The SEC recently adopted amendments to rules and forms affecting foreign private issuers. These amendments primarily focus on three topics:

  • enhancements to foreign private issuer reporting obligations;
  • revisions to the Rule 12g3‑2(b) exemption from the registration requirements under the Securities Exchange Act of 1934; and
  • revisions to exemptions from certain disclosure, filing, registration and procedural requirements for cross-border business combination transactions, tender offers and rights offerings.

This Update provides key highlights of the amendments and offers practical advice.

SEC Enhances Foreign Private Issuer Reporting Requirements

The SEC recently approved various changes to existing rules and forms relating to the determination of foreign private issuer status, the deadline for filing annual reports on
Form 20-F and certain related disclosure requirements. These amendments, described below, will become effective December 6, 2008.

Foreign Private Issuer Status Tested Once a Year. Foreign private issuers are eligible for certain accommodations under the U.S. federal securities laws, including, among others, added time to file annual reports and exemptions from SEC quarterly reporting requirements, SEC proxy solicitation rules and, for company insiders, Section 16 reporting and short-swing trading liabilities under the Exchange Act. The term "foreign private issuer" is defined in Rule 405 under the Securities Act of 1933 and Rule 3b-4 under the Exchange Act.

An issuer's eligibility to be considered a foreign private issuer is currently tested on a continuous basis. The new rules permit foreign private issuers to evaluate their status once a year, on the last business day of the second fiscal quarter. If an issuer determines that it no longer complies with eligibility requirements at that time, it must comply with reporting requirements and use the forms designated for U.S. issuers (i.e., Forms 10-K, 10-Q and 8-K) starting on the first day of the fiscal year after the determination date. On the other hand, if an issuer reporting under the U.S. issuer regime at any time qualifies as a foreign private issuer, the issuer can immediately begin complying only with the rules applicable to foreign private issuers.

Foreign Private Issuers Must File Annual Reports No Later Than Four Months After the End of the Fiscal Year. Foreign private issuers that file annual reports on Form 20-F currently are required to file the report within six months after the end of the issuer's fiscal year. The amended rules require annual reports on Form 20-F for fiscal years ending on or after December 15, 2011 to be filed within 120 days of fiscal year-end, regardless of whether the issuer is a large accelerated filer, an accelerated filer or otherwise.

Increased Disclosure Required for Reports on Form 20-F. Form 20-F currently permits foreign private issuers to provide financial statements in compliance with either Item 17 or 18 of the form. Item 18 generally requires that the financial statements conform with U.S. GAAP. Item 17 generally requires that, if the financial statements are prepared based on accounting principles of the issuer's home jurisdiction, the issuer discuss and provide a reconciliation of the material differences between those home principles and U.S. GAAP.

The SEC amendments provide that foreign private issuers, other than Canadian Multijurisdictional Disclosure System filers, that currently prepare financial statements in accordance with Item 17 of Form 20-F must comply with Item 18 for their first fiscal year ending on or after December 15, 2011. However, foreign private issuers may continue to use the U.S. GAAP reconciliation option under Item 17 for the preparation of third-party financial statements required to be included in the issuer's report on Form 20-F. In addition, foreign private issuers, in accordance with previous SEC rule amendments, may prepare financial statements on the basis of International Financial Reporting Standards without reconciling those statements to U.S. GAAP.

Other amendments to Form 20-F provide that foreign private issuers must disclose in the annual report:

  • fees and other payments made by American Depositary Receipt holders to the depositary, and payments made by depositaries to foreign private issuers for sponsored American Depositary Receipt facilities for fiscal years ending on or after December 15, 2009; and
  • for foreign private issuers listed on a U.S. exchange, differences in the corporate governance practices of the issuer and those of U.S. companies listed on the same exchange for fiscal years ending on or after December 15, 2008.

Foreign Private Issuers Required to Provide Enhanced Disclosure Regarding Changes in or Disagreements With Certifying Accountants. The SEC amendments also require foreign private issuers to disclose information in annual reports on Form 20-F for fiscal years ending on or after December 15, 2009 and in initial registration statements filed on Forms 20-F, F-1 and F-4 relating to changes in or disagreements with the issuer's certifying accountants, similar to the requirements imposed on U.S. companies by Item 304 of Regulation S-K. The amendments are designed to prevent "opinion shopping" by foreign issuers. Foreign private issuers (other than issuers listed on the New York Stock Exchange) are not currently required to disclose this information.

