In December 2005, the SEC proposed to amend its rules that limit the ability of foreign private issuers to deregister a class of equity or debt securities under the Securities Exchange Act of 1934 (the "1934 Act").  The proposals were issued in response to the concerns of many observers and critics that, under the present regulatory regime, it is extremely to difficult to terminate a company’s 1934 Act registration and reporting obligations, even where there is very little U.S. interest in the issuer’s securities.

The proposed amendments will primarily benefit foreign private issuers that maintain a listing on a non-U.S. stock exchange.  The rules are subject to public comment, and final rules are expected to be adopted later in 2006.

Background

SEC Rule 12g-4 currently governs whether an issuer may terminate its registration of a class of securities under Section 12(g) of the 1934 Act and its corresponding Section 13(a) reporting obligations.  Under this rule, a foreign private issuer[1] may seek termination of its registration of a class of securities under Section 12(g).  To do so, the issuer must certify in a Form 15 filed with the SEC that the class of securities is held by less than 300 residents in the United States, or by less than 500 U.S. residents when the issuer’s total assets did not exceed $10 million on the last day of each of the issuer’s most recent three fiscal years.  To determine the number of U.S. resident shareholders under this rule, a foreign private issuer must use a method of counting that requires looking through the record ownership of brokers, dealers, banks or other nominees on a worldwide basis, and counting the number of separate accounts of customers resident in the United States for which the securities are held.

A variety of companies and trade organizations have observed that these rules are too restrictive for those foreign companies that seek to terminate their reporting obligations under the 1934 Act.  Due to the increased internationalization of the global financial markets, the "300 U.S. resident shareholder" threshold may be easily exceeded by a foreign company that has engaged in only minimal efforts to sell its securities in the United States.  After a few years of listing its securities in the United States, a foreign company may discover that there is little U.S. market interest in its securities. Yet because it has not been able to reduce the number of its U.S. shareholders to below 300, it must continue to incur the costs of being a public company, even if it has delisted its securities from a stock exchange or Nasdaq.

Proposed Rule 12h-6: De-Registering a Class of Equity Securities

Basic Conditions for Deregistering Equity Securities.  Under proposed Rule 12h-6, in order to be eligible to terminate its 1934 Act reporting obligations for a class of equity securities, a foreign private issuer would need, as an initial matter, to satisfy the following conditions:

• SEC Reporting: the issuer has been a 1934 Act reporting company for the past two years, has filed or furnished all reports required for this period, and has filed at least two annual reports under Section 13(a) of the 1934 Act.
• No Offerings: the issuer’s securities have not been sold in the U.S. in either a registered or unregistered offering under the Securities Act of 1933 during the preceding 12 months, other than certain exceptions, such as securities:  
• • sold to the issuer’s employees; or
  • sold by shareholders in non-underwritten offerings.
• Home Country Listing: for the preceding two years, the issuer has listed the class of securities on an exchange in its "home country," which constitutes the primary trading market for the securities.[2]

Trading Volume and U.S. Percentage Ownership Tests.  If the above conditions are satisfied, a company must satisfy one of the following standards to deregister a class of equity securities.

• Well-Known Seasoned Issuers ("WKSIs"):  If the company is a WKSI, the foreign private issuer could terminate its 1934 Act registration and reporting obligations if:
• • the U.S. average daily trading volume of the class of securities has been no more than 5% of the average daily trading volume of that class of securities in its primary trading market during a recent 12 month period; and 
  • U.S. residents held no more than 10% of the issuer’s worldwide public float at a date within 60 days before the end of that same period. 
• WKSIs and Non-WKSIs:  Both WKSIs and non-WKSIs would be eligible for deregistration under proposed Rule 12h-6 if U.S. residents held no more than 5% of the issuer’s worldwide public float at a date within 120 days before the filing date of the Form 15F, which, as discussed below, is the form that a foreign private issuer would have to file to certify that it meets the conditions for terminating its 1934 Act registration.
• Less than 300 Shareholders:  Under proposed Rule 12h-6, if a foreign private issuer is unable to meet one of these proposed standards, but satisfies the other conditions of the rule described above, it could still terminate its 1934 Act registration and reporting obligations regarding a class of equity securities if that class of securities is held of record by less than 300 persons on a worldwide basis, or less than 300 persons resident in the United States, at a date within 120 days before the filing date of the Form 15F.

Debt Securities

A foreign private issuer would be eligible to terminate its reporting obligations regarding a class of debt securities under proposed Rule 12h-6 if it meets the following conditions:

• the issuer has filed or furnished all required reports under Section 15(d) of the 1934 Act, including at least one annual report; and
• at a date within 120 days before the filing date of the Form 15F, the class of debt securities is either held of record by less than 300 persons on a worldwide basis or less than 300 persons resident in the United States.

