Capital Markets April 5, 2007 SEC Adopts Changes to Its Rules Permitting Foreign Private Issuers to Deregister and Terminate Periodic Reporting Obligations At a meeting on March 21, 2007, the SEC adopted changes to the rules that govern when a foreign private issuer may deregister its securities and terminate reporting obligations under the Securities Exchange Act of 1934 (the Exchange Act ). The new rules as adopted are substantially similar to the reproposed rules published December 12, 2006 ("the reproposal"). The Release containing the new rules, Release No. 34-55540 (the "Release"), has been posted to the SEC website and published today in the Federal Register (72 FR 16934). The rules will become effective June 4, 2007. See link to the Release below: http://www.sec.gov/rules/final/2007/34-55540.pdf Background Currently, a foreign private issuer is required to have fewer than 300 U.S. resident holders to be able to terminate its registration and suspend reporting obligations under the Exchange Act. Under this standard, foreign private issuers may find themselves unable to terminate their Exchange Act reporting obligations even when there is relatively little U.S. investor interest. In the interest of continuing to attract foreign private issuers to the U.S. markets and increasing their willingness to register securities under the Exchange Act and the Securities Act of 1933 (the Securities Act ), the SEC has adopted revisions to the current standards. Equity Securities New Benchmark for Measuring U.S. Investor Interest The new benchmark set out in new Rule 12h-6 is based upon trading volume and will apply to any issuer regardless of size. Rule 12h-6 will allow a foreign private issuer to terminate its registration of a class of equity securities and terminate its reporting obligations regarding that class of equity securities permanently if the conditions of the Rule are met. Trading volume benchmark Rule 12h-6: will permit any foreign private issuer (regardless of size) to deregister and terminate its Exchange Act reporting obligations regarding a class of equity securities if during a recent 12 month period the U.S. average daily trading volume ("ADTV") of the subject class of securities has not exceeded 5 percent of the ADTV of that class of securities worldwide, rather than, as in the reproposal, 5 percent of the ADTV in the primary trading market; LNDOCS01/506839.3
2 will require a foreign private issuer that delists from a U.S. trading market (such as the New York Stock Exchange or Nasdaq) before deregistering to meet the ADTV benchmark at the date of delisting, and, if not met, wait 12 months before it may become eligible to deregister in reliance upon the ADTV benchmark; will require a foreign private issuer that terminates an American Depositary Receipts ( ADR ) facility before deregistering to meet the ADTV benchmark at the date of termination or to wait 12 months before it may become eligible to deregister in reliance upon the ADTV benchmark; the reproposal had required a 12 month waiting period after termination of an ADR facility even if U.S. trading was below the benchmark at the date of termination. In the interest of fairness, the waiting period provisions will not apply to an issuer that delisted or terminated an ADR facility prior to March 21, 2007, the date of adoption of Rule 12h-6. Foreign private issuers required to wait 12 months either because of delisting or because of termination of an ADR facility will still be required to meet the ADTV benchmark at the time of their proposed deregistration and termination of reporting obligations. U.S. ADTV will have to take account of all U.S. trading of the relevant securities, whether occurring on a U.S. securities exchange or over-the-counter, or both. In a change from the reproposal, Rule 12h-6 will also permit an issuer to include off-market transactions when calculating worldwide trading volume so long as the information is reasonably reliable and not duplicative. Convertible debt and other equity-linked securities are excluded from the definition of equity security for the purpose of the trading volume calculations. Rule 12h-6 does not specify specific data sources for determining trading volume. Issuers have the flexibility to use commercial service providers and publicly available sources they reasonably believe to be reliable and nonduplicative. The sources must be disclosed on Form 15F. Other Conditions for Equity Securities In addition to meeting the ADTV benchmark, a foreign private issuer must: have been a reporting company for at least one year, have filed or submitted all required reports for that year and have filed at least one Exchange Act annual report; not have sold securities in a registered