SEC’s FPI Changes Helpful, Welcome

A flurry of Securities and Exchange Commission rule changes that modernize the disclosure requirements for foreign issuers offering securities in U.S. markets are getting a thumbs up from experts, who say companies should find the majority of changes welcome and helpful.

While the recently approved amendments to the SEC’s rules related to foreign private issuers do include a shorter filing deadline for annual reports on Form 20-F and some additional disclosure requirements, observers say, overall, the updates to the rules are good news for FPIs.

Bannister

“The big picture is there’s not lot of bad news here,” says Alan Bannister, of the law firm Gibson Dunn & Crutcher. “The changes are mostly helpful.”

The laundry list of rule amendments adopted on Aug. 27 includes revised reporting requirements, a revamped Rule 12g3-2(b) exemption and expanded cross-border tender offer rules. The changes are the latest effort by the SEC to make the U.S. capital markets more attractive to foreign companies.

Notably, the final rules require FPIs, after a transition period, to file annual reports on Form 20-F with the SEC in four months—less than the six months currently allowed, but more than the three months the SEC originally proposed. Observers note that the deadline is consistent with home country requirements for many issuers and shouldn’t cause major problems.

Harmetz

“For some companies, there will be no impact or minimal impact because they’re already working on that schedule to accommodate their home country,” says Lloyd Harmetz, a partner in the law firm Morrison & Foerster. For FPIs filing their statements according to International Financial Reporting Standards without any reconciliation to U.S. accounting rules, he says, “It will be slightly easier to prepare annual reports.”

Those FPIs that still take a full six months to file their U.S. statements, however, “will feel a significant impact,” Harmetz says.

One welcome change lets foreign companies test their eligibility to use the FPI forms and rules once a year, on the last business day of their second fiscal quarter, rather than continuously.

“This will give FPIs a 12-month period of certainty following such testing, during which they know they may use the foreign forms and be entitled to the accommodations extended such issuers,” says Bannister.

Cathy Dixon, a partner the law firm Weil Gotshal & Manges and former chief counsel in the SEC Division of Corporation Finance, agrees that the change will be “a great relief.” It brings certainty to companies that previously had to worry that “at any given time during the fiscal year, they could flunk the test and be forced to start filing U.S. company reports,” she says.

“It’s a very positive rule for foreign issuers and I think it will be well- received.”

— Colin Diamond,

Partner,

White & Case

The final rules do require some additional disclosures about changes in or disagreements with a company’s certifying accountant, differences in corporate governance practices from U.S. practices, and fees related to American Depository Receipts. Most of the added disclosures, however, “aren’t very burdensome and many are things companies are already doing under stock exchange listing requirements,” Harmetz says.

One item that will require more work for some companies: The elimination of an instruction to Item 17 of Form 20-F, which permits some FPIs to omit segment data from U.S. GAAP financial statements. Without it, more issuers will need to show segmented financial statements than previously did, Harmetz says.

Companies won’t have to provide information in annual reports for completed acquisitions that reach the “50 percent significance test.” That proposal was omitted from the final rule.

Cross-Border Transactions

Companies are also likely to welcome amendments that expand cross-border transaction exemptions. “For people planning acquisitions of companies with minority U.S. ownership, it will be noticeably easier,” says Harmetz. The ability of non-US institutional investors to report on short-form Schedule 13G “will make their lives easier and compliance burden simpler,” he says.

Dixon

Dixon says the changes to the cross-border rules “dealt with some of the bad fits and difficult issues that have popped up since the cross-border exemptions were adopted and made them easier to use.”

FPI CHANGES

SEC’s proposed amendments to Rule 12g3-2(b)

2. Proposed Rule 12g3-2 Amendments

In February 2008, we proposed amendments to Rule 12g3-2(b) in order to adapt

that exemptive regime to the several significant developments occurring since its initial

adoption four decades ago. Those developments include the increased globalization of

securities markets, advances in information technology, and the increased use of ADR

facilities by foreign companies to trade their securities in the United States, which have

multiplied the number of foreign companies engaged in cross-border activities, as well as

increased the amount of U.S. investor interest in the securities of foreign companies. Just

as those developments led us to re-evaluate and revise the Commission rules governing

when a foreign private issuer may terminate its Exchange Act registration and reporting

obligations, so those same factors have led us to reconsider as well the Commission rules

that determine when a foreign private issuer must enter the Section 12(g) registration

regime.

