching is the SEC’s approval of issuing proxy statements over the Internet, the so-called “e-proxy” rules that have generated considerable controversy over the last year. Under the rules approved last month, companies can voluntarily furnish proxy materials to shareholders through a “notice and access” model using Internet channels, such as posting proxy materials on a Web site and sending a notice of Internet availability to shareholders at least 40 days before the meeting date.
A proxy card can’t accompany the notice, but the company can send a proxy card with another copy of the notice at least 10 days later. The notice must be written in plain English and contain certain information along with various methods that shareholders can use to request paper copies of the proxy materials; companies must comply with such requests within three business days. Under the plan, shareholders also can permanently elect to receive all future proxy materials in paper or by email. The compliance date for the amendments is July 1, 2007.
White said the rules “have been carefully crafted to decrease substantially the costs incurred by issuers and others soliciting proxies while safeguarding the interests of investors.”
Mittelman
Mittelman says the e-proxy system has the potential “for being both a blessing and a curse for public companies.”
“While companies do stand to benefit from reduced cost of printing and mailing proxy materials, the real beneficiary may be dissident shareholders," he says. “The new rules will facilitate the ability of shareholders to undertake proxy contests.”
The SEC also proposed rule changes that would eventually require companies and soliciting persons to follow the notice-and-access model for all solicitations not related to a business combination transaction—possibly as soon as the 2008 proxy season. The mandatory model would operate substantially in the same way as the voluntary system described above, but the notice could be accompanied by a full set of proxy materials.
In addition to cost savings that would benefit shareholders and companies, Cox said the proposals “exploit the potential of the Internet to provide investors” with interactive online disclosure that could be analyzed easily.
Comments are due within 60 days of publication in the Federal Register.
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