This was posted to one of the mailing lists I subscribe to. I don't know the original source:
Goodbye, Farewell,
Auf Wiedersehen, Adieu . . .
By DANIEL EPSTEIN
February 9, 2005; Page A10
LONDON -- It's tough being a U.S. securities
lawyer in Europe these days. Our hottest-selling
product might just put us out of business.
Talk to any European company with a U.S. listing
right now and the discussion will soon turn to
deregistration -- that is, the termination of
U.S. reporting obligations and escape from
corporate governance and related requirements
under the Sarbanes-Oxley Act. There is
unprecedented interest in this subject among
European corporations, and perhaps a new sense of
momentum. Currently four U.K. companies -- ITV,
mmO2, Premier Farnell, and United Business Media
-- are taking active steps toward deregistration,
and numerous others here and on the Continent
have signaled their eagerness to deregister if
they can find a way to do so. Indeed, on Monday,
ITV shareholders voted overwhelmingly in favor of
plans to cash out unwanted U.S. shareholders as a
prelude to deregistering.
The rush to delist and deregister is, in the
first instance, about money: Being a U.S.
reporting company is about to get a whole lot
more expensive. This is because of Section 404 of
the Sarbanes-Oxley Act, which requires reporting
companies to produce a detailed assessment of
their internal control regime, together with an
auditors' attestation report on that assessment.
For non-U.S. companies, this requirement is
currently due to come into force for financial
years ending after July 15, 2005. The Section 404
attestation report looks to be phenomenally
costly. ITV, for example, has claimed that if it
succeeds in deregistering it will save £4 million
this year and £3 million annually thereafter. A
significant chunk of this can be traced to
Section 404 compliance.
* * *
Sarbanes-Oxley has clearly focused the minds of
Europeans. Properly speaking, the deregistration
rush began last February, when a coalition of
European industry groups asked the U.S.
Securities and Exchange Commission to change its
rules in this area. Since then a well-coordinated
campaign has seen a succession of European
companies and commentators hammer home the point
that the U.S. reporting regime is unreasonably
expensive and intrusive, and the rules governing
exit from that regime unfairly restrictive.
This has not been lost on the SEC. In a speech at
the London School of Economics on Jan. 25, SEC
Chairman William H. Donaldson indicated that the
SEC will consider delaying the effective date of
the Section 404 internal-control requirements for
non-U.S. registrants -- it is now widely expected
that they will be deferred beyond the end of 2005
at least. In the same speech, Mr. Donaldson
signalled clearly that new SEC rules on
deregistration will be forthcoming soon: "We
should seek a solution that will preserve
investor protections without inappropriately
designing the U.S. capital market as one with no
exit." His remarks appeared to be aimed at
slowing the rush to deregister and persuading
non-U.S. registrants to adopt a wait-and-see
attitude to their U.S. listings.
In the end, there is not very much that the SEC
can do about the Section 404 requirements.
Sarbanes-Oxley is a U.S. federal statute -- the
work of the U.S. Congress -- and the SEC lacks
authority to exempt non-U.S. companies from its
scope.
Moreover, the hard truth for Mr. Donaldson and
other champions of the U.S. capital market is
that it is not so much the cost as the absence of
any countervailing benefit from continued U.S.
listing that is spurring the rush to
deregistration among European companies. A U.S.
listing of American Depositary Receipts simply
does not offer most of these companies anything
they really need anymore. Relatively few of them
are truly looking to penetrate the U.S. retail
market -- it is institutional money that matters,
and for the most part U.S. institutional
investors now prefer to invest directly in
ordinary shares in the U.K. and the euro zone
because of their greater liquidity.
MmO2 has estimated that 7.56% of its shares are
held by U.S. residents in the form of
London-listed ordinary shares, with only 0.64%
held in NYSE-listed ADR form. By the same token,
although there are notable exceptions (BT,
Nokia), U.S. exchanges account for a small
percentage of trading in many European equities.
As a result, not only are European companies
pushing to get out of the U.S. market, they are
staying away in droves -- in all of 2004, there
were only six new listings by European companies
on the NYSE and Nasdaq.
There are other potential benefits for non-U.S.
companies of being in the U.S. market. A
U.S.-listed share or ADR may be a useful
acquisition currency for companies targeting
acquisition opportunities in the United States.
In addition, New York Stock Exchange listing may
offer a certain cachet, and submitting to the
discipline of U.S. disclosure standards and U.S.
GAAP as applied by the tough and savvy folks at
the SEC can be one way to win the confidence of
investors.
Mr. Donaldson sounded this theme in his remarks
at the LSE, likening America's markets and the
regulatory framework that supports them to the
U.S. Marine Corps: "an elite -- the best of the
best." (Many Europeans would think the comparison
between U.S. securities law and the U.S. military
all too apt, though they might draw the analogy
somewhat differently.) But while this may have
real resonance as applied to issuers from
developing markets, it appears to cut little ice
when the proffered alternative is, say, the
discipline of EU disclosure standards and
International Financial Reporting Standards as
applied by the tough and savvy folks at the U.K.
Listing Authority. One of the most telling
features of the current deregistration rush has
been the apparent indifference with which U.S.
institutional investors have received the news
that European companies are lining up to exit the
U.S. reporting system. For example, according to
press reports, ITV's two largest U.S.
institutional investors, Fidelity and Artisan,
have voiced support for its efforts to
deregister. (Importantly, ITV's deregistration
plan will leave its large U.S. institutional
shareholders undisturbed; mmO2 has indicated it
will pursue a similar approach.)
Of course, it is one thing to talk about
deregistering, another to achieve it. Under
current SEC rules, the barriers to deregistration
are formidable. Generally speaking, a non-U.S.
company must be able to certify that it has fewer
than 300 U.S. resident holders of its shares and
ADRs to deregister. In counting U.S.
shareholders, the company must "look through"
brokers, banks and other nominees to find out the
number of underlying U.S. accounts for which they
hold shares. In many cases, active steps will
need to be taken to reduce the number of U.S.
holders to the necessary level, raising questions
as to whether this can be done at acceptable cost
and without prompting legal challenges from
affected shareholders under home-country
corporate or U.S. securities law. Moreover, there
are some particular features of the U.K. legal
landscape that make it relatively hospitable to
efforts to eliminate U.S. shareholders -- things
are much more difficult in many Continental
jurisdictions. Thus, despite all the tough talk,
only a handful of European companies have
actually managed to deregister in the past year.
* * *
Going forward, the degree to which European
companies will be successful in deregistering and
exiting the U.S. market is likely to depend
critically on the SEC's new rule proposals. The
SEC is said to be considering a very significant
increase in the threshold level of U.S. holders
below which deregistration would be permitted, as
well as some entirely new approaches.
Whatever proposals are made, they will be aimed
not at accommodating the demands of European
companies to get out, but at persuading issuers
in developing markets -- China, Russia, Latin
America -- that it is safe to get in. To
encourage potential new registrants in these
markets to list in the United States, it is
essential that there be a reasonable prospect of
exiting the U.S. reporting system if their hopes
for the development of a U.S. trading market in
their securities do not pan out. The SEC appears
to recognize this. We U.S. securities lawyers can
only wish them well in their endeavors.
Mr. Epstein is a partner in the London office of Allen & Overy LLP.
1:29:35 PM 
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