offering in the U.S., except for certain offerings, during the preceding 12 months (exempt offerings would be permitted); and have maintained a listing for at least a year in a foreign jurisdiction that, either alone or together with one other foreign jurisdiction, constitutes the primary trading market for the subject class of securities. The primary trading market of a foreign private issuer is defined as the market where at least 55% of the trading in the foreign private issuer s subject class of securities 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. If an issuer aggregates the trading of its securities in two foreign jurisdictions for the purpose of Rule 12h-6, the trading market for the issuer s securities in at least one of the two foreign jurisdictions must be larger than the U.S. trading market for the issuer s securities. 12-month dormancy period During the one-year period in which a foreign private issuer may not have sold securities in a registered offering in the United States, the following are nonetheless permitted: sales of registered securities to employees (as "employee" is defined in Form S-8, which includes certain other persons) or by selling shareholders in a non-underwritten offering; issues of registered securities upon the exercise of outstanding rights that have been granted pro rata to all security holders, pursuant to a dividend or
3 interest reinvestment plan, or upon the conversion of outstanding convertible securities. A rights issue underwritten on a stand-by basis is permitted if the underwriters only sell any shares taken up outside the United States pursuant to Regulations S. Sales of unregistered securities exempted under the Securities Act are permitted during the dormancy period, including securities sold in Section 4(2) or Regulation D private placements, pursuant to Securities Act Rule 144A, under section 3(a)(10) schemes of arrangement, and pursuant to Securities Act Rules 801 and 802, which provide cross-border relief for certain rights offers and business combinations. Record Holder Provision: Debt or Equity A foreign private issuer will be eligible to terminate its reporting obligations regarding a class of debt securities or equity securities under Rule 12h-6 if it meets the following conditions (in the case of equity securities, these are in addition to Rule 12h-6 s other conditions with respect to equity, aside from trading volume): the issuer has filed or furnished all required Exchange Act reports, including at least one annual report; and the class of debt or equity 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. The purpose of retaining the 300 record holder test for equity as an alternative to the trading volume benchmark is, the Release states, so that an issuer who cannot satisfy the trading volume benchmark but can meet the existing 300 holder standard is not worse off under the new rules. Counting U.S. Resident Holders To make it easier for a foreign private issuer to determine whether the number of U.S. resident equity or debt securities holders meets the threshold under the record holder test, a foreign private issuer will be permitted, as under the reproposal, to limit its 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; and if different, the jurisdiction(s) of the foreign private issuer s primary trading market. If after reasonable inquiry, the issuer is unable without unreasonable effort to obtain information about underlying customers, the issuer may assume customers are resident in the jurisdiction where the nominee has its principal place of business. However, this presumption does not appear to help in counting the number of customers. The rule explicitly permits foreign private issuers to rely in good faith on the assistance of independent information service providers that in the regular course of their business assist issuers in determining the number of, and collecting other information concerning, their security holders. Extension of Rule 12h-6 to issuers who previously deregistered or suspended reporting obligations A foreign private issuer that has terminated registration or suspended its reporting obligations under the current rules and before the effective date of Rule 12h-6 may obtain the benefits of permanent termination under Rule 12h-6 by filing a Form 15F as long as the issuer satisfies Rule 12h-6 s primary trading market listing condition for a class of equity securities and satisfies the trading volume benchmark or alternate record holder provisions at the time of filing the Form 15F. In a change from the reproposal, such an issuer can equally rely on the trading volume benchmark rather than having to recount under the record holder test to be eligible to file a Form 15F.
