Capital Markets

Sarbox: Spur to Foreign-Company Flight?

Section 404, in particular, might be causing a number of overseas companies to take the difficult step of deregistering with U.S. regulators.
Stephen TaubSeptember 21, 2004

A number of foreign companies traded publicly here are reportedly willing to take the step of deregistering with the Securities and Exchange Commission in order to shed Sarbanes-Oxley compliance burdens..

A handful of non-U.S.-based companies have chosen to de-list from U.S. exchanges according to The Wall Street Journal. Their decisions have come before governance provisions like Sarbox Section 404 go into effect next year for foreign-based companies that are listed in the United States.

So far this year, 13 foreign companies have chosen to list on Nasdaq while 10 foreign companies have voluntarily left, according to the report. Further, tobacco group Swedish Match AB announced plans last month to de-list from Nasdaq, the paper pointed out.

On the New York Stock Exchange, eight foreign companies have listed this year—just half of last year’s total—and two have voluntarily delisted, according to the report.

“We don’t think it adds value to be there,” said Anna Auguston, deputy head of investor relations at Nordic telecom group TeliaSonera AB, which de-listed from Nasdaq in August, in an interview with the Journal.

Some of the companies, of course, are delisting because of the costs of listing shares in this country and the fact that their stocks have not attracted a wide following. For example, less than 1 percent of German E-commerce software firm Intershop Communications AG’s shares were held as American depositary receipts, which is the most popular way foreign companies list their shares in the US.

Sarbox compliance was the “last straw” that pushed Intershop to deregister with the Securities and Exchange Commission and withdraw from U.S. regulatory oversight, according to the Journal story. For many companies, Sarbox 404 may have been the specific breaking point. Beginning next year, the roughly 1,300 foreign companies that list in the United States must begin complying with Section 404 of the Sarbanes-Oxley Act, which requires top executives and their auditors to sign off on the effectiveness of their internal-controls systems for finance.

The process to complete deregistration, however, is not easy—a company must prove, for instance, that it has fewer than 300 shareholders and takes time. In fact, it took Intershop eight months to complete the process, finally succeeding in June, the paper pointed out.

The SEC is apparently concerned about this drawn-out process. A spokesman for the agency told the paper it is considering making it easier for foreign companies to deregister. The commission, however, hasn’t made any specific proposals.

European industry associations are lobbying for rules that would let a company deregister if the percentage of shares traded in the United States falls below a certain threshold, rather than have it based on headcount of shareholders, according to the report.

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