(The news featured below is a selection from the news covered in the Federal Securities Law Reporter.)

Proposed SEC Deregistration Rules Do Not Cover Enough European Issuers 

The SEC's proposal to ease the deregistration rules for foreign private issuers should be modified to encompass more European issuers, in the view of the European Commission and a consortium of European listed companies. The current draft proposal covers only a small fraction of EU foreign private issuers, chiefly because sophisticated institutional investors are included in the proposed deregistration calculations. In recent remarks, Commissioner Cynthia Glassman acknowledged that the SEC has already heard from European Union officials and others that its proposal may not go far enough in loosening restrictions. The comment period on the proposal expired on February 28, 2006.

Under current SEC rules, a foreign private issuer may exit the 1934 Act registration and reporting regime if the class of its securities has less than 300 record holders who are U.S. residents. The SEC proposes three alternative criteria to allow a company to deregister: 1) a well-known seasoned issuer can terminate its registration and reporting duties if U.S. residents hold no more than 10 percent of its worldwide public float; 2) other issuers can deregister if U.S. residents hold no more than 5 percent of the issuer's worldwide float; 3) foreign private issuers unable to meet one of the proposed public float benchmarks could still terminate their obligations as long as the class of securities is held of record by fewer than 300 persons on a worldwide basis or fewer than 300 persons resident in the U.S.

While applauding the SEC for making a tangible effort to deal with issues of great concern to EU issuers, the European Commission believes that the proposal will not resolve the deregistration issue. As drafted, the new rules would allow only a fraction of European foreign private issuers to terminate their SEC registration. Against the backdrop of a strong EU securities regulation regime with stringent disclosure and reporting requirements, the EC is disappointed to discover the low eligibility of EU issuers under the deregistration proposals. Even the SEC estimated that only 26 percent of foreign private issuers will be able to permanently deregister under the proposed rules.

In the EC's view, the inclusion of institutional investors in the public float calculation for foreign private issuers constitutes the major obstacle for European issuers that wish to terminate their SEC reporting obligations. Institutional investors on average hold 20 percent of the equity in large European companies.

This degree of protection for institutional investors is neither proportionate nor economically justified, in the EC's view, since they have the necessary expertise and resources to make effective use of the information provided by foreign issuers under their home jurisdiction financial reporting. In fact, the Commission said the significant presence of U.S. institutional investors in the EU financial markets shows that they consider EU reporting and disclosure rules sound enough to enable them to take major investment decisions. The EC asked the SEC to exclude institutional investors from the calculation of U.S. resident shareholder interest for purposes of determining the eligibility of foreign private issuers to deregister.

As an alternative to excluding institutional shareholders from the calculation of the U.S. shareholder base, the EC suggested an increase to 25 percent in the public threshold that determines the eligibility of foreign private issuers to deregister. The EC noted that the quantitative benchmark of 300 shareholders no longer reflects current market conditions, and encouraged the SEC to set a new threshold of at least 3,000 shareholders.

The EC also urged the SEC to reconsider its policy in relation to some specific instances where permanent deregistration is not currently possible under the proposed rule. In particular, the EC suggested that the right to permanent deregistration might be extended to cases where a foreign issuer acquires or merges with a company listed in the U.S.

The European Association for Listed Companies ("EALIC"), focusing on the SEC's finding that only 26 percent of all foreign private issuers would be able to use the rule as proposed, said that its research indicates that very few European companies are represented among the 26 percent worldwide that can use the rules. At EALIC's request, the Cleary Gottlieb law firm and Citigroup analyzed data for 64 European companies with a market capitalization of over 1 billion euros and found that only six of them would be eligible to use the proposed rules. Unfortunately, and despite the good intentions of the SEC staff, EALIC argued that these figures do not evidence a successful deregistration framework.

Echoing the European Commission, EALIC believes that the reason so few EU companies can use the proposed rule is that U.S. ownership of many European companies is concentrated among a small number of sophisticated U.S. institutional investors. In many cases, five or 10 shareholders hold substantial stakes in a company, pushing it over the 10 percent U.S. ownership threshold, while ownership among remaining U.S. investors is widely dispersed. As a result, a very small number of sophisticated U.S. shareholders have a disproportionate impact on the threshold calculation.

EALIC suggested that the proposal be modified to reduce the impact of U.S. shareholder concentration on the threshold calculations. EALIC urged the SEC to allow companies to exclude qualified institutional buyers ("QIBs") from the calculation of their U.S. shareholder base. U.S. shareholders with large stakes in EU companies are almost always QIBs, EALIC noted, and the SEC has considered in other contexts that they do not need the protection of the registration requirements of the federal securities laws.