European Commission Proposes Disclosure Requirements for Payments to Governments for the Development of Natural Resources

Transcription

1 European Commission Proposes Disclosure Requirements f Payments to Governments f the Development of Natural Resources Summary Side-by-Side Comparison of and United States Proposals SUMMARY On October 25, 2011, the European Commission published two proposals 1 to amend the (EU) Transparency Directive (2004/109/EC) and to implement a new directive governing preparation of financial statements. Together, the EU proposals contain new requirements f the disclosure of payments to governments by certain companies engaged in natural resource extraction logging and are based on the standards set fth in the Extractive Industry Transparency Initiative (EITI). 2 The European Parliament and the Council of Ministers will now consider the proposals. As yet, no schedule deadline f consideration implementation by means of national legislation has been published. The European Commission s proposals come after similar proposals in the. The Dodd- Frank Wall Street Refm and Consumer Protection Act of 2010 directed the Securities and Exchange Commission to adopt rules requiring disclosure of payments to governments by certain companies engaged in the commercial development of oil, natural gas minerals. The proposed U.S. rules, 3 which are also infmed by the EITI standards, were published f comment on December 15, 2010 and are scheduled to be adopted by the end of The summary on the following pages provides a side-by-side comparison of the key elements of the proposals by the European Commission and the Securities and Exchange Commission. New Yk Washington, D.C. Los Angeles Palo Alto London Paris Frankfurt Tokyo Hong Kong Beijing Melbourne Sydney

2 SUMMARY SIDE-BY-SIDE COMPARISON OF EUROPEAN UNION AND UNITED STATES PROPOSALS 1. Which industries would be required to disclose payments to governments? Disclosure of payments to governments would be required from entities that are active in the extractive industry the logging of primary fests. 5 Disclosure of payments to governments would be required from entities engaged in the commercial development of oil, natural gas minerals. 2. How do the proposals define the industries required to disclose payments to governments? Companies active in the extractive industry would include those with any activity involving the explation, discovery, development extraction of minerals, oil natural gas deposits. An accompanying explanaty memandum indicates that logging activities would include clear-cutting, selective logging thinning on land classified as containing primary fest areas other disturbance of such fest fest land caused by mining, mineral, water, oil gas explation extraction other detrimental activities. The definitions above do not include suppt services to the extractive and logging industries. 6 Commercial development of oil, natural gas minerals would include explation, extraction, processing, expt and other significant actions relating to oil, natural gas minerals, the acquisition of a license f any such activity. Logging activities would not be covered by the proposed U.S. rules. Activities that are ancillary preparaty to commercial development (e.g., manufacture of products used in the commercial development of oil, natural gas minerals) and transptation activities would not be subject to disclosure. 3. Which entities in the covered industries would be required to disclose payments to governments? Disclosure of payments to governments would be required from entities that are: (1) active in the extractive industry the logging of primary fests; and (2) classified as one of the following: (2) required to file annual repts with the any EU non-eu issuer 7 with equity Securities and Exchange Commission (i.e., both U.S. and non-u.s. issuers -2- Disclosure of payments to governments would be required from entities that are: (1) engaged in the commercial development of oil, natural gas minerals; and

3 debt securities listed on a regulated market in the ; any other entity subject to EU regulation of the preparation of its financial statements 8 that is either: a large undertaking meeting two of the following three criteria on its balance sheet date: (i) total assets greater than 20 million, (ii) net turnover greater than 40 million and (iii) an average of greater than 250 employees during the financial year; a public interest entity. 9 registered with the Securities and Exchange Commission). 4. How significant would the activity have to be in der f the entity to be subject to payment repting? Disclosure of payments to governments would be required if the entity: has any extractive activity; has activities classified as logging. Disclosure of payments to governments would be required if the entity: engages in the commercial development of oil, natural gas minerals. 5. Would any payment be subject to disclosure? Repting would be required when material to the recipient government. The European Commission would be empowered to adopt delegated acts to define materiality f this purpose. Payments of de minimis amounts would not be subject to disclosure. The proposed rules do not define de minimis f this purpose, but the Securities and Exchange Commission has stated that it preliminarily believes that such a standard would not equate to materiality. -3-

