Directive 2004/109/EC on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market (Transparency Directive) regulates periodic financial reporting, major shareholding disclosures and the provision of information to investors in relation to issuers with securities traded on regulated markets of Member States of the EU or EEA (Member States).
Cypriot companies are frequently used in cross-border structures, whereby securities of a Cypriot company are listed on a regulated market of another Member State (Cypriot Issuer). This article provides an overview of the obligations of holders of listed securities of such Cypriot Issuers (Holders) and other persons subject to the notification requirements which are commonly overlooked, and sets out certain key circumstances under which Holders with 'major holdings' in a Cypriot Issuer, and sometimes also Cypriot Issuers themselves, are required to make notifications pursuant to the provisions of the Transparency Directive.
The Transparency Directive aimed to introduce a harmonised framework on the reporting and publications required to be made by issuers and holders of securities in cross border listing structures, in order to enhance investor protection and market efficiency, as well as to create transparent and integrated securities markets contributing to a genuine single market.
As an EU directive, the Transparency Directive has been implemented in Cyprus by the Transparency Requirements Law, L.190(I)/2007, as amended (Law). The Cyprus Securities and Exchange Commission (CySEC) is the competent authority with responsibility for supervision and enforcement of the Law. The approach taken by Cyprus in transposing the Transparency Directive into national legislation has generally been to "copy out" the provisions of the Directive, thereby adopting wording which reflects as closely as possible the provisions at the EU level.
Nonetheless, due to the fact that the Transparency Directive has been transposed into the national legislation of each Member State, it is often the case that Member States have approached or interpreted certain matters differently, with such nuances sometimes giving rise to diverging practices as concerns the applicable requirements in each Member State. Additionally, in cross border structures where the listing of securities is in a different Member State than the 'home Member State', Holders often overlook the reporting obligations required by the home Member State, focusing only on the requirements of the listing jurisdiction.
Notifications of 'major holdings'
A key requirement under the Law for both Cypriot Issuers and Holders is the imposition of notification requirements on Holders to notify the Cypriot Issuer and CySEC of the proportion of voting rights of the Holder in the Cypriot Issuer as a result of the acquisition or disposal of 'major holdings' by a Holder.
Under the Law, 'major holdings' are met where a Holder acquires or disposes of a proportion of shares to which voting rights are attached in a Cypriot Issuer, where that proportion reaches, exceeds, or falls below the thresholds of 5%, 10%, 15%, 20%, 25%, 30%, 50% and 75% (Thresholds). A Holder who newly acquires shares in a Cypriot Issuer and meets these Thresholds is also required to make the relevant notifications. The notification must be submitted in a prescribed form.
Calculation of voting rights
Voting rights arising from shares
The traditional notification requirement by Holders under the Law is triggered where a change in the 'voting rights' of a Holder causes the Holder meet the Thresholds. 'Voting rights' under the Law arise under various circumstances, the most frequent way being in relation to a Holder having shares in a Cypriot Issuer to which voting rights are attached. In this case, voting rights are calculated on the basis of all the shares to which voting rights are attached, even if the exercise thereof is suspended.
Voting rights arising from 'entitlement'
In addition, in calculating whether a person, legal or natural, has triggered the notification requirement, voting rights in a Cypriot Issuer which a person is entitled to acquire, dispose of, or exercise in a Cypriot Issuer (Entitled Person) must also be included. A key example in this respect which is commonly overlooked is in respect of the granting of a discretionary proxy over a Holder's voting rights in a Cypriot Issuer. Under the Law, where a Holder grants a discretionary proxy to any person (Proxy) in relation to securities held in a Cypriot Issuer listed on a regulated market, such Proxy would be deemed to be acquiring voting rights in the Cypriot Issuer and the notification requirements are triggered. Other such 'entitlements' which under the Law could deem a person to be an Entitled Person include:
- voting rights held by a third party with whom a Holder has concluded an agreement, which obliges them to adopt, by concerted exercise of the voting rights they hold, a lasting common policy towards the management of the Cypriot issuer (Concerted Voting)
- voting rights held by a third party under an agreement concluded with a Holder providing for the temporary transfer, for consideration, of the voting rights in question (Temporary Transfer)
- voting rights attaching to shares which are lodged as collateral with a person, provided that such person controls the voting rights and declares its intention of exercising them (Collateral)
- voting rights attaching to shares in which a person has the life interest (Life Interest)
- voting rights which are held, or may be exercised within the meaning of points (a) to (d) above, by an undertaking controlled by an Entitled Person (Controlled Undertaking)
- voting rights attaching to shares deposited with a person which such person can exercise at its discretion in the absence of specific instructions from the Holder
- voting rights held by a third party in its own name on behalf of a person Further detail on who is required to make a notification under these circumstances is provided further down in this article.
Voting rights arising from financial instruments
Furthermore, it is also required that in calculating a Holder's voting rights to determine whether the notification requirements are triggered, any voting rights relating to the following financial instruments, whether direct or indirect, must also be included:
- financial instruments that, on maturity, give the holder, under a formal agreement, either the unconditional right to acquire or the discretion as to his right to acquire, shares to which voting rights are attached, already issued, of a Cypriot Issuer
- financial instruments which are not included in point (a) but which are referenced to shares referred to in that point and with economic effect similar to that of the financial instruments referred to in that point, whether or not they confer a right to a physical settlement
For the purposes of the Law, financial instruments are understood to be the following: transferable securities, options, futures, swaps, forward rate agreements, contracts for differences, and any other contracts or agreements with similar economic effects which may be settled physically or in cash. In addition, under the Transparency Directive, the European Securities and Markets Authority (ESMA) maintains an indicative list of instruments which are also subject to the notification requirements, which currently includes irrevocable convertible and exchangeable bonds referring to already issued shares, hybrid financial instruments and repurchase agreements.
