T O O U R F R I E N D S A N D C L I E N T S May 25, 2004 EU Prospectus Rules Introduction On April 29, 2004 the European Commission adopted regulations (the Regulations ) 1 implementing the European Prospectus Directive (the Directive ; 2 together with the Regulations, the Prospectus Rules ). The Regulations will be directly applicable throughout the European Union as of July 1, 2005. By that date, each Member State of the EU is required to have transcribed the Directive into national law. The Prospectus Rules are intended to harmonize disclosure requirements for the majority of securities issued and listed on official stock exchanges in the European Union. Existing EU legislation relating to prospectuses, the Listing Particulars Directive, 3 allowed national securities regulators in each jurisdiction in which shares would be offered to the public or admitted to listing to require additional information in a prospectus. These differing national disclosure requirements significantly hampered the process of trans-european securities offerings. Under the Prospectus Rules, companies that publish an approved prospectus prior to issuing or listing their securities will be granted mutual recognition and will be permitted to offer those securities to the public or list them on stock exchanges throughout the EU, without additional disclosure requirements from national regulators. For US issuers, the Prospectus Rules will continue to permit the use of financial statements drawn up according to US GAAP, without restatement, in EU offerings. In addition, an English-language prospectus will be acceptable if the offer is made through the UK or another jurisdiction allowing prospectuses written in English, and only the prospectus summary will need to be translated into the local languages of the various countries where the securities will be offered. These provisions should significantly reduce the expense of trans-european offerings by US companies. Scope of the Prospectus Rules As a general rule, the Prospectus Rules apply to all offers of securities to the public (very broadly defined) and to any application for the admission of securities to 1 Regulation 809/2004 of April 29, 2004, O.J. L 149, April 30, 2004 (the Regulations ). 2 Directive 2003/71/ED of November 4, 2003, O.J. L 345, December 31, 2003 (the Directive ). 3 Directive 80/390/EEC of March 17, 1980, O.J. L 100, April 17, 1980. Copyright 2004 Fried, Frank, Harris, Shriver & Jacobson LLP A Partnership Including Professional Corporations New York One New York Plaza New York, NY 10004 212.859.8000 Washington, DC 1001 Pennsylvania Avenue, NW Washington, DC 20004 202.639.7000 Los Angeles 350 South Grand Avenue Los Angeles, CA 90071 213.473.2000 London 99 City Road London EC1Y 1AX United Kingdom 44.20.7972.9600 Paris 5, boulevard de La Tour-Maubourg 75007 Paris France 33.140.62.22.00 www.friedfrank.com
trading on regulated markets within the European Union. The broad scope of the Prospective Rules, however, is qualified by a number of exceptions. Excluded securities Certain types of securities are excluded from the scope of the Prospectus Rules altogether, including securities issued by closed-end investment funds; government or municipal debt and government-backed securities; securities issued by non-profit organizations; short-term money market instruments; and certain debt issued on a repeating basis by credit institutions. 4 These excluded securities will still be subject to national securities regulation in each Member State, and offerings of those securities will not automatically be granted mutual recognition by other Member States. However, in most cases, if an issuer, offeror or person seeking listing of such securities voluntarily publishes a prospectus complying with the Prospectus Rules, it will be accorded mutual recognition and can be offered or listed throughout the EU. 5 Public offers The Directive provides that Member States must require publication of an approved prospectus prior to any offer of securities to the public. 6 An offer is defined broadly to include any communication to persons in any form and by any means, presenting sufficient information on the terms of the offer and the securities to be offered, so as to enable an investor to decide to purchase or subscribe to these securities. 7 A prospectus drawn up in the context of such an offer, once approved by one EU Member State, must be granted mutual recognition throughout the EU, and may be used in public offers in any Member State. Restricted exempt offerings Some offers, while governed by the Directive, are exempt from the obligation of preparing and publishing a prospectus: 8 4 Directive, Article 1(2). 5 Directive, Article 1(3). Shares in closed-end mutual funds, central banks shares, securities issued by non-profits, and real-estate occupancy shares cannot make use of this opt-in provision, and will remain subject to national regulation in each Member State. 6 Directive, Article 3(1). An offer of securities to the public is defined as any form of communication presenting sufficient information on the terms of the offer and the securities to be offered, so as to enable an investor to decide to purchase or subscribe to the securities, including an offer made through a financial intermediary. Directive, Article 2(d). 7 Directive, Article 1(d). 8 Directive, Article 3(2). Securities which are to be listed on an exchange cannot take advantage of the restricted exempt offering provisions. Fried, Frank, Harris, Shriver & Jacobson LLP 2 May 25, 2004
