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Lifting the Veil from the SEC's Cross-Border Rules

Author: Stephen D. BOHRER

Type: Article : News

ref: 52006709-723

N0:5 of 2006

Pages: 709-723

The U.S. Securities and Exchange Commission adopted the Cross-Border Rules to counter the perceived practice of non-U.S. companies excluding U.S. security holders from cross-border corporate transactions in order to avoid the application of U.S. securities laws to such deals. Unfortunately, the Cross-Border Rules have not lived up to their mission. The highly restrictive conditions for the application of the Cross Border Rules and ambiguous terminology with respect to certain of their requirements have prevented various cross-border transactions from benefiting from the exemptions offered under the Cross-Border Rules. In particular, the methodology used to calculate U.S. security holder ownership levels under the Cross-Border Rules can lead to counter-intuitive results and limit the application of the rules, and the provisions of the Cross-Border Rules concerning what information should be furnished to the SEC and disseminated to U.S. security holders are not models of clarity, which can lead to countless hours and expense complying with perceived requirements. Companies considering the extension of an offer to U.S. security holders are accordingly often left with a question similar to the one they faced prior to the adoption of the Cross-Border Rules—whether to exclude U.S. securities holders in order to avoid the application of U.S. securities laws to their cross-border transactions?

The Cross-Border Rules can be an effective method to extend offers to U.S. security holders without triggering compliance with most U.S. securities laws if certain amendments are adopted. In particular, the methodology under the Cross-Border Rules to calculate stock ownership levels of U.S. security holders should be modified to better reflect the interests of, and need for regulatory protection by, U.S. security holders. One way to accomplish this objective is to (i) exclude from the calculation only the shares of the target company that are owned by 10% or greater U.S. security holders and (ii) include in the calculation the shares of the target company owned by the acquiror. Furthermore, the amount of information that must be translated into English and furnished to the SEC also should be curtained to align the cost and delays associated with this exercise with the perceived benefits U.S. security holders obtain when receiving such information. By effecting the foregoing amendments, the Cross-Border Rules could apply more intuitively to certain overseas business acquisitions to prevent the application of U.S. securities laws to transactions that have only a remote nexus to the United States. If a non-U.S. company’s ability to effect its business plans is curtailed when U.S. security holders own its securities, then non-U.S. companies may opt to curb the offering of its securities to U.S. persons or restrict the ability of shareholders to transfer securities to U.S. security holders. If enough companies adopt either of these approaches, then the status of the U.S. capital markets as the seat of global finance could be challenged.