United States: SEC Adopts Rules To Facilitate Exit From U.S. Exchange Act Registration & Reporting Requirements

On March 27, 2007, the U.S. Securities and Exchange Commission (SEC) adopted new rules intended to facilitate the process by which non-U.S. companies may terminate the registration of their securities under the U.S. Securities Exchange Act of 1934, as amended (Exchange Act), and their ongoing SEC reporting obligations under the Exchange Act.¹ The new rules will be effective June 4, 2007.

Historically, non-U.S. companies have found it difficult to terminate the registration of their securities and their SEC reporting obligations under the Exchange Act even if their securities have been delisted from the applicable U.S. exchange or automated trading system and the U.S. market interest in their securities is relatively low.² Prior to the adoption of the new deregistration rules (and until these new rules are effective), the rules for deregistration provided that a non-U.S. company could only deregister securities under the Exchange Act if the registered class of its securities had fewer than 300 U.S. resident record holders (or, alternatively, fewer than 300 record holders worldwide).³ In an attempt to address the concerns raised publicly by representatives of non-U.S. companies and non-U.S. industry associations⁴ and in response to the increased globalization of U.S. securities markets, the SEC published new proposed rules intended to facilitate the process for non-U.S. companies to deregister securities under the Exchange Act and to terminate their SEC reporting obligations on December 30, 2005.⁵

In response to significant comments received to the December 2005 rule proposals and the ongoing public debate about the difficulty of exiting the U.S. public markets (and the hurdles this creates for non-U.S. companies who are interested in accessing the U.S. capital markets), the SEC re-proposed new rules on December 22, 2006 addressing the deregistration conditions and processes.⁶

As adopted, the new deregistration rules allow a non-U.S. company to terminate the Section 12(g) registration of a class of its securities, as well as its Sections 13(a) and 15(d) reporting obligations,⁷ provided the level of U.S. market interest in the non-U.S. company's registered securities is low relative to the trading volume in the worldwide market for the securities. The new rules provide that the level of U.S. market interest for equity securities will be determined in terms of either trading volume criteria or the traditional numeric standard of record ownership. In the case of debt securities, the level of U.S. market interest will be gauged in terms of only the traditional numeric standards of record ownership.

The new rules will permit a non-U.S. company that has a class of equity securities registered under the Exchange Act (or is otherwise subject to SEC reporting obligations with respect to a class of its equity securities) to terminate both the registration of its securities and its Exchange Act reporting obligations if all of the following conditions are met:

1. EXCHANGE ACT REPORTING CONDITION

The non-U.S. company:

1. has been an Exchange Act reporting company for at least the preceding 12 consecutive months,
2. has filed or furnished all required reports under the Exchange Act during the past 12 consecutive months, and
3. has filed at least one (1) annual report under the Exchange Act.⁸

2. DORMANCY CONDITION

The non-U.S. company has not directly or indirectly sold its securities in the U.S. during the preceding 12 months in a registered offering. Offerings exempt from registration are excluded from the dormancy condition and certain exceptions to the dormancy condition apply for registered sales of equity securities to employees, by shareholders in a non-underwritten offering, pursuant to pro rata rights offers, in connection with dividend or interest reinvestment plans, as a result of conversions of convertible securities and pursuant to exercises of outstanding transferable warrants.

3. NON-U.S. LISTING CONDITION

The non-U.S. company has for at least the past consecutive 12 months maintained a listing of the securities on one or more exchanges outside the U.S. which, alone or together with the trading of such securities on another non-U.S. exchange, constitutes the "primary trading market" for such securities. (See discussion below of "Primary Trading Market.")

4. LEVEL OF U.S. INTEREST CONDITION

The non-U.S. company must meet the level of U.S. interest condition by satisfying either the applicable U.S. trading volume criteria or the record ownership criteria described below.⁹

• U.S. TRADING VOLUME CRITERIA
  The average daily trading volume in the U.S. for the security class in question during a recent 12-month period is not greater than five percent (5%) of the average daily trading volume of such security class on a worldwide basis.