- offers addressed to certain individuals and legal entities who are qualified investors ; 9 - offers addressed to less than 100 persons per Member State, not counting qualified investors; - offers addressed to investors who acquire securities for at least 50,000 per investor; - offers for securities having a per unit price of at least 50,000; and - offers having a total consideration of less than 100,000 over a 12 month period. Securities sold under the exemptions listed above are restricted: any subsequent resale of those securities will be considered a separate offer, and the same criteria will apply as for any other offer for determining whether publication of a prospectus is required. The exemptions listed above are intended, for the most part, to facilitate offers to professional investors, and the exemptions provided in the Directive are similar to the exemptions in the United States provided by the SEC s Regulation D, although more restrictive. 10 In addition, as illustrated in Table 1 below, the definition of accredited or qualified investors, a necessary element of several exemption categories, is significantly broader under the SEC rules. Table 1: Accredited and Qualified Investors Categories of investors EU Prospectus Rules ( qualified investors ) US SEC Regulation D ( accredited investors ) Financial institutions Yes Yes Pension plans Yes Yes Venture capital firms Yes Yes National, regional, and international governmental entities Private firms Yes (1) If meets 2 of 3 criteria: (a) more than 250 employees; (b) assets of over 43 million; or (c) No, except for state and local pension plans If has assets over $5 million 9 Qualified investors are defined as (i) legal entities licensed to operate in financial markets; (ii) governmental institutions and international organizations; (iii) corporations not meeting the definition of a small and medium-sized enterprise ; (iv) natural persons recognized by their home government as qualified investors, provided that such persons carry out substantial transactions on securities markets at least 10 times per quarter over the previous four quarters, has a securities portfolio of at least 500,000, and has worked in the financial sector for at least a year; or (v) certain small and medium-sized enterprises recognized, at their request, as qualified investors by their home government. 10 Securities Act of 1933, Regulation D, 17 CFR Part 230, Rule 501(a). Fried, Frank, Harris, Shriver & Jacobson LLP 3 May 25, 2004
Natural persons Insiders of the issuer turnover of over 50 million; or (2) Firms that do not meet above criteria, if they request and are granted authorization by their home Member State. If a resident of a Member State, and requests and is granted authorization, and meets 2 of 3 criteria: (a) has carried out at least 10 transactions per quarter for last year; (b) has a securities portfolio of over 500,000; or (c) has worked for at least 1 year as a professional in the securities field. No, but offers are generally exempted under other provisions. If has $1 million in assets or $200,000 in annual income ($300,000 combined with spouse) Yes Non-restricted exempt offerings In addition to the restricted exempt offerings described above, the Prospectus Rules allow non-restricted offers of the following types of securities without publication of a prospectus: 11 - shares issued in substitution for other shares without a capital increase; - securities offered through exchange offers in connection with a takeover, or in connection with a merger, if a document providing information equivalent to that in a prospectus is made available; - shares offered, allotted, or paid in kind as dividends, if information is made available concerning the shares and the offer; - securities offered to directors or employees, if the issuer s securities are already listed and if information is made available concerning the securities and the offer. Shares offered pursuant to the exemptions listed above are not restricted; i.e., they may be resold freely in the secondary market. This contrasts with the treatment of shares sold under Regulation D, which are normally restricted from resale. 11 Directive, Article 4(1). Fried, Frank, Harris, Shriver & Jacobson LLP 4 May 25, 2004
The difference in treatment is particularly marked in the case of exempted sales to company insiders. The SEC s Regulation D defines exempted company insiders as directors, executive officers and general partners of the issuer, or of a general partner of the issuer. The Prospectus Rules provide a much broader exemption that includes any director or employee of the issuer, though it requires that the issuer already have shares listed on a regulated exchange in order to qualify for the exemption. Unlike shares offered to insiders under Regulation D, the resale of shares sold to directors and employees under the Prospectus Directive is not restricted. Admission to trading The Directive also requires that Member States require publication of a prospectus prior to admitting any security to trading on one of their regulated markets. 