Global Depositary Receipts and the new EU regime

Transcription

1 Global Depositary Receipts and the new EU regime Introduction This note sets out the implications of issuing Global Depositary Receipts ( GDRs ) on an EU regulated market (usually London in the case of GDRs) in light of the forthcoming implementation of the Prospectus Directive, the Transparency Obligations Directive and the Market Abuse Directive. Key measures central to the EU regime change are: the Prospectus Directive ( PD ), which will significantly alter prospectus requirements applicable to securities being listed or offered in the EU, including the requirement that issuers follow International Financial Reporting Standards ( IFRS ) or equivalent in relation to financial information in the prospectus Contents Introduction 1 Prospectus Disclosure for new issues 1 Continuing Disclosure 3 Impact on issuers option(s) 4 Summary 5 the Transparency Obligations Directive ( TOD ) dealing with ongoing periodic disclosure obligations of such issuers, including annual and half-yearly reports under IFRS or equivalent the Market Abuse Directive ( MAD ) requiring immediate public disclosure of price-sensitive information by issuers that have securities admitted to an EU regulated market. For a general overview of the new regime, please click here. Prospectus Disclosure for new issues GDRs are non-equity securities for purposes of the PD. Therefore, GDR issuers will have freedom of choice as to the authority to which they have to apply for approval of a prospectus 1. Issuers of GDRs with a denomination per unit of at least 50,000 will avoid (a) the requirement for IFRS accounts in prospectuses 2 and (b) the requirement to file an annual list of all information they made public during 1 2 Article 2(m)(ii) of the PD. Instead they will need to include a narrative statement of significant differences from IFRS. 15 February

2 the preceding year under applicable company law, securities laws or market regulations. However, given the nature of GDRs (linked to a number of underlying shares) the 50,000 exception is unlikely to be of significant benefit to issuers in practice, as GDRs typically have a much smaller denomination. Pursuant to Article 35(3) of the Prospectus Regulation, non- EU issuers of GDRs will have until 1 January 2007 before they are required to prepare prospectuses which include IFRS accounts. However, due to the fact that GDRs are not debt securities for the purposes of the TOD, such an issuer would still need to produce IFRS accounts to fulfil its obligations under the TOD, regardless of denomination see further Continuing Obligations. The prospectus must include disclosure of the information required by Annex 10 of the Prospectus Regulation. Annex 10 requires equity-style disclosure on the issuer of the underlying shares 3. This will entail disclosure which is different in several respects to what is currently required. Some more significant differences are set out below: Summary: A prospectus summary must be prepared which conveys the essential characteristics and risks associated with the issuer and the securities in around 2,500 words. Selected financial information: Inclusion of selected financial data key figures summarising the issuer s financial condition is required. Operating and financial review: An operating and financial review ( OFR ) must be included in the prospectus. Guidance from the Committee of European Securities Regulators ( CESR ) states that the OFR should provide investors with a balanced historical and prospective review of the issuer s performance and financial condition, including risks and uncertainties of the business 4. Profit Forecasts: If a profit forecast or profit estimate is included, there must also be a statement of the principal assumptions on which the forecast or estimate is based and an auditor s report stating that the forecast or estimate has been properly compiled and is consistent with the issuer s accounting policies. Capital Resources: Considerable detail is required on sources and amounts of an issuer s cashflows, funding structure, restrictions on the transfer of funds within its group, its treasury policies and objectives, peak borrowing requirements, etc.. Trend Information: The most significant recent trends in production, sales and inventory, and costs since the end of the last financial year are required. Information on any known trends, uncertainties, demands, 3 4 Though, unlike the position with shares, no working capital statement is required. This so-called Level 3 guidance is intended to assist issuing companies considering the disclosure provisions of the new regime contained in the Prospectus Regulation and to promote greater transparency in the way in which supervisors will apply these disclosure requirements. The guidance was published on 10 February February 2005

3 commitments or events reasonably likely to have a material effect on the issuer s prospects for at least the current financial year must be disclosed. Conflicts of interest: Directors, and any senior manager who is responsible for establishing that the issuer has appropriate management expertise and experience must disclose any potential conflicts of interest and if there are none must confirm accordingly. Corporate governance: A statement on the extent of the issuer s compliance with relevant corporate governance requirements must be given, plus information on board committees. Related party transactions: Information must be given on related party transactions entered into between the start of the period covered by historical financial information and the prospectus date. Statement of material interests by experts: If an independent expert s report is included, disclosure must be made of any material interest the expert may have in the issuer, including compensation received or an employment relationship and any relationship with the financial intermediaries in the offering. Material contracts: A summary of each material contract, other than contracts entered into in the ordinary course of business, to which the issuer or any member of the group is party for the two years immediately preceding publication of the prospectus. CESR has also provided guidance on certain of the other disclosure requirements. For example, CESR has stated that, in respect of the required description of property, plants and equipment, issuers are expected to refer to (a) a description of the size and uses of the property, productive capacity and extent of utilisation of the issuer s facilities; and (b) an indication of how the assets are held (for example, by property or leased), the products produced and the location. There are also certain disclosure requirements about the Depositary, the underlying shares and the terms of the depositary receipts. The information required to be disclosed on the Depositary is limited to details of its registered office, date of incorporation and the legislation under which it operates. Continuing Disclosure As mentioned above, GDRs are not debt securities for the purposes of the TOD and the exemption for issuers of debt securities with a denomination of greater than 50,000 will not be available for a GDR issuer 5. Once the TOD 5 Note that for the purposes of the TOD, issuer is taken to mean issuer of the underlying shares, as apposed to the depositary. Global Depositary Receipts and the new EU regime 3

