Like a bored child in the backseat on a long car journey, you’d be forgiven for asking the time honoured question, “Are we there yet?”, in respect of what has seemed like the interminable review of the EU Prospectus Directive. The answer is: nearly.
On 28 May 2010, the EU Council wrote to the Parliament setting out the text of the proposed changes to the Directive (click here to view) which the Council and the Commission would agree to and Parliament is due to vote on these changes from 12 noon on 16 June 2010. No substantive changes to the proposals are expected at the voting stage.
We have prepared a composite version of the Directive showing all the changes to the text as they will appear in the amended Directive (this is attached to the covering email). The highlights are as follows:
Summary/“Key Information Document” and Liability regimes
This was the main talking point throughout the negotiation process. The final amendments show that the name “summary” has been retained (rather than mirroring the “two-pager” UCITS “key information document” idea). Article 6(2) maintains the current standard of liability for the summary section except that it tacks on a requirement that, when read with other parts of the prospectus, the summary should provide “key information” in order to aid investors when considering whether to invest in such securities.
“Key information” is defined in a new Article 2(1)(s) and will mean “essential and appropriately structured information which is to be provided to investors with a view to enable (sic ) them to understand the nature and the risks of the securities that are being offered to them or admitted to trading on a regulated market and, without prejudice to Article 5(2)(b), to decide which offers of securities to consider further. In light of the offer and securities concerned, the key information shall include the following elements:
- short description of the risks associated with and essential characteristics of the issuer and any guarantor, includ[ing] the assets, liabilities and financial position;
- a short description of the risk associated with and essential characteristics of the investment in the relevant security, including any rights attaching to the securities;
- general terms of the offer, including estimated expenses charged to the investor by the issuer or the offeror;
- details of the admission to trading;
- reasons for the offer and use of proceeds.”
The proposal that the summary should allow an investor to compare the securities with other investment products was debated at length during the negotiations as securities practitioners struggled to see how this might work in practice. The proposal has fortunately been refined to state that “the format of the summary should be determined in a way that allows comparison of the summaries of similar products by ensuring that equivalent information always appears in the same position in the summary”. If this is now simply a “layout” point, that is easier to work with. Helpfully, the amended Directive will also clarify that the summary should be a taster for investors to help them decide “which offers of securities to consider further” and is to be read “in conjunction with the prospectus”.
Interestingly, the 2,500 word limit which has caused problems on multi-issuer programmes and when describing complex securities or businesses appears to have been retained in the Directive in Recital 21.
EUR50,000 wholesale threshold
Because of the political perception that some retail investors have been buying single bonds worth EUR50,000, the EU no longer feels that the threshold between “wholesale” and “retail” trades is realistic. The EUR50,000 threshold is therefore being raised to EUR100,000. This will be tracked through to the EU Transparency Directive (2004/109/EC) and securities with EUR50,000 denominations which benefit from the existing TD exemptions will be grandfathered. However, so far there has been no mention of whether the threshold change will also apply to the exemption from the EU Statutory Audit Directive (2006/43/ EC). This will be followed up with the EU.
“Qualified investor” definition aligned with MiFID
Unfortunately, the proposed amendment to the definition of “qualified investors” in Article 2(1)(e) still contains the concept tracked from MiFID of investors being able to opt in and out of “qualified investor” status on request. As has been pointed out by various lobbying groups, this MiFID concept does not translate well to the PD world as the same investor could be treated differently by different intermediaries and investors need to be told about the deal (and so have received the offer) in order to make a decision whether to opt in or out of “qualified investor” status for that deal. This could create significant uncertainty.
100 persons exemption
The “limited circle” of investors offering exemption in Article 3(2)(b) will be amended to allow 150 non-qualified investors per Member State to be targeted with an offering rather than 100. This means that 4,800 will be able to be included in each offering rather than the current number of 3,200.
Other threshold changes to keep pace with the markets
Articles 1(2)(h) (total consideration) and (j) (credit institutions’ continuous and repeated debt issuance) will be amended to raise the thresholds to EUR5,000,000 (from 2,500,000) in paragraph (h) and EUR75,000,000 (from EUR50,000,000) in paragraph (j) to reflect changing market practice/deal values.
