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Foreign private issuers
• a statement that the auditors of the
financial statements included in the
report have issued an audit report on
the effectiveness of ICFR.
The auditors’ report on the effectiveness
of ICFR must also be included in the Form
20-F. A first-time registrant is exempt from
these rules until its second annual report
is filed with the SEC. For a more in-depth
discussion of the ICFR requirements, see
Section 6.1(b).
Disclosure controls and procedures: A
foreign private issuer is also required
to maintain “disclosure controls and
procedures” designed to ensure that
financial and nonfinancial information
required to be disclosed under the
Exchange Act is recorded, processed,
summarized and reported in a timely
and accurate matter. They must include
procedures to accumulate and communicate
information to top management to allow
for timely decisions regarding required
disclosure, including reports on Form 6-K.
CEO and CFO certifications: The CEO and
CFO of a foreign private issuer provide two
separate certifications in annual reports
on Form 20-F (or Form 40-F, though not
in any Form 6-K). The substance of these
certification requirements is discussed in
Section 6.1(b).
(c) Beneficial ownership reporting by
investors
After the IPO, the issuer’s major
shareholders will be required to comply
with certain reporting requirements under
the Exchange Act. Specifically, any person
who is directly or indirectly the beneficial
owner of more than 5% of any listed class
of voting equity securities of the issuer
will be required to file reports under
Sections 13(d) and 13(g) of the Exchange
Act. Regulation 13D-G under that act
generally requires each such person (or
group of persons acting together), within
10 days after the 5% threshold is crossed,
to file a report on Schedule 13D with the
SEC and send copies to the issuer and
relevant stock exchanges. Schedule 13D
requires substantial disclosure regarding
the identity of the acquirer, the source
and amount of funds used to acquire the
securities, the purpose of the acquisition,
the amount and percentage of securities
held by the acquirer and related details
about the acquirer’s involvement with the
securities. A shareholder who holds more
than 5% of an issuer’s securities at the
time of an issuer’s IPO is entitled to file
a report on less demanding Schedule 13G,
but changes in the shareholder’s holdings
may require the holder to switch over to
filing reports on Schedule 13D.
Section 7.3 contains additional
information on the required disclosures
under Regulation 13D-G and timing of
disclosures.
The directors, officers and large
shareholders of a U.S. company are subject
to certain reporting and short-swing
profits requirements under Section 16 of
the Exchange Act, as described in Section
7.4. Foreign private issuers are not subject
to these rules.
9.7 Corporate governance
Cleary Gottlieb Steen & Hamilton LLP
(a) Stock exchange corporate governance
requirements
For a foreign private issuer, most—but
not all—corporate governance matters
will be determined by home country
laws and practices. Issuers listed on
the NYSE are subject to governance
requirements set forth in the NYSE
Listed Company Manual. The Manual
provides that a foreign private issuer
may follow home country practice rather
than the Manual’s corporate governance
provisions, but with some important
exceptions. A listed foreign private
issuer must maintain an audit committee
compliant with the independence
requirement of SEC Rule 10A-3 and is
also subject to the requirement that the
CEO promptly notify the NYSE if he or
she becomes aware of noncompliance
with the applicable provisions and the
requirement to submit annual (and under
some circumstances, interim) written
compliance affirmations. The NYSE also
requires that a listed foreign private
issuer disclose in its annual report on
Form 20-F any significant ways in which
its corporate governance practices differ
from those followed by U.S. issuers under
NYSE standards, including with respect
to audit and compensation committee
requirements. As noted earlier, a foreign
private issuer with shares or ADRs
listed on the NYSE is required to solicit
proxies from U.S. holders for shareholder
meetings.
(b) Audit committee
Any issuer listed on a U.S. exchange
must have an audit committee to oversee
accounting, financial reporting and audit
services. There are no size requirements
for the audit committee of a listed foreign
private issuer, so the committee may
consist of a single member.
The members of the audit committee
must be independent within the meaning
of SEC Rule 10A-3. The SEC defines the
term independent in this context to mean
that a member of the audit committee
(1) may not be an “affiliated person”
of the issuer or any of its subsidiaries
and (2) may not accept any consulting,
advisory or other “compensatory fee”
directly or indirectly from the issuer or
any of its subsidiaries, other than in his
or her capacity as a member of the board
of directors or any board committee
(including the audit committee).
There are two general exemptions from
the independence requirements. First,
although all audit committee members
must be fully independent within a year
of listing in the United States, only one
member of the audit committee must be
fully independent at the time of the initial
listing and only a majority of the members
must be fully independent within 90 days of
listing. Second, an audit committee member
may sit on the board of directors of both
a listed issuer and an affiliate of the listed
issuer if the member otherwise meets the
independence requirements for each entity.
For a foreign private issuer, three
additional exemptions from the
independence requirements are available
to permit the following persons to sit on
the audit committee:
• any employee who is not an executive
officer, if that employee is elected
or named to the board of directors
or audit committee pursuant to the
issuer’s governing law or constitutive
documents, an employee collective
bargaining or similar agreement or
other home country legal or listing
requirements;
• a person who is an affiliate or a
representative of an affiliate (including
106 NYSE IPO Guide