The Finnish flagging rules governing the obligation to notify major holdings in listed companies (flagging obligation) will undergo significant changes to correspond to the amended EU Transparency Directive. The Directive will also necessitate some amendments to the disclosure obligation of listed companies, the biggest change being the abolishment of the obligation to publish Q3 and Q9 interim reports. The changes are implemented through amendments to the Finnish Securities Market Act and take effect starting on 26 November 2015.

Flagging rules

What are the main amendments?

Most of the amendments to the flagging rules relate to the situations and instruments that trigger a flagging obligation, whereas the flagging thresholds (5, 10, 15, 20, 25, 30, 50, 2/3, or 90 percent of shares or voting rights) and deadlines for submitting a flagging notification will remain the same. Exemptions from the flagging obligation also remain largely unaffected, with a new exemption for stabilization.

The scope of financial instruments that trigger a flagging obligation will be expanded. Under the new rules, all financial instruments that entitle the holder to acquire shares or that have similar economic effect must be notified. The flagging obligation covers both physically and cash settled instruments. This means that, unlike previously, also cash settled derivative instruments will need to be notified. Such instruments may include: options, futures, swaps, warrants, forward rate agreements, contracts for differences, repurchase agreements and any other agreements with similar economic effect.

However, the flagging obligation will apply only to financial instruments referenced to already issued shares. Instruments referenced to new shares not yet issued (such as convertible bonds that entitle the holder to new shares) are no longer notifiable, nor is there an obligation to notify financial instruments that entitle the holder to dispose of shares. The previous general obligation to notify an agreement or other arrangement that, when realized, would result in the crossing of a flagging threshold will also be abolished.

Under the new rules, holdings will need to be assessed separately, according to which of three different groups of baskets they belong. The flagging obligation will be triggered whenever a threshold is crossed in any of these baskets.

Basket 1: Actual holdings of shares and/or voting rights

Basket 2: Financial instruments that entitle the holder to acquire already issued shares or that have similar economic effect

Basket 3: The aggregate amount of actual holdings and financial instruments (Basket 1 + Basket 2 = Basket 3)

Only long positions shall be taken into account when calculating the number of shares or voting rights attributable to a financial instrument. No netting of long and short positions is permitted when making the calculation.

What are the practical implications for investors and listed companies?

Shareholders and holders of financial instruments should note that the entry into force of the new rules may trigger an immediate flagging obligation in baskets 2 and/or 3 even if there is no change in the existing holdings. Any holdings that did not need to be notified under the old rules but that do trigger a flagging obligation under the new rules must be notified by 27 December 2015 at the latest.

The Finnish Financial Supervisory Authority will publish a new form for flagging notifications on its website before the new rules enter into force.

The definition of a financial instrument that triggers a flagging obligation is broad, and holders of financial instruments need to form their own view as to whether the instruments (i) satisfy the condition of being an entitlement to acquire or (ii) are instruments with similar economic effect to holding shares or an entitlement to acquire. It should be noted that agreements between shareholders may also be considered as financial instruments that trigger a flagging obligation.

When a flagging obligation is based on cash settled financial instruments, the holding is calculated based on a delta adjusted method by multiplying the notional amount of underlying shares by the delta of the instrument. The delta should be calculated daily based on generally accepted standard pricing models; it should also take into account the closing price of the underlying share. If the delta adjusted holding crosses a flagging threshold due to changes in the value of the underlying share, that change will need to be notified even if there would be no change in the holding of the respective financial instrument as such. Holders of financial instruments should ensure that they have appropriate reporting systems to monitor changes in the delta values of the relevant instruments.

The amendments should not require any changes to the disclosure practices of listed companies. However, listed companies should be prepared for a possible increase in the number of flagging notifications, especially within the one-month transition period after the relevant amendments enter into force.

Disclosure obligation of listed companies

What are the main amendments?

Listed companies will no longer have an obligation to publish Q3 and Q9 interim reports. They will only have an obligation to publish half-year reports and financial statements (together with board of directors' report). However, interim reports may still be published every three months on a voluntary basis, and it seems likely that many listed companies will continue this practice.

The obligation to publish a financial statements bulletin will be removed from the law, but it seems likely that such obligation will be maintained in the rules of Nasdaq Helsinki.

The "consistency of disclosure" principle will be added to the Finnish Securities Market Act in order to ensure that listed companies disclose information in a consistent way, as compared to prior disclosure practice. This does not prevent listed companies from changing their financial reporting practice, for example. However, the Finnish Financial Supervisory Authority recommends that the manner of publishing financial reports not be unnecessarily changed during a financial period. Listed companies should disclose to the public in advance any major changes in their disclosure practices.

The deadline for the publication of financial statements will be extended to four months and the deadline for half year reports to three months from the end of the relevant period. The company's financial statements, board of director's reports, auditor's reports, corporate governance statements and half year reports must be kept available on the company's website for ten years after their publication (compared to five years for stock exchange releases). This obligation does not apply retroactively, so there is no need for listed companies to publish old reports on their websites.

What are the practical implications for listed companies?

Even if the obligation to publish Q3 and Q9 interim reports will be abolished, it seems likely that many listed companies will continue quarterly reporting, not least to follow investor expectations. However, in order to simplify the reporting process listed companies may consider the option of publishing somewhat less detailed Q3 and Q9 reports than the IAS 34 standard requires for half-year reports.

A full transfer to half-year reporting could also be an option for some companies, especially those with low risk profiles and stable operations with low seasonal fluctuations. However, longer reporting periods may require stricter monitoring of orderly price development on the market. Longer reporting periods will also necessitate careful monitoring of internal procedures to avoid selective disclosure of insider information, as the market would not have the benefit of quarterly financial information. Any material changes in a company's financial position or prospects would naturally still need to be disclosed without undue delay under the new reporting rules.

Amendments to Swedish legislation

In Sweden, new rules implementing the Transparency Directive are being finalized and are currently expected to take force from 1 February 2016.