The additional wording proposed for insertion at the end of Article 3(2) states that no new prospectus will be required for resales through financial intermediaries in a retail cascade so long as the offers are made within 12 months of the initial approval. This will mean that the original prospectus (as supplemented if necessary) is still valid for the retail cascade. The issuer must consent to the prospectus being used for such offers in “a written agreement”. The new wording provides that only the issuer or “the person responsible for drawing up the prospectus” needs to consent to its use so, on the face of it, the provisions do not appear to require the consent of experts such as authors of reserve reports, property valuation reports or auditors.
Content of Final Terms
A revised Article 5(4) highlights that Final Terms may only contain information relating to the securities note items and may not be used to supplement the base prospectus with updates on the issuer’s business. It also clarifies that Final Terms must be made available to the public and filed with the home Member State as well as be communicated to the host Member State which will clear up some uncertainty in some Member States about the process for filing Final Terms on passported deals.
The obligation to supplement the prospectus will end on the closing of the offer period or when trading commences, whichever occurs later. Investor withdrawal rights will only be triggered if the prospectus relates to a public offer (not an admission to trading) and the “new factor, mistake or inaccuracy” occurred while the offer was still open and before the securities were delivered.
Validity of prospectuses
The unpopular plans put forward during the trialogue process to extend prospectus validity to 18 or 24 months have been shelved and it appears that the 12 month validity period will be retained. It will be clarified that this period is measured from the date of approval not the date of publication, a more certain date.
In order to allow better access to prospectuses in our technology driven world, the Council proposes that all prospectuses should be published electronically (in addition to other publication methods if issuers so choose). This could cause problems in jurisdictions where the law restricts access to securities offering materials. However, the fact that electronic publication will be a “legal” requirement, may allow lawyers to get comfortable that local publicity rules will not be breached. The possibility to use password protected click-throughs on websites if there is a particular concern in a jurisdiction as to which investors may access the document remains.
One thing which was problematic in practice for issuers seeking to have their prospectuses published in electronic form which has been fixed in these proposals is the requirement in Article 14(2)(c) which now states that the prospectus may be put on the issuer’s website OR that of the managers/paying agents rather than AND.
Incorporation by reference
Article 11 will be tidied up to clarify that information filed both pursuant to the Prospectus Directive (prospectus supplements, etc.) and the Transparency Directive (annual reports, etc.) are covered by this provision and may be incorporated by reference into prospectuses.
Article 10 deleted
Now that the Transparency Directive is in force, the Prospectus Directive will be amended to delete the annual information update requirement in Article 10 which is a welcome change for issuers.
Instead of an outright exemption for rights issue issuers from the obligation to prepare a prospectus (as suggested earlier in the trialogue process), the final proposals suggest a new Article 7(g) which will allow rights issue issuers to take advantage of a “proportionate disclosure regime” in order to “improve the efficiency” of pre-emptive issues. The details of how the usual equity disclosure requirements will be slimmed down for rights issues is not yet clear pending the Commission publishing the detail of this regime. The proportionate disclosure regime will also apply to rights issues where the securities are trading on a multilateral trading facility (where there is an “offer to the public” so the rights issue is brought within the PD regime) so long as the MTF is subject to “appropriate ongoing disclosure requirements and rules on market abuse”. CESR is mandated to come up with guidelines regarding what such requirements and rules should be.
Employee Share Schemes
In order to provide a more level playing field for companies with employee share schemes, the exemption from the obligation to publish a prospectus is to be extended so that it is available to all companies with their head office or registered office in the EU. Such companies will need to make an alternative document available giving details of the number and nature of the securities and the reasons for and details of the offer.
Non-EU companies which have securities admitted to trading on a regulated market or a third country market will also be exempt from the obligation to publish a prospectus if two conditions are fulfilled. The first is that they must provide the same alternative document relating to the shares (in English) as EU companies need to make available. The second condition is that the EU Commission must deem the non-EU market on which the company’s securities trade to be an “equivalent” regime to that in the EU. The Commission will review the “legal and supervisory framework” of any non-EU countries submitted to it by Member State competent authorities to consider whether the market abuse, transparency and market regulation rules of the relevant country are equivalent to those in the Market Abuse Directive (2003/6/EC), the Transparency Directive (2004/109/EC) and the “regulated markets” section of MiFID (Title III of 2004/39/EC). The proposed new Article 4(1)(e) sets out conditions which any “equivalent” non-EU market will need to fulfil.
