Capital Markets September 25, 2008 SEC Shortens the Form 20-F Filing Deadline from Six Months to Four Months after Fiscal Year-End and Adopts Amendments to Disclosure Requirements for Foreign Issuers On September 23, 2008, the U.S. Securities and Exchange Commission ( SEC ) published its final release (the Release ) shortening the filing deadline for the annual report on Form 20-F from six months to four months after a foreign private issuer s fiscal year-end and adopting amendments to certain disclosure requirements for foreign private issuers. A copy of the Release is available at http://www.sec.gov/rules/final/2008/33-8959.pdf. The amendments will become effective 60 days from the date of publication in the Federal Register. The new rules are intended to enhance the information on foreign private issuers that is available to investors by effectively bringing the reporting practices of foreign private issuers more in line with those of U.S. domestic issuers. In summary, the new rules: accelerate the filing deadline for the Form 20-F from six months to four months after a foreign private issuer s fiscal year-end, after a three-year transition period; beginning with the Form 20-F for fiscal years ending on or after December 15, 2008, require annual disclosure about significant differences in the corporate governance practices of a foreign private issuer listed on a U.S. exchange as compared with the practices required from U.S. domestic issuers; after a one-year transition period, require annual disclosure in the Form 20-F about: any changes in, or disagreements with, an issuer s certifying accountant; and all fees and charges payable by American depositary receipt ( ADR ) holders and all payments, including incentive payments, made by depositaries to the foreign private issuer; in the case of foreign private issuers that present their financial statements in accordance with U.S. GAAP, after a one-year transition period, eliminate the accommodation in Item 17 of Form 20-F to omit segment data from their financial statements; in the case of foreign private issuers that reconcile their financial statements presented in their home country GAAP to U.S. GAAP, after a three-year transition period, eliminate the more limited Item 17 U.S. GAAP reconciliation and require full Item 18 U.S. GAAP reconciliation in most situations; allow reporting issuers to evaluate whether they continue to meet the criteria for foreign private issuer status once a year, rather than continuously as is currently required; and amend Rule 13e-3 of the Securities Exchange Act of 1934 (the Exchange Act ), which pertains to going private transactions by reporting issuers or their affiliates, to reference the recently adopted deregistration and termination of reporting rules applicable to foreign private issuers.
2 These rules were originally proposed in March 2008. 1 One significant proposal that was not adopted in the final rules was the requirement for foreign private issuers to provide in their Form 20-F historical and pro forma financial information on an acquired company where an acquisition makes up 50 percent or more of the issuer s assets, investment or income using specified tests. U.S. domestic issuers have such a disclosure requirement on an ongoing basis. This publication does not purport to be a detailed description or analysis of all of the issues covered in the Release. Interested persons should feel free to contact any of the Shearman & Sterling attorneys listed at the end of this publication. Acceleration of Form 20-F filing deadline The amendments shorten the Form 20-F filing deadline for all foreign private issuers from six months to four months after an issuer s fiscal year-end. Of note, the SEC did not adopt the proposal of a more accelerated 90-day deadline for foreign private issuers that are large accelerated filers and accelerated filers. 2 In the Release, the SEC noted that the original six-month accommodation to account for different requirements in home jurisdictions has been rendered obsolete over the years by the adoption of shorter deadlines by several home securities regulators, such as four months after fiscal year-end in the case of companies listed on a European Union regulated market and 90 to 120 days after fiscal year-end in the case of issuers listed in Canada. Moreover, as more foreign private issuers prepare their financial statements on the basis of International Financial Reporting Standards ( IFRS ) as issued by the 1 The proposing release is available at http://www.sec.gov/rules/proposed/2008/33-8949.pdf. Our client publication on the proposing release is available at http://www.shearman.com/cm_030508/. 2 A large accelerated filer is an issuer with a worldwide public float of $700 million or more that has been an SEC registrant for at least 12 calendar months and has filed at least one annual report on Form 20-F. An accelerated filer is an issuer with a worldwide public float of between $75 million and $700 million that has the same SEC reporting history as that required of a large accelerated filer. International Accounting Standards Board ( IASB ), they are no longer required to prepare the additional reconciliation of those financial statements to U.S. GAAP. The accelerated filing deadline remains considerably longer than those for U.S. domestic large accelerated and accelerated filers, which are 60 days and 75 days, respectively, after fiscal year-end. A foreign private issuer must comply with the accelerated filing deadline beginning with its Form 20-F for the first fiscal year ending on or after December 15, 2011. The final rules do not change the filing deadline of the annual report on Form 40-F for Canadian issuers using the