The Transparency Directive: Preparing for implementation in the UK

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1 The Transparency Directive: Preparing for implementation in the UK May 2006

2 Table of contents Introduction 1 Scope and process of implementation 2 Scope 2 Implementing rules and guidance at EU level 2 UK implementation 2 Periodic financial reporting 3 Scope 3 Content 3 Publication requirements 6 Transitional period 6 Liability 7 Disclosure of major shareholdings 11 Principal features of the new regime 11 Contracts for difference and stock lending 13 Rights of companies 13 Meetings and voting rights 15 Effective dissemination of information 16 Further information 18 Please refer to for important information on the regulatory position of the firm. A /0.24 May 06

3 Introduction The Transparency Directive, 1 which is due to be implemented on 20 January 2007, is the final major measure affecting listed issuers under the EU Financial Services Action Plan. Alongside the IAS Regulation, 2 the Prospectus Directive 3 and the Market Abuse Directive, 4 it is intended to ensure investor confidence in levels of disclosure by issuers of publicly traded securities and enhance the operation of efficient pan-european capital markets. The Transparency Directive will affect UK listed companies and investors from 20 January 2007 The Transparency Directive focuses on periodic financial reporting, disclosure of major shareholdings and the provision of information to shareholders and investors generally. It will impose new periodic reporting standards for issuers of securities on regulated markets, including some form of quarterly statement from all issuers of shares. The Directive has raised concerns about liability on periodic financial and narrative reporting. These concerns are reflected in proposed amendments to the Company Law Reform Bill which are part of a package of measures relating to directors duties and responsibilities under that Bill. 5 Investors will also have an interest in the Directive both because of its impact on listed issuers, and also because they must prepare for changes in the notification requirements applicable to major shareholdings. This report examines the impact of the Transparency Directive on UK issuers and investors in the light of the FSA s recently published consultation document on implementation of the Directive and the relevant provisions of the Company Law Reform Bill. This report does not purport to contain a comprehensive summary of the Transparency Directive s provisions, the FSA s consultation paper or the Company Law Reform Bill, but merely to highlight issues of particular interest. This report is intended to give general information only and should not be relied on as legal advice Directive 2004/109/EC, also known as the Transparency Obligations Directive. Regulation (EC) No. 1606/2002, which has effect for accounting periods commencing on or after 1 January Directive 2003/71/EC, implemented in the UK on 1 July Directive 2003/6/EC, implemented in the UK on 1 July The Company Law Reform Bill enters the Report stage in the House of Lords on 9 May On 3 May, the Government announced a package of amendments to the Bill, including provisions on narrative reporting. It also launched a short consultation on proposed clauses dealing with liability on periodic financial and narrative reporting. 1

4 Scope and process of implementation Scope The Transparency Directive applies to all issuers of securities which are admitted to trading on an EU regulated market. The regulated markets in the UK include the London Stock Exchange s markets for listed and international securities, LIFFE and virt-x. The London Stock Exchange s Alternative Investment Market is exchange-regulated and not a regulated market for EU purposes. This means that it is outside the scope of the Transparency Directive. However, the implementation of the Transparency Directive will affect AIM issuers in some respects. Implementing rules and guidance at EU level The Transparency Directive is a Lamfalussy measure, meaning that it is a framework directive, under which more detailed rules (Level 2) and guidance (Level 3) are drawn up prior to implementation of the Directive to add clarity to its provisions and ensure that it is implemented in a uniform way across the EU. These further measures, which are currently in draft form, will be adopted by the EU Commission on the basis of consultation and advice from the Committee of European Securities Regulators ( CESR ). Clarificatory and detailed implementation measures have not yet been finalised The Transparency Directive is a minimum harmonisation rather than a maximum harmonisation directive. In other words, it imposes minimum standards, but EU member states are generally free to impose more stringent rules if they so wish. UK implementation The bulk of the provisions of the Transparency Directive will be implemented through new rules made by the Financial Services Authority ( FSA ), dealing particularly with periodic financial information, major shareholding disclosures and the means of dissemination of information. These will involve amendments to the FSA s Listing Rules (LR) and new provisions in its Disclosure Rules (DR) - which are to be renamed the Disclosure and Transparency Rules (DTR). The FSA is broadly proposing to copy out the provisions of the Directive in its draft rules. This means adopting the words of the Directive with minimal amendments or additional guidance. The FSA published a consultation document on the new rules on 30 March The consultation period closes on 30 June The FSA s approach will be to copy out the provisions of the Directive The Company Law Reform Bill, currently before Parliament, will implement certain provisions of the Transparency Directive dealing with shareholder communications. It proposes to repeal the existing shareholding disclosure requirements under sections of the Companies Act 1985, while retaining the power for public companies to make inquiries as to persons interested in their shares under section 212 of that Act. As explained below, this would create a dual basis for disclosure by investors in UK companies. The Company Law Reform Bill is expected to receive Royal Assent by the end of CP 06/04. 2

