Unlike the open governance we are used to where the approach to internal control is market driven and flexible, the US regulatory scene is coming under the thumb of increasing procedural controls - some of them no doubt useful, but all of them expensive. The foreign listed companies are looking at this and saying "it's not worth it."
This article seems to cover both sides very well. So far, few have managed to leave. Maybe they won't. But it does rather look as though it isn't worth their effort to be listed on the US stock exchanges, especially as the institutional money is now quite happy to follow them to Europe. Maybe that's a trend for the future - the money will follow where the good opportunities are, rather than stay safe and warm tucked up in the home exchange.
Goodbye, Farewell,
Auf Wiedersehen, Adieu . . .
By DANIEL EPSTEIN
February 9, 2005; Page A10
LONDON -- It's tough being a U.S. securities lawyer in Europe these days. Our hottest-selling product might just put us out of business.
Talk to any European company with a U.S. listing right now and the discussion will soon turn to deregistration -- that is, the termination of U.S. reporting obligations and escape from corporate governance and related requirements under the Sarbanes-Oxley Act. There is unprecedented interest in this subject among European corporations, and perhaps a new sense of momentum. Currently four U.K. companies -- ITV, mmO2, Premier Farnell, and United Business Media -- are taking active steps toward deregistration, and numerous others here and on the Continent have signaled their eagerness to deregister if they can find a way to do so. Indeed, on Monday, ITV shareholders voted overwhelmingly in favor of plans to cash out unwanted U.S. shareholders as a prelude to deregistering.
The rush to delist and deregister is, in the first instance, about money: Being a U.S. reporting company is about to get a whole lot more expensive. This is because of Section 404 of the Sarbanes-Oxley Act, which requires reporting companies to produce a detailed assessment of their internal control regime, together with an auditors' attestation report on that assessment. For non-U.S. companies, this requirement is currently due to come into force for financial years ending after July 15, 2005. The Section 404 attestation report looks to be phenomenally costly. ITV, for example, has claimed that if it succeeds in deregistering it will save £4 million this year and £3 million annually thereafter. A significant chunk of this can be traced to Section 404 compliance.
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Sarbanes-Oxley has clearly focused the minds of Europeans. Properly speaking, the deregistration rush began last February, when a coalition of European industry groups asked the U.S. Securities and Exchange Commission to change its rules in this area. Since then a well-coordinated campaign has seen a succession of European companies and commentators hammer home the point that the U.S. reporting regime is unreasonably expensive and intrusive, and the rules governing exit from that regime unfairly restrictive.
This has not been lost on the SEC. In a speech at the London School of Economics on Jan. 25, SEC Chairman William H. Donaldson indicated that the SEC will consider delaying the effective date of the Section 404 internal-control requirements for non-U.S. registrants -- it is now widely expected that they will be deferred beyond the end of 2005 at least. In the same speech, Mr. Donaldson signalled clearly that new SEC rules on deregistration will be forthcoming soon: "We should seek a solution that will preserve investor protections without inappropriately designing the U.S. capital market as one with no exit." His remarks appeared to be aimed at slowing the rush to deregister and persuading non-U.S. registrants to adopt a wait-and-see attitude to their U.S. listings.
In the end, there is not very much that the SEC can do about the Section 404 requirements. Sarbanes-Oxley is a U.S. federal statute -- the work of the U.S. Congress -- and the SEC lacks authority to exempt non-U.S. companies from its scope.
Moreover, the hard truth for Mr. Donaldson and other champions of the U.S. capital market is that it is not so much the cost as the absence of any countervailing benefit from continued U.S. listing that is spurring the rush to deregistration among European companies. A U.S. listing of American Depositary Receipts simply does not offer most of these companies anything they really need anymore. Relatively few of them are truly looking to penetrate the U.S. retail market -- it is institutional money that matters, and for the most part U.S. institutional investors now prefer to invest directly in ordinary shares in the U.K. and the euro zone because of their greater liquidity.
MmO2 has estimated that 7.56% of its shares are held by U.S. residents in the form of London-listed ordinary shares, with only 0.64% held in NYSE-listed ADR form. By the same token, although there are notable exceptions (BT, Nokia), U.S. exchanges account for a small percentage of trading in many European equities. As a result, not only are European companies pushing to get out of the U.S. market, they are staying away in droves -- in all of 2004, there were only six new listings by European companies on the NYSE and Nasdaq.
There are other potential benefits for non-U.S. companies of being in the U.S. market. A U.S.-listed share or ADR may be a useful acquisition currency for companies targeting acquisition opportunities in the United States. In addition, New York Stock Exchange listing may offer a certain cachet, and submitting to the discipline of U.S. disclosure standards and U.S. GAAP as applied by the tough and savvy folks at the SEC can be one way to win the confidence of investors.
Mr. Donaldson sounded this theme in his remarks at the LSE, likening America's markets and the regulatory framework that supports them to the U.S. Marine Corps: "an elite -- the best of the best." (Many Europeans would think the comparison between U.S. securities law and the U.S. military all too apt, though they might draw the analogy somewhat differently.) But while this may have real resonance as applied to issuers from developing markets, it appears to cut little ice when the proffered alternative is, say, the discipline of EU disclosure standards and International Financial Reporting Standards as applied by the tough and savvy folks at the U.K. Listing Authority. One of the most telling features of the current deregistration rush has been the apparent indifference with which U.S. institutional investors have received the news that European companies are lining up to exit the U.S. reporting system. For example, according to press reports, ITV's two largest U.S. institutional investors, Fidelity and Artisan, have voiced support for its efforts to deregister. (Importantly, ITV's deregistration plan will leave its large U.S. institutional shareholders undisturbed; mmO2 has indicated it will pursue a similar approach.)
Of course, it is one thing to talk about deregistering, another to achieve it. Under current SEC rules, the barriers to deregistration are formidable. Generally speaking, a non-U.S. company must be able to certify that it has fewer than 300 U.S. resident holders of its shares and ADRs to deregister. In counting U.S. shareholders, the company must "look through" brokers, banks and other nominees to find out the number of underlying U.S. accounts for which they hold shares. In many cases, active steps will need to be taken to reduce the number of U.S. holders to the necessary level, raising questions as to whether this can be done at acceptable cost and without prompting legal challenges from affected shareholders under home-country corporate or U.S. securities law. Moreover, there are some particular features of the U.K. legal landscape that make it relatively hospitable to efforts to eliminate U.S. shareholders -- things are much more difficult in many Continental jurisdictions. Thus, despite all the tough talk, only a handful of European companies have actually managed to deregister in the past year.
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Going forward, the degree to which European companies will be successful in deregistering and exiting the U.S. market is likely to depend critically on the SEC's new rule proposals. The SEC is said to be considering a very significant increase in the threshold level of U.S. holders below which deregistration would be permitted, as well as some entirely new approaches.
Whatever proposals are made, they will be aimed not at accommodating the demands of European companies to get out, but at persuading issuers in developing markets -- China, Russia, Latin America -- that it is safe to get in. To encourage potential new registrants in these markets to list in the United States, it is essential that there be a reasonable prospect of exiting the U.S. reporting system if their hopes for the development of a U.S. trading market in their securities do not pan out. The SEC appears to recognize this. We U.S. securities lawyers can only wish them well in their endeavors.
Mr. Epstein is a partner in the London office of Allen & Overy LLP.
Posted by iang at February 9, 2005 08:51 AM | TrackBack