M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Sunday, July 8, 2007

The Delisting Wave (Part II)

I read my first news story on the foreign private issuer delisting wave last Friday in the International Business Times (you can access it here).   According to the report, since the SEC's new deregistration rules took effect on June 5, 2007, 35 foreign private issuers have taken steps to dereigster their securities and delist from a U.S. stock market (though some are choosing to remain traded on the Pink Sheets).  These include such well-known companies as British Airways, Danone and Imperial Chemical.  According to the news report and not surprisingly, many are claiming that they are delisting to escape burdensome U.S. regulation in the form of Sarbanes-Oxley and to escape the spectre of U.S. shareholder litigation.  The report also quotes Harvard Law School Professor Hal Scott to support these assertions, he states that "[t]he benefit of coming here has decreased, and the costs have increased with litigation and regulation, so they're making a trade-off to get out of here."

Professor Scott is undoubtedly right that some of these companies are delisting because they no longer perceive a U.S. listing as worth the effort.  However, this may not be attributable entirely to current, more stringent SEC regulation.  Prior to the SEC rules taking effect, listing in the United States had been analogized to the Hotel California.  Once you listed here you could never leave (get it?).  But 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).   And, as I predicted in a post on May 30: 

[T]he 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.   

For those delisting, it may also be short-sighted.  True, some studies have found statistically significant declines in equity premiums for cross-listed firms at the time immediately before and after passage of Sarbanes-Oxley.  But these declines now appear to be short term at best, according to a new study by Craig Doidge et al.,  Has New York Become Less Competitive in Global Markets? Evaluating Foreign Listing Choices over Time (June 2007).  Doidge and his colleagues have found in a recently published study that the equity premium for cross-listing on a U.S. market "has not fallen significantly in recent years. . . . In contrast, there is no premium for London listings for any year. Cross-listing in the U.S. leads firms to increase their capital-raising activity at home and abroad while a London listing has no such impact. Our evidence is consistent with the theory that an exchange listing in New York has unique governance benefits for foreign firms."   


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