5 Periodic financial reporting Among the most important provisions of the Transparency Directive are those on periodic financial reporting. Despite some vigorous opposition to the introduction of quarterly reporting during the negotiation of the Directive, the compromise outcome retains a requirement for interim reporting, which is likely to be more onerous than a mere trading statement. The new regime also brings with it uncertainty as to who will be liable for periodic information, and as to the scope of liability. The Directive introduces new periodic reporting requirements with potential liability implications Scope The periodic reporting provisions under the FSA s Rules will apply to issuers whose home state is the UK. 1 This will encompass: UK-incorporated issuers of shares or of debt with a denomination of less than 1,000 ( low denomination debt ); non-eu issuers of shares or low denomination debt if the UK is their home state for the purposes of the Prospective Directive; other issuers where the UK is their home state for the purposes of the Transparency Directive. Content Annual financial reports Under the provisions of the Transparency Directive, an issuer with securities admitted to trading on a regulated market in the EU is required to publish an annual report as soon as possible and in any event within four months of its year end. The annual report must include audited accounts, a management report and a responsibility statement. Annual reports must be published within four months of the year end The consolidated audited accounts must be drawn up in accordance with IFRS and audited in accordance with international auditing standards. The audit report must be published with the annual report. The management report must, as a minimum, comply with EU annual reporting requirements, which call for a fair review of the development and performance and the position of the undertakings included in the consolidation taken as whole, together with a description of the principal risks and uncertainties that they face. Where necessary, the analysis should include financial and non-financial key performance indicators, including information relating to environmental and employee matters. 1 Issuers that only have debt securities with a denomination of at least 50,000 admitted to trading on a regulated market, as well as certain institutions such as states or local authorities, are exempt from the periodic reporting requirements of the Transparency Directive. However, the FSA considers it important that all issuers are required to continue to provide at least annual financial reports. It is therefore proposing to require issuers which are exempt under the Transparency Directive nevertheless to produce annual reports, in accordance with their national law requirements and within 6 months of the year end. 3

6 The responsibility statement, which must be made by those responsible within the issuer (who must be clearly identified) must confirm that, to the best of their knowledge: Annual reports will have to include a responsibility statement the financial statements give a true and fair view of the assets, liabilities, financial position and profit or loss of the issuer and its consolidated undertakings as a whole; and the management report gives a fair review of the development and performance of the business, the financial position of the issuer and the risks and uncertainties that it faces. Apart from the responsibility statement, the contents of the management report correspond to those mandated by the Modernisation Directive 1 for companies annual business reviews. Under the Company Law Reform Bill, the Government is proposing to require quoted companies to publish an expanded form of business review, with an additional level of detail on environmental, employee and social and community matters, and more information on trends and factors likely to affect the company s business in the future. Half-yearly reports Issuers of shares and low denomination debt securities must publish a halfyearly report as soon as possible and in any event within two months of the period end. This must contain condensed financial statements, a management report and a responsibility statement. The condensed financial statements must be drawn up in accordance with IAS 34. There is no requirement for an auditors report or review, but any report or review must be reproduced in full, or a statement made that the financial statements have not been audited or reviewed. The interim management report must include at least an indication of the important events that have occurred during the first six months of the year, and their impact on the half-year results, together with a description of the principal risks and uncertainties for the remaining six months of the year. Disclosure must also be made of major related party transactions unless the issuer does not have shares traded on a regulated market. The responsibility statement must be made by the persons responsible within the issuer (who must be clearly identified) and must confirm that, to the best of their knowledge: The half-yearly report must look forward as well as back Half-yearly reports will also have to include a responsibility statement the financial statements give a true and fair view of the assets, liabilities, financial position and profit or loss of the issuer and its consolidated undertakings as a whole; and the management report includes a fair review of the matters it is required to cover (see above). 1 Directive 2003/51/EC, implemented in the UK by the Companies Act 1985 (Operating and Financial Review and Directors Report etc) Regulations 2005, in relation to companies financial years beginning on or after 1 April

