15, avenue Matignon Paris

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1 15, avenue Matignon Paris Date: January 9, 2006 To: From: Re: Interested Persons Davis Polk & Wardwell Exiting the US Capital Markets The SEC s Proposed Rules on Deregistration for Foreign Companies Right before Christmas, the SEC published the long-awaited draft rule proposing a significant relaxation in the conditions under which a foreign company with securities registered in the US can exit the US public markets. This proposed rule has been actively sought by many European and other foreign companies and their trade associations. In the open meeting discussing the rule, the SEC staff and the Commissioners explicitly tied the proposed exit rule to the need to attract new foreign companies to the US capital markets. The proposed rule was unanimously adopted by the Commissioners and various comments at the open meeting make it clear that the rule has strong support at the Commission and SEC staff levels. A description of the proposed rule is in the attached Annex. Comments on the proposed rule are due by February 28, The rest of this cover memorandum assumes that the reader is familiar with the proposed rules and the lobbying history and concentrates on our views as to timing and comment strategy. As an initial point, companies seriously interested in deregistration should be aware that strong SEC support for the proposed rule does not necessarily translate into quick enactment of a final rule. Companies whose fiscal year ends on December 31, 2005 should continue to act as if they would be required to file a Form 20-F by June 30, In order to exit before that time, the new rule would have to be effective as of June 15 th, which implies that the SEC would review all comments received as of February 28 th, reflect, consider and seek an internal consensus on these comments, schedule and have an open meeting and enact into place the final rule well before June 15 th. In the normally slow motion world of regulatory change, this is a lightening pace especially as nothing requires the SEC to act within a certain time frame after it receives comments. As a result, company budgets and work plans should not count on a final rule in time for this year s annual report cycle. Moreover, the content of the proposed rule itself may create delay in the implementation of a final rule. The SEC s decision to treat large and small

2 companies differently, as well as the policy choices it has taken in the proposed rule, will have created different reactions at different companies. Moreover, it is clear that many of the largest companies will be unable to benefit from the rule as proposed since many have more than 10% US investors in their free float. Some will want the rule as proposed to be made final as fast as possible. Some will want to make minor changes in the rule and some will want to make significant changes. The risk, therefore, is that a plethora of contradictory comment letters could well freeze the SEC staff for months while they weigh what the right policy choices might be. Foreign companies and their trade associations interested in lobbying to improve the rule as proposed should also take into consideration several peculiar elements of US lobbying strategy at this point in the proposed rule s life which are fundamentally different from many other countries. First, the SEC staff will only talk to the release now that the rule has been proposed and under US law all contacts with the staff must be via comment letters or, if they go further than questions about the release, will be publicly disclosed by the Staff on the SEC s website. Second, the SEC staff is most interested in policy arguments to support positions and, therefore, one wins by linking a position to a convincing policy argument not by negotiation not linked to policy points. Third, those who are lobbying in favor of the rules should be careful about the risk of a domestic US backlash as it becomes easier for foreign companies to say goodbye to the SEC than for US companies. Finally, and most importantly, this is an appropriate time to remember that in bringing about rule changes, the best can be the enemy of the good. As a result, we believe that a careful and sophisticated comment strategy by those companies seriously interested in deregistration would be to concentrate on the following three most important points: strongly support the proposed rule largely in its current form, as the most critical point, argue for the exclusion of institutional investors from the 5% and 10% calculations, and try to raise the 300 number to a number as large as 3,000. We would not exclude other arguments but suggest that companies and trade associations think carefully about what is feasible. Technical comments are always welcome by the staff and certain other points will most certainly be discussed as companies examine the rule. However, we believe that trying to put into the rule a number of proposals that have been vetted in the last few months, such as a pure 5% volume test, raising the shareholder percentages significantly beyond 10% or attempting differential treatment of companies based upon IOSCO or IFRS standards would increase the risk that the implementation of the rule may 2

3 be significantly delayed or stalled. Moreover, as the SEC s questions make clear, the SEC has retained the flexibility to both toughen or relax the proposed rule so policy level comments should be careful about opening Pandora s box. Should you have any questions, please do not hesitate to call your Davis Polk contact or to call Margaret Tahyar (margaret.tahyar@dpw.com) or Siobhan Dalton (siobhan.dalton@dpw.com) in our Paris office on Davis Polk & Wardwell 3

4 Annex Deregistration of equity securities The proposed rule would permit deregistration under the following conditions: WKSI s (large companies) 1 with 10% or less of public float held by U.S. investors and a U.S. trading volume of 5% or less of worldwide trading volume in its primary trading market over a recent 12-month period; and All other companies (small companies), and large companies that cannot meet the trading volume test, must have 5% or less of public float held by U.S. investors. The 300-person test would still exist as a alternative although as we have stated above we think it worthwhile to try to increase this number. Other conditions to apply would be: The company must have been reporting in the U.S. for at least two years, filing all of its required reports including at least two Annual Reports on Form 20-F; The company must have been listed on its home market for at least two years; and The SEC has introduced the concept of a dormancy period during which a company that has accessed the US capital markets may not exit. The company cannot have made any offering into the U.S. capital markets, debt or equity, registered or unregistered (144A or other private placements) for at least one year. Offerings to employees, most exempt offerings under Section 3 and commercial paper are exempted from this dormancy period. Sales by selling shareholders are also exempt as long as they are not underwritten. Not exempted are mergers done via a fairness hearing (known as the Section 3(a)(10) exemption). This latter is likely to affect only companies from Britain and her former colonies that conduct mergers in this way. 1 Generally, companies with at least $700 million in market capitalization held by nonaffiliates. It is unclear whether a company which is ineligible for WKSI status due to one of the criteria other than market capitalization (failure to fail a 34 Act report; consent decree) will be allowed to take advantage of the 10% threshold. A-1

5 Deregistration of debt securities The 300-person test remains although, as we have stated above, we think it worthwhile trying to increase this number. The company must have filed one annual report in the U.S. Counting rules The SEC has made some significant changes in the counting and calculation rules that are designed to be helpful to foreign companies. Indeed, this is the real place where most of the winners and losers in the rule will be found and it is worthwhile for any company considering deregistration to examine carefully whether these proposed changes will help it or not. Under the new counting test, with respect to indirect holdings, a foreign company need only make inquiries to brokers, banks and nominees in its home market, the U.S. and its principal trading market, if different from the home market. If after reasonable inquiry, the company is not able without unreasonable effort to obtain information about the ultimate customers, it may assume that the customers have the same residency as that of the nominee. In a significant move forward, good faith reliance on third party services that help companies find and count investors, such as Thomsen, will be permitted. This element should provide companies a great deal of comfort in taking the assumptions as to reasonable inquiry. A WKSI can choose any date that is 60 days from its last year end and a non-wksi can choose any date that is 120 days from its last year end as its test date for the calculation. Broad Public Notice Any company wishing to deregister would have to make a notice in a US publication with a broad audience at least two weeks before it files its deregistration form. Permanence of deregistration Deregistration would be permanent, so that a company which deregisters but then finds itself with more than 300 U.S. shareholders in the future does not become a registered company all over again. Instead, a deregistered company must electronically post home country reports in English on the company s website, and will qualify immediately for the 12g3-2(b) exemption from registration. A-2