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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
Foreign private issuers a controlling shareholder) as a nonvoting observer, if that person is not the chair of the audit committee or an executive officer of the issuer and does not receive any compensation prohibited by the independence requirements; and • a representative of a foreign government that is an affiliate of the issuer, if that representative is not an executive officer of the issuer and does not receive any compensation prohibited by the independence requirements. A foreign private issuer is exempt from the audit committee requirements if it has an alternative mechanism for overseeing the independent auditor, such as a board of auditors or statutory auditors, that is separate from the issuer’s board of directors. There are also accommodations for foreign private issuers operating under a dual holding company structure and for foreign private issuers with two-tier board structures. If an issuer relies on any of the exemptions for foreign private issuers under the audit committee rules, it must disclose that in its annual report on Form 20-F. (c) Compensation committee A foreign private issuer is exempt from the requirements concerning compensation committees that apply to U.S. issuers, but if it relies on the exemption with respect to member independence, it must in its annual report on Form 20-F, if listed on the NYSE, include a description of any significant differences of home country rule from the NYSE rules regarding the composition of compensation committees. (d) Ethics code A foreign private issuer must disclose in its annual report on Form 20-F whether it has adopted a code of ethics that applies to its CEO, CFO, principal accounting officer or controller and persons performing similar functions. If the issuer has not adopted a code of ethics governing its CEO and senior financial officers, it must disclose that fact. A “code of ethics” means written standards that are reasonably designed to deter wrongdoing and to promote (1) honest and ethical conduct; (2) full, fair, accurate, timely and understandable disclosure in documents filed with the SEC and in other public communications; (3) compliance with applicable laws, rules and regulations; (4) the prompt internal reporting of violations of the code to an appropriate person or persons; and (5) accountability for adherence to the code. The code of ethics (if one exists) must be filed with the SEC and posted on the issuer’s website or otherwise made available to any person requesting a copy without charge. The issuer must also disclose, on an annual basis, any waiver (including any implicit waiver) granted to its CEO or any of the senior financial officers subject to the code and any amendments that may be made to the code. (e) Prohibitions on arranging credit A foreign private issuer planning a U.S. IPO should review any arrangements that may be considered direct or indirect loans or other extensions of credit by it or its subsidiaries to any of its executive officers or directors, as these generally must be terminated prior to the effectiveness of the IPO registration statement to comply with SOX. (f) Clawback requirements The Dodd-Frank Act requires the SEC to establish final rules under which the stock exchanges will amend their listing standards to require listed companies to adopt and disclose compensation clawback policies as set forth in the statute and implementing regulations. The SEC has yet to issue final rules, however, and it remains to be seen whether it will establish an exemption for foreign private issuers from the clawback policy requirement as it has for other corporate governance requirements. For further information concerning clawback requirements, see Section 2.4. (g) Foreign Corrupt Practices Act As described in more detail in Section 6.1(c), a foreign private issuer that conducts an IPO in the United States will be subject to the FCPA. Two sets of provisions under the FCPA are applicable to SEC-reporting companies. One set, the accounting provisions, requires issuers to keep accurate books and records and to maintain a system of internal accounting controls. These accounting provisions are in addition to the internal control requirements and disclosure controls and procedures described in Section 9.6(b). The other set, the antibribery provisions, prohibits the bribery of non-U.S. government officials. An issuer will violate the antibribery provisions if it uses the mails or any means or instrumentality of interstate commerce (including communication between the United States and any foreign country) to, for example, make payments to foreign officials for the purpose of corruptly influencing actions or decisions by them in order to assist the issuer in obtaining business. The SEC and the U.S. Department of Justice have aggressively expanded FCPA enforcement in recent years. 9.8 Managing risk Cleary Gottlieb Steen & Hamilton LLP Once a foreign private issuer is listed on a U.S. stock exchange, it and its directors, officers and certain other employees are subject to the federal and state securities laws with respect to their registration statements, reports filed with the SEC, other public statements and trading activities, as discussed in Section 8.1. For example, Rule 10b-5 broadly prohibits fraudulent and deceptive practices and untrue statements or omissions, both written and oral, of material fact in connection with the purchase and sale of any security. Under Rule 10b-5, the issuer and its employees or agents may be liable for making false or misleading statements about the issuer, whether or not any of them actually purchased or sold any securities. Liability requires proof that the defendant engaged in willful misconduct or at least acted recklessly and can be based on information contained in a document filed with the SEC (including a registration statement, the Form 20-F or a Form 6-K), as well as other information released to the public by the issuer, including press releases. The geographic reach of liability under Rule 10b-5 has been the subject of extensive litigation and some legislative changes in recent years. A private plaintiff can only sue under Rule 10b-5 with respect to securities transactions that occur in the United States or transactions in securities that are listed on a securities exchange in the United States. The SEC and other U.S. government agencies, however, can enforce Rule 10b-5 against wrongful conduct even NYSE IPO Guide 107
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