Extending Fair Disclosure to Foreign Issuers: Corporate Governance and Finance Implications for German Companies

Tuesday, January 1st, 2002 at 12:00 am by Tanja Santucci
Tanja Santucci, Extending Fair Disclosure to Foreign Issuers: Corporate Governance and Finance Implications for German Companies, 2002 Colum. Bus. L. Rev. 499

In the Spring of 2000 the Securities and Exchange Commission (‘SEC‘) adopted Regulation FD (Fair Disclosure), effectuating ‘arguably the most important change to the U.S. disclosure regime since the adoption of integrated disclosure almost two decades ago.‘ Regulation FD governs the dissemination of material non-public information by corporate insiders to privileged members of the securities industry, but also contains several important exemptions. Notably, Regulation FD exempts foreign issuers from the scope of its coverage. In its Final Release adopting Regulation FD, the SEC determined to exempt foreign issuers ‘at this time,‘ until an extensive investigation into the reporting requirements for foreign issuers could be conducted.

This Note analyzes the impact that Regulation FD might have on foreign companies by examining the particular case of German issuers. After examining the unique characteristics of German corporate governance, which include a high proportion of debt finance, concentrated share ownership, and a significant corporate control function exercised by banks and institutional investors, this Note argues that there are several possible ways in which Regulation FD might impact German issuers. One possibility is that German companies will face a higher burden under Regulation FD than U.S. companies, as a result of the typically close relationship between German issuers and banks or other financial intermediaries and the way in which information is commonly shared between these entities. The finding of a disproportionate impact on German issuers would also have implications for companies operating under similar corporate governance systems (i.e., Japan) and might suggest that issuers from these jurisdictions would increasingly turn away from accessing U.S. capital markets. The other, more plausible alternative is that fair disclosure would not pose a disproportionate burden on German issuers, but simply constitutes an additional factor playing into a company’s decision to cross- list. While Regulation FD may entail fundamental changes in the corporate governance structure of a German company listed on a U.S. exchange or NASDAQ, Regulation FD might also turn out to provide a value enhancing mechanism for those German issuers that choose to cross-list their securities, primarily by enhancing the company’s share value and essentially serving as a signaling device to investors. This might suggest that the costs associated with fair disclosure, including the possibility that some foreign capital may migrate elsewhere, do not in fact justify the unique treatment of foreign issuers. An analysis of the implications of fair disclosure on German companies would thus shed further light on the merits of maintaining the current exemption for foreign issuers.

Part I of this Note presents Regulation FD in its scope, purposes, and content and provides a clarification of key terms and provisions. Part II provides an exposition of the German system of corporate governance with a special focus on share ownership, the role of banks and institutional investors, and the flow of information between issuers and financial intermediaries. Part III applies the requirements of fair disclosure under Regulation FD to German issuers seeking to list their stock in the United States and proposes two possible ways in which a German issuer might be impacted by fair disclosure. The conclusion advanced is that a German issuer voluntarily seeking access to U.S. capital markets is unlikely to be disproportionately burdened by the requirements of Regulation FD, but instead may be able to capitalize on its decision to voluntarily submit itself to the enhanced disclosure regime by using fair disclosure as a signaling device to lend credibility to its decision to list its shares abroad. Part IV provides a brief conclusion.

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