Ministerstvo financí České republiky Ministry of Finance of the Czech Republic Prague, 23 rd August 2010 Dear colleagues, please find below our comments on the Consultation document on the modernisation of the 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. Please find bellow our responses. These comments are only an indication of the possible approach by the Ministry of Finance of the Czech Republic and they are not meant as our final official policy position. 1. Impact of the Transparency Directive on the attractiveness of regulated markets for small listed companies. Do the Transparency Directive obligations for issuers (e.g. disclosure of annual and half-yearly financial reports, quarterly information etc.) impact on the decisions of small listed companies to be listed in or to exit regulated markets (e.g. do they act as an entry barrier)? Please provide evidence supporting your answers. The Transparency Directive obligations have only limited impact on the decisions of small listed companies to be listed or to exit. The market with liquid shares in the Czech Republic is relatively small. Out of all titles traded on the markets organized by Prague Stock Exchange ( PSE ), 45% issuers have market capitalization below 100 million EUR. However, the transparency requirements are not considered to be main cause of this situation. There is generally low trust of investors in the securities and on the other hand a low interest of potential issuers to go public and let outsiders in their ownership structure. 2. Costs for smaller listed companies. Which are the most important costs for small listed companies associated to compliance with the Transparency Directive (e.g. cost of preparing the accounts, auditing costs, legal costs, cost of making public the information etc.)? Please support your answer with quantitative data. The Transparency directive has been fully implemented since last year. Therefore, it is rather difficult to estimate the actual costs of compliance. The biggest compliance costs are supposedly connected with preparing the accounts and auditing; the costs of making the information public and if applicable legal costs seem to be less important. 1 Hence, the overall costs of compliance with Transparency Directive are not the major concern of small issuers. However, 1 For example, one of the small issuers admitted to trading to PSE, the company Pražské služby, a.s. (its market capitalization to 18.8.2010 was 51,2 mil. EUR) states in its annual report for 2009 that its cost for bookkeeping control were 252.000,- CZK (circa 10 000,- EUR) and auditing costs were 272 000,- CZK (circa 11 000 EUR). 1
every reduction and wider options for fulfilling the issuer s obligation would be welcomed. 3. Potential diminution of cost for small listed companies. What changes of the Transparency Directive will bring important reductions in costs for small listed companies? Please provide evidence in support of your answer (see also questions 7and 8 if you are able to provide more detailed replies). We don t see any possible diminution of cost for small listed companies. 4. The lower visibility of smaller listed companies. How does the visibility problem materialise (e.g. lower attention of analysts, lower investment levels, lower trading etc.) for (objectively) well performing small companies? Please provide evidence supporting your answer. We are not able to provide answer supported by evidence. 5. Other cases reflecting low benefits. Are there, in your view, other cases reflecting low benefits for small listed companies resulting from disclosure obligations compared to larger listed companies? See the Question 4. 6. Definition of a small listed company. What would be the optimal definition of a "small listed company" in the context of regular (i.e. after the admission to trading of the securities) transparency requirements? Please justify your replies - i) for issuers of shares, those companies with a market capitalisation below a certain threshold such as 100 Million4, 250 Million5 or other (please specify the threshold); - ii) for issuers of shares, those companies with a market capitalisation below a certain percentage (e.g. 60%) of the average capitalisation of a company in the regulated market where the company is admitted to trading (please specify the percentage); - iii) for issuers of shares, those companies with a market capitalisation below a certain percentage (e.g. 60%) of the average capitalisation of a company in the regulated market(s) of the home Member State of the company (please specify the percentage); - iv) for issuers of debt securities only, those companies having outstanding debt securities below a certain threshold (please specify the threshold); - v) for issuers of debt securities only, those companies having a turnover below a certain threshold (please specify the threshold) - vi) other. The definition of a small listed company should fit the conditions of every regulated market. As for the Czech Republic, a majority of shares admitted to trading on PSE is traded on foreign markets as well. There are also a significant number of foreign-based issuers whose shares are traded on the Czech Regulated markets. Some Czech based issuers have shares admitted only to foreign regulated markets. Mainly for the last reason, the small listed company could be defined by its market capitalization on the regulated market where the company is admitted to trading (point ii) above). We do not support solution 2