12 There are several exemptions to this requirement, intended to eliminate the burden of producing a prospectus in those cases where the Commission considers that investors are already adequately protected. The following types of securities do not require the publication of a prospectus prior to admission to trading: 13 - shares representing less than 10 percent of the shares already admitted to trading on the same market, over a period of 12 months; - shares issued in substitution for shares already traded on the same market, if there is no capital increase; - securities offered through exchange offers in connection with a takeover, if a document equivalent to a prospectus is made available; - securities offered in connection with a merger, if a document equivalent to a prospectus is made available; - shares offered, allotted, or paid in kind as dividends, if information is made available concerning the shares and the offer and the shares are of the same class as those already traded on the same market; - securities offered to directors or employees, if information is made available concerning the securities and the offer, and the securities are of the same class as securities already traded on the same market; - shares resulting from the conversion or exchange of other securities, if the shares are of the same class as shares already traded on the same market; and - securities already admitted to trading on another regulated market, provided that the shares have been trading on that other market for at least 18 months and that certain other conditions are met. 12 Directive, Article 3(3). Regulated markets include over 60 securities markets designated by the Commission pursuant to the 1993 Investment Services Directive. Directive, Article 2(j); EC, Annotated presentation of regulated markets and national provisions implementing relevant requirements of the investment services directive (2002/C 280/02), OJEC November 16, 2002. 13 Directive, Article 4(2). Fried, Frank, Harris, Shriver & Jacobson LLP 5 May 25, 2004
As with the exemption of certain securities from the requirement to publish a prospectus prior to a public offer, the exemptions relating to admissions to trading are intended to be binding on national regulators and prevent the imposition of additional prospectus requirements. 14 Content of the Prospectus Overview of the prospectus requirements The Directive requires that the prospectus drawn up by a prospective issuer or a person requesting admission to trading contain all information which, according to the particular nature of the issuer and of the securities is necessary to enable investors to make an informed assessment of the assets and liabilities, financial position, profit and losses, and prospects of the issuer and of any guarantor, and of the rights attaching to such securities. 15 The prospectus may consist, at the option of the issuer, the person making the offer, or the person requesting admission to listing, of a single document or of three separate documents: a registration document, containing information relating to the issuer; a securities note, concerning the securities to be issued or listed; and a summary. 16 Whether the prospectus consists of one document or several, it must contain a summary. 17 The summary must be brief, non-technical, and include a statement of the essential characteristics and risks of the issuer and the securities. The person publishing the prospectus may determine independently the detailed content of the summary, and the Regulations do not provide further guidance on this point. 18 Civil liability will attach to the party publishing the summary only if it is misleading, inaccurate, or inconsistent when read together with the rest of the prospectus. 19 The final offering price and the amount of securities to be offered need not be included in the prospectus. However, they must be published and filed with the 14 EC, Explanatory Memorandum to Amended Proposal for a Directive of the European Parliament and the Council on the Prospectus to be Published when Securities are Offered to the Public or Admitted to Trading, COM(2002) 460 final, August 9, 2002 (the Explanatory Memorandum ), p. 13. 15 Directive, Article 5(1). 16 Directive, Article 5(3). This system would be somewhat analogous to a shelf registration under U.S. securities laws, in that an issuer which had already published a current, approved registration note would be required to publish only the securities note and summary for further issuances. 17 No summary is required for prospectuses concerning the admission to listing of debt securities having a per unit price of at least 50,000. However, if the issuer chooses to list that security in a Member State whose language it has not used for the prospectus, that Member State may request a summary in its own language. Directive, Articles 5(2) and 19(4). 18 Regulations, Article 24. 19 Directive, Article 5(2) and 6(2). Fried, Frank, Harris, Shriver & Jacobson LLP 6 May 25, 2004
