UK: European Union Prospectus and Transparency Directives

Last Updated: 24 February 2004

By Christopher McFadzean, Mark R. Cannon and Dipti Thakar

Executive Summary

Introduction

The new EU Prospectus Directive (the Prospectus Directive) has been published December 31, 2003 in the Official Journal of the European Community with certain of its provisions taking effect as of this date. The Prospectus Directive is the first directive to be implemented under the EU Financial Services Action Plan and EU member states are expected to bring it into legal effect by July 1, 2005. The Plan also includes the Transparency Directive and is designed to create a single pan-European capital market that issuers and investors will be able to access efficiently. The Transparency Directive, which is still in draft form, introduces financial public reporting requirements (see International Accounting Standards and Public Reporting) which will affect companies incorporated in the EU (EU issuers) and companies incorporated outside the EU (non-EU issuers). These requirements are intended to increase investor confidence in securities traded on regulated markets. As referred to in Background and Timing of the Legislative Process, below, many of the detailed provisions have yet to be finalised and approved and, as a result, there are more questions than can be currently answered. However, the purpose of this note is to give both EU and non-EU issuers a summary of the key provisions intended to come into effect. In particular, the following issues are causing concern:

  • Financial statements will need to be prepared to International Accounting Standards (IAS) and International Standards on Auditing will apply, unless for non-EU issuers the European Commission deems other accounting standards as "equivalent." No decision is likely before mid-2004.
  • Harmonization of prospectus requirements across Europe may mean there is little scope for flexibility by individual national authorities.
  • Potentially increased liability in all EU member states may mean that preparation of a prospectus is more costly and time-consuming.
  • Restrictions on the choice of regulatory jurisdiction to review and approve prospectuses as regards equity and equity-linked securities and low denomination debt issues.
  • Tougher on-going disclosure and officer certification requirements for prospectuses and accounts may be burdensome and costly to comply with and will carry an increased risk of liability for issuers and their directors.

Ambit of the Prospectus Directive

Under the Prospectus Directive, if securities are to be admitted to trading on a "regulated market" (see Glossary) in the EU, a prospectus will be required. Otherwise, a prospectus is only required to be prepared and approved if there is a non-exempt offer to the public in the EU. The exemptions available for securities which are not admitted to trading on a regulated market apply to (i) offers made to qualified investors; (ii) private placements to fewer than 100 persons per EU member state; (iii) offers of securities in denominations of at least € 50,000; and (iv) offers where the minimum subscription is at least € 50,000 per subscriber. In addition, issuers will be subject to standardized prospectus disclosure requirements and continuing disclosure obligations (see Impact of the Prospectus Directive).

Restricted Choice of Regulator

EU issuers which issue equity, equity-linked securities (including convertible bonds) and low-denomination debt securities (i.e. denominations of less than € 1,000, or the near equivalent in any other currency) (together Relevant Securities) that are to be offered to the public or listed within the EU will have their home member state as their home competent authority. Non-EU issuers which issue Relevant Securities will only have one opportunity effective from December 31, 2003 to choose the country (the home member state) where their prospectuses are approved, and where they file their ongoing disclosure, for all such Relevant Securities in the future. This will be a permanent choice and there will be no flexibility after the initial choice is made, unless the issuer de-lists the Relevant Securities and re-lists in another EU member state. All issuers will continue to have free choice of EU jurisdiction for the approval of prospectuses relating to debt securities with denominations of € 1,000 or more (or the near equivalent) but note that this exemption does not apply with respect to equity or equity-linked securities (see New Prospectus Regime).

Harmonization and Increased Liability

The Prospectus Directive harmonises requirements for the content and approval process for prospectuses across the EU. It greatly enhances the ability of issuers to have their securities offered to the public in each EU member state. However, this will also lead to issuers being exposed to liability for their prospectuses in all EU member states (see Mutual Recognition).

Financial Requirements

The proposed Transparency Directive will require issuers to make publicly available IAS financial statements (with an exception for non-EU companies if the accounting standards are regarded as "equivalent" by the European Commission). All issuers with retail securities admitted to trading will be required to make publicly available, at least, their annual report and half-yearly financial information under standards acceptable under the EU Regulation on the Application of International Accounting Standards (the IAS Regulation) (this does not apply if the issuer has only debt securities with a denomination of at least € 50,000 admitted to trading on a regulated market). In addition, issuers with shares admitted to trading on a regulated market will be required to publish quarterly financial information. A tight timetable is laid down for the publication of these periodic reports. They must be published as soon as possible, and in any event within 90 days of the period end in the case of annual financial statements, and within 60 days of the period end in the case of half-yearly and quarterly financial statements (see International Accounting Standards).