7 Interim management statement Unless they publish a quarterly financial report in accordance with national legislation or the rules of a regulated market, issuers with shares admitted to a regulated market are required to publish an interim management statement. This statement must be published not earlier than week 11 nor later than week 20 in each six-month financial period. It must cover the period from the beginning of the relevant six-month period to the date of publication and provide: Interim management statements must give a general description of the issuer s financial position and performance an explanation of material events and transactions that have taken place during the relevant period and their impact on the financial position of the issuer and its subsidiaries; and a general description of the financial position and performance of the issuer and its subsidiaries during the relevant period. The UK Government has expressed the view that an interim management statement under the Transparency Directive would be only marginally more onerous than current disclosure practices by UK companies: Importantly, the [interim management statement] allows the UK largely to continue to rely on its tried-and-tested forms of ad hoc disclosure, commonly referred to as trading statements. 1 Many companies, however, do not currently make regular trading statements, or if they do, they publish a trading update within a few weeks of the financial halfyear or year end (i.e. after week 20) to update the market on their expectations as to performance as the financial period nears completion. The Transparency Directive will bring forward the timing of such interim announcements. Companies may find that interim management statements will require increased disclosure Moreover, where companies issue trading updates, the announcement may be linked to meetings with analysts, and intended to ensure the public has access to the same information as the analysts. The information given may consist of no more than a few key performance indicators, such as relevant commodity prices, numbers of passengers carried (for an airline), or like-for-like retail sales. These statistics may enable analysts to confirm or revise their expectations as to a company s performance, but would not necessarily satisfy the Transparency Directive s requirement to give the public a general description of the financial position and performance of the issuer during the relevant period. Compliance with this requirement may involve a fuller description of capital, as well as revenue, items. The provisions should not be a concern for those companies that already produce quarterly reports (for example, because they are listed in the United States). Such companies can continue to do so. Many other companies will, however, find themselves obliged to draw up a quarterly report, albeit without 1 Government Response dated 13 January 2004 from the Financial Secretary of the Treasury to the Report of the European Union Committee of the House of Lords (Sub- Committee B) on the Financial Services Action Plan (45 th Report, Session , HL Paper 192) published in the Committee s Supplementary Report (15 th Report, Session , HL Paper 89). 5

8 necessarily having to publish financial line items. This will be an undoubted increase in their compliance burden. Additional contents required by the Listing Rules The FSA s Listing Rules contain a number of provisions not covered by the Transparency Directive in relation to information required in the annual report. The FSA is consulting on the removal of certain of these, including those on directors waiver of emoluments, disclosure of directors interests, and information regarding share buy backs. The FSA also proposes removing the requirement for a preliminary announcement of annual results, on the basis that the period of time for production of annual reports is reduced from six months to four months by the Transparency Directive. The need for the publication of preliminary results in advance of the full report should therefore be less. In anticipation of the probability that many companies would nevertheless choose to publish a preliminary announcement (or may have to, on the basis that the results will constitute inside information for the purposes of the Disclosure Rules) the content requirements for these announcements, if made, will be retained. Additional content requirements under the Listing Rules are likely to be reduced Preliminary results announcements may not be necessary Publication requirements All periodic reporting information must be filed with the competent authority of the issuer s home member state. It must also be published in such a manner as to ensure fast access and effective dissemination of the information to the public throughout the European Union, in accordance with the procedures described later in this report (see Effective dissemination of information below). The annual report and half-yearly report must remain available to the public for at least five years. Transitional period Inconveniently, the Transparency Directive s implementation date of 20 January 2007 does not correspond with corporate financial reporting periods. The FSA is proposing to apply the new reporting regime to issuers with financial years commencing on or after 20 January For the large number of issuers whose reporting year is the calendar year, therefore, the new annual, half-yearly and interim reports will not be required until The FSA considers that this approach will be helpful in maximising the time available to adapt to the new regime, but is consulting on whether it is right that the benefit of allowing more time for most issuers outweighs the disadvantage that, for the transitional period, different issuers will be complying with different reporting rules. It is proposed to apply the new requirements to financial reporting periods beginning on or after 20 January 2007 The FSA notes that its proposed approach might be disallowed by the EU Commission. 6

