The Irish transparency regime changed on 26 November 2015 when amending European legislation was transposed into Irish law. The most notable change is the widening of the existing disclosure obligation to capture a broader range of financial instruments including cash-settled derivatives. This Briefing summarises the key changes and their practical impact.
The deadline for Member States to transpose the changes made to the existing Transparency Directive (Directive 2004/109/EC) (the Existing TD) by the amending Transparency Directive (Directive 2013/50/EU) (the Amending TD) was 26 November 2015 and the Irish Transposing Regulations (SI 541/2015) (the Irish Regulations) took effect from that date. The Central Bank of Ireland also published its updated Transparency Rules on 30 November 2015. A Commission Delegated Regulation provides further detail on calculations and exemptions.
QUESTIONS & ANSWERS
Q1: WHY HAS THE REGIME CHANGED?
The Existing TD imposed:
- reporting obligations: issuers of securities admitted to trading on regulated markets across the EU had annual, half-yearly and quarterly reporting obligations; and
- disclosure/notification obligations: shareholders in those issuers were obliged to notify acquisitions and disposals of voting shares which could lead to a holding reaching, exceeding or falling below certain thresholds.
Concerns arose that:
- the reporting obligations caused a disproportionate administrative burden for small and medium-sized issuers; and
- persons could build up economic interests in issuers using financial instruments other than voting shares, without being required to disclose those interests.
Q2: WHAT KEY CHANGES HAS THE AMENDING TD INTRODUCED?
- Disclosure: the disclosure obligation has been widened to cover holdings of all financial instruments that could be used to acquire economic interests in a listed company (in particular cash-settled derivatives).
- Aggregation: holdings of the financial instruments mentioned above must now be aggregated with shareholdings in the same issuer to calculate whether thresholds have been reached.
- the obligation on issuers to provide quarterly financial information has been removed (however, see Q11 below, and companies may still report voluntarily);
- half-year financial reports must be published within 3 (not 2) months of the end of the reporting period; and
- half-yearly and annual reports must remain publicly available for 10 (not 5) years.
- "Home" Member State: issuers who do not choose a home Member State within 3 months of securities first being admitted to trading on a regulated market will be the subject of 'deemed Member State' provisions.
Q3: WHAT OTHER CHANGES SHOULD BE NOTED?
- "Issuer": the definition of "issuer" has been broadened to cover natural persons and issuers of non-listed securities represented by depositary receipts admitted to trading on regulated markets.
- New exclusion when calculating thresholds: shares acquired for stabilisation purposes can now be excluded from the calculation.
- Notifications: these must now be made "promptly" rather than "as soon as possible" but the four trading days limit still applies.
- Sanctions: competent authorities must publish all decisions on sanctions and measures imposed for breaches of the transparency regime without undue delay (subject to rights to delay publication or publish decisions on an anonymous basis).
- Instruments of incorporation: the obligation on an issuer to notify its competent authority and relevant regulated market of changes to its instruments of incorporation has been removed.
- New loan issues: the obligation on issuers to publicise new loan issues and related guarantees and security has been removed.
Q4: WERE ANY CHANGES NOT TRANSPOSED INTO IRISH LAW?
The Amending TD requires listed and large non-listed extractive and logging companies to report all material payments to governments – this requirement has not yet been transposed into Irish law (but may instead be transposed when the Accounting Directive (Directive 2013/34/EU) is transposed in early 2016).
Q5: DID THE NOTIFICATION THRESHOLDS CHANGE?
No. The thresholds are still 5%, 10%, 15%, 20%, 30%, 50% and 70%, and Member States continue to be allowed to set lower thresholds. The thresholds in the Transparency Rules remain unchanged at 3%, 4%, 5%, 6%, 7%, 8%, 9%, 10% and each 1% threshold thereafter up to 100% or, in the case of a non-Irish issuer, 5%, 10%, 15%, 20%, 25%, 30%, 50% and 75%.
Q6: WHAT OTHER PROVISIONS OF THE AMENDING TD SHOULD WE BE AWARE OF?
- Electronic reporting: annual reports must be prepared in single electronic reporting format from 2020. ESMA is consulting on this, and the consultation period closes on 24 December 2015.
- Access: a European Electronic Access Point is being introduced to facilitate access to information across Member States. ESMA published its final draft Regulatory Technical Standards on the EEAP in September 2015 for approval by the European Commission.
