Number 1121 18 January 2011 Client Alert Latham & Watkins Finance Department Amendments to the Prospectus and Transparency Directives Wholesale debt issuers should pay particular attention to the limited grandfathering provisions of the Amending Directive in respect of the increase of the wholesale debt minimum denomination threshold. The Directive 2010/73/EU (the Amending Directive ) amending the Prospectus Directive 2003/71/EC and the Transparency Directive 2004/109/ EC was published in the Official Journal of the European Union on 11 December 2010 and entered into force on 31 December 2010. The Amending Directive is the result of the Commission s review of the Prospectus Directive 1 and is part of the legislative simplification plan agreed by the European Council in March 2007. It is aimed at improving legal clarity and reducing the burdens imposed on issuers and intermediaries, whilst at the same time upgrading investor protection. EEA Member States are required to implement the Amending Directive into national law within 18 months following its entry into force (i.e., by 1 July 2012). In order to be applicable to issuers, in addition Summary of Key Changes to their transposition into national law, the proposals contained in the Amending Directive will also require EU implementing legislation including changes to the Prospectus Regulation (809/2004/EC). The Amending Directive raises a number of implementation issues. In particular, as further explained in this alert, due to the limited grandfathering provisions in respect of the new wholesale debt 100,000 minimum denomination threshold provided for in the Amending Directive, issuers who wish to benefit from the EEA wholesale debt concessionary disclosure regime under the Transparency Directive should consider starting to issue now in denominations of at least 100,000 (or its equivalent in another currency). The Amending Directive also raises concerns as to the transition from the existing regime to the amended regime. New disclosure requirements The minimum denomination to qualify as wholesale debt and benefit from the wholesale disclosure regime and exemptions under the Prospectus Directive and the Transparency Directive will be increased to 100,000 (currently 50,000). Prospectus summaries will be required to comply with certain common format and content requirements as to key information relating to the securities. Civil liability will apply to issuers who fail to comply with the latter requirements. Latham & Watkins operates worldwide as a limited liability partnership organized under the laws of the State of Delaware (USA) with affiliated limited liability partnerships conducting the practice in the United Kingdom, France, Italy and Singapore and an affiliated partnership conducting the practice in Hong Kong and Japan. Latham & Watkins practices in Saudi Arabia in association with the Law Office of Mohammed Al-Sheikh. 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 2011 Latham & Watkins. All Rights Reserved.
Extended exemptions to disclosure requirements The employee share scheme exemption will be extended to issuers that do not already have securities admitted to trading on an EEA regulated market if either (i) they have securities admitted to trading on a third country market in respect of which the Commission has adopted an equivalence decision or (ii) they have their head office or registered office in the EEA. The thresholds of the small offer exemptions will be increased: offers will be exempt if (i) they are made to fewer than 150 persons (currently 100 persons) and/or (ii) the total consideration for the offer in the EEA is less than 5 million (currently 2.5 million) and/or (iii) in respect of offers of non-equity securities in a continuous or repeated manner by credit institutions, the total consideration of the offer in the EEA is less than 75 million (currently 50 million). The merger exemption will be extended to include securities offered or listed in connection with a division, such as a demerger. A reduced disclosure regime for rights offerings will be introduced. Simplifications and clarifications The obligation to publish a prospectus supplement will only apply until the later of the close of the offer or admission to trading and an investor s right to withdraw in connection therewith will only apply to public offerings. The definition of qualified investors exempt from the obligation to publish a prospectus will now also include professional clients and eligible counterparties within the meaning of the Directive 2004/39/EC (MiFID). The obligation to provide a prospectus for retail cascades and the obligation to publish annual information updates will be abolished. Prospectuses will be required to be published electronically. New Disclosure Requirements With a view to enhancing investor protection, the Amending Directive has introduced new disclosure requirements. Increase in wholesale debt minimum denomination Under the original regime 2, issuers of debt securities with a minimum denomination of 50,000 (or its equivalent in another currency) may offer these securities to the public without publishing a prospectus. The issuers who wish to list such securities on an EEA-regulated market have to publish a prospectus, which is subject to lighter disclosure requirements pursuant to Annexes IX and XIII of the Prospectus Regulation 809/2004/EC. The 50,000 threshold is increased by the Amending Directive to 100,000 (or its equivalent in another currency). Consequential amendments are made in the Transparency Directive so that the concessionary continuing obligations regime under the Transparency Directive will apply only to