CRAVATH, SWAINE & MOORE
825 Eighth Avenue
New York, NY 10019-7475
Tel. (212) 474-1688
Fax (212) 474-3700
File No. S7-3-99
Foreign Issuer Disclosure Proposals
We appreciate the opportunity to submit comments in response to the Commission's proposals.
Adoption of IOSCO Standards. We believe the proposals should not be made
effective as the only means of U.S. disclosure compliance for foreign issuers unless and
until the IOSCO standards (without material amendments or reservations) have been adopted
and become effective as the only means of disclosure compliance in the world's other
significant capital markets. The Commission's objectives in proposing adoption of
the IOSCO standards for the U.S. were to facilitate cross-border capital flows through the
use of a common disclosure document, to improve the comparability of information provided
to investors and to reduce regulatory burdens on foreign issuers. None of these
objectives could be achieved absent general adoption of the IOSCO standards around the
1 It should be borne in mind that even general adooption of the
IOSCO standards abroad will not create a level playing field. Accessing the U.S.
capital market will continue to be regarded as considerably more burdensome because of the
generally more demanding financial statement requirements, the much greater liability and
enforcement risks in the U.S. market and the additional nonfinancial statement
requirements (e.g., Item 9A, U.S. style exhibits, registration statement
undertakings). Also the IOSCO standards, even if adopted verbatim, could be
interpreted and enforced in a materially narrower fashion in other jurisdictions than by
the Commission and its staff.
We note that in adopting the standards IOSCO intended them to apply only to initial equity listings and to equity offerings for cash only. Accordingly, to achieve comparability with the Commission's proposals, it would be necessary to extend them, as proposed by the Commission, to equity offerings other than for cash, to all types of debt offerings and listings and to annual reports. We are not aware that other IOSCO members are moving in this direction. General adoption of comparable standards in the world's other capital markets would require that they do so.
Further, we see two major problems with unilateral adoption of the IOSCO standards as the only means of U.S. disclosure compliance for foreign issuers. First, the proposals would be a deterrent to foreign issuers deciding to list or offer securities for the first time in the United States. The IOSCO standards together with the Commission's other proposals would require a significant number of disclosures and additional information not currently required either by Form 20-F or, most significantly, by the forms applicable to U.S. registrants (see comments 5 and 6 below), and clearly go far beyond the level of disclosure currently required in most other capital markets around the world.
Second, they would materially increase the regulatory burden for foreign issuers which are already SEC registrants. Not only would additional disclosures be required but also many interpretations would be required of unfamiliar language and new definitions. The additional effort and expense, especially in the first year, could be very significant.
We believe that over a 20-year period 20-F disclosures have proven sufficient to achieve protection of U.S. investors but, at the same time, have not been so burdensome for many foreign issuers as to deter them from listing in the U.S. or accessing U.S. capital markets. Over 20 years, hundreds of foreign companies have decided to register with the Commission, in part because of the careful balance achieved by the Commission when it adopted Form 20-F.
It is therefore a major departure for the Commission to put forward proposals which would require foreign issuers to make significant additional disclosures not currently required for U.S. issuers (see comments 5 and 6 below), thus creating significant disincentives to U.S. registration (absent adoption of the same requirements in the world's other capital markets), adversely affecting comparability with U.S. issuers and, perhaps in some cases, adversely affecting the competitive position of foreign issuers because of the requirement to disclose information not required of their U.S.-based competitors.2
Except in connection with a general international harmonization of mandatory disclosure requirements, we believe it would be unwise in the extreme to abandon the successful 20-year history of Form 20-F in the interest of facilitating capital flows and reducing regulatory burdens when there is no suggestion that the current requirements of Form 20-F provide inadequate disclosure to investors. It would also be unfair to foreign issuers that have registered with the Commission in reliance upon the accommodations made for foreign issuers over this 20-year period as embodied in Form 20-F and the interpretations of its requirements by the Commission and its staff.
Standards As An Alternative. We would strongly urge the Commission to revive its
original idea of proposing the new standards as a voluntary alternative to, rather than as
a mandatory replacement for, the existing 20-F requirements. As the Commission's
stated objectives in proposing adoption of the IOSCO standards relate to assisting
markets, investors and issuers and do not suggest that the Commission is attempting to
address any perceived deficiencies in current disclosure by foreign issuers, providing
disclosure alternatives should not be inconsistent with the Commission's principal mandate
of investor protection. Indeed, if investors place a high value on receiving
somewhat more comparable information or issuers believe that adopting the IOSCO
alternative will facilitate capital raising or reduce their U.S. disclosure burden, then
the IOSCO alternative will be utilized. However, retaining the current 20-F
requirements as an alternative will avoid discentives to initial U.S. registration for
many foreign issuers as well as an immediate increase in the regulatory burden for
existing foreign registrants and provide issuers and the Commission with an opportunity to
observe how and to what extent IOSCO standards are adopted in other jurisdictions and
whether they are embraced by market participants. Adopting the IOSCO standards as
just an alternative method of disclosure would also facilitate extending such alternative
to domestic issuers wishing to prepare a single global disclosure document.