Demergers/Divisions covered in Article 4(1)(c) and 4(2)(d) exemptions
The exemptions in Articles 4(1)(c) and 4(2) (d) which cover shares allotted as a result of a merger will be amended to make it clear that if shares are allotted as a result of a demerger/division of a company, these shares will also be exempt from the prospectus preparation obligation. These technical amendments codify the existing CESR guidance that mergers and divisions should be treated in the same way.
Offers to existing shareholders free of charge
In another technical amendment, the reference to shares offered, allotted or to be allotted to existing holders free of charge at the beginning of Article 4(1)(d) will be deleted on the basis that such offers of shares are already covered by the exemption in Article 3(2)(e) for offers with a total consideration of less than EUR100,000.
Companies with “reduced market capitalisation”
A new definition of companies with a “reduced market capitalisation” will be included as Article 2(1)(t) to allow certain smaller companies with securities admitted to trading on a regulated market with an average market capitalisation of EUR100,000,000 for the last three years (using end of year quotations) to take advantage of a proportionate disclosure regime. The detail of what the proportionate disclosure regime will require is not yet clear but this will be a welcome change for small cap issuers.
The proposed amendments leave the door open for further details to be provided on several points. Here are some of the areas to keep an eye on over the coming months:
PD Regulation changes
The EU institutions do not yet appear to have a timeframe in mind for revising the PD Regulation (809/2004/EC) to reflect consequential changes to the disclosure requirements set out in the various Annexes as a result of the amendments to the Directive.
It is rumoured that there could be a proposal to extend the PD Regulation disclosure requirements relating to shares to cover GDRs. As we do not have details of the proposed PD Regulation amendments yet, this is something to keep an eye out for as it would be a big change to current practice.
The proposals require the Commission to put forward definitions of “public offer”, “primary market” and “secondary market”. It is not clear why these are needed.
EUR1,000 “low denomination debt” threshold for Home Member State determination
A decision on whether to abolish this threshold will be left to the Commission to review within five years of the amended Directive coming into force. To recap, if debt securities with a denomination of under EUR1,000 are issued, EEA-incorporated issuers are only able to have prospectuses approved by the competent authority of the member state in which they are incorporated and non-EEA issuers are “locked in” to seeking approvals from the member state where they did their first EEA-listed debt issue after 31 December 2003.
Proportionate rights issue disclosure regime
As mentioned above, it will be necessary for the EU to specify the details of what the reduced disclosure requirements for rights issues and “reduced capitalisation companies” will be compared with the ordinary equity standards of disclosure. It is as yet unclear when this will be done but it is perhaps likely that the detail will be included in the changes to the PD Regulation.
CESR is mandated to come up with guidelines regarding what will be considered to be “appropriate ongoing disclosure requirements and rules on market abuse” allowing rights issues for shares traded on multi-lateral trading facilities to be eligible to use the proportionate disclosure regime.
Format of Prospectus, Final Terms, Summary and Supplements
The revised Article 5(5) proposes that the Commission will lay down rules about the format of prospectuses, final terms, summaries and supplement and the detailed content and specific form of the key information to be included in the summary section. This is expected within 18 months of the amendment Directive coming into force.
The Commission is to establish a comparative table of Member States’ liability regimes which should prove useful for issuers and banks conducting Pan- European offerings.
When will the changes take effect?
The proposed amendments will not take direct effect in the Member States and the timing of seeing these changes implemented into national law around Europe is subject to the usual uncertainty of legislative processes in the various Member States. The following timeline shows the likely next steps.
16 June 2010
European Parliament vote on the proposals
Expected by the end of June 2010
Amendment Directive adopted By October 2010
Translation into the Member States’ languages*
End of October 2010
Publication of Directive in Official Journal
Mid-November 2010/20 days later
Directive comes into force
c. end May 2012
Deadline for Member State implementation into national law
* this could be done quicker, according to some Commission sources with a commensurate impact on the overall timetable
Note, however, that some Member States may have doctrines of interpretation which mean that market practices could be expected to be adapted to comply with new rules in advance of them being formally implemented in the relevant Member State law.