Number 870 27 May 2009 Client Alert Latham & Watkins Corporate Department Listed Companies and Transactions Involving Their Own Shares: CONSOB Approves Two Market Practices Concerning Liquidity Transactions and Buy-Back Programmes The Resolution provides a very useful regulatory change in the current market situation in which it is particularly important to sustain the correct functioning of regulated markets. Introduction On 19 March 2009, the Italian Stock Exchange Regulator (La Commissione Nazionale per le Società e la Borsa, CONSOB) approved resolution n. 16839 (the Resolution) 1 accepting two new market practices relating to European Union and Italian provisions on market abuse 2. The first accepted market practice promotes liquidity in the market (the Liquidity Practice) and the second covers buy-back programmes of issuers listed on regulated markets in Italy or other European Union member states 3 for their own shares (the Buy- Back Practice and together with the Liquidity Practice, the Practices) 4. As a result, such actions, if carried out in compliance with the Practices and for legitimate reasons 5, are now protected from the application of administrative sanctions for market manipulation under Italian law 6. With the Practices, CONSOB introduced further exemptions to the application of the market abuse administrative sanctions, in addition to the exemptions set forth in Commission Regulation (EC) n. 2273/2003 (Reg. 2273/03), which provides a general regime of safe harbour exemptions under certain conditions for buy-back programmes and stabilisation 7 of financial instruments 8. In particular, the Resolution provides that the Practices should be considered admissible, and not illegal manipulative actions, if they meet certain conditions relating to (a) the independence of the intermediaries engaged in the buy-back programme, (b) transaction requirements and (c) transparency. The Liquidity Practice Background CONSOB recognized that insufficient levels of liquidity of financial instruments traded on regulated markets hinder the correct functioning of the market, making prices less accurate and producing inefficiency for investors. For these reasons, issuers have always been looking for ways to increase the trading level of their shares on regulated markets through transactions that increase the liquidity of their shares (Liquidity Transactions). In fact, until the implementation of the MAD, CONSOB supported the use of Liquidity Transactions under certain conditions in several communications 9, stating that stabilization transactions, carried out with the purpose of increasing liquidity and without Latham & Watkins operates as a limited liability partnership worldwide with affiliated limited liability partnerships conducting the practice in the United Kingdom, France and Italy and an affiliated partnership conducting the practice in Hong Kong. Under New York s Code of Professional Responsibility, portions of this communication contain attorney advertising. Prior results do not guarantee a similar outcome. Results depend upon a variety of factors unique to each representation. Please direct all inquiries regarding our conduct under New York s Disciplinary Rules to Latham & Watkins LLP, 885 Third Avenue, New York, NY 10022-4834, Phone: +1.212.906.1200. Copyright 2009 Latham & Watkins. All Rights Reserved.
influencing the price of listed financial instruments, do not contrast with the regular functioning of the market. However, with the implementation of the MAD, CONSOB repealed the foregoing communications, and as a consequence Liquidity Transactions could be classified as market manipulation, especially if performed continuously and on a large scale. Accordingly, issuers and intermediaries involved in Liquidity Transactions had to conform to the general regulations relating to the protection of market integrity. More significantly, they were at risk that any Liquidity Transactions not within the scope of the European Union safe harbour exemptions could be considered illegal market manipulation. Changes Introduced with the Resolution Believing that Liquidity Transactions assist the correct functioning of the market, CONSOB decided to approve the intervention of the issuer (or entities controlled by, or which control, the issuer) as an accepted market practice to promote the liquidity of financial instruments in regulated markets. In order to avoid risk of market manipulation, the Resolution introduced a series of conditions that must be met for a transaction to be deemed a Liquidity Practice. Transaction Requirements The Resolution provides that in order to carry out a Liquidity Transaction in financial instruments 10 on the market 11 legitimately, the interested parties 12 must have a written contract with a qualified intermediary 13. In such contract, the intermediary must propose trading conditions that are stable enough to prevent changes in the price of the financial instruments not in-line with the movement of the market. The contract must also fix quantitative thresholds for the purchase and sale of the financial instruments in the transaction, which must be respectively bought or sold on the market before the expiration of the contract, unless a later date is set. The Resolution sets forth certain trading conditions, namely that (a) the offers made by the intermediary follow certain price limitations based on criteria similar to those in Reg. 2273/03 14 and (b) save for certain exceptions, the number of instruments purchased or sold on the market in a single trading session cannot exceed the threshold established in Reg. 2273/03 15. Finally, a Liquidity Transaction cannot be carried out during an IPO or public tender offer. Independence The Resolution distinguishes between