On 20 December 2013, the European Securities and Markets Authority (ESMA) published a final report on its proposed regulatory technical standards (RTS), which outline specific situations requiring the publication of a supplementary prospectus. The report follows ESMA's consultation on the proposed draft RTS in March 2013 and explains the material changes made to the consultation version of the RTS following respondents' feedback.
The report states that the draft RTS will have been submitted by ESMA to the European Commission by 20 December 2013. The European Commission has three months from that date to consider whether or not to endorse them.
A procedure was established in the Prospectus Directive (Directive 2003/71/EC) to ensure that every significant new factor, material mistake or inaccuracy relating to information in a prospectus, which is capable of affecting the assessment of the securities, is published in a supplement to the prospectus.
In March 2013, ESMA published a consultation paper which proposed draft RTS outlining situations that will require the publication of a supplement to the prospectus. The listed situations are intended to be examples of the situations which ESMA believes would always give rise to the general obligation to publish a supplement, but do not comprise an exhaustive list of all situations requiring a supplement. The consultation closed on 28 June 2013. Click here to read our report of the proposals in the ESMA consultation paper in our April 2013 corporate newsletter.
Test on information for supplement is same as for prospectus
For situations which are not included in the prescribed list, the issuer, offeror or the person asking for admission to trading on a regulated market should assess the relevant situation's significance or materiality. In its consultation paper, ESMA stated that the test as to whether a new factor, mistake or inaccuracy arising since the publication of the prospectus qualifies as a triggering event for producing a supplement is the same test which is used to assess whether the original prospectus contains information necessary to enable investors to make an informed assessment of the issuer. Consequently, the terms 'significant' and 'material' should be assessed according to the same qualitative and/or quantitative criteria used when drafting the original prospectus.
Certain respondents objected to the proposal, arguing that the 'significant' and 'material' test used in the context of assessing whether a supplement should be produced requires a higher level of interpretation than the test which assesses whether information is 'necessary to make an informed assessment' for inclusion in the original prospectus. Those respondents further argued that, by aligning the two tests, it would follow that any change to the information in the prospectus would necessitate the publication of a supplement.
ESMA rejected these arguments on the basis that, whilst the two tests are not identical, there is a 'strong correlation' between them. It argued that the test for assessing what information should go into a supplement is a subset of the test for inclusion of relevant information in the prospectus. ESMA notes that if erroneous, inaccurate or new material arises, it should only be considered material or significant, if it is capable of affecting an investor's decision. If the triggering element is not capable of affecting an investor's decision, then it is not material or significant, nor is it necessary information to enable an investor to make an informed assessment. Consequently, ESMA believes that if this approach is applied correctly, this should not lead to a situation where all mistakes or inaccuracies would be considered material.
In its report, ESMA summarises the feedback to each of its proposed situations which should trigger a systematic requirement to publish a supplement. We summarise the key changes to the consultation version of the RTS below.
Content of supplementary prospectus
A new recital (3) has been added to the draft RTS to clarify that a supplement should include all material information relating to the specific situations that triggered the supplement and that the information must be included in the prospectus in accordance with the Prospectus Directive.
Key changes to the proposed situations triggering a supplementary prospectus
Publication of new annual audited financial statements
There were a number of objections raised to the proposed requirement to publish a supplementary prospectus following the publication of new annual financial statements. ESMA, however, has decided to proceed with this requirement on the basis that it believes that investors should be provided with the most up-to-date financial information on the issuer. Interestingly, ESMA notes that any possibility of investors withdrawing for reasons unrelated to the triggering event, should not outweigh an investor's right to updated information. The requirement will only apply to prospectuses concerning shares, depositary receipts and transferable securities equivalent to shares. The obligation to publish a supplement where a guarantor or an obligor publishes new annual audited financial statements has been deleted.
Amendments to a profit forecast or profit estimate
The RTS no longer requires a supplement to be published where a profit forecast or profit estimate for an annual financial period is published since the publication of the prospectus. Instead, a supplement is required where there is a publication of any modification of a profit forecast or profit estimate already included in the prospectus.
Essentially, this means that a profit forecast made for a period not previously included in the prospectus is considered a new forecast and is subject to a case-by-case analysis as to whether a supplement should be published. However, if the forecast relates to a period which was already covered by a forecast in the prospectus, this is considered to be a modification, and a supplement is required. ESMA continues to believe that the obligation set out in the RTS should not apply to securities other than equity securities and depositary receipts.
Working capital statements for certain equity securities
The revised RTS specifies two situations which would trigger a requirement to publish a supplement, namely where the working capital statement becomes sufficient or insufficient for the issuer's present requirements.
Any judgement or concluding event of governmental, legal or arbitration proceedings already disclosed in the prospectus
All respondents rejected ESMA's proposal for an absolute obligation to publish a supplement for any judgement or concluding event of governmental, legal or arbitration proceedings already disclosed in the prospectus. Whilst ESMA continues to believe that an investor needs to know the results of material proceedings in order to assess their impact on the issuer, it is difficult to legislate a requirement to publish a supplement where there is a 'final decision' in respect of the proceedings, given that various EU jurisdictions have different meanings and interpretations of such a stage in the litigation process. Consequently, ESMA notes that the issuer should assess the relevant stage of proceedings on a case-by-case basis to ascertain whether there is a significant or material development to what was disclosed in the prospectus.
In October 2013, the FCA published finalised technical guidance (TN/605.2) on supplementary prospectuses in its Knowledge Base. In Primary Market Bulletin No.7, the FCA suggested that the technical note may be revised to refer to the ESMA final RTS. Whilst the FCA's current guidance does not contradict ESMA's current proposals, it will be interesting to see if and what the FCA has to say on the final and endorsed RTS.