The Sarbanes-Oxley Act and the rules applicable to foreign companies: the possible impacts on the capital markets
| Autor | Andrea Fernandes Andrezo |
| Páginas | 25-54 |
Page 25
The "Public Company Accounting Reform and Investor Protection Act of 2002", popularly known as Sarbanes-Oxley Act, brings many new rules of disclosure and corporate governance for companies. It is a response of the Congress to the recent corporate scandals that undermined the investors' confidence and interrupted the continuous growth of the American capital markets in the last years.
The American capital market experienced an exponential growth in the 90's.
The total market value of US stocks rose from $ 3.3 trillion in 1990 to $ 14 trillion by September 1999.1 The dollar amount of securities filed for registration with the Securities and Exchange Commission increased more than five-fold between 1990 and 1999 rising from $ 379 billion to $ 2.1 trillion.2 The number of foreign companies registered with the Commission also increased significantly, and almost tripled between 1990 and 1999 from 434 to over 1,200 from 57 countries,3 The following chart shows some other numbers about the growth of the American capital market during the 80's and especially during the 90's:
Page 26
In the 90's, the American capital market became not only bigger, but also more popular. In 1998, there were 84 million direct and indirect shareholders, representing 43.6 percent of the country's adult population.4 This shareholder figure is up 21 percent from 1995's 69.3 million and up 61 percent from 1989's 52.3 million.5 Of those, 33.8 million, or about 40 percent of all stockholders, resided in households that owned stock directly in 19986. Indirect equity holdings (through equity mutual funds, self-directed retirement accounts or pension plans) accounted for 40 percent of all corporate stock owned by households.7 The shareownership in non-US companies is also noteworthy. In 1998, nearly 45 percent of shareowners had some exposure to shares in companies headquartered outside the United States.8 While less than four million shareholders directly owned shares in non-US corporations, a much larger group?nearly 35 million shareholders? owned shares in non-US firms through equity mutual funds.9 The chart below provides more information about it.
Page 27
The 90's were also characterized by a bull capital market with increasingly stock prices not only of the overvalued emerging technology companies of the New Economy, but also of some traditional large companies of the Old Economy,
During the 90's, (he United States experienced high rates of economic growth too ? the average annu
-
GDP growth was 3.4% between 1991 and 2001,10 which is directly related to the growth of the capita! market.
Since 2000, however, the American capital market has been in trouble. In 2000, the dotcom bubble burst at the end of March. Nasdaq ended the year down 38% and more than 50% down from its year high,11 The Dow Jones suffered its first reverse since 1994 and the FTSE 100 closed at 6,179 ? alossof 10.8%.12
The worst, however, was yet to come. In 2001 and 2002, besides more declines in dotcoms and other emerging technology companies, the American capital market experienced a series of scandals, starting with the collapse of Enron followed by the revelation of problems at WorldCom, Adel-phia, Tyco and others. The stock market capitalization in the United States dropped and investors lost a lot of money.
The dotcom bubble burst was expected by many people, since the emerging technology companies were highly speculative ventures commonly overpriced. The problems with Enron and other well-known large companies were more serious, because they involved frauds and failures of the market safeguards, which undermined the investors' confidence.
In response to these scandals and due to the importance of the capital markets in the United States, the Congress quickly enacted in July 2002 trie Sarbanes-Oxley
Act to calm troubled markets, restore investor confidence, and avoid future scandals. One of its implications is that the new rules apply not only to American corporations, but also and equally to foreign issuers. Traditionally, before the Sarbanes-Oxley Act was adopted, non-US issuers with access to the American capital market were basically required to provide disclosure in the United States. The new rules go beyond that and touch corporate governance issues as well. Furthermore, some of the new rules apply to foreign gatekeepers too, such as accountants, auditors and attorneys.