the transactional independence and the organizational independence of the intermediary engaged in the Liquidity Transaction. Transactional Independence: The Resolution requires that the characteristics of the Liquidity Transaction (which has an economic impact on the issuer as well as the intermediary) should be decided independently by the intermediary. Further, such choices should be independent of any specific interests of the issuer and its related entities, and of any interests connected to the intermediary s investment services and activities. It is further provided that the intermediary must not receive any privileged information from the issuer. Organizational Independence: The Resolution establishes that the intermediary must not belong to the same group of the interested party. The Resolution also discusses the fees for carrying out the Liquidity Transaction, providing that the payment methods for the intermediary must be consistent with the purpose of the activity and should not create an incentive to alter the price or the level of exchange of the financial instruments artificially. Transparency The Resolution requires that the interested parties must, inter alia, notify the public of the start date of the Liquidity Transaction and upon the termination of the contract. 2 Number 870 27 May 2009
The Buy-Back Practice Background Over the past few years, several listed companies and their affiliates pointed out that, without adequate protection by the law, a buy-back of their own shares for the purpose of creating so-called treasury shares (typically used for extraordinary transactions or for employee share options programmes) outside of the safe harbour exemptions provided in Reg. 2273/03 could be considered illegal market manipulation. Changes Introduced by the Resolution Recognizing the importance of the creation of treasury shares for the promotion of operative strategies for the growth of the company and the institution of adequate incentive systems, CONSOB approved the creation of treasury shares as an accepted market practice, so long as issuers abide by certain conditions established to reduce the risk of market manipulation. Transaction Requirements The Resolution provides that the issuer or its subsidiaries can either directly, or through an engaged intermediary 16, buy-back shares traded on regulated markets 17 in order to create treasury shares (a) for use in share exchanges with other companies pursuant to strategic transactions, (b) to meet obligations deriving from distribution programs, performed either with or without consideration, options to purchase shares or share option programmes for managers, employees or associates of the issuer or its subsidiaries, and (c) to meet obligations of share award programmes for shareholders. Given the similarities of the purposes of the Buy-Back Practice and the safe harbour exemptions of Reg. 2273/03 18, the Resolution requires the price and purchase amount thresholds and other restrictions set forth in Reg. 2273/03 be followed in carrying out the Buy-Back Practice. In the event the purpose for creating the treasury shares becomes no longer relevant, the issuer can alternatively (a) use the shares for one of the purposes set forth in Reg. 2273/03, (b) use the shares for a different purpose allowed by other accepted market practices or (c) sell the shares, minimising any impact such sale may have on the market. In such cases, as explained below, the change in purpose must be promptly notified to the public 19. Independence When buy-back programmes are performed by an engaged intermediary, the Resolution requires that the decisions of the engaged intermediary be made with full independence. Similarly, when the issuer directly buys-back its own shares, internal measures must be adopted that prohibit the exchange of information between the internal officers responsible for privileged information and the internal officers responsible for the buy-back programme. Transparency The Resolution has the same disclosure obligations as Reg. 2273/03 20, namely, inter alia, disclosure to the public of the full details of the buy-back programme, including the maximum consideration, the maximum number of shares to be acquired and the duration of the period for which authorisation for the programme has been given. The issuer must also notify the public of (a) the number of shares intended to pursue the purpose provided for by the Resolution as well as (b) a decision to use the shares for other purposes within the scope of the Practices. Conclusion With the introduction of the Practices, Italy has joined other European countries 21 in recognising a specific protection for buy-back programmes and other Liquidity Transactions that are not covered by the safe harbour exemptions under European Law and could be subject to administrative sanctions for market manipulation 22. The Resolution provides a very useful regulatory change in the current market situation in which it is particularly important to sustain the correct functioning of regulated markets. 3 Number 870 27 May 2009
