Davis Polk & Wardwell Newsflash

SEC Proposes Amendments to Form 20-F Reporting Requirements and Exchange Act Entrance Requirements

February 13, 2008

At an open meeting today, the SEC voted to issue two rule proposals impacting foreign private issuers (“FPIs”).  One would amend certain Form 20-F reporting requirements and obligations and the other would update the Securities Exchange Act of 1934 (the “Exchange Act”) exemption that prevents FPIs from becoming subject to the Exchange Act reporting requirements based on the number of their US shareholders.

Proposed Changes to FPI Reporting Requirements.  The first proposed rule would: 

            Significantly Accelerate the Form 20-F Deadline.  Under the proposal, FPIs that are considered Large Accelerated Filers or Accelerated Filers under the SEC rules (i.e., those that had worldwide aggregate market value of voting and non-voting common equity held by non-affiliates of at least $700 million or $75 million, respectively, as of the last business day of their second quarter have been reporting under SEC rules for at least a year; and have filed at least one annual report) would be required to file their annual report on Form 20-F within 90 days of their fiscal year end.  Other FPIs would be required to file their annual report on Form 20-F within 120 days after their fiscal year end.  Although the proposal provides for a two-year transition period, the proposed deadlines are a substantial change from the six-month deadline applicable under current rules and significantly reduce the time allotted to FPIs to prepare and file their annual reports on Form 20-F. 

            Allow Testing of FPI Status Once a Year.  Under current rules, if an issuer exceeds certain thresholds contained in the definition of FPI (i.e., if more than 50% of its outstanding voting securities are owned by US residents and the majority of its directors and officers are US persons, more than 50% of its assets are located in the United States or the business of the company is administered principally in the United States), it immediately becomes subject to the Exchange Act reporting requirements applicable to US issuers.  Because the reporting requirements applicable to US issuers are generally more rigorous than those applicable to FPIs, this sudden change in reporting status may impose a hardship on an issuer.  Therefore, the SEC has proposed amendments which would permit issuers to test whether they meet the definition of “foreign private issuer” contained in the SEC rules once a year, as of the last business day of their second fiscal quarter.  If an issuer determines at that time that it no longer qualifies as a FPI, it would have to begin filing as a US issuer as of the first day of the following fiscal year.  For example, an issuer that determined on the last business day of its 2009 second quarter that it no longer met the definition of FPI would be required to file its annual report on Form 10-K in 2010 for its 2009 fiscal year and a proxy statement for its 2010 annual meeting.  An issuer that meets the definition of FPI as of the last business day of its second fiscal quarter, however, could begin filing as a FPI immediately. 

            Solicit Public Comment on Other FPI Reporting Enhancements.  The rule proposal also seeks public comment on whether to propose amendments to Form 20-F that would require FPIs to disclose:

Proposed Amendments to Exemption from Exchange Act Entrance Rules.  The second rule proposal would update an exemption from the SEC’s entrance rules applicable to FPIs under Exchange Act Rule 12g3-2.  Under current Exchange Act rules, a FPI that has not conducted a public offering in the United States and does not have securities listed on a US exchange may still be required to register under Section 12(g) of the Exchange Act and file periodic reports with the SEC if it has over 500 shareholders resident in the United States.  Exchange Act Rule 12g3-2 currently includes an exemption that allows FPIs that have less than 300 US shareholders to avoid such Exchange Act registration, and the related periodic report filing requirements, if they provide the SEC paper copies of certain information released publicly in their home county.

The SEC proposes to update Rule 12g3-2 so that an issuer not otherwise subject to the Exchange Act reporting requirements would qualify for the 12g3-2 exemption and would not be required to register under 12(g), without regard to the number of its US shareholders, provided that:

An issuer claiming the Rule 12g3-2 exemption would no longer be required to submit information released publicly in its home country to the SEC in paper form but would be required to make the information available via an Internet website or through another electronic delivery information system (for example, a system similar to EDGAR).

The SEC staff and Commissioners indicated that they are eager to receive feedback on these proposals and willing to work with the FPI community in order to ensure that any final rulemaking that results from the proposals is not overly burdensome.  We, therefore, encourage issuers to comment on the proposals and would be happy to assist you in this regard.

Davis Polk & Wardwell