SEC Lifts Requirement to Submit Written Applications to Claim Rule 12g3-2(b) Exemption

Exchange Act Rule 12g3-2(b) exempts certain foreign private issuers from the requirement to register under Exchange Act Rule 12(g), which also triggers SEC reporting obligations. This exemption primarily enables foreign private issuers who have not otherwise affirmatively entered the U.S. securities markets to establish certain American Depositary Receipt programs. To qualify for the exemption, the appropriate foreign private issuers currently must provide certain information to the SEC, including hard copies of materials required to be made public pursuant to home law or rules of foreign stock exchanges or that the issuer otherwise provides to its security holders.

Effective October 10, 2008, the SEC Rule 12g3-2(b) amendments will enable a foreign private issuer to claim a Rule 12g3-2(b) registration exemption without submitting a written application to the SEC as long as the issuer meets the following conditions:

  • The issuer maintains a listing of the subject class of securities on one or more exchanges in its primary trading market. In order to meet the "primary trading market" definition, at least 55% of the worldwide trading in the foreign private issuer's subject class of securities during the latest fiscal year must have taken place through a securities market in one or two foreign jurisdictions, and the trading in each of those jurisdictions must exceed that in the United States for the same class of securities.

  • The issuer is not subject to reporting obligations under Section 13(a) or 15(d) of the Exchange Act. A foreign private issuer that has an effective registration statement filed with the SEC under Section 12(b) or 12(g) of the Exchange Act or who has filed certain types of registration statements under the Securities Act would be ineligible to claim an exemption under Rule 12g3-2(b) due to the reporting obligations imposed by Sections 13(a) and 15(d) of the Exchange Act.
  • The issuer has published in English specified non-U.S. disclosure documents, from the first day of its most recent fiscal year, on its website or through an electronic information delivery system generally available to the public in its primary trading market. Following the initial posting of this information, the foreign private issuer must electronically publish the specified non-U.S. disclosure documents for subsequent years in order to maintain the Rule 12g3-2(b) exemption.

A foreign private issuer will lose its Rule 12g3-2(b) exemption if it:

  • Fails to electronically publish the required disclosure documents;
  • No longer meets the foreign listing/primary trading market condition; or
  • Otherwise becomes subject to Exchange Act reporting obligations.

SEC Expands Exemptions for Cross-Border Offerings

Under current tender offer rules, foreign offers to U.S. security holders generally are subject to the full regulatory regime of the U.S. federal securities laws unless the transaction qualifies for one of two exemptions. The "Tier I" exemption applies where no more than 10% of the securities subject to a tender offer are held in the United States, after "looking through" record ownership. Tier I transactions are exempt from almost all of the disclosure, filing and procedural requirements of the U.S. tender offer rules, and securities issued in Tier I transactions need not be registered under the Securities Act. The "Tier II" exemption applies where more than 10% but not more than 40% of the target securities are held in the United States. The Tier II exemption provides narrow relief from specified U.S. tender offer rules that often conflict with foreign law or market practice but does not exempt the transaction from most of the disclosure, filing, registration and procedural obligations applicable to U.S. transactions. Transactions where U.S. ownership in the target company exceeds 40% are subject to U.S. regulation as though the transaction were entirely domestic.

The recent SEC amendments, which will become effective 60 days after publication in the Federal Register, expand and enhance the utility of the Tier I and Tier II exemptions for foreign private issuers. The amendments are intended to encourage acquirers to permit U.S. security holders to participate in cross-border transactions on the same terms as non-U.S. security holders.

Tests for Calculating U.S. Beneficial Ownership of Targets Modified. For purposes of determining eligibility to rely on the Tier I and Tier II exemptions, acquirers may now use the date of public announcement rather than the date of commencement of a tender offer, exchange offer or business combination as the reference point for calculating U.S. ownership of the target company. Offerors are also permitted to calculate U.S. ownership within a 60-day range before the public announcement of the transaction. The current rules only permit offerors to calculate U.S. ownership as of the 30th day prior to the announcement of the transaction.