multi-jurisdictional disclosure system, or MJDS. Such issuers must continue to file the Form 40-F with the SEC on the same day that the information is due to be filed with the relevant Canadian securities regulator. Changes to Form 20-F disclosure Differences in corporate governance practices The most immediately effective requirement adopted is for foreign private issuers with a U.S. listing to disclose, in a new Item 16G to the Form 20-F, the significant ways in which their corporate governance practices differ from those required by U.S. domestic issuers listed on the exchange. A foreign private issuer must provide the disclosure required by new Item 16G beginning with its Form 20-F for the first fiscal year ending on or after December 15, 2008. This amendment should not mark a significant departure from existing practice, as the New York Stock Exchange and NASDAQ already require such disclosure from listed non-u.s. companies. These exchanges, however, allow companies to make such disclosure either on their website or in their annual reports. Changes in/disagreements with auditors The final rules require foreign private issuers to provide substantially the same disclosure currently provided by U.S. domestic issuers about changes in, and disagreements with, their certifying accountant in a new Item 16F to the Form 20-F. Among other things, new Item 16F requires disclosure about whether an issuer s accountant has resigned
3 or declined to stand for re-election or was dismissed. In this event, the issuer is required to disclose any disagreements or certain reportable events that occurred with the accountant during the two fiscal years and any interim period preceding the change. The issuer must also disclose whether material transactions were accounted for or disclosed in a manner different from what the former accountant concluded would be required. New Item 16F requires a foreign private issuer to provide a copy of such disclosure to the former accountant and to file as an exhibit to its Form 20-F any response by the former accountant regarding the issuer s position. In addition, the SEC went further than the proposed rule to require the new Item 16F disclosure in all registration statements used by foreign private issuers for public offerings. A foreign private issuer must provide the disclosure required by new Item 16F beginning with its Form 20-F for the fiscal year ending on or after December 15, 2009 and in registration statements that include information from this fiscal year onward. ADR fees and charges The final rules require foreign private issuers with sponsored ADR facilities to disclose on an annual basis all fees and charges payable by ADR holders. Currently, this disclosure is required by Item 12.D.3 of Form 20-F only once in the Form 20-F initially filed to register a class of securities. In addition to the current list of fees and charges included in this Item, the final rule adds that this disclosure must include annual fees paid by ADR holders for general depositary services. The final rules also add a new Item 12.D.4 to the Form 20-F that requires foreign private issuers with sponsored ADR facilities to disclose annually all fees and other direct and indirect payments made to them by depositary banks in connection with their ADR programs. This disclosure must be made on a per payment, rather than an aggregate, basis. A foreign private issuer must provide the new annual disclosure about ADR fees, charges and payments beginning with its Form 20-F for the first fiscal year ending on or after December 15, 2009. During this transition period, foreign private issuers and their depositary banks should review their incentive payment structures in light of the new Item 12.D.4 disclosure requirement. Elimination of segment reporting relief in U.S. GAAP financial statements The amendments eliminate after a one-year transition period certain segment reporting relief that is currently provided for foreign private issuers that present their financial statements fully in compliance with U.S. GAAP. Currently, Item 17 of Form 20-F allows such an issuer to omit segment reporting in accordance with Statement of Financial Accounting Standards (SFAS) 131 so long as the issuer provides a breakdown of total revenues by category of activity and geographical market. Such an issuer is also permitted to have a qualified U.S. GAAP audit report as a result of the omission of segment reporting. The SEC estimates that fewer than 10 foreign private issuers avail themselves of this accommodation. A foreign private issuer may no longer omit such segment reporting beginning with its Form 20-F for the fiscal year ending on or after December 15, 2009. Elimination of Item 17 U.S. GAAP reconciliation In the case of foreign private issuers that reconcile their financial statements presented in their home country GAAP to U.S. GAAP, the amendments eliminate after a three-year transition period the more limited reconciliation that is allowed by Item 17 of Form 20-F. This change means that all foreign private issuers that reconcile their financial statements to U.S. GAAP must do so in accordance with Item 18 beginning with their Form 20-F for fiscal years ending on or after December 15, 2011. The only exceptions will be for the financial statements of Canadian issuers filed in MJDS registration statements and of non-sec registered companies included in a foreign private issuer s or U.S. domestic issuer s SEC reports, such as those of a significant acquired business, significant equity method investee or debt guarantor exempt from filing its own financial statements with the SEC. In these cases, the more limited Item 17 reconciliation will continue to be permitted.
