Non-U.S. issuers may have compelling reasons to voluntarily delist their securities from U.S. stock exchanges and exit the Securities and Exchange Commission ("SEC") reporting system under the U.S. Securities Exchange Act of 1934 (the "Exchange Act"). Among the incentives to leave the system are cumbersome and expensive Sarbanes-Oxley governance and reporting requirements, the risk of U.S. securities law liabilities, the availability of improved foreign exchanges on which to list outside of the U.S., sufficient availability of capital overseas and in the private market, limited interest in the company's shares resulting in low trading volumes and continuing management distractions that arise from the significant efforts needed to comply with U.S. disclosure and reporting rules.1 While there is no question that a U.S. listing can provide important benefits to some non-U.S. issuers, in many cases the costs and burdens of complying with U.S. requirements clearly outweigh these advantages.
Leaving the U.S. reporting system should not be confused with "going dark" or "going private." After exiting the U.S. SEC regulatory and reporting scheme, foreign private issuers will often continue to maintain non-U.S. listing and trading markets which require public disclosure of material information irrespective of U.S. SEC requirements. In fact the most commonly used method of Exchange Act deregistration by foreign private issuers (Rule 12h-6) and the most commonly used exemption from the initial requirement to register under the Exchange Act (Rule 12g3-2(b)) both require that the issuer maintain a primary non-U.S. trading market. As a recent example, Allianz joined the list of substantial foreign issuers exiting the U.S. system by announcing a voluntary delisting on September 22, 2009. Allianz will focus its trading in Frankfurt, Germany and has delisted from the NYSE and plans to deregister under Rule 12h-6.2
Foreign private issuers may leave the U.S. reporting system in connection with mergers, acquisitions or going private transactions or they may do so through a voluntary exit from the U.S. reporting system.3 This memorandum explains the complicated steps necessary for a non-
U.S. issuer to delist and deregister under the Exchange Act with a focus on issuers that choose to leave the system voluntarily.
The Thresholds for Exchange Act Registration To determine how to deregister under the Exchange Act and relieve an issuer from its U.S. reporting obligations it is important to understand how Exchange Act reporting obligations arise in the first place. Exchange Act reporting requirements for a U.S. or overseas issuer can be triggered in any or all of the following different and sometimes overlapping ways:
under Section 12(b) if the issuer has shares or ADRs listed on a national securities exchange (such as NYSE or NASDAQ);4 under Section 12(g) based on having over 500 record holders of a class of securities on a worldwide basis and total assets exceeding $10 million on the last day of its fiscal year;5 or under Section 15(d) by having had a registration statement declared effective under the Securities Act. Reporting obligations under Sections 12(g) and 15(d) are suspended while obligations under Section 12(b) are in effect. By the same token, obligations under Section 15(d) are suspended while Section 12(g) reporting obligations remain in effect. As a result, each of the three different predicates for registration must be dealt with in turn and Section 12(b) obligations must first be eliminated before those under Sections 12(g) and 15(d) can be attacked.
Delisting and Deregistration under Section 12(b) is the First Step in Leaving the U.S. Reporting System Foreign private issuers wishing to exit the U.S. equity markets must first voluntarily delist their shares from any national securities exchanges on which they may be listed and deregister them under Section 12(b). This is accomplished under Exchange Act Rule 12d2-2. The issuer is entitled as of right to voluntarily delist its shares or ADSs at any time, and to deregister them under Section 12(b) of the Exchange Act by filing a Form 25 with the SEC pursuant to Rule 12d2-2(c).6 The issuer must give notice of its intention to file the Form 25 and issue a press release announcing and explaining that intention ten days prior to filing the Form 25. The delisting from the NYSE, NASDAQ or other trading market will become effective ten (10) days after filing the Form 25. There is no requirement that the issuer be current on its SEC reporting obligations to delist under Rule 12d2-2(c). The actual termination of registration under Section 12(b) of the Exchange Act does not occur until 90 days after effectiveness of the delisting. Such delisting (and deregistration under Section 12(b)), however, does not suspend the issuer's SEC reporting obligations under Sections 12(g) or 15(d) of the Exchange Act, and those obligations, including obligations to file Form 20-Fs and Form 6-Ks will continue until the issuer deregisters under those other Exchange Act sections. Once the delisting is completed, the issuer must deregister the shares under the Exchange Act under one of the methods referred to above, and only then will it have suspended or terminated the company's public reporting obligations under the Exchange Act.