issuers of securities with a minimum denomination of 100,000 or its equivalent in another currency. The amendment addresses the Commission s concern that the 50,000 threshold was too low to prevent retail investors from investing in products that the Commission considered should only be placed with professional investors. The increase of the minimum denomination threshold will impact the current market practice of issuing in $100,000 in order to take advantage of the concessionary disclosure and continuing obligation regime. Given that the market prefers round numbers, it is expected that the minimum denomination for US denominated issues will move to $150,000 or $200,000. Wholesale debt issuers should pay particular attention to the limited grandfathering provisions of the Amending Directive in respect of the increase of the wholesale debt minimum denomination threshold. 2 Number 1121 18 January 2011
Only securities with a minimum denomination of at least 50,000 (or its equivalent in another currency) but less than 100,000 (or its equivalent in another currency) that have been issued prior to 31 December 2010 will be grandfathered for the purposes of the Transparency Directive. Furthermore, the Amending Directive does not contain grandfathering provisions for the purpose of the Prospectus Directive and the Transparency Directive in respect of further issuances of the same series of securities (tap issuances) with denominations of 50,000 (or its equivalent in another currency) but less than 100,000 (or its equivalent in another currency). Accordingly, the relevant issuers should start issuing in denominations of 100,000 (or its equivalent in another currency) from now on in order to continue benefiting from the wholesale debt concessionary regime when the Amending Directive proposals are transposed into national law and become directly applicable to them. This will also enable them to make tap issuances with respect to those issues after the transposition of the Amending Directive. Increase of small offers total consideration threshold Under the original regime 3, the obligation to publish a prospectus did not apply if the offer to the public was addressed to investors who acquire securities for a total consideration of at least 50,000 per investor, for each separate offer. The Amending Directive increases the threshold to 100,000. Summary of the prospectus In order to make prospectus summaries more friendly to retail investors, the Amending Directive introduces some significant changes to their content and format and creates a new head of civil liability based on prospectus summaries. Changes to format and content Under the original regime 4, the prospectus summary should, in a brief manner, convey the essential characteristics and risks associated with the issuer, any guarantor and the securities. The Amending Directive specifies that the format and content of the summary shall provide, in conjunction with the prospectus, appropriate information about essential elements of the securities concerned in order to help investors when considering whether to invest in such securities. To this end, it requires that the summary (i) be drawn-up in a common format and (ii) convey key information on the securities. (a) Harmonization of form and content In order to facilitate the comparability of the prospectus summaries with respect to similar securities, the Amending Directive provides that summaries shall be drawn-up in a common format. If the 2,500-word limit remains unchanged, the precise content and form requirements for summaries is to be determined by the Commission and remains uncertain. The recitals of the Amending Directive state that the Commission shall, to the greatest extent possible, align the content and form requirements for prospectuses with the outcome of the debate launched by the Commission s Communication of 30 April 2009 on Packaged Retail Investment Products, with a view to preventing the duplication of documents and potential confusion for investors as well as minimizing the costs. Many market participants believe that harmonizing summaries for all different types of securities will be very challenging and that it would also be inexpedient to apply a summary format designed for retail investors to securities marketed to professionals. (b) The key information requirement The Amending Directive requires that the summary convey key information on the securities. Key information is defined as : essential and appropriately structured information which is to be provided to investors with a view to enable them to understand the nature and the risks of the issuer, guarantor and the securities that are being offered to them or admitted to trading on a regulated market and [ ] to decide which offers of securities to consider further. 3 Number 1121 18 January 2011