Impact on High Yield Debt

Most high yield bond offerings are made pursuant to exemptions from public offer rules and commonly only after closing are they listed on a regulated market. This process should be unaffected by the Prospectus Directive. Issues may arise in the disclosure requirements for the bonds from the fact that these bonds fall into the retail securities definition and hence require extensive disclosures in a prospectus. Also, for the first time, periodic disclosure requirements are made of high yield bond issuers (see Impact on High Yield Market below).

Background

The Prospectus Directive is a framework directive which sets out the major principles (Level 1) and has been approved and finalised by the European Commission (through its European Securities Committee) which has ultimate authority over the content of the Prospectus Directive. EU member states are expected to bring the Prospectus Directive into legal effect by July 1, 2005. More detailed requirements for prospectuses (Level 2 Advice) will be adopted on the basis of advice given by the Committee of European Securities Regulators (CESR) following public consultation. Several sets of recommendations have been produced to date by CESR. The Commission has until the end of June 2004 to produce final Level 2 Advice. The Level 2 Advice will then be supplemented by further guidance from CESR. It will therefore be after June 2004 that the full practical effects of the Prospectus Directive will be confirmed. The final stage in the legislative process is the adoption of implementing laws or regulations in each EU member state.

The following outlines the Prospectus Directive’s main requirements and considers the impact on offers of securities and admission to trading. (References to Articles are to Articles in the Prospectus Directive unless otherwise stated.)

Impact of the Prospectus Directive

The Prospectus Directive deals with securities that are admitted to trading on a "regulated market" (see Glossary) and securities that are offered to the public in any EU member state.

Securities Trading on a Regulated Market

Many of the key provisions of the new regime relate to issues of securities admitted to trading on an EU "regulated market," including securities traded on domestic "secondary" markets which are not currently regarded as admitted to official listing (Article 3(3)). London’s secondary equities exchange for small cap companies, AIM, is currently finalising plans to opt out of the Prospectus Directive and the London Stock Exchange is in the process of changing the status of AIM so that it no longer qualifies as a "regulated market."

Issuers applying for any securities to be admitted to trading on a regulated market will be required to prepare a prospectus and will be subject to standardised accounting requirements and continuing disclosure obligations. The new regime applies irrespective of whether the securities are actively traded on the market concerned.

A number of exemptions from the obligation to publish a prospectus for certain issues of securities will continue to apply (Article 4(1)-(2)). For example, accelerated placing with professional investors can still be made without a prospectus for offers of up to 10 percent of the number of shares already admitted to trading on the relevant regulated market (Article 4(2)(a)).

Offering of Securities to the Public—Unlisted Securities

The Prospectus Directive requires that, where securities are not admitted to trading on a regulated market but are offered to the public in any EU member state, a prospectus must be produced by the person making the offer. However, there are a number of exemptions available from the obligation to produce a prospectus.

A prospectus will not be required (unless admission to trading on a regulated market is sought) for:

  • Offers made to qualified investors. This is the Prospectus Directive’s terminology for "professionals," persons who are authorized or regulated to operate in the financial markets, including pension funds, insurance companies, government organisations, large corporations, etc.
  • Private placements. Offers to less than 100 persons (other than qualified investors) per EU member state.
  • High denominations. Offers with a minimum total consideration per investor or specified denomination of at least € 50,000 (Article 3(2)).

Where an offer has been made in reliance on an exemption, subsequent re-sales are treated as offers in their own right (Article 3(2)).

New Prospectus Regime

At present, a prospectus which is to be used for admission to trading or for a public offer in more than one EU jurisdiction must be approved in each relevant EU member state, and a full translation can be required. The Prospectus Directive sets out the framework under which issuers may issue a single prospectus in connection with an application for admission of securities to trading on a regulated market, or a public offer of securities, in any EU member state.

Approval and Timing

The prospectus need only be approved by one competent authority. Once a prospectus is approved it can be used in any member state—for a public offer or to obtain a listing—without any additional disclosure being required. A single notification procedure must be followed in every EU member state where the offer is made or listing is sought outside the state where the prospectus was approved. This involves production of a certificate by the competent authority that approved the prospectus. This requirement will apply to institutional offerings as well as retail offerings.

The Prospectus Directive requires all prospectuses to be approved by the relevant competent authority (Article 13(1)). A competent authority must approve a prospectus within 10 working days (extended to 20 working days for an initial public offering (IPO) (Article 13(2)-(3)). This can be extended if more information is required or the documents submitted are incomplete (Article 13(4)). These limits should not present particular problems if sensibly applied although competent authorities could delay the process by requesting further information. Any supplement to the prospectus must be approved within seven working days.