Liberalization to Counting Rules

The proposed rules would also liberalize the requirements for counting U.S. holders in determining whether the above percentage and number requirements have been satisfied.  A company would be able to limit its search of U.S. holders to inquiries of brokers, banks and other nominees in the U.S., the company’s jurisdiction of incorporation and, if different, the jurisdiction of the primary trading market.[3]  A company could also rely on the services of an independent information service provider in making the count.

Required Procedure for De-Registration

Proposed new Form 15F would require a foreign private issuer to provide specified information regarding several items that would enable investors to obtain information regarding the issuer’s decision to terminate its 1934 Act reporting obligations.  The proposed form would also help the SEC staff to assess whether the issuer qualifies for termination of its 1934 Act reporting obligations.  Filing a Form 15F would automatically suspend an issuer’s reporting duties.  If the SEC has not objected, the suspension would become a permanent termination 90 days after the filing is completed.

Proposed Rule 12h-6 would require a foreign private issuer, no later than fifteen business days prior to the filing of the Form 15F, to publish a notice, such as a press release, in the U.S. that discloses its intent to terminate its reporting obligations, and to submit a copy of the press release either under cover of a Form 6-K, before or at the time of filing of the Form 15F, or as an exhibit to the Form 15F.

The table at the end of this memo sets forth the timeline for effecting a deregistration under the proposed rules.

The 12g3-2(b) Exemption

Current SEC Rule 12g3-2(b) provides an exemption from 1934 Act registration for a foreign private issuer that submits to the SEC certain materials relating to its business and finances that it makes public in its home country.  The proposed rules would revise this exemption by providing that a foreign issuer that has filed a Form 15F would receive the Rule 12g3-2(b) exemption immediately upon the effective date of the termination of its 1934 Act reporting obligations.[4]  To maintain this exemption, the foreign issuer would have to publish, in English, the home country materials required by Rule 12g3-2(b) on its website or through a publicly available electronic information delivery system of the company’s primary trading market.  This proposed amendment is designed to provide U.S. investors with easy access through the Internet to material information regarding a foreign company after its 1934 Act reporting obligations have ended.  The SEC expects that a foreign private issuer that regularly posts corporate information on its website would be able to maintain this exemption.[5]

Conclusion

The proposed rules will principally benefit dual-listed companies, because the rules are conditioned upon having a primary trading market outside the U.S.  For those companies that are not large enough to be WKSIs, the proposed rules only apply to companies that have less than 5% of their shareholders in the U.S.  For companies that completed a major financing in the U.S., such as an initial public offering during the last 10 or 15 years, this may be an impossible standard to satisfy.  Similarly, the proposed rules will not necessarily help in situations where U.S. institutional investors have purchased a significant portion of the company’s shares through purchases made on the issuer’s home country stock exchange.  As a result, the impact of the proposed rules may be limited.

Proposed Rule 12h-6:  Timeline for Deregistration

Date of Action	Description
15 Business Days before Filing Form 15F	Publish notice of intent to terminate Registration
14 or 15 Business Days before Filing Form 15F	Submit notice of intent to terminate on a Form 6-K
---	File Form 15F; reporting duties suspended
90 Calendar Days after Filing Form 15F	Deregistration is automatically effective if no SEC Objection

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 Footnotes:

1:   A "foreign private issuer" is a corporation or other organization incorporated or organized in a foreign country that either has (a) 50% or less of its outstanding voting securities held of record by United States residents or, (b), if more than 50% of its voting securities are held by U.S. residents, none of the following are true:  (1) a majority of its executive officers or directors are U.S. citizens or residents; (2) more than 50% of its assets are located in the U.S.; and (3) the issuer's business is administered principally in the U.S.

2:  As proposed, the term "primary trading market" would mean that at least 55% of the trading in the issuer's securities took place in, on or through the facilities of, a securities market in a single foreign country during a recent 12 month period.

3:  In contrast, under the SEC’s current rules, the company must determine, on a worldwide basis, the number of U.S. residents that are the beneficial holders of shares held by brokers and other nominees.

4:  In contrast, under the current rules, a company must wait an 18-month period after terminating its registration.  The current exemption’s delayed availability creates the risk that an issuer may need to re-register its securities under Section 12(g) before the expiration of the 18-month period if there is an increase in the number of U.S. resident securityholders.

5:  Under the proposed rules, the ability to post home country materials on a website or through an electronic delivery system would only be available to a foreign private issuer that used the Form 15F procedure.  It would not be available to other foreign companies seeking a Rule 12g3-2(b) exemption, but that have no prior SEC reporting experience.