Yesterday, the SEC adopted long-awaited rules that will make it easier for foreign private issuers to deregister and terminate their SEC reporting obligations. New Rule 12h-6 and related Form 15F will enable a foreign private issuer meeting specified conditions to terminate its '34 Act reporting obligations. The final rules are similar to those re-proposed with some technical adjustments. Here are opening remarks from Corp Fin - and here are comments from Commissioner Atkins, Nazareth and Campos.

The new rule will be effective 60 days after publication of the SEC adopting release in the Federal Register - it is expected that the adopting release will be published by mid-April so that the rules will be effective by the middle of June. If this happens, calendar year companies will be able to avoid filing a 2006 Form 20-F (for large accelerated filers, the first to require internal control reports under Section 404 of Sarbanes-Oxley).

Below is some analysis of the adopted rules from Cleary Gottlieb: Under the new deregistration rule, a company can deregister equity securities if its average U.S. trading volume over a 12-month period represents 5% or less of its worldwide trading volume, so long as it meets the other requirements described below. While the basic test is identical to the December 2006 proposal, the SEC has refined the test in three respects:

- The 5% threshold will be calculated by comparing a company's U.S. trading volume to its worldwide trading volume, rather than comparing it to trading volume in the company's one or two primary markets.

- Off-market trading will be counted worldwide, and not only in the United States, so long as the information source is reliable and not duplicative of exchange-reported trading.

- Convertible and other equity-linked securities will no longer be counted in the threshold calculation.

Like the December 2006 proposal, the final rule provides that companies that terminate their listings or ADR programs will have to wait one year before deregistering. In contrast to the proposal, however, the waiting period will only apply to companies that are above the 5% threshold when they terminate their ADR programs (this was true for terminating listings, but not ADR programs, in the proposal). There will also be a transition rule for companies that terminated listings or ADR programs during the year preceding the adoption of the rule.

The final rule retains a number of other provisions from the December 2006 proposal, including a requirement that a deregistering company be listed in one or two foreign markets that together represent at least 55% of its worldwide trading for a year prior to deregistration, that it have at least a one-year SEC reporting history at the time of deregistration, and that it not have sold securities in an SEC-registered offering for a year prior to deregistration. Companies that deregister are automatically eligible for the registration exemption of Rule 12g3-2(b), meaning that their deregistration will be permanent so long as they publish English versions of their home country reports and financial statements on their web sites.

Under the December 2006 proposal, a company could also deregister debt or equity securities if the securities were held by no more than 300 U.S. residents (based on improved "look-through" counting rules) or 300 holders worldwide (without applying "look-through" rules). While a number of comment letters suggested raising the threshold for debt securities, the SEC did not refer to any modification of the threshold during the open meeting.

It remains to be seen whether a significant number of foreign private issuers will use the new rules. Many of the largest European issuers have informally indicated that they intend to stay registered, at least for the time being. Many of these issuers will wait to see whether the SEC eliminates the U.S. GAAP reconciliation of IFRS financial statements (currently targeted for 2009), a change that would substantially reduce the costs of a U.S. listing. Several of the Commissioners expressed support for this objective during the open meeting.

The most significant practical impact may come from a provision of the new rule that allows companies that use their shares to acquire foreign SEC registrants to avoid registering themselves as “successor issuers” (assuming this provision remains in the final rule in the form proposed in December). This provision could facilitate cross-border M&A transactions that previously would have been blocked by the successor registration requirement.

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