Via Ernail Mr. Jonathan G. Katz Secretary Securities and Exchange Commission 100 F Street, NE Washington, DC 20549-9303
Re: Comments on Proposed Rule 12h-6 Relating to Termination of a Foreign Private Issuer's Registration of a Class of Securities under Section 12(g) and Duty File Reports under Section 15(d) of the Securities Exchange Act of 1934 - File
NO. S7-12-05 Dear Mr. Katz, We are submitting this letter in response to the Securities and Exchange Cornmission's request for comrnent on ReIease No. 34-53020.
The ordinary shares of ,MTR Corporation Limited ("MTR") are Iisted on the Hong Kong stock exchange, with the government of the Hong Kong Special Administrative Region owning approximateIy 76 ?4 of IMTR's ordinary shares. lMTR is currently subject to the reporting obIigations under the Exchange Act by virtue of Section IS(d) due to SEC-registered debt sccurities, and IMTR's sheIf registration statement filed nith the SEC in 2001. AccordingIy, IMTR has been filins Form 20-Fs and Form 6-Ks pursuant to the SEC rules. \lie fulIy welcome and support the Commission's efforts to make it easier for breign private issuers like oursel\~esto exit, and to be s ~ a n t c dexemption, from the registration and reporting obIigat~onsunder the Exchange Act. However. we beIieve that the proposed rules require further amendments and clarifications to provide adcquate relief in particuIar for forcign private issuers, such as ourselves, that are reporting under Section 15(d) of the Exchangc Act in respect of debt securities and whose sec.urities are subject to relatively Iow interest in the United Statcs market. Comments 1.
"Entrance threshold" under Rule 12~-3-2(a)under the Exchange Act to be increased so that "entrance threshold" is higher than "exit thresholds" under proposed Rule 12h-6
We note and welcome that the proposed rules \vouId facilitate the exit by f o r c i g private issuers from reporting obligations under Section 12(g) of the Exchange Act by the addition of hvo new "exit tests", i.e., the "5% or fewer U.S. shareholders" test and the " 10% or fcwer U.S. shareholders and SoA or. Iess U.S. trading volume" -
tcst. 14owe\.er. it appears that the neiv rules would not amend the "entrance test" in Rule 12g-3-2(a) undcr thc Exchange Act, pursuant to which a foreign private issuer would be required to rcgister its cquity securities under Section 12(g) of the Exchange Act and become subject to the Exchange Act reporting obligations if its equity securities arc held by more than 500 holders of record worldwide and 300 or more beneficial owners rcsidcnt in the United Statcs. We believe that the Iower threshold h r the "entrance test" as cornpared to the new "exit tests" could subject a foreign private issuer to a requirement to register its equity securities under Section 12(g) under the Exchangc Act (for example, if such foreign private issuer would have 300, or have slightly more than 300, sharcholders residing in the United States) even though such foreign private issuer would simuItaneously meet the new "exit test" (for example, because such f o r e i g private issuer has been subject lo Section 15(d) reporting obligations in respect of debt securities and meets the general exit conditions and either the "5% or fewer U.S. shareholders" test or the "10% or fewer U.S. shareholders and 5% or less U.S. trading volume" test). Under the current "entrance test", foreign private Issuers could become subject to thc Section 12(g) registration and reporting requirements even if onIy a ~ninusculepercentage of their total shareholder base was comprised of shareholders resident in the United States. In our view, such a low shareholder threshold Ievel is not significant enough on a relative basis to warrant the rmposition of registration and reporting obligations, and thereby obligations under the Sarbanes-Oxley Act of 2002: on a foreign private issuer. We believe that the SEC by proposing the new "exit tests'' has recognized that the "300 or more U.S. resident shareholder" test is outdated. We therefore respectfully submit that the "entrance test" be amended by adding new entrance tests similar to the new "exit tests" so that the "entrance test" requires a higher threshold than the "exit tcst". Alternatively, we respectfully submit that the current "entrance test" threshold of the "300 or more U.S. residcnt shareholders" be significantly increased in order to more adequately baIance the interests of U.S. residcnt shareholders and Lhc burdens on foreign private issuers imposed by Exchange Act reporting and Sarbanes-Oxley Act obligations.
New counting method to be applicable to "entrance test" under Rule 12~-3-2(a) under the Exchange Act
We n~eIcomeand support the Commission's proposed streamlined counting method for determining the number of U.S. resident holders of a f o r e i g private issuer's debt and equity securitics.