4 Successor Registrants A foreign private issuer that succeeds to the reporting obligations of another company following a merger, acquisition or similar transaction can take into account the reporting history of the predecessor company in determining whether it meets the prior reporting condition for termination of registration and reporting obligations under Rule 12h-6. The successor reporting provision permits a non-reporting foreign private issuer acquiring a reporting foreign private issuer in a transaction exempt under the Securities Act, for instance under cross-border relief or in a Section 3(a)(10) scheme of arrangement, to qualify immediately for termination of registration and reporting obligations, so long as the successor meets the listing, dormancy and trading benchmark conditions and the acquired company meets the prior reporting condition. However, if a non-reporting acquiror undertakes a registered transaction, for instance on an F-4 registration statement, then it will have triggered its own reporting obligations and would have to meet the 12 month and one annual report condition before exiting. Required Certification on Form 15F Rule 12h-6 requires an issuer to file a certification on Form 15F with the SEC stating that it meets the conditions for terminating its Exchange Act registration and reporting obligations. It also requires the provision of specified supporting information. The filing of a Form 15F will 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 of the form. While there is no continuing obligation on an issuer to make further inquiries after filing the Form 15F, the issuer is required to withdraw the Form 15F if it has actual knowledge of information that causes it reasonably to believe that at the date of filing the Form 15F the trading volume or record holder information that was the basis of the filing was incorrect. Public Notice As a condition to termination of reporting under Rule 12h-6, an issuer (except for prior Form 15 filers), must publish on or before filing the Form 15 F a notice in the United States disclosing its intention to terminate reporting obligations. The notice, such as a press release, must be published through a means reasonably designed to provide broad dissemination of information to the public in the United States. It must also be submitted to the SEC under Form 6-K at or before filing the Form 15F or as an exhibit to the Form 15F. Changes to Rule 12g3-2(b) The SEC also adopted rule changes that would permit a foreign private issuer to claim the Rule 12g3-2(b) exemption with respect to a class of equity securities whose registration or reporting obligations are terminated: immediately upon termination of its registration or reporting obligations under Rule 12h-6, rather than having to satisfy the current waiting requirement; and upon the condition that the issuer publish in English its home country material required by Rule 12g3-2(b) on its Internet website or through an electronic information delivery system that is generally available to the public in the issuer s primary trading market. Under current rules, when a foreign private issuer has 300 or more U.S. resident holders of a class of equity securities, it must either register that class under the Exchange Act or be exempt from registration under Rule 12g3-2(b). The immediate availability of Rule 12g3-2(b) will therefore permit deregistration and termination of reporting obligations by foreign private issuers having more than 300 U.S. resident holders of the relevant class. This change is also consistent with deregistration and termination of reporting obligations being permanent under Rule 12h-6 unless the issuer takes further registrable activity. Registration requirements can no longer re-emerge simply because an issuer goes over 300 U.S. resident
5 holders after deregistration and termination of reporting obligations. Further, a non-reporting issuer that has received or will receive a Rule 12g3-2(b) exemption upon application to the SEC, and not pursuant to Rule 12h-6, may publish in English its required ongoing home country documents on its Internet website or through an electronic information system in its primary trading market rather than submitting the materials in paper to the SEC, as is currently required. The initial application under Rule 12g3-2(b) will still be required to be in paper. Options The Release for the first time in the history of the proposal and reproposal of the new rules recognizes that outstanding options may pose issues for certain issuers wishing to deregister. The Release states "After the effectiveness of the Form 15F, a foreign private issuer would be able to rely on Rule 701 with respect to unsold securities that had previously been covered by the Form S-8 registration statement." Rule 701 permits unregistered issuers to issue options and other equity based compensation to U.S. employees within certain limits, which are measured on the date of grant. The statement in the Release, while permitting the use of Rule 701 for unsold securities, e.g. shares to be issued upon the exercise of outstanding options, does not specify how Rule 701 is to be applied. One method of application would be to apply its limits retroactively to the year of grant. In some cases, options may need to be cash settled. A technical question arises under the revisions to Rule 12g3-2(b) as to whether registration would be triggered were an issuer to have 300 or more U.S. resident holders of options, which is considered a separate class of equity security, upon deregistration of the underlying shares. Issuers with over 300 U.S. resident option holders may not be able to take advantage of the new deregistration rules. 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. For more information on the topics covered in this issue, please contact: Beijing Lee Edwards Alan D. Seem +8610.6505.3399 Düsseldorf Hans Diekmann +49.211.17.888.0 Frankfurt Stephan Hutter +49.69.9711.1000 Hong Kong Matthew D. Bersani +852.2978.8000 London James M. Bartos David J. Beveridge Pamela M. Gibson Bonnie Greaves Ward McKimm Richard J. B. Price +44.20.7655.5000 Menlo Park James B. Bucher +1.650.838.3600 New York Robert Evans III Stephen T. Giove Antonia E. Stolper +1.212.848.4000 Paris Manuel A. Orillac Sami L. Toutounji Robert C. Treuhold +33.1.53.89.70.00 Rome Michael S. Bosco Robert Ellison +39.06.697.6791 San Francisco Mark K. Hyland John D. Wilson +1.415.616.1100 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 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 2007 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.