• RECORD OWNERSHIP CRITERIA
  Non-U.S. companies that are unable to satisfy the U.S. trading volume criteria would still be eligible to satisfy the level of U.S. interest condition for a particular class of equity securities if, on a date within 120 days before the filing date of a deregistration form (Form 15F), such class is held of record by fewer than 300 persons on a worldwide basis or by fewer than 300 U.S. residents. (See discussion of "Methodology For Counting U.S. Ownership" below.)

5. DELISTING AND ADR TERMINATION CONDITION

The non-U.S. company has not, in the 12 months preceding the filing of Form 15F, terminated a sponsored American Depositary Receipts facility unless at the time of the termination the U.S. average daily trading volume of that class of equity securities for the preceding 12 months did not exceed 5% of the average daily trading volume for such securities on a worldwide basis,

• The non-U.S. company has not delisted its equity securities from a U.S. exchange or trading system in the prior 12 months unless at the time of delisting the U.S. average daily trading volume of that class of equity securities for the preceding 12 months did not exceed 5% of the average daily trading volume for such securities on a worldwide basis.¹⁰

A non-U.S. company that has a class of debt securities registered under the Exchange Act (or is otherwise subject to SEC reporting obligations with respect to a class of its debt securities) may terminate the registration of such securities and the ongoing Exchange Act reporting obligations if such company satisfies all of the following conditions:

1. EXCHANGE ACT REPORTING CONDITION

The non-U.S. company:

1. has filed or furnished all reports required under the Exchange Act, and
2. has filed at least one (1) annual report under the Exchange Act.

2. RECORD OWNERSHIP CONDITION

The debt securities for which the non-U.S. company's registration and reporting obligations are to be terminated are held of record, on a date within 120 days before the filing date of Form 15F, by fewer than 300 persons worldwide or fewer than 300 U.S. residents.

In response to continued pressure about the difficulties in ascertaining the level of U.S. ownership under existing rules, the SEC will allow non-U.S. companies to determine whether the number of U.S. resident equity or debt securities holders meets the applicable threshold by limiting the review of securities held in accounts of customers resident in the U.S. to brokers, dealers, banks, and other nominees located in:

• the U.S.,

• the non-U.S. company's jurisdiction of organization, and

• if different, the primary trading market of the non-U.S. company.¹¹

Non-U.S. companies would also be permitted to rely in good faith on the information provided by an independent service provider which, in the regular course of its business, assists in the collection and determination of the number of shareholders and any other related information. If after reasonable inquiry a person is not able without unreasonable effort to ascertain the number of securities held by U.S. residents, it can be assumed that the beneficial owners of securities are residents of the jurisdictions in which their nominees have their principal place of business.

If, as a result of a merger, consolidation, exchange of securities, acquisition of assets or otherwise, a non-U.S. company becomes subject to the reporting obligations under the Exchange Act (as a successor to the acquired entity), it may nevertheless terminate its Exchange Act reporting obligations, if

1. As to equity securities, it satisfies the Exchange Act Reporting Condition, the Dormancy Condition, the Non-U.S. Listing Condition, and the Level of U.S. Interest Condition, each described above.

and

2. As to debt securities, it meets the Exchange Act Reporting Condition and the Record Ownership Condition, each described above.

The rules, as adopted, allow the successor/acquiring entity to take into account the reporting history of the target company in determining eligibility for deregistration.

For purposes of determining if a non-U.S. exchange or exchanges constitute the "primary trading market" of a non-U.S. company, the applicable trading market must satisfy the following conditions:

• At least 55% of the trading of the non-U.S. company's securities took place on no more than two (2) non-U.S. exchanges during the preceding 12-month period,

AND

• The trading market of at least one of the two non-U.S. exchanges (if two are in fact used) must be larger than the trading market in the U.S.

Under the new deregistration rules, once a non-U.S. company determines that it satisfies the requirements to deregister under the Exchange Act, it may file a Form 15F with the SEC wherein the non-U.S. company must certify that it meets the applicable requirements and provide the required supporting information. The filing of Form 15F will immediately suspend the reporting obligations of the non-U.S. company. The suspension of the non-U.S. company's reporting obligations as a result of deregistration will become permanent if the SEC has not objected within 90 days (or such shorter period as the SEC may determine) after the filing of Form 15F.