In light of the securities concerned, the key information shall include the following elements: a short description of the risks associated with and essential characteristics of the issuer and any guarantor, including their assets, liabilities and financial position; a short description of the risks associated with and essential characteristic of the investment in the relevant security, including any rights attaching to the securities; the general terms of the offer, including estimated expenses charged to the investor by the issuer or offeror; details of the admission to trading; reason for the offer and use of proceeds. (c) Extension of civil liability on the basis of the summary The Amending Directive introduces a new head of civil liability if a summary does not provide, when read together with the other parts of the prospectus, key information in order to aid investors when considering whether to invest in such securities. However, the scope of this new head of liability is uncertain. The recitals of the Amending Directive reiterate the original provision that Member States should ensure that no civil liability attaches to any person solely on the basis of the summary unless it is misleading, inaccurate or inconsistent with the relevant parts of the prospectus. This provision could be used to support the argument that no fundamental change of the regime was intended. Extended Exemptions to Disclosure Requirements In order to avoid the administrative burden of publishing a full prospectus when it is not necessary having regard to investor protection, the Amending Directive has extended the exemptions to full disclosure requirements. Employee share schemes Under the previous regime 5, the exemption to publish a full prospectus for offers of securities to employees was only available to employers with securities already admitted to trading on a EEA regulated market or an affiliated undertaking provided that a document was made available containing information on the number and nature of the securities and the reasons for and details of the offer. This exemption, which did not apply to a significant number of employers operating share schemes for employees in the European Union, was considered too restrictive. The Amending Directive extends the exemption to employers, or their affiliated undertakings, that do not already have securities admitted to trading on an EEA regulated market provided that: the issuer has its head office or registered office in the EEA; or the issuer is a company established outside the EEA whose securities are admitted to trading either on an EEA regulated market or on a thirdcountry market provided that the Commission has adopted a formal decision that the legal and supervisory framework of the third country market ensures that it complies with legally binding requirements equivalent to the requirements 6 applicable to EEA regulated markets. These companies will be exempt from publishing a full prospectus and will only be required to make available a short form disclosure document as required for offers of securities by employers with securities admitted to trading on an EEA regulated market. This new exemption will be particularly useful in the context of LBO financings in order to offer securities of the nonlisted holding company to employees of the target when no other exemption is available on the grounds in particular of the size of the offer. In respect of companies listed on third country markets (such as US companies not listed on an EEA regulated market), the effectiveness of the new regime will depend on how the Commission handles the process. Based on past experience of the application by the Commission of the equivalence test to other matters 4 Number 1121 18 January 2011
under the Prospectus Directive (such as the equivalence of third country GAAPs to IFRS) it is feared that it will take the Commission a long time to decide whether a third country market meets the equivalence criteria. Accordingly, if it is expected that the regulatory regime applicable to major US markets such as NYSE will finally be determined equivalent, it may take some time before US companies can benefit from the new exemption. Increase of Thresholds of Small Offers Exemptions The Prospectus Directive provides that it does not apply to offers of securities to the public below certain size thresholds. The Amending Directive increases the thresholds as follows: securities included in an offer where the total consideration for the offer in the EEA is less than 5 million over a 12 months period (the current threshold is 2.5 million 7 ); non-equity securities issued in a continuous manner by credit institutions where the total consideration for the offer in the EEA is less than 75 million over a period of 12 months (the current threshold is 50 million 8 ). The Commission shall adopt measures concerning the adjustment of these threshold. Under the previous regime 9, the obligation to publish a prospectus did not apply if the offer to the public was addressed to fewer than 100 natural or legal persons per Member State, other than qualified investors. The Amending Directive increases the threshold to 150 natural or legal persons per Member State. Merger exemption The current exemption 10 from the requirement to publish a prospectus for securities offered to the public in connection with a merger is extended to include securities offered or allotted in connection with a division such as a demerger. Reduced disclosure regime for rights offering Rights offerings were subject to extensive disclosure requirements under Annex I of the Prospectus Regulation. With a view to improving the efficiency of capital raising by way of a rights issue, the Amending Directive introduces a proportionate disclosure regime for pre-emptive issues which will apply to offers of shares which are of the same class as the shares of the issuer already admitted to trading on an EEA regulated market or on a multilateral trading facility which are subject to ongoing disclosure requirements and rules on market abuse, provided that the issuer has not disapplied the statutory pre-emption rights. The specific requirements of the reduced disclosure regime shall be determined by the Commission. The European Securities and Markets Authority (ESMA) should issue guidelines regarding these requirements in order to ensure a consistent approach by the competent authorities. The impact of the new regime is uncertain. Issuers may wish to continue to provide disclosure that exceeds the requirements of the reduced disclosure regime for marketing and liability considerations. Underwriters may also continue to require full disclosure in particular in connection with large rights offerings of European issuers which include an offering into the US under Rule 144A, due to liability considerations and the need for US counsel to provide a 10b-5 letter. Simplifications and Clarifications Harmonization of the Definition of Qualified Investors The Prospectus Directive does not require the publication of a prospectus where an offer is addressed solely to qualified investors. In order to reduce the burden on financial intermediaries of checking investor status when they market securities to their own customers, 5 Number 1121 18 January 2011
