The European authorities are concerned that issuers are using final terms to disclose information to investors which instead should have been included in the underlying prospectus or an associated supplementary prospectus.
The reason they are concerned is that a prospectus/supplementary prospectus is reviewed, commented on and approved by the relevant competent authority (such as the UKLA or CSSF). Final terms are not and effectively by-pass this process.
The European Commission has until 1 July 2012 to put in place regulations relating to the information which can be included in final terms. 1 July 2012 is the date by which EU Member States must implement other broader amendments to the Prospectus Directive which were approved at the end of last year in the Amending Directive (such as to increase the minimum person exemption to 150 persons and increase the “wholesale” denomination to €100,000). The Commission has also been tasked with adopting regulations relating to the format and content of the summary required to be included in certain prospectuses.
In order to assist the Commission the Amending Directive requires the new European Securities and Markets Authority (“ESMA”) to provide technical advice on these two issues. Earlier this month ESMA published its technical advice. This followed a Consultation Paper in June which prompted a wave of responses from market participants. Despite the protests ESMA has largely stuck to its original proposals. The question now is whether the Commission will adopt them. If it does then the proposals, in particular those relating to final terms, will have a significant impact on all issuers of securities to be listed on a European regulated market, including issuers from Australia and outside the EU.
Final terms - ESMA proposals
The ESMA advice proposes, among other things:
- Knowable information - the prospectus must contain all required information which is knowable (ie could have been included) at the time. It will not be possible to use the final terms to add a new term or condition on the basis that the issuer did not think when drafting the prospectus that market conditions would subsequently require it.
- Amendments - the final terms cannot be used to amend or replace any information in the prospectus. Not even to make changes to terms or conditions which are beneficial to investors. Instead the prospectus may contain options and the final terms can determine which option is applicable for an individual issue.
- Formula - final terms may not include any new payment formula. The formula must be contained in the prospectus. The final terms can make minor amendments to payout formulas provided they do not give rise to a wholly new product.
- Categorisation of certain information - using these tests (and also the ultimate test of whether the relevant information should be vetted by the appropriate competent authority) ESMA has categorised each of the information requirements in the relevant schedules of the Prospectus Directive Regulation. ESMA has drawn up a detailed table labelling the information category A, B or C to indicate the extent to which it can be set out in the final terms or only in the prospectus.
- Non-applicable information must be deleted - the current approach of marking not applicable information as “N/A” will no longer be permitted. This will make it more difficult to compare final terms. It is also feared it may lead to uncertainty as to whether a term in the prospectus which has not been referred to in the final terms actually applies to the issue or not.
- Summary to be annexed to final terms - if the prospectus is required to include a summary (see comments below) then a version of that summary specific to the individual issue must be annexed to the final terms. This summary will replicate applicable information from the summary in the prospectus and also include additional information relating to the particular securities issue which was not known at the date of the prospectus. If the prospectus summary is required to be translated into other languages then the issue specific summary must be as well.
Final terms - potential impact
It is thought that potential consequences of the proposals include:
- a significant increase in the number of supplementary prospectuses which competent authorities will be required to review leading to increased delays and costs for issuers;
- in certain areas prospectuses will become more product specific rather than an issuer trying to have one catch-all programme. There may also be an increase in issue specific or specialised drawdown prospectuses;
- issuers with MTN programmes are likely to want to review the terms and conditions of these programmes to ensure they provide sufficient options to choose from; and
- the obligation to, in certain circumstances, attach the summary to the final terms will have significant cost and, perhaps more importantly, timing implications - making it harder for these issuers to seize the moment in advantageous market conditions.
ESMA recognises that the proposals will have a particular impact on the structured products industry. However ESMA remains convinced that competent authorities should have the ability to scrutinise the redemption structures of structured products rather than them being included in the final terms.
The proposals may also potentially impact one of the ways in which European issuers used to be able to issue Kangaroo bonds into Australia. Previously issuers have undertaken a one-off issue using final terms to amend the terms and conditions of the issuer’s existing MTN programme on a one off basis. This may no longer be possible.
Summary - ESMA proposals
The ESMA advice proposes, among other things:
- Introduction and style - ESMA has dropped its previous proposal that the summary should be similar to a letter from the chairman but still believes that it should form an introduction to the prospectus. It should be written in plain, easily understandable language and should not simply reproduce large sections of text from the body of the prospectus.
Comparability - in order to assist investors in comparing different investments:
- the summary must be made up of five sections (Introduction and warning, Issuer and any guarantor, Securities, Risks and Offer);
- the sections must appear in a designated order;
- within each section there is a list of required information. If this information is not disclosed in the designated order then a cross reference list must be provided to the relevant competent authority; and
- information in addition to the required information may be included but only as part of one of the five sections. There cannot be any new sections.
- Cross references - the summary cannot contain any cross references to any other sections of the prospectus.
- Length - the summary must not be more than (i) 7% of the length of the prospectus (excluding financial information) or (ii) 15 pages, whichever is the shorter.
Summary - potential impact
If these proposals are adopted they will obviously require an affected issuer to substantially rewrite any summary included in a prospectus published after 1 July 2012. However they are potentially less likely to affect Australian and other non-EU issuers than the proposals relating to final terms. Generally a summary is only required in a prospectus for (i) debt securities with a denomination of less than €100,000 or (ii) equity securities. Australian issuers will normally only seek to list debt securities with a denomination of at least €100,000 on a regulated European market. This is in order to avoid triggering the on-going reporting requirements under the Transparency Directive. ESMA acknowledges in its advice that an issuer who is only seeking to list debt securities with a denomination of at least €100,000 will only be required to include a summary:
- if its prospectus is prepared other than in the language of the relevant Member State and that Member State requires it to prepare a translated summary; or
- the issuer chooses voluntarily to include one.
ESMA clarifies that where an issuer is not under an obligation to include a summary in a prospectus but wishes to produce some overview section in the prospectus, it should ensure that it is not entitled “summary” if it wishes to avoid having to meet any new disclosure requirements for summaries.
Click here to see table
The time table raises the question of what happens if an issuer publishes an approved prospectus before the new regulations take effect (say in March 2012) but then publishes a supplementary prospectus or final terms after the regulations take effect (say in September 2012). ESMA clarifies in its advice that where a supplementary prospectus is published after the regulations have come into force then the supplement does not need to provide a re-write of the prospectus to reflect the changes. What is less clear is the position regarding final terms as ESMA has indicated that various of the proposals relating to final terms are not new policy and simply clarify how it views the current provisions. As a result it is possible that once the regulations are in force some issuers may bring forward the replacement of their existing programme prospectuses.