We proposed to amend Exchange Act Rule 12g3-2 to permit a foreign private

issuer to claim the Rule 12g3-2(b) exemption, without having to submit an application to,

or otherwise notify, the Commission, as long as:

the issuer is not required to file or furnish reports under Exchange Act

Section 13(a)29 or 15(d);

the issuer currently maintains a listing of the subject class of securities on one

or more exchanges in a foreign jurisdiction that, either singly or together with

the trading of the same class of the issuer’s securities in another foreign

jurisdiction, constitutes the primary trading market for those securities;

either:

A. the average daily trading volume (“ADTV”) of the subject class of securities

in the United States for the issuer’s most recently completed fiscal year has

been no greater than 20 percent of the average daily trading volume of that

class of securities on a worldwide basis for the same period; or

B. the issuer has terminated its registration of a class of securities under

Exchange Act Section 12(g), or terminated its obligation to file or

furnish reports under Exchange Act Section 15(d), pursuant to Exchange Act

Rule 12h-6; and

unless claiming the exemption in connection with or following its recent

Exchange Act deregistration, the issuer has published specified non-U.S.

disclosure documents, required to be made public from the first day of its most

recently completed fiscal year, in English on its Internet Website or through an

electronic information delivery system generally available to the public in its

primary trading market.

As proposed, a foreign private issuer that met the above requirements would be

immediately exempt from Exchange Act registration under Rule 12g3-2(b) even if, on the

last day of its most recently completed fiscal year, it exceeded the asset and shareholder

thresholds for Section 12(g) registration, and although the 120-day window for filing a

registration statement under Section 12(g) had elapsed. Further, as proposed, an issuer

could immediately claim the Rule 12g3-2(b) exemption upon the effectiveness of, or

following its recent Exchange Act deregistration, whether pursuant to the older exit rules

of Rule 12g-4 or 12h-3,30 or Rule 12h-6, or the suspension of its reporting obligations

under Section 15(d),31 if it met the above requirements other than the electronic

publication condition for its most recently completed fiscal year.

The proposed rules would require any issuer, whether a prior registrant or not, to

maintain the Rule 12g3-2(b) exemption by publishing its specified non-U.S. disclosure

documents on an ongoing basis and for each subsequent fiscal year, in English, on its

Internet Website or through an electronic information delivery system generally

available to the public in its primary trading market. The proposed rules would require

the electronic publication in English of the same types of information required under the

March 2007 amendments.

As proposed, the Rule 12g3-2(b) exemption would remain in effect until:

the issuer no longer satisfies the electronic publication condition;

the issuer no longer maintains a listing for the subject class of securities on one

or more exchanges in its primary trading market;

the ADTV of the subject class of securities in the United States exceeds

20 percent of the average daily trading volume of that class of securities on a

worldwide basis for the issuer’s most recently completed fiscal year, other than

the year in which the issuer first claims the exemption; or

the issuer registers a class of securities under Exchange Act Section 12 or

incurs reporting obligations under Exchange Act Section 15(d).

Source

Exemption From Registration Under Section 12(G) (Sept. 5, 2008).

The previous rules were “hard to work with,” says Bannister, because they required a bidder to make a determination of the target company’s U.S. shareholder base precisely on the 30th day preceding commencement of the offer. Timing was already difficult, and, if a bid was delayed, companies had to do that testing again, leaving them uncertain about whether they had the exemptive relief.

As a result, Bannister says bidders who wanted to include the target’s U.S. investors were often required to assume that they had to comply with the full range of U.S. tender offer regulation, driving up cost and time requirements.

The SEC “gave us a much more flexible rule,” he says. The amended rule allows companies to measure the target’s U.S. shareholder base at any time up to 60 days before the announcement or 30 days after, making planning easier and allowing room for scheduling changes.

The amendments should help address a major headache for companies: Calculating U.S. ownership levels without tipping off the markets that a deal is in the works before they’re ready to disclose it.

Dixon says it appears that more bidders and other acquirers will be able to use the percentage of worldwide float test previously only available to hostile bidders. Still, she adds, questions remain about the circumstances in which a “friendly” acquirer will be permitted to use the expanded trading volume exemption. That will be clarified in the adopting release and interpretive guidance, which hasn’t yet been published.

Experts also laud amendments to Exchange Act Rule 12g3-2(b), which provides an exemption from registration under Section 12(g) for equity securities of an FPI based on the submission of certain non-U.S. information.

Diamond

“It’s a very positive rule for foreign issuers and I think it will be well- received,” says Colin Diamond, a partner with the law firm White & Case.

The revised rules scrap a requirement to submit a written application and paper disclosures to the SEC. Now companies have to publish specified disclosure documents—in English, online, and on an ongoing basis—and maintain a listing of the subject class of securities on one or more foreign exchanges in one or two jurisdictions constituting their primary trading market.

Many companies simply failed to apply for the exemption, says Diamond. Now the exemption will be self-executing, provided the trading thresholds are met and certain information is posted on the company’s Website.

As a result, he says it’s likely some issuers will become exempt from U.S. registration requirements “without taking any action, and in some cases without being aware they’ve qualified for the exemption.” Moreover, Diamond says, the amendments could make establishing ADRs in the United States more attractive to FPIs since there’s less risk of being subject to full Exchange Act reporting requirements.

Harmetz says companies will also be pleased that the SEC dropped a proposal that would’ve required that the average U.S. daily trading volume of an issuer’s class of equity securities be 20 percent or less of the average daily trading volume of that class on a worldwide basis for the most recent fiscal year.