proposed under point i) as the size of market capitalization itself does not relate to the circumstances of particular company on a particular market. The solution proposed under point iii) is not viable as an issuer from one Member State could be listed only in another Member State, thus there is no connection between the issuers home member state and regulated market where its shares are traded. As concerns the threshold for distinguishing small companies, we would suggest using median of market capitalization on a particular market. The main setback of using percentage of an average market capitalization is that there could be markets (as in the case of the Czech Republic) where big gap exists between the market capitalization of the top companies and the rest, thus the resulting average market capitalization has only limited relevance. In contrast to that the median divides the issuers into two groups according to the market capitalization whereas the lower one consists of smaller companies. The main advantage of this solution is that it could be universally applied with the same result on every regulated market regardless of its size and situation. 7. Potential diminution of cost for small listed companies if changes to the Transparency Directive were to be adopted 7.1. If a differentiated regime for small listed companies is added to the Transparency Directive with a view to reduce the compliance costs of those companies, would it be desirable to prevent Member States/regulated markets from imposing in national law/listing rules more stringent or additional obligations on small listed companies? We believe that the national law or listing rules should be allowed to provide more stringent or additional obligations. The issue of small listed companies is too diverse in every Member State; hence the possibility of regulation adjusted to the local conditions shall be kept. 7.2. Do you think that an extension of the deadline for the publication of financial reports would imply a reduction in legal, auditing or other type of costs? Please provide evidence supporting your answers (e.g. how much the cost would be reduced depending on the extension of the deadline)? We do not see any substantial reduction (see our reply to the Question 2). 7.3. Do the various rules requiring the disclosure by listed companies of reports of narrative nature bring significant costs/operation complexity for small listed companies (e.g. legal, account preparation, auditing, other type of costs)? Please provide evidence in support of your answer. We do not see any substantial reduction (see our reply to the Question 2). 7.4. Would you see benefits from integrating in the Transparency Directive the disclosure obligations mentioned in question (8.3) which are currently in different directives? Please explain you reply (e.g. rules would be more clear, the Home Member States rules would clearly apply, etc). 3
An integration of disclosure obligations into one regulation would certainly add to simplicity and thus better and more unified implementation in each Member State. 7.5. If the Transparency Directive provided for maximum harmonisation (no national add-ons) of the content of narrative reports referred to in question (7.3) for small listed companies, would this imply a reduction in legal, auditing or other type of costs? Please provide evidence supporting your answers. Although we maintain the position that the substantial reduction of costs is not possible, the harmonization of narrative parts of reports could help the small companies to fulfil their obligation and speed up the process of submitting the report. The standard content of narrative part could also enhance the possibility of comparison of reports from different issuers, thus contributing to the higher transparency of the whole market. However, we believe that the harmonization should be only minimal, enabling to address the situation of individual markets and practicability of required information. 7.6. In case you think maximum harmonisation regarding the content of narrative reports referred to in question (7.5) is desirable, what do you think would be the best way? Please provide reasons on your reply. -i) non-mandatory ready-to-use templates regarding these narrative disclosures (which could be prepared for instance by CESR/ESMA); -ii) more detailed rules in European law, either in the Transparency Directive or in delegated acts adopted by the Commission; -iii) a combination of both The solution mentioned in the point i) seems to be most practicable. The use of non-mandatory templates should be left as advantage by the issuer. The solution mentioned under point i) enables the issuer to make a choice of the most convenient way how to provide necessary information. 7.7. Concerning question (7.6), could you provide a specific reply regarding the disclosure of environmental and social data requested in Article 46(1)(b) of the Fourth Company Law? We have no particular preferences to the issue at this point. 8. Diminution of cost for small listed companies vs. diminution of transparency to the market. 8.1. Is it possible to apply lighter transparency obligations for small listed companies without a corresponding significant diminution of transparency provided to the market? Please provide evidence supporting your answer. No, if the substance of current transparency requirements is to be maintained on the same level. 8.2. If the obligation to disclose quarterly financial information was waived for small listed companies, would this result in an unreasonable diminution of transparency? Please provide evidence supporting your answer. 4