Although ESMA has provided guidance in the form of its Q&As and regulatory technical standards in the form of Commission Delegated Regulation (EU) 2015/761 in relation to how to calculate the voting rights stemming from financial instruments, it is conceivable that diverging practices may arise across Member States, particularly where Member States may have implemented this provision into their national law in different ways. Such practices could mean that different methods of calculation would lead to the notification regime being triggered differently in varying Member States.
Further complications may also arise in relation to the applicable thresholds which trigger the notification requirements. The Transparency Directive provides that a Member State does not need to apply (a) the 30% threshold, if it applies a one-third threshold, and (b) the 75% threshold, if it applies a two-thirds threshold. Predictably, this can lead to a situation where the notification requirement is triggered at different proportions in different Member States, leading Holders to possibly 'miss' a notification requirement under the Law.
Who is a 'Holder'?
The expanded range of instruments and circumstances deemed to give rise to voting rights in calculating the Thresholds leads to a wide list of persons, other than the traditional holders of shares in a Cypriot Issuer, who may be deemed Holders.
CySEC has provided some clarification on who is expected to submit a notification under the circumstances where a person is 'entitled' to voting rights, if such notification requirement is triggered, as follows:
- in relation to voting rights arising from Concerted Voting, the notification obligation is on all parties to the agreement
- in relation to voting rights arising from a Temporary Transfer, the notification obligation is on (i) the person that acquires the voting rights under the agreement, and (ii) the person who is transferring temporarily, for consideration, the exercise of the voting rights held
- in relation to voting rights arising from Collateral, the notification obligation is on (i) the person with whom the shares are lodged as collateral (collateral holder), if it controls the voting rights attached to the shares and declares its intention to exercise them, and (ii) the person who has lodged the shares as collateral (collateral lodger)
- in relation to voting rights arising from a Life Interest, the notification obligation is on (i) the person who has the life interest in the shares if it is entitled to exercise the voting rights attached to the shares, and (ii) the person who disposes such shares
- in relation to voting rights which are held, or may be exercised in relation to Concerted Voting, Temporary Transfer, Collateral and Life Interest, by an undertaking controlled by an Entitled Person (in this paragraph (e), the Controlling Person), the notification obligation is on (i) the controlled undertaking and on the Controlling Person, if the controlled undertaking has a notification duty at an individual level; and (ii) only the Controlling Person, if the controlled undertaking has no notification duty at an individual level
- in relation to voting rights attaching to shares deposited with an 'entitled' person and which the 'entitled' person can exercise at its discretion in the absence of specific instructions from the shareholders, the notification obligation is on (i) the person with whom the shares are deposited (deposit taker) if it can exercise at its discretion the voting rights attached to the shares deposited, (ii) the shareholder who deposits the shares (depositor)
- in relation to voting rights held by a third party in its own name on behalf of an 'entitled' person, the notification obligation is on the person who controls the voting rights
- in relation to the granting of a discretionary proxy and in the absence of specific instructions from a Holder, the notification obligation is on the Proxy and the Holder
Reporting by Cypriot Issuers
Notification obligations on the Holders and Entitled Persons may trigger additional reporting requirements by the Cypriot Issuer as well. Under the Law, a Cypriot Issuer is required to publish certain notifications it receives, including all notifications regarding a Holder's or Entitled Person's voting rights meeting the Thresholds.
In the example of the granting of a discretionary proxy above, a further consequence of the notification made in this respect, would be that under the Law the Cypriot Issuer would subsequently also be required to publish the notification received in relation to the proxy, as the Cypriot Issuer is subject to a requirement to make public certain notifications it receives.
Where a Holder, Entitled Person, or other person subject to the notification requirements under the Law fails to make the required notification, CySEC may impose the following administrative pecuniary sanctions:
- on a legal person, a fine not exceeding €10 million or up to twice the amount of the profits gained or losses avoided because of the breach, where those can be determined, whichever is higher
- on a natural person, a fine not exceeding €2 million or up to twice the amount of the profits gained or losses avoided because of the breach, where those can be determined, whichever is higher
- CySEC also has the power impose certain other, non-pecuniary sanctions on the person in breach, such as making public the name of the person in breach and details of the breach, as well as suspending the voting rights held by such person in the Cypriot Issuer
In addition, submitting false or misleading information, or concealing any such information required pursuant to the Law constitutes a criminal offence punishable by a prison sentence of five years or a fine of EUR 341,000. It may further be subject to an administrative fine imposed by CySEC not exceeding EUR 341,000 or in the case of remission, a fine not exceeding EUR 683,000. Furthermore, other than the administrative sanctions which may imposed by CySEC, a person in breach of the notification requirements may also incur civil liability arising from such breach.
The implementation of the Transparency Directive has without a doubt simplified reporting and notification requirements in cross-border listing structures, and the amendments introduced to the Transparency Directive by EU Directive 2013/50/EU have assisted in the convergence of the applicable regimes across Member States. However, the fact remains that each Member State has implemented the Transparency Directive obligations separately and as a result Holders, as well as Entitled Persons, should be aware of the obligations arising both from the legislation of the country of listing, and the country of origin of the listed entity.