to escape from an American listing
By Robert Pozen
Published: February 12, 2004
New listings by foreign companies in US markets have dropped sharply since the passage in 2002 of the Sarbanes-Oxley act. And among foreign companies already listed on US markets, many would like to escape the burdens imposed by the act's requirements, which have roughly doubled the cost of a US listing.
However, escaping the US securities system is time-consuming at best and impractical at worst. The Securities and Exchange Commission therefore should adopt rules allowing a foreign company to opt out of SEC requirements if it offers to buy back all its shares held by US investors at a "fair" price as determined by an independent appraiser.
Most dramatically, the act requires both the chief executive and chief financial officer of a foreign-listed company to certify personally that its financial statements contain no material misstatements or omissions, and that the company has in place internal controls designed to generate complete and accurate financial information. The uncertain civil and criminal liabilities implied by these certifications are truly daunting to top executives of foreign companies. Other provisions of the act mandate specific relationships between the foreign-listed company and its management team. These include prohibitions on almost all loans from the company to its officers and directors, as well as repayment by senior company officials of bonuses following an accounting restatement "resulting from misconduct".
Sarbanes-Oxley imposes particularly intrusive requirements on the audit process of foreign-listed companies, despite recent SEC accommodations. It requires an audit committee of a supervisory board to be composed entirely of independent directors, except for government and employee representatives pursuant to home country laws. It also mandates US inspection of any foreign firm auditing the books of a foreign-listed company, although US and foreign authorities will do joint inspections.
Faced with these new regulatory burdens, many foreign companies undoubtedly want to delist from US markets and escape the act's extraterritorial reach. However, a delisted foreign company with 300 or more US shareholders would still be subject to SEC disclosures and the Sarbanes-Oxley act. Although a delisted foreign company could offer to buy back all shares of its US shareholders, it is almost certain that more than 300 US shareholders would not accept the offer because of ownership splitting, price disagreements or pure inertia.
Some foreign companies with 300 US shareholders could ultimately escape the SEC reporting system and the act by delisting, applying for an SEC exemption and waiting for 18 months. But if a foreign company has ever made an SEC-registered public offering of equity securities to American investors, for example as part of an acquisition, it would always be subject to the SEC's disclosure system and the act's requirements as long as it had at least 300 US shareholders.
In response, the SEC should adopt a geographic variant of its "going private" rules. This would allow a foreign company not only to delist from US trading but also to deregister from the SEC's disclosure system if the foreign company made a "fair" offer to buy back all its shares held by US investors. The "fairness" of this offer would be determined by an independent appraiser and would be based on three main factors:
First, the appraiser would compare the costs to US investors of trading shares of a foreign company on the New York Stock Exchange or Nasdaq with the costs to US investors of trading such shares abroad.
Second, the appraiser would evaluate the disclosures made by a foreign company listed in the US versus the disclosures required by the company's home country.
Third, the appraiser would compute the incremental income taxes, mainly on dividends, to be paid by US shareholders of a foreign company before and after delisting.
If the buy-back offer is at a "fair" price, as determined by an independent appraiser, foreign companies should be permitted to opt out of the SEC's disclosure system and the act's requirements even if 300 US shareholders choose not to accept this offer. While corporate executives must generally live with their financial decisions, no one could have foreseen the tremendous increase in costs of the act and its unprecedented extraterritorial reach.
The writer is
chairman of MFS Investment Management and a visiting professor at Harvard Law
updated: June 04
Copyright © The President and Fellows of Harvard College.
Questions should be directed to The Program on Corporate Governance.
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