The EU Transparency Directive (2004/109/EC) on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market regulates:
- periodic financial reporting;
- major shareholding disclosures; and
- the provision of information to investors regarding issuers whose securities are admitted to trading on EU or European Economic Area member state regulated markets.
Cypriot companies are frequently used in cross-border structures, whereby their securities are listed on the regulated market of another member state (hereinafter 'Cypriot issuers'). This update provides an overview of:
- the obligations on holders of listed securities of such Cypriot issuers (hereinafter 'holders') and other persons subject to the notification requirements which are commonly overlooked; and
- circumstances in which holders with major holdings in a Cypriot issuer and Cypriot issuers themselves must make notifications under the EU Transparency Directive.
The EU Transparency Directive aimed to introduce harmonised reporting obligations for issuers and holders of securities in cross-border listing structures, in order to:
- enhance investor protection and market efficiency; and
- establish transparent and integrated securities markets that contribute to a genuine single market.
The EU Transparency Directive was implemented in Cyprus via the Transparency Requirements Law L190(I)/2007, as amended. The Cyprus Securities and Exchange Commission (CySEC) is responsible for the supervision and enforcement of the Transparency Requirements Law. The general approach taken to transpose the Transparency Directive into national legislation has been to take a "copy-out" approach, thereby adopting wording which reflects the EU provisions as closely as possible.
However, as the EU Transparency Directive has been transposed into the national legislation of each EU member state, it has been interpreted differently, which has resulted in diverging practices. Further, in cross-border structures where securities are listed in a different member state than the home member state, holders often overlook the reporting obligations that the home member state requires and instead focus on the listing jurisdiction's requirements.
Under the Transparency Requirements Law, following a holder's acquisition or disposal of major holdings, Cypriot issuers and holders must notify the Cypriot issuer and CySEC regarding the percentage of the holder's voting rights in the Cypriot issuer.
Under the Transparency Requirements Law, a 'major holding' is when a holder acquires or disposes of a proportion of shares in a Cypriot issuer with voting rights attached that equals, exceeds or falls below a 5%, 10%, 15%, 20%, 25%, 30%, 50% or 75% threshold. A holder that acquires shares in a Cypriot issuer and meets one of these thresholds must make the relevant notifications in the prescribed form.
Voting rights arising from shares
The general notification requirement for holders under the Transparency Requirements Law is triggered if a change in a holder's voting rights causes it to meet one of the above thresholds. Voting rights under the law arise in various circumstances. The most common involves a holder with shares in a Cypriot issuer to which voting rights are attached. In this case, voting rights are calculated on the basis of the shares to which voting rights are attached, even if the exercise thereof is suspended.
Voting rights arising from entitlement
Voting rights in a Cypriot issuer that a legal or natural person is entitled to acquire, dispose of or exercise (hereinafter an 'entitled person') must be considered when calculating whether a legal or natural person has triggered the Transparency Requirements Law's notification requirement. A key example in this respect, which is commonly overlooked, involving the granting of a discretionary proxy over a holder's voting rights in a Cypriot issuer. Under the Transparency Requirements Law, where a holder grants a discretionary proxy to any person regarding securities held in a Cypriot issuer listed on a regulated market, this proxy is considered the acquisition of voting rights in the Cypriot issuer and therefore the notification requirements are triggered. Other entitlements under the Transparency Requirements Law which may qualify a person as an entitled person include:
- voting rights held by a third party with whom a holder has concluded an agreement which obliges them to adopt, by the concerted exercise of the voting rights that they hold, a lasting common policy towards the management of a Cypriot issuer (ie, concerted voting);
- voting rights held by a third party under an agreement concluded with a holder providing for the temporary transfer (for consideration) of the voting rights in question (ie, a temporary transfer);
- voting rights attached to shares which are lodged as collateral with a person, provided that such person controls the voting rights and declares its intention of exercising them (ie, collateral);
- voting rights attached to shares in which a person has a life interest;
- voting rights which are held, or may be exercised within the meaning of the points above, by an undertaking controlled by an entitled person (ie, a controlled undertaking);
- voting rights attached to shares deposited with a person, which that person can exercise at its discretion in the absence of specific instructions from the holder; and
- voting rights held by a third party in its own name on behalf of another person.
Further detail on who is required to make a notification under these circumstances is provided below.
Voting rights arising from financial instruments
When calculating a holder's voting rights to determine whether the notification requirements are triggered, any voting rights relating to the following financial instruments (directly or indirectly) must be included:
- financial instruments that on maturity give the holder (under a formal agreement) the unconditional right to acquire – or the discretion regarding its right to acquire – shares in a Cypriot issuer to which voting rights are attached; and
- financial instruments not included in the first point, but which are referenced to shares referred to therein and have an economic effect similar to that of the financial instruments referred to therein, whether or not they confer a right to a physical settlement.
Under the Transparency Requirements Law, financial instruments include:
- transferable securities;
- forward-rate agreements;
- contracts for differences; and
- other contracts or agreements with similar economic effects which may be settled physically or in cash.
Further, under the EU Transparency Directive, the European Securities and Markets Authority (ESMA) maintains an indicative list of instruments which are subject to the notification requirements, including:
- irrevocable, convertible and exchangeable bonds that refer to issued shares;
- hybrid financial instruments; and
- repurchase agreements.