As a condition to termination of SEC reporting obligations in connection with the filing of Form 15F, the non-U.S. company will be required to publish in the U.S., before or on the date of filing of Form 15F, a notice of its intent to terminate the registration of its securities under the Exchange Act and its SEC reporting obligation in such manner as to achieve broad dissemination to the public in the U.S. (i.e., by means of press release) and to submit such notice with the SEC.

The benefits of the new deregistration rules will be available to non-U.S. companies who have filed the requisite deregistration form with the SEC prior to June 4, 2007.¹² In order to secure the benefit of the deregistration rules, the non-U.S. company must satisfy the following conditions:

• File Form 15F;

• Must, for at least 12 consecutive months before filing the Form 15F, have maintained, as to any equity securities subject to Form 15F, a listing on a non-U.S. exchange which constitutes the primary trading market for these securities; and

• Must satisfy either the Trading Volume or Record Ownership Conditions with respect to equity securities, or the Record Ownership Condition with respect to debt securities.

Rule 12g3-2(b) under the Exchange Act provides an exemption from registration under Section 12(g) of the Exchange Act to a non-U.S. company upon application to the SEC (prior to having of record 300 or more U.S. persons as owners of its equity securities). Under the prior rules, this exemption was not available to a non-U.S. company that had a class of securities registered under the Exchange Act in the 18 months preceding the application for the exemption or triggered U.S. reporting obligations as a result of an offering of securities registered under the Securities Act. This limitation created significant uncertainty to non-U.S. companies that were able to meet deregistration standards at the time of the application for deregistration but remained, for a period of at least 18 months, subject to possible U.S. Exchange Act registration and reporting requirements (i.e., if, as a result of trading activity, more than 500 U.S. persons came to hold their equity securities, which triggered the registration requirement under Section 12(g) of the Exchange Act and the reporting requirements under the Exchange Act).

The SEC has amended the rules to make the exemption under Rule 12g3-2(b) available to a non-U.S. company immediately upon termination of the registration of a class of securities under the Exchange Act and termination of the non-U.S. company's reporting obligation under the Exchange Act. Under Rule 12g3-2(e), a non-U.S. company that meets the deregistration standards is eligible for the 12g3-2(b) exemption immediately upon the effectiveness of the termination of the registration of its securities under the Exchange Act. Any such company that wishes to avail itself of the benefits of the 12g3-2(b) exemption will be required to publish on its website (or through a publicly available electronic information system in its primary trading market) the materials currently required to be submitted to the SEC under Rule 12g3-2(b) and publish English versions of some of these materials. (See discussion of "English Translations" below.) In the past, in order to maintain the Rule 12g3-2(b) exemption, the issuer had to physically mail the relevant materials to the SEC. The website or electronic information system proposed to be used must be specified in the Form 15F filed with the SEC.

Non-U.S. companies who currently maintain Rule 12g3-2(b) exemptions will, under the new rules, no longer be required to physically mail materials to the SEC but will, instead, be able to satisfy SEC submission obligations under Rule 12g3-2(b) by publishing the applicable materials on their websites or through an electronic information system in their primary trading market.

In order to avail itself of the electronic publication facility, a non-U.S. company that maintains a 12g3-2(b) exemption will be required to take the following actions:

1. NOTICE TO THE SEC

Provide the SEC with the address of its website (or the name of the electronic information system to be used for electronic publication) by means of an amendment to the existing 12g3-2(b) exemption.

2. ELECTRONIC PUBLICATION

Publish all materials currently being submitted to the SEC on its website or the applicable electronic information system (see English Translation requirements below).

3. ENGLISH TRANSLATIONS

Publish English translations of, at least, each of the following documents:

• Annual Reports (including financial statements)

• Interim Reports (including financial statements)

• Press Releases

• All communications and documents distributed directly to the applicable security holders.

Should you have any questions on the subject of the new rules, please contact Herman H. Raspé or Karen M. McCarthy.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.