By Oxford Analytica - 06/07/07 06:32 PM EDT
European corporations and regulators have long sought to make it easier for companies to reverse their previous decisions to list on a U.S. stock exchange. The ruling signals that regulators are intent on improving U.S. global competitiveness and the climate for investment.
The SEC has for several years mulled rule changes to facilitate “deregistration.” The clamor for such a policy change increased after adoption of the Sarbanes-Oxley Act in July 2002, when some European companies had sought to exit the U.S. capital markets to escape additional regulatory requirements. These companies found that although it was possible to “de-list,” or terminate a listing on a U.S. exchange, this would generally not release a company from onerous reporting requirements to the SEC under the Securities Exchange Act of 1934. This left a few companies “trapped” on U.S. markets.
Regulatory overkill?The SEC in part acted because it regarded the functional inability to deregister as a “barrier to entry” that convinced some companies to avoid taking up a U.S. exchange listing. U.S. financial regulators are keenly sensitive to charges that excessive regulation has eroded the comparative attractiveness of U.S. markets, especially compared to London, Hong Kong, and Singapore — even though the evidence that regulatory factors are the primary driver of this trend is, at best, mixed.
Revised SEC requirements.Following the rule change on June 4, foreign private issuers — those foreign companies that have opted to offer securities for sale in the United States — may elect to terminate their U.S. reporting requirements if the average daily trading volume of their U.S. securities is no more than 5 percent of the average daily trading volume of that class of securities on a global basis.
Potential ambiguities.At a glance, the rules seem clear, but closer scrutiny reveals potential ambiguities, in that they lack clear guidance on the timetable involved in:
•canceling an American Depository Receipts (ADR) program;
•de-listing from a stock exchange; and
•deregistering so as no longer to be subject to reporting requirements (and the associated legal liability) under U.S. securities law.
Corporate reaction.Some European companies, including British Airways, Telekom Austria and Adecco, have announced that they will exit the U.S. capital markets now that the rule change has come into effect, due to concerns over U.S. compliance costs. The overall number of companies that deregister is likely to be very small. (The number of companies with a U.S. share listing, where U.S. investors comprise only a tiny percentage of their shareholder base, is tiny.) However, Wall Street observers suggest that the SEC decision will probably not have the intended beneficial effect — an increase in companies opting for U.S. listings — for two major reasons:
•Competing international markets. Other global markets continue to mature, and many companies no longer feel compelled to secure the regulatory imprimatur and prestige formerly associated with a listing on a U.S. exchange.
•Institutional investor exception. Companies can make a U.S. Rule 144A offering, and reach important categories of U.S. investors (such as institutional investors), without being required to comply with the SEC requirements necessary to complete a registered offering. Companies are increasingly opting for this alternative, which allows them access to U.S. capital while minimizing compliance expenses.
Perceived litigation risks.Some of the limited moves to de-list in the wake of the SEC rule change are motivated by the perception that U.S. operations carry a high risk of exposure to litigation. This is in part a misperception, because such risks are currently declining — yet they remain a factor:
•Sarbanes-Oxley risk. Sarbanes-Oxley undoubtedly increased the regulatory burden that applies to companies. However, this increased burden has not led to a great upsurge in federal actions — either civil or criminal — targeting corporations. Instead, the overall attention of federal regulators to financial and securities issues has declined, as the consequences of the initial 2002-2003 post-bubble bankruptcies have been absorbed by the financial system.
•State attorneys general. Former New York state Attorney General Eliot Spitzer played a leading role in targeting the financial sector, particularly in exposing alleged conflicts of interest in areas including research analysis, mutual fund trading abuses, insurance practices and compensation policy at the New York Stock Exchange. Spitzer’s focus on such issues in part arose out of his wider political ambitions, which culminated in his election as governor of New York last year. Moreover, Spitzer’s actions responded to a temporary gap in federal attention to financial regulation and oversight; the shift of Congress to Democratic control has led to strengthened oversight of federal regulators. His successor, Andrew Cuomo, is likely to focus on more traditional consumer affairs issues — including healthcare, environmental issues, and possibly homelessness — than financial concerns.
•Private litigation risk. Recent trends in U.S. case law, including the Supreme Court’s February decision in Philip Morris v. Williams, further reduces business exposure to catastrophic punitive damages awards in product liability and other lawsuits. This decision reinforces what had until relatively recently been regarded as a novel legal theory — that the due process clause of the U.S. Constitution imposes limitations on excessive punitive damages awards. While the legal exposure of corporate defendants to private litigation remains significant, recent judicial decisions, combined with federal and state tort reform measures, have improved the operating climate for business. However, the implications of these trends have yet to be absorbed by corporations, especially non-U.S. firms accustomed to operating in home markets where they are subject to a lower overall level of litigation risk.
Oxford Analytica is an international consulting firm providing strategic analysis on world events for business and government leaders. See www.oxan.com .