the Amending Directive amends the definition of qualified investors to include persons classified as professional clients and eligible counterparties under Annex II of Directive 2004/39/CE (MiFID). Supplement and withdrawal rights Pursuant to the Prospectus Directive 11, an issuer must publish a supplement if a significant new factor, material mistake or inaccuracy relating to the information included in the prospectus which is capable of affecting the assessment of the securities occurs and is noted between the time when the prospectus is approved and the final closing of the offer to the public or, as the case may be, the time when trading on a regulated market begins. The Amending Directive clarifies that the obligation to publish a supplement is terminated at the final closing of the offering period or the time when trading on a regulated begins, whichever occurs later. Pursuant to the Prospectus Directive 12, investors who have already agreed to purchase or subscribe for the securities before the supplement is published have the right to withdraw their acceptance within a time limit of two working days, which Member States may extend. The Amending Directive amends the regime applicable to the right to withdraw as follows: the right to withdraw will only apply to prospectuses relating to offers of securities to the public; the new factor, mistake or inaccuracy must arise before the final closing of the offer and the delivery of securities; and the right to withdraw shall be exercised within two working days after the publication of the supplement, which period may be extended by the issuer or the offeror, provided that the final date of the right of withdrawal shall be stated in the supplement. Retail cascades The Amending Directive clarifies the regime of the so-called retail cascades, i.e. the selling of securities to retail investors through financial intermediaries such as retail banks. Under the current regime, resales of securities by financial intermediaries constitute separate offers for the purposes of the Prospectus Directive and require the publication of a prospectus. This results in an unnecessary burden where a prospectus has already been published and is valid. The Amending Directive provides that Member States shall not require another prospectus in any subsequent resale of securities or final placement of securities through financial intermediaries as long as: a valid and up-to-date prospectus is available; and the issuer or the person responsible for drawing up such prospectus consents to its use by means of a written agreement. This clarification will be useful in the context of straightforward retail cascades whereby financial intermediaries resell securities directly to retail investors. It will also be useful in some repackaging deals whereby securities are distributed to retail investors through other products such as life insurance schemes giving access under certain circumstances to the underlying securities. Electronic publication The Amending Directive introduces changes to issuers publication obligations with a view to simplifying and harmonizing publishing requirements. Among the various available methods of publication, the Prospectus Directive currently permits publication of a prospectus in electronic form on the issuer s website to the extent it is also published on the website of the financial intermediaries placing or selling the securities, if applicable. The Amending Directive provides that a prospectus will be deemed available to the public if it is published either on the issuer s website or, if applicable, on the website of the financial intermediaries placing or selling the securities. Furthermore, rather than leaving to Member States the choice 6 Number 1121 18 January 2011
to impose such requirements, it also provides that an issuer which chooses to publish a prospectus by insertion in a newspaper or in printed form made available to the public, shall also publish it electronically on its website or on the website of financial intermediaries placing or selling the securities. Time period for prospectus validity The Amending Directive did not extend the 12 months validity period to 18 or 24 months as suggested during the consultation process. It only introduces a minor amendment regarding the commencement of the period which will now run from the date of approval of the prospectus by the competent authority of the relevant Member State, instead of the date of its publication. Abolition of annual information update The Amending Directive abolishes the obligation for issuers whose securities are admitted to trading on a regulated market to provide annually a document containing all information that they have published or made available to the public over the preceding 12 months. This requirement was considered unnecessary and duplicative in light of the disclosure requirements under the Transparency