2 In fact, it is somewhat inconsistent to suggest that foreign
issuers must comply with the heightened IOSCO standards to promote comparability
and cross border capital flows while domestic issuers remain subject to U.S. standards and
do not have the option of adopting IOSCO standards for U.S. compliance.
We note that IOSCO itself contemplated that its standards "provide alternative standards for the preparation of a single disclosure document by foreign issuers, but do not necessarily replace a jurisdiction's existing disclosure requirements for foreign or domestic issuers."3 Unless and until other jurisdictions replace their existing requirements and make IOSCO standards mandatory, we do not believe the Commission should do so either.
3. Age of
Financial Statements. Whether the IOSCO standards are adopted as required
disclosure or alternative disclosure, we believe the proposals to reduce substantially the
permitted age of financial statements should be deferred until there is much greater
harmonization of financial statement requirements in other capital markets.4
The financial statement requirements of Form 20-F can be very time consuming owing to the
substantial differences which currently exist between financial statement requirements in
the United States and many other jurisdictions. The time required for 20-F financial
statement compliance is especially long for foreign issuers offering equity or
noninvestment grade securities which must provide all information required by U.S. GAAP
and Regulation S-X (Item 18). Even the task of preparing the required footnote
reconciliation under both Item 17 and Item 18 can be time consuming for many foreign
issuers. The time periods in current Rule 3-19 were developed over the years to
accommodate the additional time required for 20-F financial statement compliance.
The fact that more current financial information may be required for offerings in other
capital markets is not dispositive because compliance with the financial statement
requirements in such markets is typically substantially less time consuming than
compliance with Form 20-F financial statement requirements. In sum, requirements as
to the age of financial statements should not be harmonized without first harmonizing the
content of financial statements.
3 See International Disclosure Standards, September 1998, page 3.
4 In fact, in certain situations--such as an initial public offering by a foreign issuer that is not public in its home country--the IOSCO requirements appear to allow less preparation time than allowed for first time U.S. issuers.
4. Individual Management and Major Shareholder Disclosure. The most significant departures in Form 20-F from requirements for U.S. issuers has been the elimination of disclosures concerning individual senior managers, provided that disclosure is made concerning senior management in the aggregate and on an individual basis to the extent disclosed in the home jurisdiction or elsewhere. Similarly, Form 20-F raises from 5% to 10% the threshold for disclosing major shareholders. It was correctly perceived by the Commission that such departures were critical to permit and encourage access to U.S. capital markets by foreign issuers from jurisdictions having long traditions of confidentiality on such matters and, in many cases, legitimate personal security concerns, and also, as concerns major shareholders, difficulties in identifying major shareholders, especially those with bearer shares. Moreover, we believe the Commission correctly determined that the 20-F standards nonetheless provide adequate information to investors, particularly when considered together with the general obligations to disclose additional information that is material (such as under Rule 408).
In some jurisdictions individual management disclosures have been expanded considerably since adoption of Form 20-F, but in most there has been little change in the last 20 years. As to management compensation (including option grants), the proposals continue the principle in Form 20-F that individual disclosures need be no greater than required by the home jurisdiction or voluntarily disclosed, and we believe the same principle should be continued with respect to disclosure on an individual basis of outstanding options and share ownership and with respect to disclosure of related party transactions.
Even if the IOSCO standards with respect to such matters are adopted in all other major capital markets, there can be significant differences in interpretation. To take one example, the new term "Directors and senior management" could be much more narrowly interpreted in other jurisdictions than by the Commission and its staff, thus resulting in disclosures elsewhere covering a much smaller group of senior managers. Different corporate structures in other jurisdictions such as two-tier boards and the absence of "officers" offer ample opportunity for material differences in interpretation of such definition. The new "related party" and "significant influence" definitions also offer wide scope for differing interpretations. Hence, we believe that, even if the IOSCO standards are adopted generally, the exclusion in Form 20-F for information not otherwise disclosed should be continued with respect to outstanding options, share ownership and related party transactions.
In the case of major shareholders, we believe the threshold for disclosure of ownership of 10% (or such lower threshold as is required in the home jurisdiction) continues to be a reasonable accommodation for the wide universe of foreign issuers. We note that disclosure of names sometimes presented concerns even with the 10% threshold of share ownership. With a lower 5% threshold, such concerns would likely increase significantly. We therefore believe that if a lower 5% threshold is adopted names of major shareholders should not be required but instead a general description of the nature of the shareholder should suffice at least with respect to private individuals not employed by the issuer. We also believe the three-year history of major shareholdings is not material and, at the very least, should be phased in over a three-year period because records may be unavailable.