Choice of Regulator to Approve Prospectus
At present, an issuer of securities is subject to the jurisdiction of each member state in which it chooses to list or offer its securities to the public. The country where the issuer is incorporated or established is not relevant. For example, if a UK company applies for listing of its shares on the Luxembourg Stock Exchange, but not the London Stock Exchange, the listing particulars will be approved by the Luxembourg competent authority. The Prospectus Directive, however, places responsibility for approval of a prospectus on the competent authority of the "home" member state (Article 13(1)). The home member state is, in summary, determined as follows:

    1. For EU issuers of Relevant Securities this is defined as the EU member state where the issuer has its registered office (Article 2(1)(m)). The competent authority in the home member state (home competent authority) can transfer responsibility for approval to another competent authority, although it is unlikely that much use will be made of this power (Article 13(5)).
    2. For non-equity securities with a minimum denomination of at least € 1,000 and also in the case of warrants and certificates, the issuer may choose either the EU member state where the issuer has its registered office or an EU member state where the securities are admitted to trading or offered to the public as their home member state.
    3. The home member state of non-EU issuers of Relevant Securities will be that in which the securities are first offered to the public or admission to trading is first sought after December 31, 2003 (Article 2(1)(m)). In the case of a non-EU issuer having multiple listings, it is not yet clear which EU member state will be its home member state. Non-EU issuers wishing to benefit from certainty can select their home member state of preference by listing their next issue of Relevant Securities in that EU member state or alternatively they can notify the European Commission as to their choice.

Care will have to be taken by a non-EU issuer when doing issues in the period immediately following publication of the Prospectus Directive (December 31, 2003), to avoid inadvertent choice of the wrong competent authority for Relevant Securities. For further information on this, please refer to our client alert "EU Prospectus Directive—Immediate Impact for Non-EU issuers."

Publication

Once approved, the prospectus must be published "as soon as practicable, and in any case, at a reasonable time in advance of, and, at the latest, at the beginning of, the offer or the admission to trading" (Article 14(1)). For an IPO, the prospectus must be available at least six working days before the end of the offer (Article 14(1)).

Publication may be by means of posting on an issuer’s or a competent authority’s Web site or on the Web site of the regulated market where admission to trading is sought (Article 14(2)). Competent authorities must publish prospectuses which they have approved on their own Web sites (or provide a hyperlink to them) (Article 14(4)). Competent authorities can require issuers to publish prospectuses on their Web sites as well as in hard copy. Reconciliation of any requirement to publish a prospectus on an open-access Web site with other countries’ securities laws (particularly those of the US) is an area requiring consideration.

The Prospectus Directive imposes limited additional publicity controls. Advertising must not be inaccurate or misleading and must be consistent with the prospectus information (Article 15(3)). Any information that is disclosed concerning the offer, even if not advertising, must also be consistent with the prospectus (Article 15(4)). This requirement would apply to roadshow presentations but should not lead to a change in practice since existing procedures should already be designed to ensure consistency with the prospectus. Advertising does not require competent authority approval.

In relation to offers where no prospectus is required, the Prospectus Directive forbids selective disclosure of material information to particular qualified investors or special categories of investors; any material information disclosed to them must also be disclosed to all other investors (Article 15(5)).

Form and Content of the Prospectus

The Prospectus Directive allows issuers some measure of choice as to the form of the prospectus. Issuers can choose from (i) a single document (valid for 12 months—subject to updating through supplements), (ii) a three-part prospectus in the case of securities to be admitted to trading in the EU, or (iii) a base prospectus in the case of an offering programme for non-equity securities with the final terms of the securities to be filed separately if not incorporated in the prospectus.

A three-part prospectus will consist of a Registration Document which contains the business disclosure, a Securities Note which is produced as and when an issue is made and contains details of the securities being issued and a Summary of the prospectus (Article 5(2)).

The Registration Document must be updated annually and can be used with a new securities note and summary note for new issues during that 12-month period. Alternatively an issuer can draw up the prospectus in the traditional form  of a single document (which may itself be supplemented if further issues are made within 12 months).

Any format of prospectus must include a Summary which must be "brief" and in a non-technical language, it must convey the essential characteristics and risks associated with the issuer, any guarantor and the securities. A list of specific matters expected to be covered is set out in the Prospectus Directive (Annex IV to the Prospectus Directive). CESR has decided that there is no need to develop further the requirements of the Summary beyond those in the Prospectus Directive. To meet the concern that an issuer could be liable for incomplete information contained in the Summary, the Prospectus Directive provides that civil liability attaches to the Summary only if it is misleading, inaccurate or inconsistent when read together with the rest of the prospectus (Article 5(2)(d)). Despite this protection, potential liability for the Summary is likely to be a real concern for issuers, particularly where the full prospectus is only available in a different language (see Mutual Recognition).