In addition, the new rules modify the look-through analysis for calculating U.S. ownership percentages. Under the revised rules, individual holders of more than 10% of the subject securities will no longer be excluded from the calculation of U.S. ownership.

Conflicts Between U.S. and Foreign Law for Certain Cross-Border Tender Offers Eliminated. The SEC amendments are also designed to remedy situations involving Tier II tender offer transactions where foreign law or practice may differ from or conflict with U.S. law. The new rules permit foreign private issuers to:

  • Implement subsequent periods in tender offers longer than 20 business days;
  • Provide up to 20 business days from the time of tender for the purchase of securities tendered during a subsequent offering period;
  • Make more than one offer abroad in connection with a U.S. offering;
  • Include foreign security holders in U.S. offerings and U.S. security holders in foreign offerings;
  • Suspend withdrawal rights after the end of the initial offering period but before securities have been accepted for payment;
  • Pay interest on securities tendered during a subsequent offering period where required by foreign law; and
  • Allow separate offset and proration pools for securities tendered during the initial and subsequent offering periods, for "mix and match" structures.

Interpretive Guidance Issued. The SEC also recently offered interpretive guidance on certain topics that come up frequently for practitioners in the cross-border area, including the following:

  • No amendments to all-holders requirement of U.S. law. The SEC reiterated its earlier position that tender offers subject to Section 13(e) or 14(d) of the Exchange Act must be open to both foreign and U.S. target security holders, but the rules do not require distribution of offering materials outside the United States.
  • Clarification of the factors bidders should consider when contemplating the use of the vendor placement procedure. The SEC reiterated its previous guidance regarding the use of vendor placement procedure and various suggested factors for consideration by bidders.
  • Bidders in offers for U.S.-registered securities should include U.S. holders on the same terms as other target holders. The SEC indicated that exclusionary offers for securities of foreign private issuers that trade on a U.S. securities exchange will be viewed with skepticism where the participation of those U.S. holders is necessary to meet the minimum acceptance condition in the tender offer.
Practical Tips

Annually Assess Foreign Private Issuer Status. Following the end of an issuer's second fiscal quarter, it should promptly assess whether it still qualifies as a "foreign private issuer." If an issuer no longer qualifies as a foreign private issuer, it will need to prepare to begin using Forms 10-K, 10-Q and 8-K to comply with its SEC reporting obligations, to comply with SEC proxy solicitation requirements and to make other required disclosure requirements. It will also need to inform its insiders of their requirements under Section 16 of the Exchange Act. Due to the added disclosure scope and the accelerated filing periods for some of these requirements, issuers who lose their foreign private issuer status will need to substantially revise their SEC reporting calendar and related disclosure controls and procedures.

Prepare for Accelerated and Revised Reporting for Annual Reports on
Form 20-F.
Preparing an annual report on Form 20-F requires extensive input from various company departments and review by officers, directors and external auditors and lawyers. Adequate time should be allowed to complete each step of the disclosure controls and procedures and internal control over financing reporting, and for proper review. The disclosure changes and enhancements adopted by the SEC for annual reports on Form 20-F, including the accelerated filing deadline, are subject to a three-year transition period. During this transition period, foreign private issuers should revise their Exchange Act reporting calendars and coordinate with outside advisors to prepare to satisfy the accelerated annual reporting requirement and other disclosure changes noted above.

Foreign Private Issuers That Sponsor American Depositary Receipt Programs and Rely on Exchange Act Rule 12g3-2(b) Should Start Making Arrangements for Required Documents to Be Translated Into English and Made Available Electronically. The Exchange Act Rule 12g3-2(b) amendments become effective October 10, 2008. During a three-month transition period, the SEC will continue to process paper submissions. However, after the end of the three-month transition period, the SEC will no longer accept paper submissions. Issuers should start making arrangements for any necessary documents to be translated into English and made available via the electronic methods required by the new rule.

Additional Information

You can find a copy of the full text of the SEC amendments relating to foreign private issuer reporting enhancements at http://www.sec.gov/rules/final/2008/33-8959.pdf; Exchange Act Rule 12g3-2(b) at http://www.sec.gov and cross-border transactions at http://www.sec.gov/rules/final/2008/33-8957.pdf. You can find discussions of other recent cases, laws, regulations and rule proposals of interest to public companies on our website.