Such a change would have only limited impact. When the big listed companies continue to disclose the quarterly financial information, the small ones would have to follow in order to stay visible to the market. 9. Addressing the lower visibility of smaller listed companies 9.1. Do you think that measures at EU level (including possible changes to the Transparency Directive) can help solving the lower visibility of smaller listed companies? -(i) Yes (see next question) -(ii) No, it is an structural problem or a market feature (e.g. size matters etc.) which EU measures will not be able to solve (please explain). No, we don't think that any EU measure could substantially improve this matter. In the case of the Czech Republic, even the smallest of the listed companies is relatively important to the domestic economy and in fact not really small. The IPO's are rare and every time they occur they are heavily oversubscribed. From this point of view there is no need to improvement of visibility. 9.2. What type of measures at EU level could help solving the visibility problem of small listed companies? -i) The Transparency Directive should contain differentiated rules for small listed companies regarding timing and/or methods for the disclosure and dissemination of information (please explain); -ii) there are rules in other EU directives (e.g. prudential requirements) and/or national law (e.g. tax law) which discourage financial analysts and intermediaries' interests in small listed companies which should be modified (please explain) -iii) financial analysts and intermediaries should get incentives to interest themselves in small listed companies (please explain); -iv) other (please explain). N/A 9.3. Do you think that the development of an EU database storing regulated information on all issuers of securities in the EU will facilitate research and create interest/result in greater attention in small listed companies by financial analysts, financial intermediaries and investors? Please explain. Yes, we think that an EU database could be one of the few improvements of visibility of small companies from different Member States. If actual and easily accessible, such a tool could obviously direct the investors to the smaller and less developed markets across the Europe. 10. Do you have any other views on regular transparency requirements, which could make regulated markets more attractive to small listed companies? N/A 5
11. Would the disclosure of holdings of cash-settled derivatives be beneficial to the market? Please provide evidence supporting your answer (e.g. situations in which lack of disclosure of cash-settled derivatives produced negative results). Please report about your experience, if any, with the disclosure of cash-settled derivatives in the United Kingdom and/or in other jurisdictions where cashsettled derivatives are disclosed (such as in Switzerland). The holdings of cash-settled derivatives should be disclosed under transparency regulation. Although we have no evidence of such practices in the Czech Republic, the Commission report on Transparency Directive supports the conclusion that there were many cases when cash settled derivatives were used to influence the issuer or acquire issuer s shares at preferential conditions. As ex post prosecuting of any such practice could be difficult, the transparency requirement regarding the cash-settled derivatives seems to be a suitable precautionary measure. 12. If the Transparency Directive was to require holders of cash-settled derivatives to disclose their positions, 12.1. should holdings of cash-settled derivatives be aggregated to holdings of voting rights and/or of financial instruments giving unconditional access to voting rights for the purposes of calculating whether the threshold triggering the disclosure obligation is reached or crossed? 12.2. and if such disclosure of cash-settled derivatives should be done independently of voting rights and of other financial instruments, which threshold should be applied? E.g. (i) the thresholds provided in Article 9(1) TD should be applied (5%, 10% etc); (ii) the lower/initial threshold for this kind of disclosure should be significant and higher than the 5% foreseen in Article 9(1) TD (e.g. at least 10% or higher); (iii) other). Holdings of voting rights and holding of cash-settled derivatives should be aggregated. Czech implementation of Transparency Directive is based on this interpretation. We believe that it is the only way to be in line with the purpose of the Transparency Directive, i.e. to provide the market with reliable information about persons having substantial influence over the issuer. This information could not be complete unless all means of gaining or exercising the voting rights are not considered. Otherwise a shareholder could simultaneously have an access to the voting rights partly by holding the shares of the issuer and partly by cash-settled derivatives, both holdings bellow the threshold triggering the disclosure obligation but when combined crossing the threshold for disclosure. The disclosure of such combined holding should be broken down to the voting rights held directly and voting rights held by the cash-settled derivatives. For the purpose of preventing further interpretation divergence, it would be also useful to create harmonized regulation stating the types of derivatives, which fall into the scope of the disclosure obligation. 13. Would the establishment of a specific disclosure mechanism for holders of voting rights who do not hold shares between the record date and the shareholders meeting be useful/effective to prevent empty voting practices? (i) yes (please explain); 6