A summary is not required for certain prospectuses that are not directed at retail investors and which relate to listed wholesale securities (see Glossary) (Article 5(2)). EU member states can nevertheless require that a Summary in their language must be prepared if the full prospectus is in another language (Article 19(4)).

Exempt Securities

There are exemptions for: debt securities with a maturity of less than one year; open ended collective investment schemes; debt securities issued or guaranteed by governments, local authorities, public international bodies, the European Central Bank and the central banks of EU member states; securities issued by non-profit making bodies; and bank certificate of deposit programs. A new exemption has been introduced for offers of securities with a total consideration of less than € 2,500,000 within a 12-month period, which addresses concerns that small issuers would be subject to disproportionate costs and may inhibit their raising of capital.

Supplement

A supplement to the prospectus must be published if any significant new factor arises or a material inaccuracy in the prospectus is noticed between the approval of the prospectus and the closing of the offer or commencement of trading (Article 16(1)). Investors who have agreed to purchase or subscribe for securities can withdraw their acceptances within a specified period if a supplement is published (Article 16(2)).

Base prospectus

The base prospectus must contain all relevant information about the issuer and the relevant securities and can be supplemented by filing the final terms of particular issues with the competent authority without any further approval requirement (Article 5(4)). This procedure appears broadly consistent with the existing mechanics of medium term note and covered warrant programs. Supplementary information relating to a change since the issue of the base prospectus would, however, need to be approved (see "Approval and Publication") and would therefore be subject to timing constraints
(Article 16(1)).

Content

The overriding requirement in the existing legislation remains unchanged: the prospectus must contain all the information which is necessary to enable investors to make an informed assessment of the assets and liabilities, financial position, profit and losses and prospects of the issuer and of any guarantor and of the rights attaching to the securities (Article 5(1)). Subject to this requirement, much of the detail relating to prospectus content is left to the Commission to determine, with the assistance of CESR.

CESR proposes the inclusion of separate schedules containing information requirements for different types of securities, such as equities, debt securities and derivatives. CESR’s proposals do not distinguish between different types of issuer according to their activities, despite the Prospectus Directive’s requirement to adapt the information required for small and medium sized enterprises (Article 7(2)(e)).

For equity securities, the Prospectus Directive requirements are based on the disclosure standards for cross-border equity offerings issued by the International Organisation of Securities Commissions (IOSCO). It provides that:

  • Risk factors must be disclosed.
  • Pro forma financial information is required where there is a significant gross change in the size of the issuer.
  • The future prospects of the issuer for at least the current financial year must be given. If profit forecasts are provided, they should be accompanied by a statement prepared by independent accountants or auditors that the forecast has been properly prepared on the basis stated and that the basis of accounting is consistent with the issuer’s accounting policies.
  • IAS financial information must be included. For non-EU issuers who do not prepare their financial information to International Accounting Standards, additional disclosure will not be required provided that the financial information has been prepared under equivalent accounting standards and reported on under equivalent auditing standards. As yet the European Commission has not made a decision as to whether US GAAP will be granted "equivalent" status, and, although considered likely, no decision will be made until mid-2004. (See International Accounting Standards).

The Prospectus Directive has broadly preserved the provisions of the existing prospectus directives authorising derogations from the content requirements where disclosure would be contrary to the public interest or seriously detrimental to the issuer, provided that the public would not be misled by the omission, or where the information is of minor importance only (Article 8(2)).

Public documents that have previously been published and approved by or filed with the competent authority may be incorporated by reference in the prospectus (Article 11).

Mutual Recognition

The Prospectus Directive promises an improvement in the mechanism for mutual recognition of prospectuses between EU member states.

Notification Procedure

A prospectus which is approved by the competent authority of one EU member state will be valid for the public offer or admission to trading of securities in any other EU member state (host member state), provided only that the host member state’s competent authority (host competent authority) is notified of the approval of the prospectus (Article 17(1)). The host competent authority is expressly prohibited from approving the prospectus for use in its own jurisdiction and cannot require additional information to be included (Article 17(1)): such requirements have inhibited mutual recognition under the existing prospectus directives.

Where issuers are based in countries outside the EU, the competent authority in the home member state (see Approval and Timing and Publication) may approve a prospectus drawn up in accordance with legislation of a third country provided it has also been drawn up in accordance with international standards (such as the IOSCO disclosure standards) and is subject to information requirements that are "equivalent" to the requirements under the Prospectus Directive (Article 20(1)).