Deregistration under Section 12(g) and Section 15(d)
Once delisting and deregistration has been accomplished under Section 12(b), then registration and reporting obligations under Section 12(g) may be triggered. Non-U.S. issuers with U.S. listings or Exchange Act reporting obligations have two different regulatory schemes under which they can deregister and cease reporting under both Sections 12(g) and, if applicable, Section 15(d) of the Exchange Act. The first path to exiting the U.S. reporting system following a delisting is under Exchange Act Rules 12g-4 and 12h-3 which are applicable to both U.S. domestic and non-U.S. issuers. Under those rules, an issuer's ability to deregister depends on its having less than 300 holders of record of the relevant class of equity securities on a worldwide basis. In computing the number of record holders, issuers are permitted to use the counting method set forth in Rule 12g5-1 that does not look through the holdings of brokers, dealers, banks or other nominees to beneficial owners. As a result, a company may have many hundreds or even thousands of security holders and still have less than 300 holders of record for this purpose.
The second path to Exchange Act deregistration is available only to foreign private issuers and is provided by Rule 12h-6 which requires that the issuer have a primary trading market outside the U.S. that constitutes at least 55% of its trading in a recent 12-month period. In addition, the issuer must meet either a U.S. trading volume test (the issuer must have had less than 5% of its average worldwide daily trading volume in the U.S. over a recent 12-month period), or show that it has less than 300 holders of record (or less than 300 U.S. resident holders of record) computed using a method of counting record holders resident in the U.S. that requires a modified look through of nominee holders to the underlying beneficial owners.
Which method of deregistration an eligible foreign issuer chooses will depend on its specific circumstances. A company will only rarely meet the criteria for both paths to deregistration. In some unusual cases, however, it could be advantageous for non-U.S. issuers which have suspended their U.S. reporting obligations under the first path to subsequently comply with Rule 12h-6 which affords a more permanent termination (as opposed to just a suspension) of Section 15(d) reporting obligations. Companies with substantial U.S. trading or that lack a primary non-U.S. trading market or which do not meet the definition of "foreign private issuer" are not eligible to use Rule 12h-6. And companies that cannot meet the 300 worldwide holders of record test computed under Rule 12g5-1 will be unable to use the older rules designed to allow companies to suspend or terminate their Exchange Act registration.
Both paths to deregistration are complex, technical and in some respects inconsistent and are described in detail below. For most large companies with widely held shares, Rule 12h-6 will be the path of choice. However, it is important to carefully consider the company's precise situation and all of the facts and circumstances affecting the company before choosing a path to voluntary deregistration.
Definition of a Foreign Private Issuer
Before choosing a path to deregistration, a non-U.S. issuer must first determine whether it qualifies as a "foreign private issuer" as only those companies are eligible to use Rule 12h-6. The term "foreign private issuer" is defined in Rule 3b-4 as any foreign issuer, other than a foreign government, unless it meets the following conditions as of the last business day of its most recently completed second fiscal quarter:
(1) more than 50% of the issuer's outstanding voting securities are directly or indirectly held of record by residents of the U.S.; and
(2) any one of the following:
(a) the majority of the issuer's executive officers or directors are U.S. citizens or residents;
(b) more than 50% of the issuer's assets are located in the U.S.; or
(c) the business of the issuer is administered principally in the U.S.
There can be many interpretive issues in determining whether an issuer qualifies under the criteria in clauses 2(b) and 2(c) above, including questions as to the valuation of the assets, the treatment of non-operating assets or the significance of cash in accounts at U.S. banks and the meaning of "administered principally" in the U.S. when applied to diverse...