9 Liability On 3 May 2006, the Government published draft proposals to amend the UK liability regime on financial reporting in response to concerns that the Transparency Directive would extend the potential liability of UK issuers and their directors. These concerns are based on considerations both as to who is responsible for company information, and as to the universe of persons to whom those responsible may be found liable. Current law Under English law as it stands at present, the directors are responsible for drawing up the annual report and accounts under the Companies Act but it is primarily the issuer who is responsible for publication of half-yearly reports and other information required by, for example, the Listing Rules. The extent to which the directors of a company may be liable in respect of negligent misstatements in the company s financial statements and audit reports is subject to the principles laid down in the leading case of Caparo Industries plc v Dickman. 1 In this case, the House of Lords held that the purpose of statutory accounts is not to inform shareholders investment decisions, nor is it to inform the investment decisions of the wider public. In the ordinary course of events, therefore, the directors in preparing the accounts (as well as the auditors in auditing the accounts) owe no duty of care to potential investors or to the public at large to ensure that the accounts are accurate. Only in limited circumstances, for example where accounts are provided to particular third parties in the knowledge that they will be relied upon, will directors be liable to persons other than shareholders. English law currently protects directors and auditors from liability on accounts prepared for Companies Act purposes The Caparo case was decided in relation to the responsibility of auditors for accounts. It did not, therefore, consider specifically the directors report. There is also currently no express authority on the extent, if any, of directors responsibility to investors for the directors remuneration report or summary financial statements. Impact of the Transparency Directive The Transparency Directive requires member states to impose liability for periodic financial and other information required to be published under the Directive on at least the issuer or its administrative or supervisory bodies (i.e. the board of directors). The extent of that liability is for member states to determine. In the absence of any legislative intervention, however, the Transparency Directive, is likely to have the effect of extending the scope of liability under English law for annual accounts, as well as other periodic information, to investors and the public in general, across the EU. This is because it is the objective of the periodic financial reporting requirements, as stated both in the recitals and elsewhere in the Directive, to allow investors to make an informed assessment of an issuer s position and to increase investor protection within Periodic information aimed at informing investors must be made available to the public throughout the EU 1 [1990] 2 AC

10 the EU. It is also clear that periodic information must be made generally available throughout the EU. The intended recipients of such documents are therefore, arguably, not shareholders alone, and the purpose of their publication is not solely to enable the exercise of shareholder rights. Instead, the audience is the investing public, receiving information for the purposes of their investment decisions. The responsibility statement in respect of annual and half-yearly reports could also increase the risk of liability on the part of those making it to any reader of the reports and accounts. The effect of the Transparency Directive on directors liability in the UK was examined in some detail by the European Union Committee (Sub-Committee B) of the House of Lords, which published its report on the topic on 19 May 2004 (the House of Lords Report ). 1 The Committee considered evidence received from Lachlan Burn (a partner at Linklaters) who voiced the concern that the Transparency Directive could extend the liability of directors to investors generally, removing the Caparo limitation. The House of Lords Report concluded that the Committee was not satisfied that the fears expressed. are without foundation, and that there remains legitimate uncertainty as to the effects of the Directive with regard to the question of whether it will extend the civil liability of directors for accounts to the investing public generally. 2 The safe harbour debate Concerns regarding the Transparency Directive's effect on the liability of directors are particularly pertinent in the light of the recent debate on narrative reporting, and pressures for better forward-looking information, in directors' reports. The introduction, and subsequent repeal, of the mandatory operating and financial review ( OFR ) for UK quoted companies led the Government to consult again on the topic of narrative financial reporting. 3 Responses from many organisations representing institutional investors, issuers and directors focused on liability fears and called for a safe harbour to protect directors from the threat of liability. It was argued that a safe harbour, at least in respect of forward-looking information (for which US law provides a precedent), is necessary to encourage good quality narrative reporting. Otherwise, liability concerns may make directors excessively cautious, particularly as regards forward-looking information. The House of Lords agreed there was legitimate uncertainty as to the effects of the Directive Discussions on reporting obligations brought calls for a defence for directors against potential liability to investors The proposal for such a safe harbour raises a number of questions and issues, such as: what liabilities should a safe harbour protect against? what conditions should apply to availability of the safe harbour? what kind of statements should a safe harbour apply to? For example, should a director have the benefit of a safe harbour if he is reckless rather than merely negligent? Should it apply only to forward-looking information or to information generally? Government s proposals to clarify and reform liability On 3 May 2006 the Government responded to calls to clarify and limit the liability of directors in relation to financial reporting, particularly in light of the The Government has proposed significant limitations on directors liability th Report, Session , Directors and Auditors Liability, HL Paper 89. House of Lords Report, paragraph 22. The consultation closed on 24 March