appropriate regulatory authority when they are determined, and acceptances received previously may be withdrawn for at least 2 days following the filing. 20 The prospectus must be updated to take into account any significant new factor arising between the time the original prospectus is published and the closing of the offer. 21 For non-equity securities, asset backed securities, offering programs concerning warrants or regular issuances of mortgage-backed or deposit-guaranteed securities by credit institutions, the Prospectus Rules allow the use of a base prospectus containing information about the issuer and limited data concerning the securities to be issued. 22 This system is similar to a US shelf offering, as the information in the base prospectus must be supplemented with the final terms of any particular offering at the time the offering is made. The Prospectus Rules leave open the possibility for national regulators to accept prospectuses drawn up according to the requirements of non-eu jurisdictions, so long as such prospectuses are in conformity with international standards. 23 Whether or not this option is available, however, will depend on national regulation. 24 Accounting standards for non-eu issuers In general, the Regulations require that prospectuses provide historical financial information prepared according to standards established by the International Accounting Standards Board. As of January 1, 2005, all EU issuers will be required to adopt international financial reporting standards ( IFRS ). Information prepared according to other standards, such as US GAAP, must be restated. However, for issuers located outside of the EU, the Regulations provide a transitional mechanism. Until January 1, 2007, non-eu issuers that are listed on a regulated EU stock exchange will not be required to restate their financial statements. Similarly, any prospectus filed before that date may include financials using non-ifrs accounting standards. 25 By the expiration of the transition mechanism in 2007, the Commission intends to establish an equivalency mechanism. 26 On the basis of informal conversations with the Commission, we understand that this mechanism will make the current non- 20 Directive, Article 8. 21 Directive, Article 16. 22 Directive, Article 5(4); Regulations, Article 22. 23 Directive, Article 20. 24 According to informal conversations with the Commission, we understand that no EU-wide regulation on this point is currently envisaged, unless there are widespread abuses. 25 Regulations, Article 35, para. 3 and 4. EU issuers are provided a shorter transition period. Regulations, Article 35, para. 1 and 2. 26 Regulations, Article 35, para. 5. Fried, Frank, Harris, Shriver & Jacobson LLP 7 May 25, 2004
restatement provisions permanent, and issuers using US GAAP should not be required to restate their financials. There is no restatement obligation for offers of debt, derivative or asset-backed securities having a per unit denomination of at least 50,000. However, the prospectus for such offers must clearly identify the accounting principles used, and provide a narrative description of the differences between those principles and IFRS. 27 Schedules and Building Blocks Under the Prospectus Rules, the precise content of the prospectus will vary depending on the type of security being offered or admitted to listing. All prospectuses must include three parts: a summary, a registration document with information about the issuer, and a securities note describing the securities to be issued. Annexes to the Regulations set out the information that must be included in the registration document and the securities note for each type of security. For the registration document, there are 8 different schedules, depending on the type of security being offered or listed: (i) shares; (ii) debt and derivatives with a nominal value of less than 50,000; (iii) debt and derivatives with a nominal value over 50,000; (iv) asset-backed securities; (v) bank debt and related derivatives; (vi) closed-end investment funds; (vii) state, regional and local authorities; and (viii) public international organizations. For the securities note, there are 4 schedules: (i) shares; (ii) debt securities with a nominal value of less than 50,000; (iii) debt securities with a nominal value of more than 50,000; and (iv) derivatives. In addition to the schedules described above, the Regulations provide a number of additional forms, referred to as building blocks, for information relating to pro forma financial information, guarantees, asset-backed securities, and underlying shares. These building blocks are used in combination with the schedules to provide supplemental information. For any particular offering, the Regulations set out which schedules and which additional building blocks are required. For example, a prospectus for an offer of common stock would require a registration document containing the information from the share schedule and the pro forma information building block, and a securities note using the share schedule. 28 Prospectuses concerning securities not falling under one of the Regulations defined categories can use a combination of schedules and building blocks. 27 Regulations, Annex VII, item 8.2 bis, and IX, item 11.1. 28 Regulation, Annex XVIII. Fried, Frank, Harris, Shriver & Jacobson LLP 8 May 25, 2004