Language

In offerings excluding, or listings outside, the home member state, the prospectus can be drawn up in "a language customary in the sphere of international finance", for which English would presumably qualify. Even when scrutinised by the competent authority in the home member state the prospectus can be drawn up in a language customary in the sphere of international finance at the option of the issuer, offeror or person seeking a listing. In such cases the host member states can only require that the Summary be translated. In international offerings or listings that include the home member state, the prospectus must be drawn up in the language accepted by the competent authority of the home member state and may be made available in "a language customary in the sphere of international finance." In such cases the host member states can only require that the Summary be translated (Article 19(2)-(3)). A single prospectus drawn up in a language customary in the sphere of international finance can be used throughout the EU for listed wholesale securities, although EU member states can require that a summary must be drawn up in their official language (Article 19(4)).

Harmonization

The Prospectus Directive is commonly referred to as one requiring maximum rather than minimum harmonization, meaning that it sets common standards to be implemented rather than mandating minimum standards which leave EU member states free to impose additional requirements. Concern has been voiced that this will prohibit competent authorities from maintaining rules that go beyond the Prospectus Directive. However, a home competent authority can require an issuer to include additional information in a prospectus if necessary for investor protection, although this is presumably intended to apply on an ad hoc basis rather than allowing competent authorities to make rules of general application (Article 21(3)(a)). The Prospectus Directive should also not affect competent authorities’ ability to impose continuing obligations on listed companies, such as the UK Listing Authority’s class tests which require shareholder satisfaction or approval for transactions of a certain size, since it does not prevent the imposition of requirements that do not relate to the drawing up, content or dissemination of a prospectus (for example, in relation to corporate governance) (preamble to the Prospectus Directive).

Liability

Despite the harmonization of content requirements, the Prospectus Directive provides only limited harmonization of civil liability for information included in a prospectus: responsibility for the content must be taken by the issuer or its board, the offeror, the person requesting admission to trading or the guarantor (Article 6). However, the standard of liability is left to individual EU member states to determine.

In addition, despite the Prospectus Directive providing that there will be no civil liability in respect of the Summary unless it is misleading when read together with the full prospectus, investors could argue, if their securities decline in value, that the issuer deliberately omitted certain information from the Summary. In extreme cases, this could result in criminal liability, from which there is no exemption under the Prospectus Directive.

International Accounting Standards and Public Reporting

Under the IAS Regulation all EU issuers with securities admitted to trading on a regulated market must prepare consolidated financial reports for financial years commencing on or after January 1, 2005 in accordance with IAS (January 1, 2007 in limited cases). In practice, listed issuers will need to prepare IAS information for periods starting from the prior year onwards in order to be able to present comparative information on a basis consistent with the first financial period required to be reported under IAS.

Under the IAS Regulation, a company without subsidiaries may continue to prepare its accounts in accordance with its domestic law. However, a home member state may ultimately require compliance with IAS under powers contained in the IAS Regulation.

The requirement for public disclosure of financial reports mentioned above (see Executive Summary) results from the draft Transparency Directive:

  • issuers whose securities are admitted to trading on a regulated market must disclose publicly consolidated annual and half annual financial reports in accordance with the IAS Regulation.
  • issuers whose shares are admitted to trading on a regulated market must publicly disclose quarterly financial information.

This applies to both EU and non-EU issuers and thus will require both to publish IAS consolidated financial statements unless the issuer’s existing accounting standards are deemed to be "equivalent" to IAS (The European Commission has not made a decision as to whether US GAAP will be granted "equivalent" status, but it is considered to be likely, although such decision is unlikely to be before mid-2004).

A tight timetable is laid down for the publication of these periodic reports. They must be published as soon as possible, and in any event within 90 days of the period end in the case of annual reports, and within 60 days of the period end in the case of half-yearly and quarterly reports.

Both annual reports and half-yearly reports will have to contain responsibility statements by the issuer’s directors stating that, to the best of their knowledge, the information contained is true and complete. The half-yearly report will also have to contain an update of the directors’ report on the annual accounts. Both half-yearly and quarterly reports will have to reproduce in full the terms of any report or review by the auditors. These provisions may increase the liability of directors and presumably auditors in relation to periodic financial reporting—issuers will in effect need to treat them like prospectuses, with inevitable cost consequences. Furthermore, the liability is not only to existing shareholders. Issuers or directors will be responsible "to the public" throughout the EU, and may be sued by investors in any (or every) EU member state if the reports turn out to be misleading.