11 Transparency Directive, by publishing two new draft clauses for inclusion in the Company Law Reform Bill. The Government is consulting on the form of these clauses until 12 May 2005, ahead of formally tabling them as amendments to the Bill. These provisions both clarify and substantially restrict directors liability in relation to the content of narrative reports generally - not just in relation to forward-looking statements. The first provision would specify the extent to which directors may be liable for directors reports, directors remuneration reports and information in summary financial statements derived from either of those reports published in accordance with company law requirements. The draft provision: imposes an obligation on a director to compensate the company for any loss if suffers as a result of an untrue or misleading statement in, or omission from, a report, but only if he knew or was reckless as to whether the statement was untrue or misleading or knew the omission to be dishonest concealment of a material fact; and exempts directors from any other liability to the company or to any other person. This provision has the effect of leaving any common law liabilities for negligent misstatement in accounts unaffected, so that directors could still be liable to shareholders on accounts under the principles in Caparo. However, it provides a broad exemption from liability in relation to narrative reporting, except where the director is knowing or reckless regarding a defect. Even so, his liability can only be to the company. Directors will only be liable to the company for errors in directors reports The second proposed provision deals with liability in relation to reports published under the FSA s rules, or any other provisions made under the Transparency Directive, by issuers with securities traded on a UK regulated market. This would cover annual reports, half-yearly reports and interim management statements. The draft provision: imposes on an issuer of securities liability to pay compensation to an investor who acquired securities of the issuer and suffered loss as a result of an untrue or misleading statement in, or omission from, a report, but only if a person exercising managerial responsibilities within the issuer knew or was reckless as to whether the report was untrue or misleading, or knew the omission to be dishonest concealment of a material fact; and exempts the issuer and any other person from any other liability, subject to: an existing power under FSMA for a court or the FSA to require restitution to be paid to investors or others who have suffered loss resulting from a breach of FSA rules. Although never yet used in the context of a breach by an issuer or director of the Listing, Disclosure or Prospectus Rules, this power does leave open at least a possibility of personal liability to investors on the part of directors; and civil or criminal liabilities such as under the market abuse regime, penalties for Listing Rule breaches or criminal acts under section 397 of the Financial Services and Markets Act 2000 ( FSMA ). Investors will be entitled to compensation from issuers if reports published under transparency rules contain errors as to which senior management were knowing or reckless 9

12 The Government also proposes to clarify the purpose of the directors report in the Company Law Reform Bill, by stating that the purpose of the business review is to inform members of the company and help them assess how directors have performed their duty to promote the success of the company. This duty will include the obligation to have regard to a number of factors such as environmental, employee and community issues, as well as the long-term and the need to be fair as between members of the company. The combined effect of these provisions is that investors should not have a right of action against directors, but that they could claim against the company, if they can show both that they have suffered loss, and that there was knowledge or recklessness on the part of senior management regarding the defect in the report. The company could then claim its own loss (compensation paid to an investor) against an individual director who had the requisite knowledge or was reckless. Jurisdictional scope of liability A further question considered by the House of Lords Committee was that of the jurisdictional scope of liability in relation to information published under the Transparency Directive. The Directive clearly, as the Treasury has stated, mandates greater cross-border provision of information than has previously been required, thereby increasing the scope for cross-border liability litigation. 1 During the negotiation of the Directive, the UK Government attempted to introduce a provision that would have required cross-border civil liability disputes to be resolved within the civil liability regime of the issuer s home member state. However, the amendment was not accepted, as other member states wanted to maintain the possibility of investors suing in their own member states, regarding this as an important element of investor protection. 2 Issuers and directors may suffer an increased risk of litigation in other member states While the Transparency Directive arguably does not create the risk of crossborder liability for EU issuers, the increased level of cross-border investment which is the objective of this and other Financial Services Action Plan measures can be expected to increase the risk of issuers and/or their directors being exposed to litigation under the different liability regimes of other EU member states. 1 2 Letter from the Financial Secretary of the Treasury to the Committee, 22 March Letter from the Financial Secretary of the Treasury to the Committee, 22 March

