August 13, 2008

Rush for the Exits: Why Foreign Firms Leave the US

In a new study, G. Andrew Karolyi and René Stulz of Ohio State and Craig Doidge of the University of Toronto looked at 59 companies that took advantage of Exchange Act Rule 12h-6 (adopted in March 2007) to deregister and leave the US market. This study appears to be the first look at the hard data following the SEC’s efforts to ease deregistration for foreign firms, and offers some glimpses into the arguments about US competitiveness in the capital markets.

The authors found that the firms deregistering in the first six months after Rule 12h-6 was adopted generally exhibited poor growth opportunities, come from more economically developed countries and experienced poor stock price performance in the years prior to deregistration. Of the 59 firms studied, 19% were from Europe, 12% were from Australia and 10% were from Canada.

Upon announcing their delisting, the firms experienced either no or a negative stock price reaction, although those firms with greater growth opportunities experienced a significantly worse stock price reaction. The authors of the study were not able to definitively establish the extent to which the Sarbanes-Oxley Act adversely affected the firms that deregistered.

The authors admit that some of the tests performed may have been limited by the small sample size of only 59 firms. Perhaps it may be too early to tell what the long term effects of Rule 12h-6 will be, but certainly the study supports the notion that no great “pop” can be expected in a firm’s value from leaving the US. Further, with the movement toward global accounting standards and mutual recognition occuring in the US while other developed countries implement Sarbanes-Oxley-like reforms, it could be expected that any loss of competitiveness arguments (and perceived benefits of dropping a US listing) will continue to lose steam.

For more on Rule 12h-6 and foreign issuer deregistration, check out our “Deregistration & Modified Reporting” Practice Area.

Auction Rate Settlements (In Principle)

Last week, the Division of Enforcement announced preliminary settlements in principle with Citigroup and UBS in cases arising from the collapse of the auction rate securities market, and more such settlements are likely on the way. Merrill Lynch announced that it was voluntarily buying back auction rate securities from retail customers beginning in January 2009.

The Citigroup and UBS settlements, if ultimately approved by the SEC, would provide for the extreme result of obligating the firms to repurchase the securities at par from smaller investors and making those investors whole in some instances, while liquidating auction rate securities from institutional investor accounts by the end of next year. The firms would be prohibited from selling their own inventory of these securities before the customers’ holdings are liquidated. The firms also would be obligated to provide no-cost loans to customers that will remain outstanding until all auction rate securities are repurchased. The firms face the possibility of penalties, depending on whether they adequately perform on their obligations under the terms of the settlement.

I have spoken with a number of people harmed in the auction rate securities meltdown, and I am encouraged to see that these settlements focus on very direct ways at helping investors, particularly the smaller investors that suffered the most as a result of the collapse of liquidity in the market.

It remains to be seen what relief – if any – these firms will get from the tender offer rules or other requirements when complying with the terms of the settlement, although there is some talk that relief might be forthcoming.

It is pretty rare to see the Staff announce a settlement agreement in principle (that is to say, still subject to Commission approval) in an Enforcement investigation. The last time I can recall it happening was with the global settlement in the research analyst cases, which like these auction rate cases involved joint settlements with state regulators. I suspect that the Commissioners may have been involved in the formulation of these auction rate securities settlements, given the enormity of this matter, and perhaps now there is less hostility at the Commission level to the Staff negotiating and reaching settlements that are subject to Commission approval.

Marty Dunn’s Second “Pro or Troll” on Shareholder Proposals

Test your skills with our new game courtesy of Marty Dunn of O’Melveny & Myers – “Pro or Troll #10: Shareholder Proposal Subject Matter.” This game delves into the Staff’s positions on several notable shareholder proposals.

– Dave Lynn