The draft Transparency Directive excludes issuers who only have listed wholesale securities from the obligations to make publicly available periodic financial information or to make the accompanying certifications.

The draft Transparency Directive does allow the competent authority of a home member state to exempt non-EU issuers from the public disclosure requirements if the domestic law of the non-EU issuer has equivalent requirements. The information will still have to be filed in the home member state and be disclosed in a timely manner.  The use of IOSCO standards by non-EU countries as a basis for such disclosure requirements will help in establishing equivalence although we will have to see how this develops in the final rules.

Under the Prospectus Directive, a new obligation requires issuers whose securities are admitted to trading on a regulated market to provide annually a document that contains or refers to all information that the issuer has published or made available to the public, both in EU member states and other countries, over the last 12 months in compliance with the requirements of securities laws (Article 10(1)). This document must be filed with the issuer's home competent authority after publication of the issuer's financial statements (Article 10(2)). Issuers with only listed wholesale securities are exempt from this requirement (Article 10(3)).

The CESR recommendations on Level 2 implementation covering the use of historic financial information under the Prospectus Directive were published on January 8, 2004. They recommended that a prospectus include three years of financial information for equity securities offerings and two years for debt securities offerings. The CESR recommendations with respect to the use of IAS and auditing standards attempt to clarify the position between the Prospectus Directive, the Transparency Directive and the IAS Regulation (see Impact on the High Yield Market.) During the transition to IAS reporting under the IAS Regulation, CESR recommended restatements of two years of financial information for equity and one year for debt securities.  CESR also recommended that the Commission should make it clear that an issuer will not be required to produce IAS financial statements in a prospectus for any accounting period prior to January 1, 2004 (or 2006 as appropriate). New non-EU issuers (i.e. those without securities listed on December 31, 2003) are permitted to use US GAAP financial information for periods prior to financial years commencing on or after January 2007 (but no other GAAPs) instead of IAS if they are already using US GAAP. Existing non-EU issuers (i.e. those with securities listed on December 31, 2003) can, in effect, carry on using GAAPs that are presently accepted under the existing directive subject to the final agreed transitional arrangements from the existing directive but additional information may need to be provided.

In practice additional information requirements are interpreted differently by competent authorities and this interim measure will presumably lead to different results in different member states. In this regard CESR has promised "coordination."

However, this is only a temporary measure. Existing issuers can only continue to use such existing GAAP until the reporting requirements under the Transparency Directive come into effect. CESR has recommended that the European Commission needs to work out a procedure for determining the equivalence of non-EU GAAPs including US GAAP. Although CESR specifically references the fact that US GAAP will have to go through this process, it is positive for US GAAP issuers that CESR has implicitly accepted the "equivalency" of US GAAP. Notwithstanding this, any issuer with only listed wholesale securities could take advantage of the exemptions on financial disclosure in a prospectus and on-going financial public reporting requirements; however, an EU issuer must still produce IAS consolidated accounts as it will be caught by the IAS Regulation. Although the Transparency Directive is to be finalised in early 2004, it is uncertain how long it will take before a decision as to what accounts would be treated as equivalent to IAS and this could be left to Level 2 Advice.

Impact on High Yield Market

Various issues are raised by the Prospectus Directive for the European High Yield Market.

With some exceptions, high yield bonds have been offered pursuant to exemptions from public offer rules and only after closing has a listing on a regulated market been undertaken. This process should be unaffected by the Prospectus Directive. The initial offering can still be undertaken under exemptions with adequate representations, certifications and legends and be followed by a listing with a compliant prospectus. (See Impact of the Prospectus Directive-Offering of Securities to the Public-Unlisted Securities).

Many issues may arise by the fact that this market traditionally sees bonds issued in denominations of $1,000, € 1,000 or £1,000 and hence it will not benefit from many of the disclosure exemptions that are based on minimum € 50,000 denominations for non-equity offerings. At the moment high yield bonds are treated as any other instrument held by sophisticated investors, for example as specialist debt securities under the UK Listing Rules, but we will have to see how the competent authorities develop their new disclosure rules based on the Level 2 Advice.

The requirement for a Summary will not directly impact since "the Box" has long been in any bond prospectus. However, it should be noted that an EU member state can require that the Summary be translated into its local language leading to extra cost and timing issues.

The requirement for Risk Factors may not directly impact since issuer, industry, country and legal risk factors are common in an high yield prospectus. CESR expressly calls for risk factors that address market risk. We will have to wait and see if this develops into something more than simply saying that there may not be a liquid market in the bonds.