13 Disclosure of major shareholdings The Transparency Directive amends the provisions previously contained in the Major Shareholdings Directive 1 regarding the disclosure by shareholders of the level of voting rights held by them in listed companies. The changes seek to achieve a greater standardisation of shareholding disclosure rules, but, given the minimum harmonisation nature of the Directive, will not - to the regret of many institutional investors - create a single regime with identical disclosure thresholds and exemptions across the EU. Implementation of these provisions in the UK will involve the FSA receiving new powers to make rules on shareholding disclosures of interests. The powers will be conferred under the Company Law Reform Bill, which will also repeal the current disclosure provisions in sections of the Companies Act The FSA s approach of largely copying out the Transparency Directive, with little additional guidance, risks leaving the market in a state of some confusion as a number of provisions of the Directive are somewhat vague or unclear. Principal features of the new regime The major shareholding disclosure provisions of the Transparency Directive are not radically different from the previous rules at EU level. However, the provisions on disclosure of interests in the Companies Act 1985 have previously imposed a superequivalent regime in the UK. The FSA is proposing to reduce, but is unlikely to eliminate entirely, the level of superequivalence. The FSA will assume responsibility for shareholding disclosure rules Shareholding disclosure thresholds may remain unaltered but the nature of disclosable interests will change The UK s current basic disclosure thresholds of 3% (or 10% for non-material interests) 2 and 1% increments above those levels are more onerous than the Directives, which only requires disclosure at levels of 5%, 10%, 15%, 20%, 25%, 30% (or one-third), 50% and 75% (or two-thirds). The FSA s consultation document provides draft wording for two alternative proposals: either to adopt the Directive s thresholds; or (as far as possible) to retain the more onerous existing disclosure thresholds. Given the loss of market transparency that would result from higher, and fewer, disclosure thresholds, the favoured option is likely to be that of retaining the existing thresholds. Key differences between the current and the new regimes, so far as the UK is concerned, include the following The Companies Act 1985 disclosure obligations are based on the existence of interests in shares. This - very widely defined - term creates a broader obligation than the Transparency Directive requirements proposed to be adopted by the FSA. The latter are based on: shareholdings (including holdings of depository receipts, which are deemed to be holdings of the underlying shares), or the ability to exercise voting rights in certain circumstances. Disclosure obligations apply to shareholders and others who can exercise voting rights, not to persons who have interests 1 2 These provisions are now incorporated into the Consolidated Admission and Reporting Directive (Directive 2001/34/EC). Non-material interests include, broadly, interests held by virtue of managing investments or operating collective investment schemes. 11

14 The obligation to disclose will fall on the shareholder (defined as a person holding shares in his own name, whether directly or indirectly, and whether for his own account or that of another) and also, in some circumstances, on any other person who is entitled to exercise the voting rights attaching to those shares. These circumstances include: where there is an agreement which obliges holders of voting rights to vote in concert; where someone holding securities as collateral intends to exercise the voting rights; where a person has discretion on how to vote under an appointment as proxy. The initial minimum disclosure threshold required by the Directive is set at 5% - compared with 10% under the current EU requirements. Accordingly, holdings in UK companies by investment managers, unit trusts, open-ended investment companies and similar will become disclosable at the level of 5%. Currently these are non-material interests for UK purposes and do not have to be disclosed until they reach the 10% level. The initial 5% disclosure threshold will not, however, apply to authorised market makers provided that they do not intervene in the issuer s management or exert any influence on the issuer to buy back shares or support the share price. At present, in the UK, market makers interests (for such securities as are still traded by means of the market making system) are generally not disclosable at any level, but under the provisions of the Directive, they will become disclosable at the 10% level. Market makers will have to notify the fact that they make a market in an issuer s shares to the competent authority in the issuer s home state, so that it is clear to the competent authority when the exemption applies. In counting shareholdings and voting rights, it is not necessary to count shares held within the trading book of a credit institution or investment firm, provided that: the aggregate shares held in the trading book do not represent more than 5% of the voting rights; and the institution or firm does not exercise the voting rights or use them to intervene in the management of the issuer. Parents must aggregate their holdings with those of their subsidiaries. The Companies Act 1985 is more stringent, requiring aggregation with holdings in entities in which a person has one-third ownership of the voting rights. Those required to make a notification under these provisions will be obliged to notify the competent authority in the issuer s home member state directly, as well as notifying the issuer. The issuer remains under an obligation to announce information notified to it to the public. The Transparency Directive treats holdings of shares separately from holdings of financial instruments, such as exchangeable securities, options or other derivative contracts which give a right to acquire, on the holder s initiative alone, existing issued shares. If a person holds several different classes of these types of financial instruments, he must Some holdings will be disclosable for the first time Market makers must disclose positions above 10% and must inform competent authorities of the shares in which they make a market Holdings in trading books of less than 5% can be ignored Interests through certain financial instruments are separately disclosable 12

