Next year the Prospectus Directive is being amended, and the changes could be significant for equity issues. The Amending Directive has been finalised and will come into force in July 2012. However, in order to understand how the changes made by the Amending Directive will work in practice, we need to look to the implementing regulation, which is currently being consulted on by the European Securities and Markets Authority ("ESMA").
ESMA has just issued its consultation but, because July 2012 is fast approaching, it requires input by 15 July 2011. For those involved in equity issuance there are some big points still being considered, and it is important for UK companies and markets that our voice is heard in Europe on these issues. Investment banks should think now about how the changes may affect the structuring options they offer clients and whether the shorter prospectuses which may be produced as a result of the changes are going to be cheaper to prepare, as issuers will expect.
The summary which is currently included at the start of a prospectus 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". The Amending Directive includes a new requirement that the summary must be drawn up in a common format to facilitate comparability of the summaries for issues of similar securities. There is a similar proposal to produce standard summaries of the key characteristics of packaged retail investment products (PRIPs) which the Commission has requested that ESMA take into account in formulating the detailed requirements relating to equity.
We have previously commented that providing a generic framework for equity issues is far more difficult than in relation to other financial products. ESMA has suggested that:
- a modular approach is adopted, so that tables show the points required in a summary for each type of prospectus based on the current annexes to the Prospectus Directive (that is, equity, debt, etc)
- the information is categorised under one of five headings: (A) Introduction and warnings; (B) Issuer and any guarantor; (C) Securities; (D) Risks; (E) Offer
- issuers must decide if the information in their prospectus in relation to a specified point is "key" information
- the essential elements of that information must be redrafted into a "chairman's letter" style
- whilst there should be no limit on the number of words used, no information additional to that specified in the modules may be included in the summary - that is, only the information included under the given points can be "key information".
There are also amendments to the liability which attaches to the summary. Currently liability accrues for a summary "only if the summary is misleading, inaccurate or inconsistent when read together with the other parts of the prospectus". As redrafted, "no civil liability shall attach to any person solely on the basis of the summary, including any translation thereof, unless it is misleading, inaccurate or inconsistent, when read together with the other parts of the prospectus, or it does not provide, when read together with the other parts of the prospectus, key information in order to aid investors when considering whether to invest in such securities". Thus, the price of being given more words in which to complete the summary is that liability can accrue if the summary does not pick out of the main prospectus all the points which are "key".
Reduced disclosure on secondary issues
The Amending Directive provides for a reduced prospectus requirement for issues by companies which:
- are already traded on a regulated market or MTF with appropriate disclosure requirements and market abuse rules and
- have not disapplied statutory pre-emption rights.
In the UK most secondary issues are undertaken by disapplying pre-emption rights and, therefore, there were initially concerns whether this relaxation would produce any of the 25% reduction in administrative burden on companies that the EU Commission is seeking to achieve. Fully pre-emptive secondary offers would often trigger US filings which would render redundant any simpler regime in Europe. ESMA proposes that the Amending Directive may be implemented in a broad manner by equating statutory pre-emption rights with similar pre-emptive provisions, tightly defining what will qualify as "near identical rights" to avoid abuse. This is a helpful approach, although it would still potentially leave out of the regime open offers, especially if there were no compensatory element.
The UK AIM market would also qualify for this reduced regime.
The question of the content requirements for a "proportionate" disclosure document remains taxing. This is largely because the essence of a rights issue is the tradability of the nil-paid rights, so the issue is clearly not made with the intention that the only people who subscribe are existing shareholders who already know the company well. Nonetheless certain information which is available under transparency obligations can be removed from the prospectus (although in some jurisdictions that gives rise to language concerns) and historical financial information is to be reduced to require only historical financial information covering the last financial year. Note that IAS 1 still applies so the financial statements will still need to be presented with comparative data but the comments in the notes to the financial statements will only cover the last financial year. A full schedule of the requirements required for the rights issue prospectus is included in the consultation and it will be interesting to see the responses to ESMA's request for data relating to the costs of burdensome disclosure requirements. Of the items which will no longer be required, the operating and financial review requirement is the most likely actually to reduce costs.
Proportionate regime for SMEs
In its mandate, ESMA has been invited to advise the Commission on a possible annex containing the minimum information to be disclosed in prospectuses for SMEs and companies with reduced market capitalisation taking into account their size, the amount raised and, where appropriate, their shorter track record. ESMA is invited to identify the information which could be omitted from the registration document applicable to other issuers.
Interestingly, ESMA has concluded that it is not in favour of such a reduced disclosure regime and instead proposes a separate primary market network for such companies. It also notes that all issuers (and, more importantly, professionals) should avoid boilerplate drafting, remember to apply the materiality principle for those contents requirements which include it and utilise incorporation by reference if applicable.
Bankers, and issuers who occasionally tap the equity markets, might want to consider, now these proposals are at a fairly advanced stage, how beneficial they would be in the current form. Certainly in relation to secondary offers some changes are needed to allow UK companies to benefit fully and it will be worthwhile for market participants to respond to that effect.