Transparency Directive debt and ABS issuers

Transparency Directive debt and ABS issuers Periodic financial reporting and other continuing obligations Detailed briefing note February 2009

Introduction Home Member State The Transparency Directive (2004/109/EC) (TD) aims to improve the efficient operation of the EU as a single, effective capital market by improving investor protection and increasing comparability of information between issuers in different jurisdictions and EU markets. The intention of the TD is to encourage a pan-european market through the provision of minimum disclosure requirements for issuers with securities which are admitted to trading on a regulated market. Alongside the International Accounting Standards Regulation (1606/2002) (IAS Regulation),the Market in Financial Instruments Directive (2004/39/EC) (MiFID) the Prospectus Directive (2003/71/EC) (PD) and the Market Abuse Directive (2003/61/EC) (MAD), the TD is one of the key measures affecting issuers with securities admitted to trading on regulated markets in the EU under the EU Financial Services Action Plan. The TD is a minimum harmonisation directive and, therefore, the UK and other Member States may choose to impose additional requirements where they deem it appropriate to do so. Directive 2007/14/EC (the 2007 Implementing Directive), published on 09 March 2007, contains various measures designed to implement the TD. When did the rules take effect? The TD had to be implemented in each Member State by 20 January 2007. In the UK, the Disclosure and Transparency Rules (DTRs) came into force on 20 January 2007 and took effect for financial reporting periods starting on or after 20 January 2007. Many member states did not meet this deadline; however, the rules have been implemented in Ireland and Luxembourg. In the UK, if a company has 31 March as its year end, it had to produce its first set of TD-compliant half-yearly accounts in respect of the six month period to 30 September 2007. If a company has 31 December as its year end, it had to produce its first set of TD-compliant half yearly accounts by 31 August 2008. Information which the issuer is obliged to disclose under the TD must, at the time of publication, be filed with the competent authority of the issuer s home Member State and the issuer s obligations will be governed by the law of its home Member State. A host Member State (ie a Member State other than the home Member State in which the issuer s securities are admitted to trading on a regulated market) has only limited rights to impose additional obligations. The TD states that the home Member State for debt issues which have denominations of over 1,000 is the Member State chosen by the issuer from either: the Member State in which the issuer has its registered office, or those Member States in which the issuer has its securities admitted to trading on a regulated market. For issuers of debt securities with denominations of less than 1,000, where the issuer is incorporated in the EU, the home Member State will be the Member State where it has its registered office and for non-eu issuers, the Member State where the issuer is required to file its annual information update under Article 10 of the PD. An issuer can choose only one Member State and that choice remains valid for at least three years, or earlier if the issuer ceases to have any securities admitted to trading on a regulated market. The definition of home Member State is different from that used for the purposes of the PD and means that an issuer could have two different home Member States under the PD and TD. 1

Decision tree financial reporting requirements Does the issuer have securities admitted to trading on a regulated market in the EU? Transparency Directive does not apply. Are the securities exempt securities? Periodic financial reporting does not apply Are the securities equity securities? Are the securities debt securities with denominations of at least 50,000? Is the issuer incorporated outside the EU (a third country issuer)? Does the issuer produce consolidated accounts in accordance with US or Japanese GAAP? See separate note on financial reporting for equity issuers. Periodic reporting under the Transparency Directive will not apply BUT the FSA will continue to require annual financial reports (exemption for issuers of asset-backed securities). Is the issuer required to produce consolidated accounts? US and Japanese GAAP are deemed to be equivalent to IFRS and third country issuers reporting to US and Japanese GAAP will not need to restate their consolidated financial statements in accordance with IFRS. For financial periods commencing on or after 20 January 2007, the issuer must file with the home Member State, annual financial reports (including accounts under national GAAP) and half yearly financial reports* (including minimum requirements). For financial periods commencing on or after 20 January 2007, the issuer must file with the home Member State annual and half yearly financial reports* (including consolidated accounts in accordance with IFRS). Annual Financial Report audited financial statements management report** responsibility statement Half yearly financial report* condensed set of financial statements interim management report responsibility statement Does the issue produce accounts in accordance with the GAAP of the People s Republic of China, Canada, the Republic of Korea or the Republic of India? Chinese, Canadian, Korean and Indian GAAP, are deemed to be equivalent to IFRS and third country issues reporting to Chinese, Canadian, Korean, Indian GAAP will not need to restate their consolidated financial statements in accordance with IFRS until 31 December 2011. Does the issuer produce consolidated accounts in accordance with the GAAP of a third country which has made a public commitment (before 30 June 2008) to converge standards to IFRS by 31 December 2011? Such third country issuers will not need to restate their consolidated accounts to IFRS until financial years starting on or after 01 January 2012. Is the issuer a single entity issuer (ie does not produce consolidated accounts)? For financial periods commencing on or after 20 January 2007, a third country single entity issuer must file with the home Member State an annual financial report (including accounts in accordance with IFRS) and a half-yearly financial reports (including minimum requirements). * Issuers whose only debt securities admitted to trading with denominations of less than 50,000 were listed prior to 01 January 2005 under the old specialist debt securities regime do not need to file half yearly financial reports for 10 years from 01 January 2005. ** Third country issuers whose only securities admitted to trading with a denomination of less than 50,000 listed prior to 01 January 2005 will not be required to produce their management report in accordance with Article 46 of Directive 78/660/EEC or if the issuer is required to prepare consolidated accounts, in accordance with Article 36 of Directive 83/349/EEC (provided certain conditions are satisfied). 2

