Over the last few years, several European (and, more specifically, German) companies have delisted from the NYSE, instead favoring an exchange closer to home – in many cases, Frankfurt. The phenomenon of European companies delisting from the NYSE is just part of the story, though, given the increase in recent or announced IPO activity from companies around the globe onto the Frankfurt Stock Exchange (FSE). The NYSE, home of renowned companies such as IBM, Coke and Proctor & Gamble, is often seen as the gold-standard exchange – and it may well remain so for the time to come.

On the other hand, however, is a trend of delisting. This may at first may seem curious, but the reality for companies from Bayer to British Airways seems to be that the NYSE is losing favor to exchanges like Frankfurt, which offers a seemingly endless array of benefits. Many academics, practitioners, and commentators from around the globe will be quick to point to their speculations that, with the implementation of Sarbanes-Oxley, the accompanying costs of compliance would lead to the demise of foreign issuers choosing to list on the NYSE. In this two-part Westlaw Business Currents series, we focus on European companies that have delisted from the NYSE citing, various factors driving their decision. Next week, the focus shifts to the increase in recent or announced IPO activity on the FSE.

The facts on the ground seem, at first glance, to confirm the reasoning behind the exodus by some companies from the U.S. exchange. Among the companies delisting from NYSE are German companies BASF, Bayer, SGL Group, E.ON, and Allianz, as well as UK giants British Airways, Imperial Chemical, and Wolseley and Danone and Sodexho from France, Ducati and FIAT from Italy, Norsk Hydro from Norway, and Van der Moolen from the Netherlands stand out due to the size and renown of the companies.

Many of these companies seemed unabashed in disclosing their reasons for delisting. BASF, for example, in its July 2007 announcement, stated that its “decision to delist from the New York Stock Exchange underlines BASF’s continuous efforts to reduce complexity and costs.” Echoing that sentiment, only a few months later in September 2007, Bayer stated that “delisting and deregistration [from the NYSE] will enable us to achieve this with fewer formalities and therefore at lower cost.”

Adding to the horrendous costs of listing on the NYSE is the lack of harmonization of US GAAP with the IFRS. At the FSE, like in most trading places internationally, internationally harmonized reporting and accounting standards (IFRS) are in place, thus simplify the reporting and accounting process for companies significantly. This is particularly true with regards to companies intending to list their shares at various different exchanges: They do not need to reconcile their financial statements to US GAAP, the costs for which can reach eight-figure numbers. Thus, listing their shares only on exchanges using the harmonized standards can be a major cost-saving factor. While the SEC did take a massive step in the right direction in March 2008 by changing the long-standing rule requiring ALL foreign filers to reconcile their financial statements to US GAAP, the exception does not apply to all companies and the SEC still requires audit qualification under SEC rules, and accompanying US GAAP.

Perhaps a complete solution could have been provided by the proposed ‘roadmap’ which outlined the SEC’s plan for implementing IFRS as the reporting standard for all filers, including U.S. companies, and would have greatly decreased costs for foreign filers. But the plan took a backseat when Chairman Mary Schapiro stated that she “won’t feel bound by the roadmap” and all but completely dismissed the possibility of IFRS implementation in the U.S. Whether the SEC will again consider following that roadmap remains to be seen, but it certainly doesn’t look like any headway in that direction will be made any time soon.

Further complicating the issue for European companies listed on the NYSE is a complex set of listing rules and guidelines that vary a great deal from their European counterpart in Frankfurt. Those companies that offer securities for trading on an exchange, like the FSE, that’s within the European Economic Area (EEA) benefit from a process known as ‘passporting.’ Passporting allows companies listing on an EEA exchange can take advantage of the EC Prospectus Directive of 2003, which allows companies which want to list on multiple exchanges the benefit of maximum harmonization.

In other words, companies offering their securities for trading on an exchange within the EEA can list on another exchange within the EEA using the exact same filing documents (with the one exception – some ‘host’ countries may require a company to include in their filing documents a summary of no more than 2,500 words in the official language of the host country) because the filing document standards from one country to another are the same. The process is most akin to shelf registration in the U.S. Therefore, companies that delist from the NYSE and only remain on European exchanges need only one set of disclosures—this is a huge money saving benefit.

Related to passporting, and worth noting, is that under the ‘fundamental freedoms’ of the EU and EEA treaties, once a company has been authorized to establish a business in any EEA member country, it is then possible to write business throughout the EU/EEA either by establishing a Branch, thus operating on a ‘freedom of establishment’ basis, or by writing business directly on a ‘freedom of services’ basis (A simple listing of shares at any European Stock Exchange would not suffice, however).

While German national company law was changed in 2008 to reflect these EU law ‘freedoms’, the conflict of law rules still prohibit the ‘passporting-out’ of German-registered companies - and according to the recent European Court of Justice ruling in ‘Cartesio’, Germany is free to keep restricting its own companies from ‘passporting out’. Thus, registering an office in Germany does not open up the whole of the EEA market (while registering in the UK, for example, would, because national English, Scottish and Welsh rules permit the “passporting out”).

Perhaps one of the biggest direct benefits to listing in Frankfurt, though, especially in light of many of the comments made by those delisting from the NYSE, are the costs which pale in comparison to listing on the NYSE and LSE. Studies show that not only are transaction costs in terms of fees significantly lower at Deutsche Börse; on top of higher fees, the costs of Sarbanes-Oxley compliance alone can amount to dozens of millions of dollars, depending on the size of the company, and cut significantly into earnings a not-insignificant amount. In times of increased competition and diminishing profit margins, these costs can be decisive as to whether a company can run profitably – or not.

Yet another (unstated) reason why many companies may choose to delist from the NYSE is the recent stepped-up levels of enforcement by the SEC. Indeed, even during SEC Chairman Mary Schapiro’s confirmation hearings she stated that “I’ve never been afraid to go after people who I’ve thought violated the public trust,” and “[o]ne of the first things I’ll do is take the handcuffs off the enforcement division.” Needless to say, a host of recent fines issued by the SEC, coupled with an unprecedented amount of enforcement activity, have confirmed these remarks.

While companies understandably shy away from outright disclosing that a reason for delisting is stringent enforcement the proverbial ‘elephant in the room’ is often the desire to avoid huge fines should the worst occur. Indeed, Bayer, which delisted from the NYSE, made comments almost to the contrary by stating that “Bayer will maintain a high level of transparency in its reporting and thus continue to satisfy the requirements of international investors”. And yet, it can be speculated that the comparatively lax enforcement standard in place in Germany, and Europe in general (although the FSA in the UK has recently issued a number of fines contradictory to years of practice), as well as the lack of experience of the bodies charged with enforcement contribute to the attractiveness of the Frankfurt exchange, at least for some companies.

Nonetheless, while it appears based on these company examples that the NYSE seems to be losing some of its significance, it would not be accurate to assume that Frankfurt is about to take over from NY. The volume and numbers of shares traded in NY still dwarf those any other exchange. And some foreign companies are still making the move to the NYSE: British company Aviva, for example, decided to move against this trend and listed on NYSE in October 2009. Meanwhile, German-based multinationals Siemens and Daimler specifically issued statements that they had no intention of delisting their shares from the NYSE, citing the position of the NYSE as the unchallenged number one as reason for this decision.

At the end of the day, even though NYSE delistings by German companies loom large and there is evidence of the growing robustness of the FSE, the NYSE still shines when companies want to go for prestige. For the majority of companies, the ever-increasing cost associated with the NYSE seems to still be well worth its proverbial weight in gold.