Foreign firms check out of SEC’s "Hotel California"

By Dominic Jones

INTERNATIONAL companies registered with the U.S. Securities and Exchange Commission (SEC) have begun taking advantage of new rules that make it easier for them withdraw from U.S. financial and corporate governance reporting requirements.

Companies announcing their intention to deregister blame high costs of maintaining a U.S. listing and complying with regulations. While most companies plan to maintain a minimal presence on the U.S. over-the-counter (OTC) market, some say that the growing internationalization of capital markets makes it possible for U.S. investors to conduct their trades on the companies’ home exchanges.

UK-based Imperial Chemical Industries PLC (NYSE: ICI) on Tuesday became the latest in a string of companies to signal their intention to terminate their SEC registration under relaxed rules introduced in March. ICI said it will cancel the listing of its American Depositary Shares on the New York Stock Exchange after almost 24 years and deregister its securities from the SEC.

Under the new deregistration rule, which takes effect on June 4, companies can deregister their stock if their average U.S. trading volume is 5% or less of its worldwide trading volume over a 12-month period. Previously, foreign companies complained that it was difficult or impossible for them to deregister under a formula based on the number of U.S. shareholders they had. This led to the term “Hotel California” because foreign firms could “never leave,” a reference to a popular 1976 song by The Eagles.

However, like several companies that have announced plans to deregister, ICI will not be leaving the U.S. markets entirely. Its ADRs will be converted to a Level 1 program with Citibank and will be traded OTC. Under a Level 1 ADR program, companies continue to sponsor the securities but have minimal SEC reporting requirements and cannot issue new securities in the U.S. As OTC issues, their securities have a low profile, although improvements in Web technology have created opportunities for companies to continue to deliver information to U.S. investors.

Trading in ICI’s NYSE-listed ADRs has averaged 180,000 per day over the past three months, while its London Stock Exchange shares have averaged almost 11 million per day, according to Yahoo! Finance. The company’s CFO Alan Brown said a NYSE listing and SEC registration “no longer makes sense from a cost and administrative perspective.”

I have been keeping track of companies that have announced their intention to delist and deregister. It is interesting to read their reasons for pulling out and how they intend to maintain some form of market for U.S. investors.

Of note is that a couple of companies made a point of mentioning that they were compliant with Section 404 of the Sarbanes-Oxley legislation and were not pulling out because they did not want to comply with its provisions. Others say improved regulations in their home markets give investors sufficient protection.

Here is a summary of some of the announcements by companies over the past month:

BioProgress plc (NASDAQ:BPRG)

The UK-based specialty pharma and healthcare company said May 29 that it will delist its ADRs from The NASDAQ Stock Market and deregister from the SEC. Its stock will continue to trade on London’s AIM and JPMorgan Chase Bank, N.A. will administer a Level 1 ADR program on the U.S. OTC market. BioProgress CEO Richard Trevillion said the costs of maintaining the NASDAQ listing “have increased significantly over the last 18 months.” The company listed “burdensome costs of compliance with the SEC rules and in particular the Section 404 requirements of the Sarbanes-Oxley Act.” The company said it believes the compliance costs outweigh “the limited benefits” and that “the cash saved can be put to greater use in other parts of the business.”

TNT N.V. (NYSE:TNT)

The Netherlands-based express delivery and mail company said May 25 that its board and management has decided to apply for deregistration and to delist its ADRs from the NYSE. The company said “the benefits of U.S. registration and a NYSE listing for TNT have declined over time.” It said most of its shares held by U.S. investors are traded through Euronext Amsterdam. “Due to globalisation of capital markets TNT expects it can fully satisfy its current and future capital requirements based on its financial standing, without having a cross listing on the NYSE and Euronext Amsterdam. TNT’s Board of Management has also taken into account the regulatory, legal, reporting and governance complexity and costs of complying with these two registrations,” the company said. TNT ADRs will be available as a Level I program and trade in the U.S. OTC market.

Spirent Communications Plc (NYSE:SPM)

The UK-based communications technology company said May 25 it would delist from NYSE and seek to deregister from the SEC, while maintaining a Level 1 ADR in the U.S. The company said the “administrative burden and increasing costs associated with maintaining its listing on the NYSE and the reporting requirements necessary for its registration with the SEC” outweigh the benefits to Spirent and its shareholders.

Telenor ASA (NASDAQ:TELN)

The Norway-based telecommunications company said May 22 that it will delist from NASDAQ and seek to deregister from the SEC. It said it will maintain an amended ADR program through JPMorgan Chase Bank, N.A. and the securities will trade OTC in the US. Its primary market will remain the Oslo Stock Exchange. The company said “continued compliance with the reporting requirements under the Exchange Act are expensive and burdensome for the company and such costs outweigh the benefits of maintaining a U.S. listing.” It said all investors “are accorded protection by Telenor’s continued compliance with the rules of the Oslo Stock Exchange and other Norwegian regulations.”

Petroleum Geo-Services ASA (NYSE:PGS)

The Norway-based geophysical company providing seismic and reservoir services said May 18 it would seek to delist from the NYSE and deregister its securities with the SEC. The company, which on the same day confirmed it had complied with Section 404 of the Sarbanes-Oxley Act, said the moves would cut costs by about $5 million annually. “With the increased sophistication and transparency of the capital markets worldwide, PGS believes that the value of maintaining a dual listing of its shares in the United States and Norway is reduced,” said the company. The company, whose NYSE ADRs have an average daily volume of just over 100,000 shares, did not say if it would maintain an OTC ADR program.