Currently a red, or a red herring, will not contain pricing information. However, the CESR recommendations on the Level 2 implementation require an indication of the expected price at which the securities will be offered or the method of determining the price and the process for its disclosure. The Prospectus Directive requires a two working day window in lieu of this disclosure during which investors have a right to withdraw. This will be an issue in any bond offering where admission to trading on a regulated market is sought at closing of the offering rather than after.

In most prospectuses, the Plan of Distribution contains very standard disclosure. The CESR recommendations on the Level 2 implementation require disclosure on entities agreeing to a firm commitment to underwrite and entities agreeing to place securities without a firm commitment. The disclosure will also include material features of any agreement with such entities, including quotas, overall commission and placing fees. Any portion of the offering not underwritten will also have to be disclosed. We will have to see what the competent authorities develop in their rules for these disclosure requirements.

Incorporation by reference of documents filed with a home competent authority will be helpful to many issuers when producing a prospectus. However, there is no allowance for incorporation by reference to US Securities and Exchange Commission (SEC) filed documents so there is no short cut for SEC registered issuers unless they report the same disclosure in an EU member state.

The CESR recommendations on the Level 2 implementation on historic financial information, published January 8, 2004, requires a prospectus to contain two years of audited financial information prepared in accordance with the accounting standards which will be adopted in the issuer's next annual financial statement. Issuers will be using the standards acceptable under the IAS Regulation or non-EU member states local GAAP equivalent to the standards acceptable under the IAS Regulation. The financial information must be audited in accordance with standards applicable in an EU member state or an equivalent standard. Issuers from non-EU member states will only have to restate their financial information if their local GAAP is not equivalent to the standards acceptable under the IAS Regulation or their local auditing standards are not equivalent to standards applicable in an EU member state. However, any issuer in that position will be able to take advantage of the listed wholesale securities exemption where it must:

  • make a prominent statement in the prospectus that the financial information has not been prepared in accordance with IAS and that there may be material differences in the financial information had IAS  been applied and it must include a description after the historical information of the material differences.
  • make a prominent statement in its prospectus disclosing which auditing standard was applied and explaining the significant departures from the International Standards on Auditing.

Currently a high yield issuer with no listed equity has more limited continuing obligations than issuers of listed equity. They disclose material changes to the issuer and its business that affect the price of the bonds or the issuer’s ability to repay and are outside other reporting and corporate governance requirements.

Going forward high yield issuers whose securities are admitted to trading on a regulated market will have to:

  • Make publicly available their annual and half-yearly financial reports prepared in accordance with the IAS Regulation. The annual and half-yearly financial reports will be accompanied with a responsibility statement signed by the persons responsible within the issuer that the information in the report is, to the best of their knowledge, in accordance with the facts and that the report makes no omission likely to affect its import. Issuers making the US Sarbannes-Oxley Act certifications should not find this a problem. Indeed, a home member state may exempt non-EU issuers where their domestic laws contain equivalent provisions to the periodic reporting requirements of the Transparency Directive.
  • File with the home member state (and make publicly available via for example the issuer's Web site) a document containing all information made publicly available anywhere during the prior year pursuant to applicable securities laws. (see International Accounting Standards).

Concerns amongst issuers and underwriters about the requirements for periodic public reporting of IAS prepared accounts, the related certifications and the annual information requirements are now leading to some high yield bond issues being undertaken in denominations at or in excess of € 50,000 in anticipation of the listed wholesale securities exemptions for these requirements. Some issuers may go so far as to include in their bonds the right to delist the bonds if maintaining the listing becomes too onerous following implementation of the Transparency Directive.

List of Current EU Member States   

Austria  
Belgium  
Denmark  
Finland  

France  
Germany  
Greece  
Ireland  

Italy
Luxembourg
The Netherlands
Portugal

Spain
Sweden
United Kingdom


List of EU Accession Countries in May 2004

 

Czech Republic
Cyprus  
Estonia  

Latvia  
Lithuania  
Hungary

Malta
Poland
Slovenia

Slovakia

Timetable for Implementation    

Measure

Formal approval/adoption

Publication
in Official
Journal

In Force

Deadline for
implementation in
Member States

IAS Regulation

July 19, 2002

September 11, 2002

September 14, 2002

None required - applies directly for financial years commencing on or after January 1, 2005 (or 2007, for some companies)

Prospectus Directive

July 15, 2003

December 31, 2003

December 31, 2003

July 1, 2005

Transparency Directive

Still in draft - possibly early 2004

Following approval

Once published in
Official Journal

Currently proposed to be December 31, 2004

Glossary

"base prospectus"

A form of prospectus that may be used in the context of an offering program, where the final terms, such as price and coupon, of the securities may be filed separately with the competent authority and are not subject to approval.