15 aggregate the holding, and notify if the voting rights exceed a relevant threshold. However, curiously, the Transparency Directive imposes no obligation upon a holder of financial instruments to aggregate direct shareholdings with underlying interests through financial instruments. The new rules will apply in respect of voting rights in companies admitted to trading on a regulated market or to AIM. Unlike the current Companies Act provisions, they do not extend to all public companies. Contracts for difference and stock lending The FSA rejects, at least for the time being, suggestions that it should impose disclosure obligations in relation to contracts for difference (CFDs) which give a holder a purely economic interest in an issuer s shares. Although the Takeover Panel has recently introduced rules requiring disclosures regarding derivatives holdings in companies in bid situations, the FSA argues that the nature of CFDs, which may include both long and short positions, is so complex that any rules and disclosures would themselves be complex and might not justify the costs involved. Purely economic interests will not be disclosable One area in which the FSA is seeking to add a clarification to the provisions of the Transparency Directive relates to stocklending. The FSA proposes, as alternatives, that either: a lender should be treated as having no change in his holding level, by virtue of netting off the disposal of shares (the loan) against the right to recall the shares; or as above, except that this would only apply if the lender was obliged to exercise the right of recall on every occasion when a vote was to be held. A borrower of shares, if he holds the shares rather than using them to settle a market transaction, will potentially have a disclosure obligation. This is because the obligation to redeliver the shares when they are recalled is not treated as a disposal which could be netted off against the acquisition. Rights of companies The narrower scope of the Transparency Directive disclosure requirements, compared with the existing disclosure regime for interests in UK companies, means that some interests that currently have to be disclosed may not be disclosable in future. Companies concerned about the loss of visibility of their investor base will still, however, be able to make inquiries under the provisions of the current section 212 of the Companies Act 1985, which are to be retained under the Company Law Reform Bill. These provisions enable a company to serve a notice on anyone whom it reasonably considers may have an interest in its shares, requiring them to provide details of their interests. Company investigation rights under section 212 will be unaffected The issue of concern to investors is that there will in effect be two different bases on which they have to disclose holdings in UK companies. They will need to adjust their information and record-keeping systems to enable them to disclose under the new FSA rules, but will still also need systems to track the 13

16 more widely defined interests under the Companies Act, to enable them to respond to company inquiries. 14

17 Meetings and voting rights Another objective of the Transparency Directive is to ensure that investors, including cross-border investors, are enabled to exercise their rights as securityholders, for example, by appointing proxies for general meetings. To this end, the Directive contains a number of provisions aimed at ensuring that shareholders, or the holders of debt securities, receive adequate information about meetings, and how to exercise their rights, together with a proxy form (on paper or using electronic means). All shareholders must be enabled to exercise their rights The Directive provides that issuers must be allowed to use electronic means of communication for these purposes, subject to a number of conditions: the use of electronic communications must be approved by the shareholders (or the holders of debt securities, in the case of communications to them) in general meeting; securities holders of each class must be treated equally. In particular, electronic communications must be available to all security holders, no matter where they are located; and identification arrangements must be put in place to ensure that not only shareholders but, where relevant, others entitled to direct the exercise of voting rights are effectively informed. Such persons must be contacted in writing to request their consent to the use of electronic means of communication. However, they can be deemed to have consented if they do not object within a reasonable period of time. They may always thereafter request a return to communication by conventional means. Those entitled to direct voting would also be entitled to electronic information The FSA will adopt rules applying these requirements to issuers whose home state is the United Kingdom. The Company Law Reform Bill contains provisions facilitating electronic communications with shareholders and holders of debt securities for UK companies and reflecting the requirements of the Directive for shareholder approval. It also contains provisions enabling companies to permit shareholders to request the company to recognise another person as the person entitled to exercise voting and other rights. UK companies may be able to use this mechanism to help satisfy the requirement to identify persons other than shareholders who are entitled to exercise voting rights. 15