Directive. Passporting The Prospectus Directive provides that once a prospectus is approved by the home Member State, it is valid for a public offer or admission to trading in any other Member State, subject only to: the competent authority of the home Member State delivering a certificate of approval to the competent authority of the host Member State; and translation of the summary into the official language of the host Member State being filed with the competent authority of the host Member State, if applicable. In order to provide certainty to issuers as to when delivery of the certificate of approval has actually been made, the Amending Directive provides that the issuer shall be notified by the competent authority of the home Member State of the issuance of the certificate at the same time as it is delivered to the competent authority of the host Member State. Choice of home member state for low denomination debt Currently, issuers of non-equity securities can choose their home Member State as the Member State where the issuer has its registered office or where the securities are to be admitted to trading on regulated market or where the securities are offered to the public, for offerings of securities whose denomination is at least 1,000. The Amending Directive provides that the Commission should undertake a review of this provision and decide whether it should be maintained or revoked. Implementation Issues In order to be fully applicable to issuers, in addition to its transposition into national law, the Amending Directive requires further EU implementing legislation including, in particular, conforming changes to the Prospectus Regulation. To this end, the Commission is empowered by the Amending Directive to adopt delegated acts and will be assisted for this purpose by the ESMA, which will replace the CESR in 2011. However, the scope, and the timing for the adoption, of these delegated acts is unclear. Although the amendments introduced by the Amending Directive are not directly applicable to issuers until it is transposed into national law, due to the limited grandfathering provisions of the Amending Directive, certain amendments must nonetheless already be taken into account by issuers. As explained previously, as a result of the introduction of the new wholesale debt 100,000 minimum denomination threshold, issuers who wish to benefit from the EEA wholesale debt concessionary disclosure and continuing obligation regime under the Prospectus Directive and the Transparency Directive should start to issue now in denominations of at least 100,000 (or its equivalent in another currency). 7 Number 1121 18 January 2011
Another area of concern is the lack of transitional measures in the Amending Directive. In particular, there are concerns as to what will happen in respect of an offer launched before the implementation of the Amending Directive under the wholesale concessionary disclosure regime, which remains open after the implementation of the Amending Directive and does no longer benefit from such exemption under the then applicable amended regime. The fact that Member States may implement the Amending Directive at different times also raises a number of transitional issues. For instance, there is uncertainty as to the treatment of a prospectus established under the wholesale concessionary disclosure regime in a Member State where the Amending Directive has not been implemented, which is then passported into a Member State where the Amending Directive has been implemented and where the prospectus must be drawn-up in accordance with the retail regime. Conclusion Most of the changes introduced by the Amending Directive constitute useful simplifications and clarifications and should therefore be welcomed by market participants. However, a number of changes still need to be further provided for by implementing acts. Through the powers delegated to it, the Commission will play a key role in the adoption of the necessary implementing legislation together with the new European Securities and Markets Authority (ESMA), which should introduce flexibility in the process. The transposition of the Amending Directive will also require the adoption of specific transitional measures. For the time being, an immediate concern for issuers is the increased wholesale denomination threshold of 100,000 in order to qualify for the wholesale debt exemptions under the Prospectus Directive and the Transparency Directive. Recent transactions show that issuers have already factored in this change and use 100,000 denominations in order to continue benefiting from the wholesale debt regime. Endnotes 1 Article 31 of the Prospectus Directive required the Commission to assess the application of the Prospectus Directive five years after its entry into force and to present, where appropriate, proposals for its review. 2 Article 3(2)(c) of the Prospectus Directive. 3 Article 3(2)(c) of the Prospectus Directive. 4 Article 5(2) of the Prospectus Directive. 5 Article 4(1)(e) of the Prospectus Directive. 6 Market Abuse Directive 2003/6/EC, Title III of Directive 2004/39/EC and Transparency Directive 2004/109/EC. 7 Article 1(2)(h) of the Prospectus Directive. 8 Article 1(2)(j) of the Prospectus Directive. 9 Article 3(2)(b) of the Prospectus Directive. 10 Article 4(1)(c) of the Prospectus Directive. 11 Article 15(1). 12 Article 15(2). If you have any questions about this Client Alert, please contact one of the authors listed below or the Latham attorney with whom you normally consult: Frédéric Chamboredon +33.1.40.62.20.39 frederic.chamboredon@lw.com Paris 8 Number 1121 18 January 2011
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