4 6. What types of payments to governments would be required to be disclosed? Disclosure would be required f payments to covered governments f: Disclosure would be required f payments to covered governments that: (1) include any of the following: production entitlements; production entitlements; taxes on profits; taxes (including taxes on cpate profits, cpate income and production, but not taxes levied on consumption, such as value added taxes, personal income taxes and sales taxes); royalties; royalties; signature, discovery and production bonuses; dividends; and and license fees, rental fees, entry fees and other considerations f licenses and/ concessions; other direct benefits to the government concerned. No exemption f payments not made to further extractive logging activities is proposed. No exemption f social community payments is proposed. and bonuses; fees (including license fees). (2) are made to further commercial development of oil, natural gas minerals. Social and community payments (e.g., payments to improve schools hospitals) would not be covered by the proposed U.S. rules. Payments made in kind would be subject to Payments made in kind would be subject to disclosure either by value by volume. 10 disclosure. 7. How do the proposals define governments to whom payments would be required to be disclosed? Payments would be required to be disclosed if they are made to: any national, regional local authity of an EU member state, including a department, agency undertaking controlled by that authity; Payments would be required to be disclosed if they are made to: the federal government (but not state local governments in the ); -4-

5 any national, regional local authity of a third country, including a department, agency undertaking controlled by that authity. Control f this purpose would be determined by reference to the proposed EU standards f preparation of consolidated financial statements and would generally include the following situations: a government having a majity of the shareholders members voting rights in the subject entity; a government shareholder member having the right to appoint remove a majity of the members of the administrative, management supervisy body of the subject entity; a government shareholder member having the right to exercise dominant influence over the subject entity pursuant to certain contracts with the entity certain provisions of the entity s memandum articles of association; a government having power to exercise, actually exercising, dominant influence control over the subject entity; the government and the subject entity being managed on a unified basis by a parent; a government shareholder member having appointed, solely through exercise of its voting rights, a majity of the members of the administrative, management supervisy body of the subject entity who have held office a non-u.s. government, which includes: a non-u.s. government department, agency instrumentality of a non-u.s. national government, whether national sub-national (such as the government of a non-u.s. state, province, county, district, municipality territy); a company majity-owned by a non-u.s. government. -5-

6 over a specified period of time; a government shareholder member controlling alone, pursuant to an agreement with other shareholders in members of the subject entity, a majity of shareholders members voting rights in the subject entity. 8. Would payments to companies partly wholly owned by governments be subject to disclosure? A company would be considered to be a government to whom payments would be required to be disclosed if it were controlled by any government f purposes of the preparation of consolidated financial statements. See Question 7 above f a description of the situations in which such control would be deemed to be present. A company would be considered to be a government to whom payments would be required to be disclosed if it were at least majity-owned by a non-u.s. government. 9. What infmation would be required to be disclosed? Payment repts would include: Payment repts would include: and total amount of payments made to each government within a financial year; total amount per type of payment made to each government within a financial year; where payments have been attributed to a specific project, the amount per type of payment made f each such project within a financial year and the -6- type and total amount of payments made to each government; total amounts of payments by categy; currency used to make the payments; financial period in which the payments were made; issuer s business segment that made the payments; government that received the payments and the country in which the government is located; and type and total amount of payments made f each covered project;

7 total amount of payments made f each such project. project of the issuer to which the payments relate. Infmation would be published in both text and interactive data fmat. 10. How do the proposals define projects f which disclosure would be required? A project would be a specific operational repting unit at the lowest level within the undertaking at which regular internal management repts are prepared to monit its business. The proposed rules do not define projects subject to repting. The Securities and Exchange Commission noted in its proposing release that projects may be defined in a variety of ways, depending on the particular industry business in which an issuer operates and other facts such as the size of the issuer. 11. Which entities in a consolidated group would be required to make repts? If ganized in an EU member state, a parent of a group of undertakings would be required to prepare a consolidated rept disclosing payments made by it and its subsidiaries consolidated f purposes of the EU proposals governing preparation of consolidated financial statements. No separate rept showing payments made only by the parent (i.e., excluding payments made by subsidiaries) would be required. 11 An explanaty memandum accompanying the proposed Directive on financial statements indicates that, when consolidated repts are prepared, individual repts by subsidiaries included in the consolidated rept would not be required, but the text of that proposal suggests that only subsidiaries ganized in an EU member state would be exempt from individual repting. Each issuer required to file annual repts with the Securities and Exchange Commission would be required to disclose payments made by it, by any subsidiary and by any entity under its control. At a minimum, controlled entities would include subsidiaries consolidated f purposes of the issuer s financial repting in the (including proptionately consolidated entities). -7-