4 Item 17 allows an issuer not to provide certain footnote disclosures required by U.S. GAAP and SEC Regulation S-X unless such disclosures are otherwise required by the issuer s home country GAAP. Examples are disclosures related to pensions, lease commitments, business segments, tax attributes, stock compensation awards, financial instruments and derivatives. This more limited reconciliation is currently allowed in a foreign private issuer s annual report on Form 20-F as well as in a limited number of non-capital raising offerings by foreign private issuers. Elimination of Item 17 reconciliation should not have a significant impact on most foreign private issuers. Given that all but a limited number of SEC-registered offerings require full U.S. GAAP reconciliation under Item 18, the majority of foreign private issuers that prepare financial statements in accordance with their home country GAAP opt to provide the full Item 18 reconciliation in their annual report in order to have the flexibility to use their annual report disclosure in the context of an offering. 3 Moreover, an increasing number of foreign private issuers are, and will be, preparing their financial statements in accordance with IFRS as issued by the IASB, and therefore not preparing U.S. GAAP reconciliation at all for their SEC filings. Timing for evaluation of foreign private issuer status An issuer that is a foreign private issuer loses that status as soon as more than 50% of its voting securities are directly or indirectly held of record by U.S. residents and any one of the following occurs: (i) more than 50% of its assets are located in the United States; (ii) its business is administered principally in the United States; or (iii) the majority of its executive officers or directors are U.S. citizens or residents. Currently, a foreign private issuer is required to monitor its foreign status based on these criteria on a continuous basis. At the time its status as a foreign private issuer is lost, the issuer becomes subject immediately to the SEC ongoing reporting obligations and other obligations applicable to U.S. domestic companies. Thus, the issuer becomes subject to, among other things: the requirement to prepare financial statements in accordance with U.S. GAAP, the U.S. proxy rules, the filing of insider trading reports, enhanced executive compensation disclosure requirements, the short-swing profit rule for secondary trades by its officers, directors and more than 10% shareholders and the ongoing U.S. domestic reporting forms the Form 10-K annual report, Form 10-Q quarterly report and Form 8-K periodic report. The final rules require a foreign private issuer to evaluate its foreign status based on these criteria only once a year on the last business day of its second fiscal quarter, rather than on a continuous basis. A foreign private issuer no longer meeting the criteria on this determination date will be required to file SEC forms prescribed for U.S. domestic issuers, and to comply with other SEC obligations applicable to U.S. domestic issuers, only as of the beginning of the fiscal year after the year in which the determination is made. For example, a foreign private issuer that does not qualify as a foreign private issuer as of the end of its second fiscal quarter in 2009 could continue to file Forms 6-K in 2009, but would file a Form 10-K in 2010 for its 2009 fiscal year. Accordingly, foreign private issuers have an additional six months to transition to domestic forms compared with the present rules. The new determination date also applies to Canadian issuers using MJDS. By contrast, a former U.S. domestic issuer that qualifies as a foreign private issuer as of the determination date will be eligible to enter the foreign reporting system immediately. Amendments to Exchange Act Rule 13e-3 Rule 13e-3 of the Exchange Act requires any reporting issuer that engages in specified transactions that have the purpose or reasonable likelihood of causing the issuer s registered securities to be delisted from a U.S. exchange or 3 A foreign private issuer s annual report on Form 20-F can be incorporated by reference into the issuer s offering document on Form F-3.