Howcver, it appears that under the proposed rules the new counting method will only appIy to the "exit tests" but not to the "entrance test" under Section 12(g) and Rule 12g-3-2(a) of the Exchange Act. \Ye believe that the proposed new counting method shouId apply equally in connection with the "entrance test" and suggest that Rule 123-3-2(a) be amended accordingIy. Immediate avaiIabilits of Rule 12~-3-2(b)exemption to be extended to foreim private issuers that terminate their reportinn obligation under Section 15/d) in
tMTR t!!Ek @ a Corporation respect of debt securitics and that do not meet the "entrance test" under Section We n.clcome and support the Commission's proposal pursuant to which the Rule 12g-3-2(b) exemption from the Section 12(g) registration and reporting require~nentswill be available immediately upon the effectiveness of a termination of the reporting obligations pursuant to the filing of proposed Form 15F under proposed Rule 12h-6 (i.e., without the 18 months waiting period required under the current rules). However, the proposed new ruIe 122-3-2(e) appears to appIy only if a reporting obligation under Section 12(g) or 15(d) in respect of w r r i f y securities has been terminated pursuant to proposed Rule 12h-6. Thus, it appears that a foreign private issuer that is not subject to the Section 12(g) registration and reporting requirements (LC., that does not meet the "entrance test7'-thresholds) and is only subject to Section 15(d) reporling obligations in respect of & securities would be subject to an I 8 months waiting period upon tennination of its "debt securities" reporting obligation under Section 15(d) of the Exchange Act prior to bcing abIc to avail itself of the Rule 129-3-2(b) exemption. Accordingly, we respectfully submit that proposed Rule 122-3-2(e) be amended to clarify that the RuIe 125-3-2(b) exemption will also be immediately available to a forei_gn private issuer that was only subject to a "debt securities" reporting obligation under Section 15(d) and meets the following conditions: (i)
such issuer has terminated its reporting obIigations under Section 15(d) of the Exchange Act in respect of & securities; and
suchissueratsuchtimeisnotrequiredtoregisteritsequitysecuritiesunder Section I2tg) (i.c,, such issuer does not meet the "entrance test" thresholds).
We beIieve that tbe above suggested clarification is necessary in order to address the following three issues and inconsistencies in particular: (1)
The 15 months waiting period that would otherwise be applicable to a foreign private issuer that has terminated its Section I5(d) reporting obligation in respcct of debt securitics would particuIarIy create probIems for foreign private issuers that maintain a Level 1 ADR facility. The maintenance of a LeveI 1 ADR facility generally requires that an issuer is either (i) subjcct to Exchange Act reporting obligations ur (ii) has obtained the Rule 12g-3-2(b) exemption. Thus, such forcign private issuer would be forced either to continue to be subject to the Exchange Act report in^ obligations or to terminate its Level 1 ADR fdcility to the detriment of the ADR holders. During the 18 months waiting period, such issuers would have to monitor the number of U.S. resident holders contil~uouslyand could become subject to Section 12(g) registration and reportins obligations, while an issuer that terminated a Section 12(g) reporting obligation or that does not otherwise have " >: 33 . , I . ' I 2 9 3 7: 1 I '
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any Section I2(gj reporting obligation could immediately avaiI itself of the Section 12g3-2(b) exemption. (iii)
Under the Commission's proposed Rule 12g-3-2(e), a foreign private issuer that is subject to Section 12(g) reporting obligations in respect of its equity securities is also subject to Section 15(d) reporting obligations in respect of its SEC-registered debt securities & nieets the "exit test" in respect of both its Scction 12(g) and Section 1S(d) reporting obligation could avail itself of the RuIe 12g-3-2(b) exemption ixrlxrlediately upon termination of the Section 12(g) "equity securitiesv-reporting obIigations. In contrast, a f o r e i s private issuer that is only subject to Section 15(d) reporting obIigations in respect of debt securities and that is well below the Section 12(g) thresholds, would be subject to an 18 months waiting period upon termination of its Section 15(d) "debt securities" reporting obligation. We believe that there is no justification for such unequal treatment and therefore urge the Commission to amend RuIe 12g-3-2(e) as suggested above.