Endnotes 1 The text of the resolution and related documents are available in Italian at http://www.consob. it. The Resolution went into effect on 24 March 2009, the day after its publication in the CONSOB Bulletin. 2 Specifically, the market practices set forth in Art. 1, paragraph 5 of Directive 2003/6 EC, relating to the abuse of privileged information and market manipulation (the MAD) and Art. 180, paragraph 1, letter c), of D. Lgs. n. 58 of 24 February 1998 (TUF). 3 See Art. 180, paragraph 1, letter a) of TUF and the Resolution. 4 The term accepted market practices means practices which it is reasonable to expect to find on one or more financial markets and accepted or identified by CONSOB in accordance with the implementing provisions of Directive 2003/6/EC of the European Parliament and of the Council of 28 January 2003 (Art. 180, paragraph 1, letter c) of TUF). The conditions for accepting a practice and the procedures that CONSOB must follow are set forth in Art. 40 and 41 of CONSOB Regulation n. 16191 of 29 October 2007. Specifically, Art. 41 provides that after a period of consultation, CONSOB shall publish its decisions, accompanied by an appropriate description of the practice assessed, and shall submit such adopted decisions to the Committee of European Securities Regulators (CESR) who shall distribute the decision to the European Union community through publication on its Web site: http://www.cesr-eu.org (Art. 3, paragraph 3, Directive 200472/EC). 5 See Art. 187-ter, paragraph 4 of TUF which states for the offences referred to in paragraphs 3a) and 3b), administrative sanctions may not be imposed on persons who demonstrate that they acted for legitimate reasons and in accordance with accepted market practices on the market concerned. 6 Specifically, Art. 187-ter, paragraph 3 of TUF sets forth, inter alia, that without prejudice to the penal sanctions applicable when the action constitutes a criminal offence, the pecuniary administrative sanction referred to in paragraph 1 shall be imposed on any person who: a) carries out buy or sell transactions or places orders to buy or sell which give, or are likely to give, false or misleading signals as to the supply of, demand for or price of financial instruments; b) carries out buy or sell transactions or places orders to buy or sell which secure, by a person or persons acting in collaboration, the price of one or several financial instruments at an abnormal or artificial level. 7 The term stabilisation means any purchase or offer to purchase relevant securities, or any transaction in associated instruments equivalent thereto, by investment firms or credit institutions, which is undertaken in the context of a significant distribution of such relevant securities exclusively for supporting the market price of these relevant securities for a predetermined period of time, due to a selling pressure in such securities (Art. 2, n. 7 of Reg. 2273/03). 8 The text of the regulation is available at http:// eur-lex.europa.eu. Specifically, Art. 3 of Reg. 2273/03 states that in order to benefit from the exemption provided for in the MAD, the sole purpose of that buy-back programme must be to reduce the capital of an issuer or to meet obligations arising from any of the following: a) debt financial instruments exchangeable into equity instruments; b) employee share option programmes or other allocations of shares to employees of the issuer or of an associate company. 9 See communication n. BOR/RM/92005334 of 23 July 1992 and CONSOB communication n. DME/94375 of 22 December 2000. 10 The term financial instruments means shares or quotas of closed-end investment funds, pertaining to an interested party, admitted to trading on regulated markets in Italy or other European Union member states. 11 The term market means a regulated market or a multilateral trading system (MTF) on which the transaction is performed. 12 The term interested parties means the issuer or the parties directly or indirectly controlled by or in control of the issuer authorized by the issuer to enter into a contract or an investment management company that manages closed-end investment funds. 13 The term qualified intermediary means an intermediary qualified to carry out the investment services and activities set forth in Art. 1, paragraph 5, letters a), b), d) and e) of TUF. 14 See Art. 5, paragraph 1 of Reg. 2273/03. 15 See Art. 5, paragraph 2 of Reg. 2273/03. 16 The term engaged intermediary means the intermediary engaged by the issuer to coordinate the share purchase program in full independence and without any influence by the issuer throughout the purchase period. 17 The term shares means the shares of the issuer admitted to trading on the regulated markets in Italy or other European Union member states. 18 See Art. 3 of Reg. 2273/03. 19 See paragraph 10 of the section of the Resolution relating to the Buy-Back Practice. 4 Number 870 27 May 2009
20 See Art. 4 of Reg. 2273/03. 21 The competent authorities of France, The Netherlands, Spain, Portugal and Greece have recognised market practices pertaining to issuer buy-back programmes. Specifically, in France, l Autorité des Marchés Financiers recognized two distinct practices relating to both liquidity contracts and the creation of treasury shares, while The Netherlands, Spain and Portugal have adopted practices relating only to liquidity contracts. Greece, on the other hand, has adopted practices relating to buy-back programmes to be used for share exchanges with other companies. The practices adopted by these countries can be examined in detail on the CESR internet site: http://www.cesr-eu.org. 22 It should be noted, given that the Practices regard only certain illegal procedures of market manipulation and not the act in itself, that certain actions and transactions that adhere to the thresholds, conditions and purposes set forth in the Practices will not automatically be considered market abuse, but will be treated on a case-bycase basis. If you have any questions about this Client Alert, please contact the author listed below or the Latham attorney with whom you normally consult: Maria Cristina Storchi +39.02.3046.2044 mariacristina.storchi@lw.com Antonio Coletti +39.02.3046.2061 antonio.coletti@lw.com Isabella Porchia +39.02.3046.2078 isabella.porchia@lw.com Luca Lo Po +39.02.3046.2074 lucaantonio.lopo@lw.com 5 Number 870 27 May 2009
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