Incorporation by reference Information previously published by the issuer may be included in the prospectus by reference, including annual and interim financial information; documents prepared for a specific transaction, such as a merger; audit reports and financial statements; prior prospectuses; and circulars to security holders. 29 However, there is no allowance for incorporation by reference of documents filed with non-eu authorities, such as the SEC. In addition, all listed companies must annually publish a document containing or referring to all information that they have published or made available to the public over the preceding twelve months, in the EU or elsewhere, in compliance with national securities laws. 30 This document must be filed with the issuer s home Member State regulator, and released to the public within twenty days of the publication of the annual financial statements. 31 Approval of the Prospectus Choice of the regulator The Directive provides that no prospectus shall be published until it has been approved by the competent authority of the home Member State. The choice of the home Member State depends on the type of offering or admission to listing that is proposed. As a general rule, for EU issuers, the home Member State is the Member State where they have their registered office. 32 For non-eu issuers, the home Member State is the state in which the securities are first offered to the public or first admitted to trading after the date of entry into force of the Directive, at the option of the issuer, offeror or person requesting to have the securities listed. However, if a party other than the issuer chooses the home Member State, the issuer may subsequently make a different election. 33 This provision effectively allows non-eu issuers to choose their home Member State, and therefore choose their regulator, by making their initial European offering or listing in that Member State. 29 Directive, Article 11; Regulations, Article 28. 30 Directive, Article 10. This obligation does not apply to issuers whose only listed securities are debt securities with a denomination of at least 50,000. 31 Regulations, Article 27. 32 Directive, Article 2(1)(m)(i). 33 Directive, Article 2(1)(m)(iii). The competent authority in one Member State may transfer the approval process to another state s competent authority, subject to its approval. Fried, Frank, Harris, Shriver & Jacobson LLP 9 May 25, 2004
However, the Directive provides an exemption for the issuance, offer, or listing of debt securities with a nominal value of at least 1,000, and of certain derivatives. 34 For these securities, the issuer, offeror, or party seeking admission to listing may choose between either (a) the Member State where the issuer has its registered office; or (b) the Member State where the securities are offered to the public or admitted to trading. 35 This provision applies equally to EU and non-eu issuers, and provides a substantial degree of flexibility to bond issuers in choosing the regulatory forum. For European debt issuers, the Prospectus Rules generally preserve the status quo. For example, a French corporation offering bonds with a denomination of more than 1000 may elect to have its prospectus regulated by the Luxembourg or UK securities authorities, as is currently the case. However, a French corporation issuing common shares in London will be governed by the French securities regulators disclosure requirements. Language The Directive provides different requirements for the language to be used in a prospectus depending on the the type of securities involved and the location of the offer or listing. The Directive provides for three different language scenarios: (i) (ii) If the offer is made or listing is sought in the issuer s home Member State, the prospectus must be prepared in a language accepted by that state. 36 If the offering or admission to listing concerns the home Member State as well as other states, the prospectus must be in both (a) a language accepted by the home Member State; and (b) either a language customary in the sphere of international finance, such as English, 37 or languages accepted by each of the states where the offer will take place. 38 34 The derivatives to which this provision applies are issues of non-equity securities giving the right to acquire any transferable securities or to receive a cash amount, as a consequence of their being converted or the rights conferred by them being exercised, provided that the issuer of the non-equity securities is not the issuer of the underlying securities or an entity belonging to the group of the latter issuer. Directive, Article 2(1)(m)(ii). 35 Directive, Article 2(1)(m)(ii). 36 Directive, Article 19(1). 37 Directive, Article 19(2). Language customary in the sphere of international finance is not defined in the Directive, but is clearly intended to include English. 38 Directive, Article 19(3). Fried, Frank, Harris, Shriver & Jacobson LLP 10 May 25, 2004
(iii) If the prospectus will be used only for offers or admission outside the home Member State, the issuer has the option of drawing up the prospectus only in an accepted international language. 39 For debt securities with a nominal value of over 50,000, the prospectus may be written solely in a customary financial language whether or not the offer or listing involves the home Member State. 40 If a prospectus is in a customary financial language, only its summary must be translated into the official language of states where the offer or admission to listing will take place. The Prospectus Rules translation provisions mark a substantial improvement for US issuers. Non-EU issuers can effectively choose their home Member State by conducting their first offer or listing in that country. If US issuers elect the United Kingdom or another jurisdiction that authorizes the use of English as an official regulatory language as its home Member State, the prospectus can be drawn up in English and used for offers throughout Europe. Only the summary would need to be translated into local languages. For exempt offerings, no translation would be required. Deadlines The competent authority in the home Member State must evaluate all proposed prospectuses and announce its decision within 10 business days. 41 This deadline may be extended to 20 days for initial public offerings. 