18 Effective dissemination of information As we have already seen, the Transparency Directive is greatly concerned with ensuring rapid accessibility of company information to investors throughout the EU. This will require use of additional media, as well as continued dissemination through an RIS for UK home state issuers. The FSA s proposed rules apply to all information published under the Transparency Directive, Article 6 of the Market Abuse Directive, the Listing Rules or the Disclosure and Transparency Rules ( regulated information ). The following are among the key aspects of the new regime: Regulated information must be disclosed without delay, in a manner ensuring that it is capable of being disseminated to the general public, fast, and as close to simultaneously as possible in all EEA states. To achieve this, the information must be communicated to an appropriate number of media, including being capable of reaching the public throughout the EU. Communications to the media must be in unedited full text, in a manner which is secure and provides certainty as to its source. The FSA offers no guidance on what number or forms of media will be appropriate for these purposes. Regulated information must also be communicated to a RIS. Upon request, issuers must be able to provide the FSA with information about their means of communicating regulated information including details of security and embargo measures. Issuers may not charge investors for providing regulated information. Information which is not regulated information but which may be of importance to the public in the EU and that has been disclosed outside the EU must be disclosed in accordance with the requirements for communication of regulated information. Regulated information should be filed with the competent authority in the issuer s home member state at the same time as it is published. This requirement will be satisfied if a person uses a RIS to disseminate information. Regulated information must be filed in the language of the issuer s state of incorporation if its securities are admitted to trading there. Where an issuer s securities are admitted to trading in another member state, it may choose whether to use either the local language or English. Member states are required to ensure that there is at least one officially appointed mechanism (OAM) for the central storage of regulated information, with which issuers will be required to file their information. CESR is due to provide advice on the role and quality standards for an OAM in June 2006 and detailed standards may not be settled until sometime after the implementation date of the Transparency Directive. The ultimate intention is that regulated information should be accessible, at affordable prices, to retail investors via a European network, which would also capture information such as prospectuses and filings with Registrars of Companies. The FSA states that in the interim the requirement for each member state to have an OAM will be satisfied for the UK by the availability of information to Information must be effectively disseminated throughout the EU, using appropriate media Regulated information must be filed with the competent authority Central repositories for regulated information are to be established 16

19 retail investors through websites such as Hemscott.net, the London Stock Exchange website and Financial Express - UK Wire. 17

20 Further information If you require further information on the matters discussed in this report, please contact Lucy Fergusson on , or your usual contact at Linklaters. Amsterdam Tel: (31 20) Fax: (31 20) Bratislava Tel: (421-2) Fax: (421-2) Brussels Tel: (32-2) Fax: (32-2) Budapest Tel: (36-1) Fax: (36-1) Frankfurt am Main Tel: (49-69) Fax: (49-69) Lisbon Tel: (351) Fax: (351) London Tel: (44-20) Fax: (44-20) Luxembourg Tel: (352) Fax: (352) Madrid Tel: (34) Fax: (34) Paris Tel: (33) Fax: (33) Prague Tel: (420) Fax: (420) Rome Tel: (39-06) Fax: (39-06) Stockholm Tel: (46-8) Fax: (46-8) Warsaw Tel: (48-22) Fax: (48-22) This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts at Linklaters. Linklaters. All rights reserved 2006 Please refer to for important information on the regulatory position of the firm. We currently hold your contact details, which we use to send you newsletters such as this and for other marketing and business communications. We use your contact details for our own internal purposes only. This information is available to our offices worldwide and to those of our associated firms. If any of your details are incorrect or have recently changed, or if you no longer wish to receive this newsletter or other marketing communications, please let us know by ing us at marketing.database@linklaters.com 18