Final rules for deregistration of foreign private issuers

By Cydney Posner

The SEC has posted the final rules permitting foreign private issuers to terminate registration and reporting under the Exchange Act. The rules are designed to protect U.S. investors by permitting the termination of Exchange Act registration and reporting only by those foreign registrants with relatively low market interest in the United States. In addition, the one-year reporting and dormancy conditions (discussed below) will provide information upon which U.S. investors can base their investment decisions and deter quick exits following promotion of U.S. investor interest. By establishing a more clearly defined process with a more appropriate benchmark for termination, the SEC believes that foreign private issuers may actually be encouraged to register their securities in the United States.

As summarized in the adopting release, new Exchange Act Rule 12h-6 and the accompanying rule amendments will:

• permit a foreign private 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, for a recent 12-month period, the U.S. ADTV (average daily trading volume) of the subject class of securities was no greater than five percent of its worldwide ADTV, reflecting a change from the standard of five percent of ADTV in its primary trading market, as reproposed in the second version of the rule;
• require, in addition to the ADTV requirement, that a registrant of equity securities to have at least one year of Exchange Act reporting, be current in reporting obligations for that period, and have filed at least one Exchange Act annual report, as reproposed;
• permit an issuer to include off-market transactions, including transactions through alternative trading systems, when calculating its worldwide ADTV as long as the trading volume information regarding the off-market transactions is reasonably reliable and does not duplicate other trading volume information;
• require an issuer to wait 12 months before filing to deregister (Form 15F) in reliance on the trading volume standard if the issuer has delisted its class of equity securities from a national securities exchange or automated inter-dealer quotation system in the United States (note that neither the OTC Bulletin Board nor the Pink Sheets are considered by the SEC to be automated inter-dealer quotation systems) or terminated a sponsored ADR facility and, at the time of delisting or termination, the U.S. ADTV of the subject class of securities exceeded five percent of its worldwide ADTV for the preceding 12 months;
• retain the 300-holder standard as an alternative to the trading volume standard for an issuer of equity securities and as the quantitative standard for a debt securities issuer, as reproposed;
• exclude convertible debt and other equity-linked securities from the definition of equity security for the purpose of new Rule 12h-6's trading volume provision;
• permit an issuer to count a special financial report filed pursuant to Exchange Act Rule 15d-2 as an Exchange Act annual report for the purpose of the new rule's prior reporting condition;
• prohibit an issuer of equity securities from selling securities in the United States in a registered offering, except as specified, during the 12 months preceding the filing of its Form 15F (the "dormancy condition"), substantially as reproposed;
• require an issuer of equity securities to have maintained a listing of the subject class of securities for at least the 12 months preceding the filing of its Form 15F 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, substantially as reproposed;
• define primary trading market to mean that at least 55% of the trading in a foreign private issuer's class of securities that is the subject of Form 15F took place in, on or through the facilities of a securities market or markets in a single foreign jurisdiction or in no more than two foreign jurisdictions during a recent 12-month period, as long as the trading in at least one of the two foreign jurisdictions is larger than the trading in the United States for the same class of the issuer's securities;
• permit an equity securities issuer relying on the alternative 300-holder standard, or a debt securities issuer, to use a revised counting method that limits the inquiry regarding the amount of securities represented by accounts of customers resident in the United States to brokers, dealers, banks and other nominees located in the United States, the foreign private issuer's jurisdiction of incorporation, legal organization or establishment, and the one or two jurisdictions constituting the issuer's primary trading market if different from the issuer's jurisdiction of incorporation, legal organization or establishment, as reproposed;
• permit an issuer of equity or debt securities to rely on the assistance of an independent information services provider when determining whether the issuer falls below the 300-holder standard, as reproposed;
• permit a successor issuer meeting specified conditions to terminate its Exchange Act reporting obligations under new Rule 12h-6, as reproposed (note that a predecessor has a limited role in determining a successor issuer's eligibility to terminate its Exchange Act reporting obligations under Rule 12h-6);
• permit a foreign private issuer that filed a Form 15 and suspended or terminated its Exchange Act reporting obligations under the current exit rules before the effective date of Rule 12h-6 to terminate its Exchange Act reporting obligations under new Exchange Act Rule 12h-6, as long as, if regarding a class of equity securities, the issuer meets Rule 12h-6's listing condition and either the trading volume or alternative-300 holder condition or, if regarding a class of debt securities, the issuer meets the rule's 300-holder condition for debt issuers;
• extend the Rule 12g3-2(b) exemption to a foreign private issuer of equity securities, including a successor issuer and prior Form 15 filer, immediately upon its termination of reporting under Rule 12h-6, and require the issuer to maintain that exemption by publishing in English specified material home country documents required by Rule 12g3-2(b) on its website or through an electronic information delivery system generally available to the public in its primary trading market, as reproposed;
• permit a non-reporting company that has received or will receive the Rule 12g3-2(b) exemption, upon application to the SEC and not pursuant to Rule 12h-6, to publish its "ongoing" home country documents required under Rule 12g3-2(b) on its website or through an electronic information delivery system rather than submit them in paper to the SEC; and
• permit an issuer that has filed a Form 15F to terminate its Exchange Act reporting obligations regarding a class of debt securities to establish the Rule 12g3-2(b) exemption for a class of equity securities upon the effectiveness of its termination of reporting under Rule 12h-6, by submitting an application for the Rule 12g3-2(b) exemption after filing its Form 15F.

The SEC also adopted, as reproposed, procedural conditions that will:

• require a foreign private issuer to file a Form 15F providing information with respect to whether the issuer meets the requirements for terminating its reporting obligations under Rule 12h-6;
• automatically suspend an issuer's Exchange Act reporting obligations upon the filing of its Form 15F and trigger a 90-day waiting period at the end of which, assuming the SEC has no objections, the suspension will become a termination of reporting; and
• require a foreign private issuer to publish a notice, such as a press release, announcing its intention to terminate its Exchange Act reporting obligations under Rule 12h-6, before or at the time of filing its Form 15F.

The foreign listing condition and U.S. trading volume benchmark reflect the SEC's view that, before a foreign private issuer may terminate its Exchange Act reporting obligations under Rule 12h-6, it must have been subject to an ongoing disclosure and financial reporting regime, and have a significant market following, in its primary trading market. The U.S. trading volume benchmark was set at a level that, although there may be some U.S. investor interest in the subject securities, that interest should be sufficiently low that a foreign private issuer should be permitted to terminate its Exchange Act reporting if it determines that it is no longer desirable to continue as a U.S. registrant. The condition restricting the ability of an issuer to rely on the trading volume standard in the event of U.S. delisting and termination of a sponsored ADR facility was designed to deter an issuer from excluding U.S. investors, particularly retail investors, from investing in its securities when U.S. market interest is still significant. The immediate availability of the exemption under Rule 12g3-2(b) was designed to foster access by U.S. investors to ongoing home country information about an issuer after it terminates its Exchange Act registration and reporting under Rule 12h-6. Finally, the conditions relating to the filing of Form 15F and the publication of a press release or other notice are intended to promote transparency in the exit process.

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