Definition of brokers. dealers, banks and other nominees to exclude individual shareholders
Rule I2h-6 requires forcign private issuers to "look-through" brokers, dealers, banks and other nominees. However, it is generaIly not possible for a foreign private issuer to determine from a review of its sharehoIder register whether a registered shareholder is a broker, dealer, or other nominee. The proposed new countins method is therefore of little value to f o r e i p private issuers if they wcre required to conduct their "look-through" inquiries with every registered shareholder. Accordingly, we suggest limiting thc look-through test for brokers, dealers, banks and other nominees to non-individual shareholders as discernible from the entry in the resister of shareholders. Alternati\leIy, we suggest the addition of a new rule to aIlow issuers to make the assumption that all individual shareholders (i.e., shareholders who are, or from their corresponding entry in a foreign private issuer's shareholder register appear to be, naturaI persons) are holding the shares for their own behalf and not as nominees for other beneficial owncrs. 5.
Calculations undcr proposed Rule 12h-6 to exclude Qualified Institutional Buyers
Under the calculations underlying proposed RuIe 12h-6, no differentiation is nude with respect to different types of U. S. investors. Given the difference between sophisticated institutional investors and other types of investors, we believe that it wouId be appropriate to treat sophisticated institutional investors difyerently from other investors in this context. It appears to us that this distinction already exists in other contexts, as for cxample undcr Rulc 1444 under the Securities Act. We bclieve that Qualified
Ins~itutionalBuyers, as defined in Rille 144A, n.ouId not require the same degree of protection as non-institutiona1 investors, as they are by their nature sophisticated investors capable of making investment decisions on the basis of otherwise available materials; for example, under foreitg private issucr's home market disclosures, and are sufficiently protected by the regulatory requirements of such foreign private issuers' home jurisdictions. Accordingly, we suggest that Qualified Institutional Buyers, as defined in Rule 14414, be excluded when calcuIating the numbcr of US residents for all purposes under
proposed Rule I2h-6. 6.
Trading volume benchmark under proposed Rule 12h-6 to be increased to 10%
Since shares of large foreign private issuers that qualify as weII-known seasoned issuers ("WKSI") are often constituent stocks of a number of stock market indexes, institutional investors may likely make purchases of such securities in bulk for portfoIio rebalancing or index tracking purposes. As a result, the LJ.S. trading volume for such foreign private issuers couId easily exceed the "5% or less LJ.S. average daily trading volume" test availabIe to LVKSIs under proposed Rule 12h-6 even thou$ the number of U.S. holders resident in the United States [nay actuaI1y be very small. LVe would therefore propose an increase of the benchmark of LJ.S. trading volume to 10% of thc avcrage daiIy trading volume of the relevant class of equity securities.
For the reasons discussed above, we submit that the proposed Rule 12h-6 and Rule 1233-2 be revised to: (i)
increase the thresholds undcr the "entrance test" under Section I2(g) and Rule 1 2g-3-2(a) so that such "entrance test" requires a higher threshold than the new "exit tests" under Rule 12h-6;
cnsure that the proposed new counting method applics equalIy in connection with the "entrance test" under Section 12(g) and RuIe I2g-3-2(a);
clarify that a foreign private issuer that is not subjcct !o Section 12(g)
regisfratiori and repofling rcquiremcnts (i.e., that does not mee[ rile "entrance test" thresholds) and is only subject to Section 15(d) reporting obligations in respect of & securities, would be able to avail itself of the RuIe 12g-3-2(b) exemption immediately upon termination of its "debt securities" reporting obligation under Section I5jd) of the Exchange Act; (iv)
limit the look-through test for brokers, dealcrs, banks and other nominees to non-individual sharehoIders as discernible from the entry in the register of
shareholders; or allernativel~.:to add a new ruIe to allow issuers to make the assumption that all individual shareholders (i.e., shareholders who are, or from their corresponding entry in a foreign private issuer's sharehoIder register appear lo he, natural persons) hold shares for their own behalf and not as nominees for other beneficiaI owners; (v)
exclude Qualified Institutional Buyers, as defined in Rule 144A, when calculating the number of US residents for all purposes under proposed Rule 12h-6; arid
increase the U.S. trading volume benchmark for well-known seasoned issuers to 10%.
We would be pIeased to discuss with the staff of the Conimission the various issues raised and the suggestions we have made. If you have any enquiries, please fee1 frce to contact Mr. Jimmy Lau, General Manager - Financial Control & Treasury, at (852) 2993-2403. Very truly yours,
Finance ~ i r e & r