On 31 December 2010, the Prospectus Directive was amended. This article looks at the changes which relate to the drafting of equity prospectuses. The introduction of proportionate disclosure regimes to reduce the burden when a prospectus is being prepared for a secondary issue such as a rights issue or for a smaller issuer could have a significant impact on the equity capital markets in the EU. The amending directive ("Amending Directive") lays down only the principles for the changes. The detail is to follow in "delegated acts".
The initial work in preparing those delegated acts is being done by the European Securities and Markets Association ("ESMA", which replaces CESR in the new regulatory regime). ESMA was given a mandate to undertake that work in January and duly released a consultation, which closed on 25 February.
There is a fairly short timeline for these changes to be made as the Amending Directive requires member states to bring into force the laws, regulations and administrative provisions necessary to comply with the Amending Directive by 1 July 2012. It is therefore more significant than usual to follow the proposals being made as they may influence the documents being prepared on transactions as early as next summer.
Proportionate prospectuses on rights issues
The Amending Directive provides a proportionate disclosure regime for secondary offers of shares "provided that the issuer has not disapplied the statutory pre-emption rights". Current UK market practice is to disapply statutory pre-emption rights, so does this mean that the proportionate regime would apply to only a limited number of secondary issues? Possibly, although the existence of a proportionate disclosure regime may shift the balance of considerations taken into account in deciding whether to disapply pre-emption rights. Currently, rights issues are often undertaken by disapplying statutory pre-emption rights in order to:
- facilitate the exclusion of overseas holders in certain jurisdictions
- deal more simply with fractional entitlements.
Neither of these points is insurmountable if the statutory route is used. In addition, secondary offers may be structured as open offers and those are not traditionally made in compliance with the pre-emption provisions of the Companies Act 2006. Once again, it is possible that an attractive proportionate disclosure regime could create a shift here and that open offers would be made on a pre-emptive basis more frequently.
Several of the responses to the ESMA consultation from the UK have raised the issue that it is not solely the content requirements of the prospectus that make prospectuses on secondary issues unwieldy. It is the requirement for the competent authority to approve the prospectus. The London Stock Exchange suggests that no approval should be required on a secondary offer. One way in which that might work is to delegate responsibility to the sponsor or nomad. In the case of sponsors, though, that would be a significant departure from their current role and might not achieve the desired result if sponsors were unwilling to assume any risks that the prospectus in question was not complete.
As to the actual contents of a proportionate prospectus, a significant amount of work was undertaken by the Rights Issue Review Group in the UK as part of its report to the Chancellor in 2008. The group looked at which of those disclosure requirements currently contained in Annexes I to III of the PD Regulation might be retained in a proportionate disclosure document. It did so on the basis that "existing shareholders will already have access to a range of financial and other information about the issuer [which can be taken advantage of] without creating prospectus liability for such information by incorporating by reference. This will be available from the periodic and episodic statements and disclosures made in accordance with the Transparency and Market Abuse Directives." It concluded that the main omissions from the requirements for a full prospectus might be the sections dealing with:
- statutory auditors
- business overview
- organisational structure
- property, plant & equipment
- operating and financial information
- capital resources
- patents and licences
- management structures
- remuneration and benefits
- board practices
- major shareholders
- related party transactions
- historic financial information.
In each case, there should be sufficient information already in the market in accordance with ongoing transparency obligations, though some element of current trading update might helpfully be included.
If the delegated act takes this approach, the proportionate prospectus will be easier and quicker to prepare. It will be important to note that, as with the current annexes, any reduced set of requirements will be a starting point. There will remain an overarching requirement to make disclosure of all such information as investors and their professional advisers would reasonably require for the purpose of making an informed assessment of the issuer and its securities (section 80 of the Financial Services and Markets Act 2000) and a very short document is more likely to be achieved with financial advisers who are familiar with the issuer and where there is no US involvement (requiring a 10b-5 opinion which is likely to drive pressure to include more information in the prospectus itself).
The Amending Directive changes the Prospectus Directive in so far as it provides how account should be taken of various factors in deciding the contents requirements set out in the annexes. Currently, the Prospectus Directive provides that the model prospectuses should take account of: "the various activities and size of the issuer, in particular SMEs. For such companies the information shall be adapted to their size and, where appropriate, to their shorter track record". It is now amended to refer also to companies with reduced market capitalisation (and credit institutions issuing non-equity securities).
It is not particularly clear what this change is going to mean in practice. Some respondents to the consultation are envisaging an AIM admission type of document for these issuers. The LSE, however, makes the good point that the new element of this definition (the issuer with reduced capitalisation) relates only to companies that are already on a regulated market. The change would therefore not relate to IPOs (and should not, as that would create a confusing two-tier market).
In the UK, with the AIM market alternative, this would seem an appropriate approach, but may not be what is envisaged by the European Commission or ESMA.
The Amending Directive also makes a change in relation to the summary part of the prospectus. The summary is required to provide, in a brief manner and in non-technical language, the essential characteristics and risks associated with the issuer and the securities. What is new is a requirement that the summary must be drawn up in a common format to facilitate comparability of the summaries of similar securities. There is a similar proposal to produce standard summaries of the key characteristics of packaged retail investments products (PRIPS) which the Commission requests that ESMA take into account.
It is quite difficult to see how prospectuses relating to equity securities can be given a standard summary, the decision in relation to investment being dependent on the different underlying businesses of the issuers in question. Providing a generic framework may therefore be difficult for ESMA.
ESMA plans to issue a fuller consultation which will go into these issues in more depth by July this year. It then plans to issue its advice to the European Commission on the shape of the new requirements by September.