5 to be held by fewer than 300 persons to disclose its plan for taking the company private on a form known as Schedule 13e-3. The disclosure required by Schedule 13e-3 can be extensive, is subject to review and comment by the SEC and must be distributed to security holders. Among the transactions subject to Rule 13e-3 are tender offers conducted by an issuer for its own securities and any other acquisition by an issuer of its own securities for value. The amendments make clear that Rule 13e-3 applies where an issuer conducts a transaction governed by the Rule that has the purpose or reasonable likelihood of rendering the issuer eligible for deregistration under the SEC s recent rules. These recent rules focus primarily on percentage of U.S. trading volume relative to worldwide volume in the case of deregistering equity securities. 4 Next steps key deadlines By way of example, summarized below are the key new filing and disclosure deadlines for foreign private issuers with a December 31 fiscal year-end: 4 See the final release available at http://www.sec.gov/rules/final/2007/34-55540.pdf. Our client publication on the final release is available at http://www.shearman.com/publications/detail.aspx?publication=45f7bc34-43d5-4f93-8be5-0f6f587c4dff. Form 20-F for the year ended December 31, 2008 New Item 16G: provide disclosure of significant differences between home country corporate governance practices and those required by the relevant U.S. exchange from U.S. domestic issuers. Form 20-F for the year ended December 31, 2009 New Item 16F: provide new disclosure about changes in, or disagreements with, certifying accountant. Item 12.D.3 and new Item 12.D.4: provide disclosure annually about all fees and charges payable by ADR holders and all payments made by depositaries to the foreign private issuer. If presenting financial statements fully in compliance with U.S. GAAP, provide segment data. Form 20-F for the year ended December 31, 2011 File Form 20-F by April 30, 2012 and by April 30 for each year thereafter. If reconciling financial statements presented in home country GAAP to U.S. GAAP, provide the full reconciliation required by Item 18. This memorandum is intended only as a general discussion of these issues. It should not be regarded as legal advice. We would be pleased to provide additional details or advice about specific situations if desired. If you wish to receive more information on the topics covered in this memorandum, you may contact your regular Shearman & Sterling contact person or any of the following: Bay Area Mark K. Hyland John D. Wilson +1.415.616.1100 Beijing Lee Edwards Alan D. Seem +8610.5922.8000 Düsseldorf Hans Diekmann +49.211.17.888.0 Frankfurt Stephan Hutter Marc O. Plepelits +49.69.9711.1000 Hong Kong Matthew D. Bersani Kyungwon (Won) Lee +852.2978.8000 London Pamela M. Gibson Jacques McChesney Ward McKimm Richard J. B. Price +44.20.7655.5000 New York David J. Beveridge Robert Evans III Stephen T. Giove Antonia E. Stolper +1.212.848.4000 Paris Manuel A. Orillac Sami L. Toutounji Robert C. Treuhold Bertrand Sénéchal +33.1.53.89.70.00 Rome Michael S. Bosco Robert Ellison Domenico Fanuele +39.06.697.6791 São Paulo Richard S. Aldrich, Jr. Andrew B. Jánszky +55.11.3702.2200 Singapore Gail Ong +65.6230.3800 Tokyo Masahisa Ikeda +81.3.5251.1601 Toronto Christopher J. Cummings Adam Givertz Jason R. Lehner +1.416.360.8484 Washington, D.C. Abigail Arms +1.202.508.8000 599 LEXINGTON AVENUE NEW YORK NY 10022-6069 WWW.SHEARMAN.COM 2008 Shearman & Sterling LLP. As used herein, Shearman & Sterling refers to Shearman & Sterling LLP, a limited liability partnership organized under the laws of the State of Delaware.