On March 27, 2007, the Securities and Exchange Commission (SEC) issued a final release adopting new rules governing when foreign private issuers may terminate their registration and reporting requirements under Section 12(g) of the Securities Exchange Act of 1934, as amended (Exchange Act).

5% Average Daily Trading Volume Test 

The new rules generally permit foreign private issuers to deregister a class of equity securities if the average daily trading volume in the securities in the United States has represented no more than 5% of the worldwide average daily trading in the securities during the preceding 12 months.  In addition, the company must have maintained a listing of the securities in a primary trading market outside the United States for at least 12 months preceding the deregistration.  A primary trading market is one in which at least 55% of the worldwide trading of the securities occurs.  Trading in two jurisdictions outside the United States may be combined to reach the 55% minimum.

In calculating the U.S. average daily trading volume, a company must include both on-exchange and off-exchange transactions.  Off-exchange transactions occurring outside the United States may be included in the worldwide average daily trading volume if the information concerning such transactions is reasonably considered reliable and not duplicative of on-exchange transactions. Equity-linked securities, such as convertible debt, options or warrants, need not be included in making the trading volume calculations.

Limitations on Use of the 5% Test 

Deregistration under the 5% average daily trading volume test is possible only if the company has been reporting under the Exchange Act for at least one year before deregistration and has filed or furnished all required reports, including at least one annual report. 

Companies may not make use of the deregistration provisions if they have conducted a public offering in the United States within the preceding 12 months.  Exceptions are made for offerings to employees, offerings by selling security holders not using an underwriter, pro rata rights offerings, and offerings pursuant to dividend or interest reinvestment plans or upon the conversion of outstanding convertible securities or exercise of outstanding transferable warrants.

Companies that have delisted from an exchange or terminated a sponsored ADR program must wait 12 months from these events before taking advantage of the deregistration provisions, unless they met the 5% maximum trading volume requirement over the 12 months preceding the delisting or termination of the sponsored ADR program.  This requirement is intended to prevent companies from using the delisting or ADR program termination to achieve the 5% maximum trading volume requirement.  This rule will not apply, however, to delistings or ADR program terminations that took place before March 21, 2007. 

The 300 Holder Test

Additionally, the SEC amended its current recordholder-based standard for deregistration to permit issuers to terminate their Exchange Act registration if, as of a date 120 days prior to deregistration, their equity securities are held of record by less than 300 persons worldwide or less than 300 persons resident in the United States.  To determine the number of U.S. resident holders, the issuer must “look through” banks, brokers and other nominees in the United States, the issuer’s jurisdiction of incorporation or organization and, if different, the jurisdiction of its primary trading market (rather than worldwide, as previously required).

Deregistration of equity securities under the 300 holder test is available only if the issuer has been reporting under the Exchange Act for at least one year before deregistration and has filed or furnished all required reports, including at least one annual report.  Deregistration is not available for equity securities that have been the subject of a public offering in the United States within the preceding 12 months, subject to the same exceptions available under the 5% test.

The amended rules also allow for termination of Exchange Act reporting obligations for debt securities provided the issuer has filed or furnished all required reports, including one annual report, under the Exchange Act, and the class of debt securities is held of record by less than 300 holders either worldwide or in the United States (determined for U.S. resident holders in the same manner as for U.S. resident holders of equity securities).

Exemption Following Deregistration 

Following deregistration, the issuer may claim a continuing exemption from certain Exchange Act requirements by publishing  in English, either on its website or through an electronic delivery system available to the public in its primary trading market, material home country documents, including annual and interim financial statements, material press releases and communications with security holders. This will eliminate copies of  these documents to the SEC under Rule 12g3-2(b) or to monitor whether the number of its U.S. resident or worldwide security holders exceeds the number that would require re-registration Section 12(g) of the Exchange Act or an application for an exemption under Rule 12g3-2(b). 

Effective Date 

The new rules will be effective 60 days after their publication in the Federal Register.  Thus, qualifying issuers with a December 31 fiscal year (and thus a June 30th deadline for filing Form 20-F) will be able to deregister prior to the Form 20-F filing due date.     

If you would like additional information about this topic, please contact Bonnie Roe  or Scott Tayne  in the New York office at (212-588-5500), Robert Murphy in the Toronto office at (416-863-0900) or Neil Kravitz in the Montréal office at (514-841-6400).   

Davies Ward Phillips & Vineberg LLP, with over 235 lawyers, practices nationally and internationally from offices in Toronto, Montréal, New York and an affiliate in Paris and is consistently at the heart of the largest and most complex commercial and financial matters on behalf of its North American and overseas clients. 

The information and comments herein are for the general information of the reader and are not intended as advice or opinions to be relied upon in relation to any particular circumstance. For particular applications of the law to specific situations, the reader should seek professional advice.