SEC Adopts Foreign Issuer Reporting Enhancements
October 22, 2008
Francois Janson- New York
On September 23, 2008, the SEC published final rules that implement various improvements to the disclosure regime applicable to Canadian and other non-U.S. public companies listed in the U.S. or having U.S. reporting obligations. The rules were proposed in February 2008 and are adopted with few modifications.
The principal change is a uniform requirement for all foreign private issuers (FPIs), other than Canadian issuers relying on the Multi-Jurisdictional Disclosure System (MJDS), to file their annual report within 120 days after the close of their fiscal year, with a three-year delayed implementation.
These amendments complete a series of recent initiatives by the SEC to bring more flexibility in its rules applicable to non-U.S. companies that access the U.S. capital markets, report in the U.S. or have U.S. shareholders. These initiatives include rules permitting FPIs to use International Financial Reporting Standards (IFRS) without the need for reconciliation with U.S. Generally Accepted Accounting Principles (GAAP), new rules facilitating cross-border takeovers (see our alert dated October 1, 2008) and improvements to the exemption from SEC registration available to non-U.S. issuers that have U.S. shareholder interest
(see our alert dated October 3, 2008).
The rules will become effective on December 6, 2008, with various delayed compliance dates discussed below.
Overview
The amendments purport to:
- permit issuers to assess their eligibility to use the FPI disclosure regime once a year instead of continuously
- accelerate the filing date of annual reports from six to four months after the close of the fiscal year for all FPIs (other than Canadian MJDS issuers)
- require FPIs to provide IFRS or U.S. GAAP-compliant financial statements in their Form 20-F registration statements and annual reports
- incorporate the new threshold for deregistration based on average daily trading volume (ADTV) into the trigger of the going private disclosure rules
- add three new disclosure items to the annual reports and registration statements of FPIs
Eligibility to Use the FPI Disclosure Regime
Non-U.S. issuers that are registered with the SEC or have U.S. reporting obligations benefit from various accommodations and exemptions from the rules governing securities offerings, mergers and acquisitions transactions, and periodic reporting by U.S. companies.
This regime is premised on the issuer qualifying as a FPI. Any issuer incorporated in a jurisdiction other than the U.S. qualifies as a FPI unless (i) it has more than 50% of its shareholders resident in the U.S. and (ii) it is deemed to be based in the U.S. (which is the case if (A) a majority of its executive officers or directors are U.S. citizens or residents, (B) more than 50% of its assets are located in the U.S., or (C) its business is administered principally in the U.S.).
Until now, issuers were required to determine their eligibility to use the FPI disclosure regime on an ongoing basis. This created problems for issuers that have a substantial U.S. shareholder base close to the 50% threshold. Under the new rules, Canadian and other non-U.S. issuers will now only be required to assess their status as a FPI once a year at the close of their second fiscal quarter. Issuers making an initial public offering must continue to assess their status one month prior to the filing of their first registration statement with the SEC.
Issuers may use the FPI disclosure regime immediately upon making the determination that they qualify. FPIs that fail the test are not required to switch to the periodic reporting regime applicable to domestic U.S. companies until the beginning of the next fiscal year. Canadian issuers that wish to use the MJDS must continue to assess whether they meet the other criteria for eligibility at the end of their fiscal year. Canadian issuers that fail the FPI test at the close of their second fiscal quarter must switch immediately to the FPI disclosure regime for purposes of Securities Act registration statements. They may, however, continue to report on MJDS forms under the Securities Exchange Act of 1934 for the rest of the fiscal year. The new date for testing FPI status will provide a substantial accommodation for MJDS filers because, currently, these filers are required to use the domestic securities offering forms as soon as they lose their FPI status.
Acceleration of Filing Date for Annual Reports
Beginning with annual reports for fiscal years ending on or after December 15, 2011, all annual reports of FPIs (other than Canadian MJDS issuers) will be required to be filed no later than four months after the close of the fiscal year. The SEC staff had proposed accelerating the filing date from six months to 90 days for issuers that have a public float of $75 million or more and 120 days for other issuers, after a two-year transition period. As some countries still allow issuers to file more than 90 days after the close of their fiscal year, the SEC staff settled for 120 days for all issuers and extended the transition period to three years. Qualifying Canadian issuers must continue to file their annual report on Form 40-F upon filing the same in Canada.