(ii) no, only limiting/prohibiting empty voting practices would be effective. No, we don t see the benefits of such disclosure mechanism. The problem of empty voting is inherent to the regulation of record day and is difficult to solve effectively. If the disclosure mechanism would be established, it is not clear how the information about possible empty voting helps the issuer or indeed other shareholders. They have no possibility to influence it anyway. There is also the question how to penalize effectively the breach of such disclosure obligation (e.g. rescission of the vote?). Even if the empty voting practices would be limited or prohibited, it would be still possible to sell the shares day after the general meeting the resulting effect is similar to the empty voting. This cannot be banned, as it would mean a strong interference with the shareholders rights. The shareholder has no particular obligation to be loyal to the company and can vote according to its own interest, even if this would mean winding up of the company. To prevent the shareholder from exercising this right is obviously hardly feasible within the rule of law system. 14. If a specific disclosure obligation is imposed regarding the transfer of voting rights independently of the shares between the record date and the general meeting, 14.1. which threshold of voting rights should be applied in order to trigger the obligation? E.g. 0,5%, 1%, 2%, other. If such disclosure obligation is ever to be introduced, the threshold should follow the rules of general disclosure obligation, i.e. at least 3 %. The purpose remains the same - to make public any holding with certain significant influence over the issuer. 14.2. which time-limit for the disclosure should be applied for this disclosure to be useful? E.g. immediate disclosure; no later than 1 day, other. With regard to our answer to Question 13, at this point we have no preference in this matter 15. Which is the best way to make the investment process more transparent (please justify your answer): -i) requesting investors to disclose their future intentions with holdings; -ii) requesting investors to disclose their actual voting policies; -iii) both; -iv) none; -v) other. None of the proposed measures sub i) or ii) seems to be practical. If the shareholder does not disclose its true intention or its intention changes, the disclosure obligation seems to be pointless. This is connected with the enforceability and possible sanctions for not following the declared intention. Such an intention could be also hardly proved. We do not think that it is possible to prohibit the shareholder to change its mind about how to manage its holdings. 7
Every step in this direction would mean an obstacle to the investors and could lessen the attractiveness of certain regulated markets. 16. If investors were required to disclose to the market which their intentions are with regard to their investment, 16.1. would such disclosure be useful? -i) this would be useful for issuers and other investors (e.g. more transparency) please provide examples/justify your reply; -ii) this would be negative to issuers and other investors (e.g. facilitate antitakeover defences) please justify your reply. See answer to Question 15. We believe that such regulation would limit the benefits of regulated markets to the investors and in some cases it could made their legitimate investment strategies impractical. 16.2. which should be the minimum threshold triggering such disclosure? Please justify your reply. -i) the thresholds provided in Article 9(1) TD should be applied (5%, 10% etc); -ii) the lower/initial threshold should be significant and higher than the 5% foreseen in Article 9(1) TD (e.g. at least 10% or higher); -iii) the information should only be requested only if certain threshold are crossed and provided that the investor is among the largest 3 investors in the issuer; -iv) other. If such disclosure obligation is established, the initial threshold should be higher than 10 % (similarly to the thresholds in Germany or France), lesser holding are not significant enough. We would also prefer not to add any other limit, i.e. every shareholder surpassing the minimal threshold should have the disclosure obligation. 16.3. should such disclosure consist in (please justify your reply): -i) simple information on intentions (e.g. box ticking in a form: I intend to change/influence control of the issuer/i do not intend to change/influence control of the issuer); The simple information seems not to be revealing enough, if it is not known why and in which way the shareholder intends to influence the issuer. All possibilities cannot be predicted in the given form. -ii) more substantial information on intentions (e.g. narrative explanations on purpose of the acquisition including any plans or proposals of the investor for future purchases or sales of issuer's stock or for any changes in the issuer's management or board of directors etc.); This would be the most practicable way if the disclosure obligation is to be introduced. However, as stated above, it could have an impact on the willingness of investors to trade on the regulated markets as some transactions can be carried out only under condition that they are not known in advance. 8
-iii) information on source and amount of funds used to acquire the securities; The main benefit of this information is that it would be possible to determine who yields an indirect influence over the voting rights as a result of funding the acquisition of the securities. -iv) arrangements to which the investor is a party relating to issuer's securities; This information could help to disclose concerted practices of investors or third party; however, if these persons are not willing to disclose such arrangements, the competent authorities have only limited powers to uncover them. v) other. N/A 17. Should holdings of shares and voting rights be aggregated with holdings of financial instruments giving unconditional access to voting rights for the purposes of calculating the relevant thresholds that trigger the notification obligation? Please justify your reply. Yes, we believe that such holdings should be aggregated, for the same reasons as stated above in the reply to Question 12. 