Before the Sarbanes-Oxley Act, the costs of being traded in the United Slates seemed to under weigh the benefits. As provided before, the number of foreign issuers increased a lot in the last years ? currently approximately 1,300 foreign issuers file annual reports on Form 20-F or 40-F with the SEC.13 Some argue that this, however, might change, as the Sarbanes-Oxley Act touches not only disclosure, but also some other aspects of Corporate Governance, related, for example, with the Board of Directors and the Audit Committee. Worse still, some of the new requirements directly contradict some of the foreign rules. The SEC could exempt non-US issuers from many of the new rules, but does not want to seem to back away. Some foreign companies that trade on US exchanges have threatened to delist and others have announced to feel discouraged from listing on American stock exchanges. Some people argue that this might also give force to initiatives to improve the trading of securities at domestic markets. The effects that this might bring to the American capital market, as well as the ways that the SEC and the foreign companies are dealing and could deal with this new scenario will be the focus of this essay,
Page 28
This essay is divided in five parts. Pail I shows the most relevant rules of the Sar-banes-Oxley Act applicable to foreign issuers. Part II brings the main complaints of the foreign issuers regarding these new rules. Part III provides the SEC response to these complaints, by showing the SEC proposed and final rules as applicable to foreign issuers. Part IV discusses the SEC international enforcement. Finally, Part V analyzes the possible responses of the foreign issuers to the new requirements applicable to them under the Sarbanes-Oxley Act.
Before providing an analysis of the new rules, it is essential to know to whom the Sarbanes-Oxley Act applies. This turns, in many cases, on the definition of the term issuer in § 2(a)(7) of [he Act, as follows: "The term 'issuer' means an issuer (as defined in 5 3 of the Exchange Aci of 1934), the securities of which are registered under § 12 of that Act, or that is required to file reports under § 15(d), or that files or has filed a registration siaiemen! that has not yet become effective under the Securities Act, and that it has not withdrawn".
This definition captures the following three hypotheses:
(i) Registration under § 12
Any US or non-US issuer which has a class of equity or debt securities listed on a US securilies exchange or a class of equity securities quoted on Nasdaq is required to register that class of securities under § 12 of the Exchange Act of 1934. In addition, any non-US issuer with total assets in excess of $ 10,000,000 and a class of equity securities held of record by 500 or more persons, of which 300 or more reside in the United Stales, is required to register the securities under § 12. There is an exemption, however, provided by Rule 12g3-2(b), which applies to most foreign private issuers with Depositary Receipts traded in the US over-the-counter markets ("Level I" ADR program) and issuers that have conducted offerings under Rule 144A. The SEC has made it clear that the Sarbanes-Oxley Act does not apply to foreign private issuers which have claimed the Rule 12g3-2(b) exemption.
(ii) Requirement to file repo rts under § I5(d)
§ 15(d)of the Securities Act provides thai, as a result of an offering of debt or equity securities pursuant to an effective registration statement under the Securities Act of 1933, an issuer must file with the SEC the same periodic reporis for any year in which there are 300 or more US holders of the class of security as it would have to file if the class were registered under the Exchange Act of 1934, Foreign private issuers that have sold debt securities in a registered offering or conducted a registered exchange offer of debt securities following an exempt institutional offering are required to file reports under § I5(d), but foreign government and political subdivisions issuers are expressly exempt from the requirement to file reports under § 15(d).
(iii) Registration Statement not yet effective
The purpose of this part of the legal text is to capture domestic and foreign private pre-IPO issuers, which would not yet be subject to either § 12 or § 15(d). In regard to non-US issuers with ADR programs, the new rules apply basically to those with "Levels II and III" ADR programs, but do not apply to [hose with "Level I" or Rule 144A program, which have claimed the Rule 5 2g3-2(b) exemption. Some of the new rules are applicable lo foreign gatekeepers as well, such as attorneys and accountants.
It is also relevant to mention the definition of "foreign private issuer", since this
Page 29
term appears in many SEC rules. Under the Exchange Act Rule 3b-4(c), a foreign private issuer is a non-government foreign issuer, except for a company that (1) has more than 50% of its outstanding voting securities owned by US investors, and (2) has either a majority of its officers and directors residing in or being citizens of the US, a majority of its assets located in the US...
Para continuar a ler
PEÇA SUA AVALIAÇÃO