The mounting furore surrounding the rocketing costs of compliance with a new financial reporting regime in the US has prompted dozens of UK and European companies to consider de-listing from stock exchanges in the US.
But misconceptions of US listing rules are leading to a situation where many believe you can just up and leave at the drop of a hat. The reality is much more complicated.
The actual process of de-listing is pretty straightforward, most commentators agree. What proves more complex is the process that follows it.
‘There’s a difference between de-listing and de-registering,’ explains Tom Troubridge, partner and head of the London capital group at PricewaterhouseCoopers. ‘De-listing is the easy bit.’
To de-list all you have to do is fill out a form informing the market and a company’s share will stop being traded almost immediately. But a company is still subject to the rules and regulations laid down by the Securities and Exchange Commission, the powerful US watchdog.
While the SEC would like to make it easier for non-US companies to remove themselves from US markets, and despite a spokesman confirming it is under ‘serious consideration’, this is unlikely to happen overnight.
Troubridge also warns that by announcing the intention to de-list, companies run the risk of attracting hedge funds into buying shares in the hope that the company will then be forced to buy them out at a much higher rate than anticipated.
There are, however, more practical issues to consider. In order to de-list you have to show you have had fewer than 300 US shareholders over a period of 18 months. This is much more difficult than it sounds.
‘It can be difficult to find out who the shareholders actually are, as they might be held in nominee names,’ explains Troubridge.
The only way to guarantee that the number of US shareholders falls below the 300 mark and stays there, says Troubridge, is to give directors power in the company’s articles of association to restrict share ownership.
The companies that have gone public on this, such as the Rank Group, say that the main drivers behind their deliberations would be to avoid the burden of the Sarbanes-Oxley Act.
But this, warn commentators, could force questions among investors and other stakeholders. It could also raise the cost of capital. And how well would it go down with any shareholder that a company is stepping away from complying with tougher standards?
Alan Millings, head of US capital markets at Ernst & Young, said: ‘It doesn’t send out great signals to investors if you de-list.’
But the cost of Sarbox compliance is not the only reason that non-US companies are considering other exchanges on which to trade their shares.
Lastminute.com, the online travel company, is just coming to the end of its de-registration process.
Outgoing finance director David Howell told Accountancy Age that the risk to reward ratio for listing on Nasdaq ‘just didn’t stack up’.
‘It was the whole cost of being on Nasdaq. The new regulations were another complexity. But we were spending over £1m a year to support our listing on Nasdaq,’ says Howell.
Lastminute.com started to think about de-registering from the SEC around 18 months ago, he explains. The company de-listed in July, but it still has to wait another 90 days, from Wednesday 24 November, before the de-registration process is completed.
His advice to any company considering such a move, is ‘to make sure you have good lawyers who understand the intricacies of US law, and diligent people who are persistent in their search to obtain hard-to-get information’.
Howell says the company wrote to all its US shareholders but many did not even reply while many shares were held through nominee accounts. ‘This is the really difficult bit,’ he adds.
Perhaps the growing threat of de-listing from non-US companies is a thinly veiled attempt at pressurising US regulators to compromise more on the new corporate-governance regime.
But anecdotal evidence indicates that although US regulators are mindful of foreign companies’ intentions to flee their stock markets, the ploy won’t start them running to dismantle the controversial rules for non-US companies.
The SEC’s mandate is not only to regulate markets, but also to protect the rights of US shareholders, even if they only hold one share in a company. If the watchdog is seen to be excessively easing the way for foreign registrants to leave their markets, the news won’t go down well.
US regulators have in the past been keen to attract foreign companies to US markets, sometimes making it easier for them. But as one source said:’We aren’t in one of those times.’
Perhaps it is as Digby Jones, director general of the Confederation of British Business, suggests – New York is now a ‘protectionist society’.
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