4 is implemented 6, the issuer of the underlying shares will need to produce annual reports prepared in accordance with IFRS, regardless of whether the GDRs have a denomination per unit of at least 50,000. Issuers of shares are obliged under the TOD to publish half yearly reports in accordance with IFRS and interim management statements. It is not clear from the text of the directive whether GDRs will be treated as shares for this purpose. Non-EU issuers (which, for these purposes means the issuer of the underlying share) that use US GAAP are not required to use IFRS in their annual reports prior to the financial year starting on or after 1 January Obligations under the MAD to publicly disclose inside information will apply to the depositary as issuer of the GDR, rather than the issuer of the underlying share. However, given that the obligation set out in that directive is merely to disclose inside information which directly concerns the depositary, it will not be obliged by the MAD to disclose information it may become aware of regarding the issuer of underlying share. It should be noted that maintaining a listing on an EU regulated market may also subject the issuer to other obligations which the EU Commission devises in future EU regulations and directives (in the field of corporate governance, for example). Such forthcoming legislation could result in additional administrative burdens being placed on such issuer. Impact on issuers option(s) Existing issued GDRs will become subject to the TOD when it is implemented. This will oblige the issuer of the underlying shares to produce its financial statements in accordance with IFRS and provide the required periodic reports. For new issues of GDRs the increased disclosure requirements will apply. While the GDR regime may offer some advantages to non-eu issuers accessing EU equity markets, the net effect of the above changes may lead existing issuers of GDRs to review whether to maintain a listing on an EU regulated market. The options available to existing issuers of GDRs (including those who are unable or unwilling to comply with the TOD) include delisting or moving across to an exchange regulated market. Both the London Stock Exchange and the Luxembourg Stock Exchange have expressed an intention to establish a market platform or segment (each an Exchange Regulated Market ) that is not a regulated market for the purpose of the EU regime but will be regulated by the relevant exchange. The Luxembourg Stock Exchange has stated that the operating rules of the Luxembourg Exchange 6 This must be done by 20 January February 2005

5 Regulated Market will be almost identical to the current rules. We await further details from the Luxembourg Stock Exchange on this. The FSA in the UK has published a consultation paper 7 setting out the proposed details of its Exchange Regulated Market for specialist securities 8, including GDRs listing on the Exchange Regulated Market. Issuers of GDRs (irrespective of the denomination per unit of the issue) will be required to prepare listing particulars containing the same disclosure as is required by Annex 10 of the Prospectus Regulation for GDRs with a denomination per unit of at least 50,000 (i.e. IFRS is not required), and without the requirements with respect to profit forecasts as set out above. The FSA has clarified that issuers of specialist securities will not be required to report historical financial information in IFRS or an equivalent GAAP either in listing particulars or as a continuing obligation requirement. The FSA expects to follow that approach following implementation of TOD. It remains to be seen what other regulations the Exchange Regulated Market will be subject to. Given that these markets are within the jurisdiction of the EU, it is not inconceivable that they could also be subject to future EU legislation. To date no other stock exchange has developed a listing requirement which can accommodate GDRs. The Swiss stock exchange has developed a new regime to facilitate debt listings, however, it (like the Singapore and Hong Kong exchanges) has not yet addressed GDRs. Issuers considering delisting and/or unwinding an existing GDR programme will need to carefully review the contractual documentation establishing that programme and, in the case of delisting, the impact on investors required to hold listed securities. Summary We believe that the significant number of existing GDR issuers who will be unable to comply with the TOD will need to move across to an Exchange Regulated Market. We await further details from the FSA and the Luxembourg Stock Exchange as to how such a move would be effected. 7 8 Financial Services Authority Consultation Paper 04/06 October 2004 The Listing Review and implementation of the Prospectus Directive Draft rules and feedback on CP203. Specialist securities are those that comply with Chapter 23 of the Current UK Listing Rules and are sold to persons who may be expected normally to buy or deal in securities of that kind (see section 82(c) of FSMA). Global Depositary Receipts and the new EU regime 5

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