18. Are there other cases of potentially insufficient transparency regarding corporate ownership? Please justify your reply. N/A 19. Would it be desirable to set up a uniform EU regime (e.g. by a directly applicable EU Regulation) for the notification of major holdings of voting rights? Please justify your reply by describing any legal obstacles (e.g. related to civil or company law) to such uniform EU regime. We believe that it would be useful to set up a uniform EU regime of the technical aspects such as the method for calculation of major holdings, for their aggregation, the notification procedure, time limits etc. As regards the unification of the thresholds, we understand that the investors might find it difficult to comply with up to 27 various national regulations, nevertheless by introducing a uniform EU regime, national states would loose the possibility to take into account the specifics of their legal systems and their capital markets e.g. for Czech Republic it would mean the application of the 3% threshold would be compulsory not only for issuers with the issued share capital above 100 000 000 CZK (4 mil. EUR), as the rule is now, but for the smaller companies as well. Then we would not be able to apply the 40% threshold any longer, which is significant due to the fact that according to Czech company law it constitutes the presumption of control. 9
Except the arguments mentioned above, we do not see any further legal obstacles to a uniform EU regime. 20. If a fully uniform EU regime is not possible because of insurmountable legal barriers, should Member States be prevented from adopting more stringent requirements than those of the Transparency Directive regarding the notification of major holdings of voting rights? See answer to Question 19. 21. Would it be desirable to set up a uniform EU regime (e.g. by a directly applicable EU Regulation) regarding issuers' disclosures? Please justify your reply by describing legal/other obstacles to such uniform EU regime. The introduction of a uniform regime would improve the comparability of the reports of issuers from various countries and it would facilitate their preparation. But it is necessary to clarify what would be the relation of such EU Regulation to other EU law that sets up the requirements on the contents of financial statements. Would it only determine the narrative part of the reports, or would it unify the contents of the financial statements as well, on a more detailed level than the IFRS do at present? In this respect, as stated above, we support the solution, which consists in the unification of minimum requirements on the content of the reports. It would bring sufficient legal certainty to the issuers regarding their obligations, and at the same time it would be flexible enough to let the countries adjust the requirements to the situation on their regulated markets. 22. Could you please explain in what way national rules implementing the Directive result in different methods for aggregating holdings of voting rights (and where applicable financial instruments) for the purposes of calculating whether the relevant thresholds triggering the notification obligation are reached or crossed by investors? Please justify your reply. The Directive is not clear enough as regards the aggregation of the holdings of shares and voting rights and the holdings of financial instruments giving unconditional access to voting rights. Czech law aggregates the two categories, but according to the Commission report this provision of the Directive (Art. 13) is not being interpreted uniformly within the EU member states. Furthermore, it should be clear whether in a situation where the voting rights held by a third party with whom a person or legal entity acts in concert are attributed to that person or entity for the purpose of notification requirements according to Art. 10 (a), the person or legal entity has also an individual notification obligation (regarding its own voting rights), and whether the notification obligation is triggered as well by transfers of voting rights within the group of persons acting in concert. Czech law states that the voting rights held by persons acting in concert are aggregated for the purpose of the notification obligation, but each of these persons has an individual obligation as well and the transfers between them are 10
subject to the notification requirement, if in the consequence of such transfer the relevant threshold is crossed. In the situations covered by Article 10 of the Transparency Directive it is not sufficiently clear whether the voting rights are attributed to both persons mentioned, or only one of them, e.g. when the shares are provided as financial collateral, is it only the collateral taker, who has to take them into account when calculating the holding of voting rights, or is it also the collateral provider, notwithstanding the fact that it cannot exercise the voting rights? 23. Could you provide evidence of cases where unclear rules in the Directive ought to be clarified? Please explain. There are following interpretation problems in the current wording of the Transparency Directive which could be further clarified: - It is not certain, whether the voting rights exercised by natural person or legal entity according to the Article 10 of the Transparency Directive are considered as only its own, or if the voting rights are also attributed to the real shareholder for the purposes of counting the relevant threshold. - There is a possible contradiction between the Home Member State rule and the wording of Article 8(2) of Directive 2001/34/EC as it provides for additional obligations and disclosures potentially required by Host Member State. 24. Do you have any other comments regarding the Transparency Directive? No, we have not further comments. 11