8 12. Do the proposals contain any exemption from disclosure f infmation that would be difficult to obtain? A parent would not be required to disclose payments to governments made by its subsidiaries f which: severe, long-term restrictions substantially hinder the parent in the exercise of its rights over the assets management of the entity; the infmation necessary f the preparation of the rept cannot be obtained without disproptionate expense undue delay. This exemption would not apply to payments made by any entity making an individual rept of solely its own payments. The proposed U.S. rules do not exempt repting of payment infmation that would be difficult to obtain. 13. Do the proposals contain any exemption from disclosure f payments that would contravene host country legal prohibitions? When public disclosure of a type of payment to a government in a country is clearly prohibited by criminal legislation of that country, that type of payment could be excluded from a rept. The rept would instead state that it does not include payments and disclose the name of the government concerned. The proposed U.S. rules include no exemption f repting of payment infmation when host country laws prohibit disclosure. 14. Do the proposals contain any exemption when disclosure would contravene confidentiality undertakings? The proposed EU rules include no exemption f repting of payment infmation subject to confidentiality undertakings. The proposed U.S. rules include no exemption f repting of payment infmation subject to confidentiality undertakings. -8-

9 15. When would repts be required to be published? Repts would be required to be published by six months after the end of each financial year and remain publicly available f at least five years. 12 Repts would be furnished as exhibits to an issuer s annual repts filed with the Securities and Exchange Commission, which f U.S. issuers are required to be filed between 60 and 90 days following the end of the financial year and, f many 13 feign private issuers, are required to be filed within four months following the end of the financial year. 16. When are the disclosure requirements expected to be implemented and become effective? The European Parliament and the Council of Ministers will now consider the proposals to amend the Transparency Directive and implement the directive on preparation of financial statements. The European Commission has not announced any schedule deadline f implementation by means of national legislation. The Securities and Exchange Commission has indicated that it intends to adopt final rules by the end of The repting requirements would apply beginning with financial years ending at least one year after the publication of the final rules. If adopted by the end of 2011, the first repts f calendar-year issuers would be required f financial years ending on after December 31, * * * Copyright Sullivan & Cromwell LLP

10 ENDNOTES 1 The European Commission s proposal to amend the Transparency Directive is available at provisional-proposal_en.pdf The European Commission s proposal to implement a new directive governing preparation of financial statements is available at 5-legislative-proposal_en.pdf. The EITI Rules are available at The Securities and Exchange Commission s proposed rules are available at F a summary of the proposed U.S. rules governing disclosure of payments to governments, see Sullivan & Cromwell LLP s publication dated January 6, 2011 available at 0e38f6910f79/SC_Publication_Resource_Payments_Disclosure_Requirements.pdf. An accompanying explanaty memandum indicates that a primary fest (defined in Directive 2009/28/EC) would be a naturally regenerated fest of native species, where there is no clearly visible indication of human activities and the ecological processes are not significantly disturbed. An undertaking active in the extractive industry is defined by reference to Section B-Divisions 05 to 08 of Annex I to Regulation (EC) No. 1893/2006 of the European Parliament and the European Council and does not include suppt activities f extraction of minerals, oil natural gas deposits. Similarly, an undertaking active in the logging of primary fests is defined by reference to Section A-Division 2.2 of Annex I afesaid and does not include silviculture and other festry activities, gathering of wild growing non-wood products suppt services to festry. The EU proposals contain no exemption from disclosure f issuers who issue only wholesale debt (i.e., debt with a minimum denomination of 100,000). In the case of listed depositary receipts, issuers of the underlying securities are deemed to be listed issuers even if the underlying securities are unlisted. The types of entities that would be subject to EU regulation of the preparation of its financial statements are set fth in Article 1 of and the Annexes to the proposed Directive on financial statements and generally include both public and private entities with limited liability. Public interest entities include EU-ganized credit institutions and insurance undertakings and other entities designated as such by a member state of the. When payments are repted in terms of value, suppting notes explaining how the values were determined would be required. The proposal to amend the Transparency Directive, which applies to EU and non-eu issuers with securities listed on an EU-regulated market that are active in the extractive industry the logging of primary fests (but not to entities required to make repts solely because they are large undertakings public interest entities), indicates that payments to governments shall be repted at the consolidated level, suggesting that EU-listed issuers not ganized in an EU member state may nevertheless be required to make consolidated repts. Only the proposal to amend the Transparency Directive, which applies to EU and non-eu issuers with securities listed on an EU-regulated market that are active in the extractive industry the logging of primary fests (but not to entities required to make repts solely because they are large undertakings public interest entities), sets fth the six-month deadline f publication and -10-

11 ENDNOTES (CONTINUED) 13 five-year time frame of public availability of the repts. The proposal to implement a new directive governing preparation of financial statements indicates only that repts should be made on an annual basis. F financial years ending befe December 15, 2011, annual repts of feign private issuers on Fm 20-F are due within six months after the end of the financial year. In addition, special rules apply to certain Canadian issuers. -11-

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