"competent authority"

The regulatory authority in each member state with responsibility for approval of prospectus.

"equity securities"

  1. shares;
  2. other transferable securities equivalent to shares in companies;
  3. any other type of transferable securities giving the right to acquire securities under (i) or (ii), as a consequence of them being converted or the rights conferred by them being exercised, provided that the securities conferring such rights are issued by the issuer of the underlying shares or by an entity belonging to the group of the said issuer.

Convertible bonds and warrants over an issuer’s own shares will therefore be classified as "equity securities," although exchangeable bonds or covered warrants issued by third parties will be "non-equity securities."

"home member state"

  1. for all EU issuers of securities which are not covered by (ii) below, the member state where the issuer has its registered office;
  2. for any issuer of non-equity securities whose denomination per unit amounts to at least € 1,000, and for any issues of non-equity securities giving the right to acquire any transferable securities, or to receive a cash amount, as a consequence of them being converted or the rights conferred by them being exercised, provided that the issuer of the non-equity securities is not the issuer of the underlying securities or an entity belonging to the group of the issuer, any member state where the issuer has its registered office, or where the securities were or are to be admitted to trading on a regulated market or where the securities are offered to the public at the choice of the issuer, the offer or or the persons asking for admission as the case may be. The same regime applies to non-equity securities in a currency other then euros, provided that the value of such minimum denomination is nearly equivalent to € 1,000;
  3. for all issuers of securities incorporated in a third country, which are not covered by (ii), the member state where the securities are intended to be offered to the public for the first time after the entry into force of the Prospectus Directive or where the first application for admission to trading is made on a regulated market, at the choice of the issuer, the offeror or the person asking for admission, as the case may be, subject to a subsequent election by issuers incorporated in a third country if the home member state was not determined at their choice.

"host member state"

The state where an offer to the public is made or admission to trading is sought when different from the home member state.

"IAS"

International Financial Reporting Standards as endorsed by the European Commission for the purpose of the IAS Regulation relating to the preparation of consolidated accounts by listed EU companies.

"non-equity securities"

All securities that are not equity securities.

"public offer"

A communication to persons in any form and by any means, presenting sufficient information on the terms of the offer and the securities to be offered, so as to enable an investor to decide to purchase or subscribe to the securities. This definition also applies to the placing of securities through financial intermediaries.

"qualified investors"

  1. persons who are authorized or regulated to operate in financial markets, including credit institutions, investment firms, insurance companies, collective investment schemes and their management companies, pension funds and their management companies and commodity dealers;
  2. national and regional governments, central banks and international and supranational institutions such as the World Bank, the IMF, the European Central Bank and the European Investment Bank; and
  3. large corporations, being companies which, according to their last annual or consolidated financial statements, meet at least two of the three following criteria: (a) at least 250 employees, (b) a "total balance sheet" over € 43,000,000 and (c) an annual turnover exceeding € 50,000,000.

"registration document"

A document containing information relating to the issuer of securities which, together with a securities note and, where applicable, a summary, and updated if required, constitutes a prospectus.

"regulated market"

a market for securities which appears in the list of regulated markets drawn up by the EU member state in which the market is situated or operates; includes EU stock exchanges (such as the London and Luxembourg stock exchanges), as well as any designated systems. It will not include any non-EU stock exchange or screen-based system (such as the New York Stock Exchange, Nasdaq or any off-shore stock exchange).

"retail securities"

Securities which are not wholesale securities.

"securities note"

A document containing information concerning the securities offered or to be admitted to trading on a regulated market, which together with the registration statement and, where applicable, a summary, constitutes a prospectus.

"summary"

A summary, comprising part of the prospectus, which in a brief manner and non-technical language conveys the essential characteristics and risks associated with the issuer, any guarantor and the securities.

"wholesale securities"

Non-equity securities with denomination of at least € 50,000, or, in the case of derivatives, which can only be acquired on issue for € 50,000 or more.

*********************

Latham & Watkins operates as a limited liability partnership worldwide with an affiliate in the United Kingdom and Italy, where the practice is conducted through an affiliated multinational partnership. © Copyright 2003 Latham & Watkins. All Rights Reserved.

Latham & Watkins is an international law firm of more than 1,500 attorneys in 21 offices worldwide, including Boston, Brussels, Chicago, Frankfurt, Hamburg, Hong Kong, London, Los Angeles, Milan, Moscow, New Jersey, New York, Northern Virginia, Orange County, Paris, San Diego, San Francisco, Silicon Valley, Singapore, Tokyo, and Washington, D.C.

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