ESMA has provided guidance in the form of Q&As and the EU Commission Delegated Regulation (2015/761) regarding how to calculate voting rights that stem from financial instruments. However, it is conceivable that diverging practices may arise across EU member states, particularly where this provision may have been implemented into national law in different ways. This could mean that different methods of calculation will lead to the notification regime being triggered differently in different member states.
Further complications may also arise regarding the applicable thresholds which trigger notification requirements. The EU Transparency Directive provides that an EU member state does not need to apply:
- the 30% threshold if it applies a one-third threshold; and
- the 75% threshold if it applies a two-thirds threshold.
This can lead to a situation in which the notification requirement is triggered differently in different EU member states, leading holders potentially to miss a notification requirement under the Transparency Requirements Law.
The expanded range of instruments and circumstances considered to give rise to voting rights has resulted in a longer list of persons, other than the traditional holders of shares in a Cypriot issuer, that may be classed as holders.
CySEC has provided the following clarification regarding notification requirements when a person is entitled to voting rights:
- If the notification requirement is triggered by voting rights arising from concerted voting, the notification obligation is on all parties to the agreement.
- If the notification requirement is triggered by voting rights arising from a temporary transfer, the notification obligation is on the person that:
- acquires the voting rights under the agreement; and
- transfers temporarily, for consideration, the exercise of the voting rights held.
- If the notification requirement is triggered by voting rights arising from collateral, the notification obligation is on:
- the person with whom the shares are lodged as collateral (ie, the collateral holder), if it controls the voting rights attached to the shares and declares its intention to exercise them; and
- the person that has lodged the shares as collateral (ie, the collateral lodger).
- If the notification requirement is triggered by voting rights arising from a life interest, the notification obligation is on:
- the person that has the life interest in the shares if it is entitled to exercise the voting rights attached to the shares; and
- the person that disposes of such shares.
- If the notification requirement is triggered by voting rights which are held or may be exercised regarding concerted voting, temporary transfer, collateral and life interest by an undertaking controlled by an entitled person (ie, the controlling person), the notification obligation is on:
- the controlled undertaking and the controlling person, if the controlled undertaking has a notification duty at an individual level; and
- the controlling person, if the controlled undertaking has no notification duty at an individual level.
- If the notification requirement is triggered by voting rights attached to shares deposited with an entitled person which the entitled person can exercise at its discretion in the absence of specific instructions from the shareholders, the notification obligation is on:
- the person with whom the shares are deposited (ie, the deposit taker) if it can exercise at its discretion the voting rights attached to the shares deposited; and
- the shareholder that deposits the shares (ie, the depositor).
- If the notification requirement is triggered by voting rights held by a third party in its own name on behalf of an entitled person, the notification obligation is on the person that controls the voting rights.
- If the notification requirement is triggered by the granting of a discretionary proxy and in the absence of specific instructions from a holder, the notification obligation is on the proxy and the holder.
Notification obligations on holders and entitled persons may also trigger additional reporting requirements for the Cypriot issuer. Under the Transparency Requirements Law, a Cypriot issuer must publish certain notifications that it receives, including all notifications regarding a holder's or entitled person's voting rights that meet the thresholds.
In the above example of granting a discretionary proxy, the Cypriot issuer would have to publish the notification received regarding the proxy as, under the law, the Cypriot issuer is subject to a requirement to make public certain notifications that it receives.
Where a holder, entitled person or other person subject to the notification requirements under the Transparency Requirements Law fails to make the required notification, CySEC may impose the following administrative penalties:
- whichever is higher of a fine not exceeding €10 million on a legal person or up to twice the amount of the profits gained or losses avoided because of the breach, where they can be determined; and
- whichever is higher of a fine not exceeding €2 million on a natural person or up to twice the amount of the profits gained or losses avoided because of the breach, where they can be determined.
CySEC also has the power to impose non-pecuniary penalties on the person involved in the breach, such as making its name and details of the breach public, as well as suspending the voting rights held in the Cypriot issuer.
Further, submitting false or misleading information or concealing required information pursuant to the Transparency Requirements Law constitutes a criminal offence punishable by a five-year prison sentence or a €341,000 fine. CySec may also impose an administrative fine not exceeding €341,000 or in the case of remission, a fine not exceeding €683,000. Other than the administrative penalties that CySEC may impose, a person in breach of the notification requirements may also incur civil liability arising from the breach.
The implementation of the Transparency Directive has undoubtedly simplified reporting and notification requirements in cross-border listing structures, and the amendments to the EU Transparency Directive under EU Directive 2013/50/EC have helped to harmonise the applicable regimes across EU member states. However, each member state has implemented the EU Transparency Directive's obligations separately and, as a result, holders and entitled persons should be aware of the obligations arising from the legislation of the country of listing and the listed entity's country of origin.
For further information on this topic please contact Nancy Erotocritou or Elina Mantrali at Harneys Aristodemou Loizides Yiolitis LLC by telephone (+357 2582 0020) or email ([email protected] or [email protected]). The Harneys website can be accessed at www.harneys.com.
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