5. Additional Information. The IOSCO standards would require a lengthy description as of the balance sheet date and the latest practical date of the issuer's share capital, covering seven specified subjects, a description of ten enumerated provisions of its charter documents and a description of "material contracts" over the last two years. Except for the general requirement to disclose material matters, there is not a comparable requirement currently applicable to foreign or U.S. registrants. These standards may be difficult to interpret and would potentially lead to extensive disclosure of information not material to investors or better disclosed in the footnotes to the financial statements or filed exhibits or both. We believe they should not be adopted under any scenario.
IOSCO Standards. While we have made an effort to compare in detail IOSCO
disclosure requirements with those of Form 20-F, we are not yet confident that we fully
appreciate the implications of the changes. However, in addition to those discussed
above, we have serious reservations about a number of the requirements, not currently
applicable either to foreign or U.S. registrants, including5:
5 Much of the objectionable and arguably irrelevant disclosure
seems to result from extending the IOSCO standards beyond their intended scope of equity
offerings and initial equity listings.
- to identify in an offering prospectus the issuer's "principal" "bankers" and legal advisors
- to include in an offering prospectus a timetable and a description, among other things, of the method and time limits for paying up securities and for delivering them (in the case of equity) and to describe the manner in which results of the distribution of securities are to be made public
- to add a number of items to the table of selected financial data and to provide a five-year dividend history even for an offering of straight debt
- to include in an offering prospectus a capitalization table (including "indirect and contingent indebtedness") no older than 60 days at the time of effectiveness
- to include a separate section on "risk factors" in annual reports even for registrants of the highest credit rating
- to disclose "important events" in the company's development (presumably since its founding)
- to disclose principal capital expenditures and divestitures for the last three years and those in progress
- to disclose takeover offers for the company in the last and current years
- to provide a detailed description of properties and plants including, among other things, capacity and utilization and "environmental issues"
- to identify in the MD&A the most significant "trends" in production, sales and inventory, order book, costs and selling prices
- to disclose detailed information regarding employees including a breakdown of numbers by activity and geographic region, a description of relationships with labor unions and the number of temporary employees
- to state specifically whether or not any significant change has occurred since the date of the most recent financial statements and to include note disclosure in interim financials of significant events and disclosures since the most recent annual statements
- to disclose the terms (not just the nature) of material relationships with an underwriter or financial advisor
- to disclose dilution in all equity offerings (not just IPO's or where the issuer has a history of losses)
- to include in the prospectus (not the registration statement) the expenses of the offering or listing.
- to require consents of experts in annual report filings
In general, we do not support what appears to be an attempt in the IOSCO standards to mandate disclosure, whether or not material, of information that is frequently provided in U.S. disclosure documents only if material to the issuer.
7. Exhibits. In a separate proposal (not based upon an IOSCO standard) foreign issuers would be required to file the same exhibits as U.S. issuers, eliminating the relaxation of exhibit requirements approved by the Commission after considerable discussion and comment in adopting Form 20-F. The rationale for this change is not provided in the proposing release. We believe the accommodation as to exhibits for foreign issuers in current Form 20-F remains a reasonable one.
8. Suggested Reproposal. If the Commission decides to proceed with these proposals, we urge it to take into account comments received and publish revised proposals for further comment (together with a detailed analysis of all additional disclosure being proposed), for a number of reasons.
First, the proposals represent an enormous departure from the successful 20-year history of Form 20-F and have serious potential consequences for the competitiveness of U.S. exchanges and capital markets. The small number of comment letters received to date (and the fact that not a single comment letter has yet been received from a foreign issuer) suggests that the implications of the proposals have not been fully appreciated by market participants. In fact, our discussion of the proposals with certain other interested parties suggests that many potentially significant changes from current requirements are not easily identified without a careful review of the proposals against the current rules. Unless adopted after an informed review by market participants and as part of a coordinated international effort involving effective action by the relevant authorities in all other significant capital markets, they could set the U.S. on a unilateral path which would impair rather than promote globalization of markets and capital flows. Thus, because of the importance of the proposals we believe that more time for comment and reflection is desirable, particularly if the IOSCO standards are to become the only means of U.S. disclosure compliance.
Second, the proposals are quite lengthy and complex. Analyzing all the differences between them and current 20-F requirements is a considerable task. The proposing release does not purport to describe or enumerate the very significant changes from current law and practice.
Third, the most valuable comments are likely to come from foreign issuers and stock exchanges around the world, and their response time cannot be expected to be as prompt as that, for example, of U.S. commentators on Commission proposals having principally a domestic impact. Moreover, the proposals were published at a time when most foreign issuers and their key personnel and advisors were fully occupied with preparing shareholder reports and Forms 20-F for the 1998 fiscal year. A second round of comments, for which hopefully a substantial response time will be permitted, would come at a time when the key people would have more opportunity to focus upon these important proposals.
If you would like
to discuss any of the above comments please call Jim Edwards at (212) 474-1688, Dan
Cunningham at (212) 474-1030 or Paul Michalski at 011-44-171-453-1020.
Very truly yours,
Cravath, Swaine & Moore
Mr. Jonathan G. Katz, Secretary
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549