Q7: WHAT FINANCIAL INSTRUMENTS ARE NEWLY IN SCOPE?
- Category 1: instruments in respect of which there is a binding agreement that, on maturity, the holder will have an unconditional right to acquire (or the discretion to acquire) voting shares that are already in issue.
- Category 2: financial instruments not covered by Category 1 above, but which are referenced to shares referred to in Category 1 above, and have a similar economic effect (whether or not they confer a right to cash settlement).
Q8: ARE THERE EXAMPLES OF THOSE FINANCIAL INSTRUMENTS?
Yes, as follows:
- Examples in Amending TD: 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 are in scope. ESMA has confirmed that the reference to "options" includes a reference to puts, calls or any combination thereof.
- ESMA indicative list: the following are in scope if they come within either category at Q7 above and reference voting shares:
- irrevocable convertible and exchangeable bonds referring to already issued shares;
- financial instruments referenced to a basket of shares or an index where either:
- the voting rights in a specific issuer held through financial instruments referenced to the basket or index represent >1% of the voting rights attached to shares of that issuer;
- the shares in the basket or index represent >20% of the value of the securities in the basket or index; and
- warrants, repurchase agreements, rights to recall lent shares, contractual buying pre-emption rights, other conditional contracts or agreements than options and futures, hybrid financial instruments, combinations of financial instruments and shareholders' agreements having financial instruments in one of the two categories referred to in Q7 above as an underlying.
Q9: WILL NOTIFICATIONS AND CALCULATIONS CHANGE?
Yes. Notifications must now distinguish between:
- holdings of shares and holdings of financial instruments;
- the two different categories of financial instruments referred to in Q7 above; and
- financial instruments with a right to physical settlement and those with a right to cash settlement.
- voting rights in respect of a financial instrument must be calculated by reference to the full notional amount of underlying shares unless the instrument provides for cash settlement only, in which case a 'delta-adjusted' basis must be used;
- the holder must aggregate and notify all financial instruments relating to the same underlying issuer; and
- only long positions can be taken into account, and long positions cannot be netted with short positions relating to the same underlying issuer.
The Central Bank has updated its Form TR-1 to take account of the Irish Regulations.
Q10: DO THE SAME EXEMPTIONS APPLY TO HOLDINGS OF FINANCIAL INSTRUMENTS?
The existing exemptions relating to clearing and settlement, custodians, shares held by market makers, voting rights held in the trading book, notifications by parent undertakings, management companies and investment firms apply to holdings of newly inscope financial instruments.
Q11: DID IRELAND EXERCISE MEMBER STATE DISCRETION?
Yes, as follows:
- Quarterly reporting: the Central Bank can require that issuers who are financial institutions and (subject to the fulfilment of certain conditions) other issuers provide additional periodic financial information.
- Stricter requirements: the Central Bank can apply stricter requirements to shareholders and holders of other relevant financial instruments when setting notification thresholds, applying stricter notification and disclosure procedures, and applying laws relating to mergers, takeovers and other transactions affecting ownership or control of companies.
- Sanctions: the Central Bank has the right to impose a higher monetary figure for a breach by an individual of the Irish Regulations (€2,500,000 instead of €2,000,000).
Q12: ARE THE TAKEOVER RULES OR PART 17 OF THE COMPANIES ACT 2014 AFFECTED?
No, those regimes are unaffected.
Q13: OTHER NOTABLE POINTS?
- Market maker exemption: the Irish Regulations provide that a market maker looking to rely on this exemption must notify the competent authority of the issuer's home Member State, rather than the competent authority that regulates the market maker in respect of its market making activities.
- Sanctions: the Irish Regulations now also give the Central Bank (where there has been a failure to comply with notification obligations) the ability to suspend voting rights.
The Amending TD has been in the pipeline for some time and represents the first in a series of significant amendments to European and Irish securities laws. If firms have not already updated their systems to enable reporting on the new in-scope instruments and compliance with the other new requirements they should do so soon.
On 3 July 2016, the new Market Abuse Regulation will become directly effective in Ireland and will have a major impact on the ongoing reporting obligations of issuers of securities. The EU has also published proposed amendments to the prospectus regime by way of a draft prospectus regulation on 30 November 2015 which will have a significant impact on the content of prospectuses. We will shortly be issuing a further briefing on both of these developments.
This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.