Financial Information
All FPIs will be required to provide IFRS or U.S. GAAP-compliant financial statements in their Form 20-F registration statements and annual reports. This change is driven by the adoption last year of new rules permitting FPIs to use IFRS instead of having to comply with U.S. GAAP.
The SEC will no longer permit FPIs that do not raise equity or below-investment grade capital in the U.S. or are filing an annual report to omit certain financial disclosure from their Form 20-F. Under Item 17 of Form 20-F, FPIs that must file a registration statement on Form 20-F because they have a substantial U.S. shareholder base, become listed in the U.S. or complete certain U.S. securities offerings and FPIs that file their annual report may provide financial statements prepared in accordance with accounting principles other than U.S. GAAP, provided they include a line item reconciliation to U.S. GAAP.
Beginning with the first fiscal year on or after December 15, 2011, this accommodation will no longer be available and all FPIs will be required to comply with the expanded financial disclosure required by Item 18 of Form 20-F. Financial statements prepared in accordance with principles other than IFRS or U.S. GAAP will need to comply with all U.S. GAAP disclosure requirements and to include all information required under Regulation S-X, in addition to the line item reconciliation. In practice, many FPIs are already reporting under Item 18 because Item 18 financial statements are required in Forms F-3 (the abbreviated form available to seasoned issuers) filed in connection with primary securities offerings. The Item 17 reconciliation remains available to Canadian MJDS issuers for certain categories of securities offerings and annual reports filed pursuant to periodic filing obligations arising from these offerings.
In addition, to continue using Item 17 of Form 20-F, FPIs that report in U.S. GAAP will be required to provide full segment data beginning with their fiscal years ending on or after December 15, 2009. Financial statements prepared under IFRS include full segment data.
Going Private Transactions
Transactions that result in a FPI no longer maintaining a listing or having 300 record holders in the U.S. are subject to certain disclosure requirements contained in Rule 13e-3 designed to give public shareholders information about the subject issuer and the transaction. In June 2007, the SEC implemented Rule 12h-6 to allow FPIs that have little U.S. market interest and have not made any U.S. registered public offerings in the prior 12 months to deregister, provided they meet a new test of U.S. market interest based on a comparison of U.S. ADTV relative to worldwide ADTV, using a 5% benchmark. To ensure regulatory consistency, the SEC now amends Rule 13e-3 to incorporate this test into the trigger of the disclosure requirements applicable to going private transactions. The SEC staff, however, maintains its position that share repurchases that are not undertaken for the purpose or with the reasonable likelihood of causing the issuer to no longer report in the U.S. are not subject to Rule 13e-3.
New Disclosure Items
The SEC will require FPIs (other than Canadian MJDS issuers) to provide disclosure in their annual reports and registration statements regarding changes in their accountants, fees and payments made to ADR depositaries, and differences between their corporate governance practices and those applicable under the relevant listing standards.
Beginning with the first fiscal year ending on or after December 15, 2009, the U.S. disclosure requirements regarding changes in accountants will become applicable to FPIs. FPIs will be required to disclose in their annual reports and registration statements, among other things, if their independent accountants have resigned, declined to stand for re-election or were dismissed as well as any disagreements or reportable events in the current fiscal year and preceding two fiscal years. There remains no separate requirement to disclose such changes upon occurrence. A report on Form 6-K will only be required if a filing in the issuer’s home jurisdiction is also required on a current basis.
Following the introduction of new depositary fees charged to ADR holders, the SEC will now require that ADR issuers disclose such fees and any ADR fees paid to them in their annual reports and registration statements on Form 20-F. This requirement will become applicable to annual reports for fiscal years ending on or after December 15, 2009.
Finally, for FPIs listed in the U.S., the SEC incorporates in Form 20-F the requirement of the New York Stock Exchange and NASDAQ that listed issuers disclose in their annual report the significant differences between their corporate governance practices and those applicable to U.S. listed companies under the relevant listing rules. This requirement is applicable to annual reports for the first fiscal year ending on or after December 15, 2008.
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