The Pending NYSE-Euronext Merger and Sarbanes Oxley

This post is by Allen Ferrell, Harvard Law School.

An issue that has recieved quite a bit of press in the last several months has been the pending NYSE-Euronext merger.  Many in Europe are concerned that the merger will result in the application of Sarbanes-Oxley (including Section 404) to Euronext-listed companies (actually, companies are listed on the Amsterdam, Lisbon, Paris, and Brussels markets and not on Euronext itself).

In a paper for Euromoney (with Reena Aggarwal and Jonathan Katz) — called U.S. Securities Regulation in a World of Global Exchanges — we point out that this fear is misplaced.  It is highly unlikely that Sarbanes-Oxley would apply to companies listed on a Euronext market by virtue of the merger.  Rule 12g3-2(b) will provide an exemption for these companies due to the fact that the Euronext markets will not be a registered securities market.

The real issue is that the “merger” will be effectuated by a holding company structure with the U.S. markets (NYSE and Arca) and the Euronext markets retaining their independent trading platforms.  The various markets will be subsidiaries.  In short, the ability to realize cost savings (including regulatory cost savings) and maximize liquidity will be severely limited by the fact that the markets will largely continue in the form that they currently exist.  Consolidation of the trading platforms with one listing would likely result in the imposition of Sarbanes-Oxley on Euronext-listed companies given that Rule 12g3-2(b) would not longer be applicabe — the consolidated exchange would likely be considered a U.S. exchange that would need to be registered.

In short, domestic regulation will not prevent cross-border exchange mergers, but it will severely limit the ability of cross-border exchanges to fully realize the benefits of a merger.

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