Naspers Limited (NASDAQ:NPSN)

The South Africa-based media holdings company said May 17 it would request delisting from NASDAQ and seek U.S. deregistration, while at the same time converting to a Level 1 ADR to trade OTC “to give current ADR holders the option to continue to hold ADRs.” Interestingly, the company said it would also seek to list DRs on the London Stock Exchange (LSE) to provide “a platform for international investors who wish to trade in Naspers N ordinary shares” other than on the Johannesburg Securities Exchange (JSE), its home market. The company did not say why it was seeking to delist and deregister, but pointed out that it is subject to “the JSE Listings Requirements, high corporate governance standards as reflected in the guidelines contained in the King Report on Corporate Governance for South Africa 2002 as well as laws applicable to publicly listed companies in South Africa.”

ARCADIS NV (NASDAQ:ARCAF)

The Netherlands-based consulting and engineering company announced its intention May 16 to delist from the NASDAQ Global Select Market and seek derigistration from the SEC in 2008. ARCADIS CEO Harrie Noy said: “We got our NASDAQ listing in 1993 through the merger with Geraghty & Miller, even before we became listed at Euronext in Amsterdam. That enhanced our profile and visibility in the U.S. However, the benefits of a U.S. listing no longer justify the costs and complexity. And because shareholders can just as well invest through Euronext, we believe it is time to delist from NASDAQ.” The company, which also said it was SOX compliant, estimated it would save $2.7 million per year. Holders of the NASDAQ ADRs would have the option to exchange them for the company’s Euronext quoted shares and the company would cover fees and expenses. The ADRs would also trade OTC.

Koor Industries Ltd. (NYSE:KOR)

The Israel-based holding company said May 14 it would delist from the NYSE and terminate its ADR program before also seeking to deregister with the SEC. All trading would shift to the Tel Aviv Stock Exchange. The company said its board of directors decided on the move due to the limited number of Koor’s U.S. holders of record, low trading volume, costs of the ADR program, and high costs of U.S. reporting requirements, including SOX costs.

Ducati Motor Holding S.p.A. (NYSE:DMH)

The maker of high-performance sport motorcycles said May 14 it intends to delist from the NYSE and terminate registration of its shares and ADSs under the Exchange Act. “In light of the costs associated with maintaining the listing and registration of Ducati’s ordinary shares and ADSs with the NYSE and the SEC, and the sustained low trading volumes of these securities in the United States, the Board decided to take advantage of recent amendments by the SEC,” the company said in a statement. Ducati will trade only in Italy. The company said the delisting and deregistration “do not affect Ducati’s business strategy in the United States nor its commitment to high standards of corporate governance and financial reporting.”

Genesys Conferencing (NASDAQ:GNSY)

The France-based conference calling company said May 11 said it was delisting its ADSs from the Nasdaq Global Market and terminating its SEC registration. It listed four reasons for the move, including:

1. Most of the company’s shares held by U.S. investors are ordinary shares that trade only on Euronext Paris;
2. The company has adopted International Financial Reporting Standards and believes that U.S. GAAP and IFRS are generally equivalent and that it is unnecessary to continue to report under two standards;
3. ADS trading volume has declined since 2001 and accounted for less than 5% of the worldwide average daily trading volume in its shares in 2005 and 2006; and
4. Genesys Conferencing is continuously seeking to optimize its operating costs.

The company will maintain a Level 1 ADR program that will trade in the U.S. OTC market.

CanWest Global Communications Corp. (NYSE:CWG)

The Canada-based television and media company said May 11 that is it withdrawing the listing of its non-voting shares from NYSE and will seek to deregister and terminate its SEC reporting obligations. However, the company’s subsidiary CanWest MediaWorks Inc. will continue to file reports with the SEC in line with the terms of the indentures governing its outstanding notes. “Capital is more mobile than ever and those who want to invest in CanWest have a very liquid exchange in Toronto,” said President and CEO Leonard Asper. “We believe that the trading volume of our securities on the NYSE is not sufficient to support the continuation of our listing and the associated listing and administrative costs.”

SkyePharma PLC (OTC:SKYEY formerly NASDAQ: SKYE)

The UK-based drug reformulation group said May 4 that is was delisting its ADSs from the NASDAQ Stock Market and seeking to deregister from US reporting. The company’s board believed that U.S. reporting rules, “in particular Section 404 of the Sarbanes-Oxley Act”, would be costly. It also said that investors in the company’s London Stock Exchange-listed shares and its over-the-counter ADRs “are accorded protection” by the company’s compliance UK rules and regulations. At the time of writing, the company’s ADRs have already been moved to the OTC market.

AMCOR Limited (NASDAQ: AMCR)

The Australia-based packaging company said May 2 it would to delist from the NASDAQ Stock Market in early June and then seek to deregister. The company said it expects to provide a Level 1 ADR that will be traded in the U.S. over-the-counter market. Amcor’s Managing Director and CEO Ken MacKenzie said: “The Board of Directors determined to take this action based on several factors, including the ongoing expense of preparing additional periodic reports for filing with the SEC and the substantial increase in costs to meet the requirements of the Sarbanes-Oxley Act.” He added that “in view of Amcor’s adoption of the Australian equivalents of the International Financial Reporting standards, the cost of preparation of similar US GAAP accounting reports is no longer warranted.”

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