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Boston College Law School

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Wednesday, May 30, 2007

The Coming Delisting Wave

The Financial Times is reporting that ICI, the U.K. chemicals company, will delist its American Depositary Receipts from the New York Stock Exchange.  The company expects the delisting to occur on or about June 18 immediately after it deregisters its securities under the Exchange Act.   ICI will remain listed on the London Stock Exchange, but ICI will also issue American Depositary Shares on OTCQX, a new quotation system launched by the Pink Sheets, the U.S. over-the-counter market home to many a penny stock.

Expect to see more announced delistings from U.S. stock markets by foreign issuers in the next few weeks.  This is because the SEC's new rules liberalizing the ability of foreign issuers to deregister their securities and terminate their reporting requirements under the Exchange Act take effect on June 4.  Prior to this rule, the Exchange Act was a lobster trap -- deregistering equity securities and terminating or suspending reporting requirements once these securities had been registered was prohibitively difficult if not impossible.  Now, under the SEC's new rules if the average daily U.S. trading volume of a foreign issuer is 5 percent or less of its worldwide trading volume it can freely deregister and terminate its Exchange Act reporting requirements.  To do so, however, the foreign issuer must also delist its securities from the U.S. stock market (i.e., Nasdaq or NYSE). 

So, the new rules will release pent-up demand of foreign issuers who previously desired to deregister their securities and now do so.  Most if not all of these issuers will cite Sarbanes-Oxley to justify the termination of their listing.  But don't always believe it.  These issuers originally listed in the United States for a variety of reasons, and for many a delisting will simply mean the reasons no longer exist (and probably haven't for a long time).  For example, many a foreign high-tech company listed on the Nasdaq during the tech bubble seeking the extraordinary high equity premium accorded Nasdaq-listed tech stocks.  Post-crash, many of these foreign companies still exist but are much smaller or have remained locally-based and a foreign listing is no longer appropriate for them.

All-in-all, though, the rules are a step in the right direction.  Permitting foreign issuers to more freely delist will encourage them to experiment with a U.S. listing in the first place.  The SEC would also do well to take the next step and consider whether all foreign listings need to be regulated at the current level.  Does the SEC really need to regulate ICI to begin with?  It is, after all, regulated by the FSA and LSE in England.  A mutual recognition system for issuers listed in foreign countries who provide an acceptable level of regulation would go a long way to making the U.S. more competitive in the global listings market.  It would also provide greater access for U.S. investors to foreign investments.  Both good things. 

NB.  The ICI planned listing on the Pink Sheets highlights this problem.  The Pink Sheets is not a stock market, but rather a bulletin board where shares are quoted -- trading on this market is often illiquid and spreads Texas-wide.  Yet, the SEC freely permits foreign companies to quote their shares here under the Exchange Act Rule 12g3-2b exemption.  I am at a loss to explain why this is appropriate yet not a freer stock market listing regime in the U.S. markets for foreign issuers; one that permits these foreign issuers to list on the NYSE or Nasdaq.  Especially since the latter would provide U.S. investors more efficient access to foreign stocks and permit the United States to more easily attract these listings. 

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