42 The European Commission had originally proposed that failure to respond within these deadlines would, by default, be deemed approval of the prospectus, or allow the issuer to choose a new competent authority. 43 This proposal, however, was struck down by the Council. The final draft of the Directive specifies that failure to respond within the required time shall not constitute default approval of the prospectus, 44 but otherwise the Directive is silent on the consequences of delay. This question will need to be answered by national law, and specific implementation provisions will probably vary among Member States. 39 Directive, Article 19(2). 40 Directive, Article 19(4). 41 Directive, Article 13(2). 42 Directive, Article 13(3). 43 European Commission, Amended Proposal for a Directive of the European Parliament and the Council on the Prospectus to be Published when Securities are Offered to the Public or Admitted to Trading, COM(2002) 460 final, August 9, 2002, Articles 13(2) and 13(5). 44 Directive, Article 13(2). Fried, Frank, Harris, Shriver & Jacobson LLP 11 May 25, 2004
Publication Publication of the prospectus, after its approval, may be accomplished in several ways. The Directive specifies that posting the prospectus on the issuer s website will alone be deemed adequate publication, and in certain cases it may be required by the home Member State. 45 The home Member State may also require publication of a notice stating how the public can obtain the prospectus, 46 and advertisements regarding the offer or the admission to listing must make reference to the prospectus. 47 If an offer or admission to listing is exempt from the prospectus requirement, as are, for example, offers restricted to qualified investors, material information provided to any potential investor must nonetheless be made available to all investors to whom the offer is addressed. 48 Thus information concerning a restricted offer disclosed orally in the course of a conference call with certain investors must be made available to all investors in the target category. Mutual recognition and exclusivity One of the primary benefits issuers derive from the Prospectus Rules is Communitywide mutual recognition of approved prospectuses. The Directive provides that any prospectus relating to a public offer or admission to listing approved by one Member State will be valid in all European Community states. 49 The Directive explicitly states that host Member States may not undertake any approval or administrative procedures with regard to a prospectus approved by the issuer s home Member State. 50 The Directive is intended, in part, to reduce the fragmentation of the European securities market created by differing prospectus requirements in different Member States. Under the Prospectus Rules, national authorities are generally not permitted to require additional information in prospectuses beyond the information set forth in the appropriate schedules. 51 However, the Regulations exempt certain specialist issuers from this rule, including investment companies, scientific research companies, and start-ups with less than three years of operations. 52 For securities issued by such companies, the home Member State regulator may request additional information, 45 Directive, Article 14(2)(c). 46 Directive, Article 14(3). 47 Directive, Article 15. 48 Directive, Article 15(5). 49 The home Member state must notify the host Member States where the securities will be offered or listed, at the issuer s request, that the prospectus has been approved. Directive, Article 18. 50 Directive, Article 17(1). 51 Regulation, Article 3 and 22. 52 Regulations, Article 23 and Annex XIX. Fried, Frank, Harris, Shriver & Jacobson LLP 12 May 25, 2004
including an independent expert s valuation. A prospectus concerning such specialist issuers that includes all the information required by the home Member State should be granted all other benefits of the Prospectus Rules, including mutual recognition, though the Regulations are silent on this point. Exemptions from the prospectus requirement are also binding on the Member States. An Explanatory Memorandum, issued by the European Commission along with its amended Directive proposal in August 2002, makes explicit the goal of eliminating the flexibility that allows Member States to decide whether or not the exemptions have to be incorporated into national law. 53 Accordingly, issuers should be able to make these types of exempt offers throughout the EU without being subject to additional requirements imposed by a national regulator. Conclusion The Prospectus Rules constitute a major element in the European Commission longterm project of unifying the EU s financial markets, and should facilitate both crossborder offerings and multiple European listings. The new regime should standardize prospectus requirements, and thereby reduce the costs and timing of trans-european offerings. For non-eu issuers, the language and accounting provisions also represent significant benefits. New York Valerie Ford Jacob +1 212 859 8158 Paris Eric Cafritz +33 1 40 62 22 00 James Gillespie +33 1 40 62 22 00 53 Explanatory Memorandum, p. 13. Fried, Frank, Harris, Shriver & Jacobson LLP 13 May 25, 2004