Which companies do the rules apply to? The TD applies to issuers of securities which are admitted to trading on a regulated market in the EU. Issuers The periodic financial reporting obligations are imposed on the issuer which is defined in the TD as a legal entity governed by private or public law, including a State. In the case of depositary receipts representing securities, the company required to comply with the TD will be the issuer of the securities represented. Under the TD, guarantors are not required to comply with the periodic financial reporting. Securities The TD applies to transferable securities (essentially shares, bonds or other forms of securitised deals and any other securities giving the right to acquire or sell such securities or giving rise to a cash settlement by reference to certain benchmarks). Annual reporting requirements will apply to all issuers of transferable securities. However, half-yearly reporting will only apply to issuers of debt (and equity) securities. Debt securities are bonds or any other form of transferable securitised debts. There is an exception for securities which are equivalent to shares in companies, convertible or exchangeable bonds and other securities which give a right to acquire shares or securities equivalent to shares. Admitted to trading on a regulated market in the EU The definition of regulated market is contained in MiFID. The regulated markets in the EU include the regulated markets of the London Stock Exchange, the Irish Stock Exchange and the Luxembourg Stock Exchange. The TD does not apply to issues of securities which are admitted to trading on each of the exchange-regulated markets (Professional Securities Market in London, the Alternative Securities Market in Ireland and the Euro MTF market in Luxembourg). Exempt securities The TD will not apply to: units issued by collective investment undertakings (other than closed end ones) or to units acquired or disposed of by such undertakings money market instruments (such as certificates of deposits and commercial paper) having a maturity of less than 12 months. In addition, issues by a State, regional or local authority of a State, a public international body of which at least one Member State is a member, the European Central Bank and Member States national central banks are exempt from the periodic financial reporting requirements. Debt securities with denominations of at least 50,000 An issuer which only has debt securities admitted to trading on a regulated market in the EU with a minimum denomination of at least 50,000 or its equivalent at the date of issue (a wholesale issuer) will be exempt from periodic financial reporting. Although wholesale issuers are exempt from the TD requirements, the FSA will retain the current requirements for wholesale issuers to produce an audited annual financial report. The accounts will not be required to be in accordance with IFRS. Wholesale issuers of asset-backed securities are exempt from the requirement to produce an annual report and accounts. 3

Periodic financial reports Annual financial report The TD requires issuers of securities to file with their home Member State an annual financial report within four months of the end of each financial year (previously, the issuer had six months) consisting of: audited financial statements management report responsibility statement. Financial statements EU issuer consolidated accounts Under the TD, where an issuer is required to prepare consolidated accounts, the annual and half-yearly financial statements must be prepared on the basis of international accounting standards endorsed by the EU Commission (now usually referred to as International Financial Reporting Standards IFRS). The IAS Regulation already requires, on or after 01 January 2005, EUincorporated companies with securities which are admitted to trading on a regulated market in a Member State to prepare their consolidated accounts on the basis of IFRS. Essentially, it is parent companies which are required to produce consolidated accounts. SPVs are not ordinarily required to produce consolidated accounts and would not, therefore, be required to produce IFRS accounts. EU issuer non-consolidated accounts Where the issuer is not required to produce consolidated accounts, the annual financial statements must be prepared in accordance with the national law of the Member State in which it is incorporated. As a minimum, the half-yearly financial statements must consist of a condensed balance sheet and profit and loss account and explanatory notes on these accounts. The 2007 Implementing Directive states that the half-yearly financial statements must include additional items if they would not give a true and fair view of the issuer. n-eu issuers see below Half-yearly financial report The TD requires issuers of debt securities (and shares) to file with their home Member State a half-yearly financial report, covering the first six months of the financial year, within two months of the end of that six month period consisting of: condensed set of financial statements interim management report responsibility statement. Auditing requirements The annual financial statements must be audited and the audit report must be disclosed in full to the public. The half-yearly financial statements do not need to be audited or reviewed by an auditor but if they have been, then either that report or review must also be published, or a statement included that the financial statements have not been audited or reviewed. Management reports The annual management report must as a minimum comply with EU annual reporting requirements. The interim management report must include at least: an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed financial statements, and a description of the principal risks and uncertainties for the remaining six months of the year. Responsibility statement A responsibility statement and must be made by the issuer and its directors and confirm that, to the best of their knowledge: the statements, which have been prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the companies included in the report the management report gives a fair review of the development and performance of the business and the group s position, taken as a whole, together with a description of the principal risks and uncertainties that they face, and the interim management report includes a fair review of the information it is required to contain. 4

What is the position of a non-eu issuer? The competent authority of the home Member State can exempt an issuer incorporated outside the EU (a third country issuer) from certain financial reporting requirements under the TD if the law of that third country (or another third country law with which the issuer complies) lays down requirements that are equivalent. To ensure there is a harmonised approach to this exemption, the TD requires the EU Commission to adopt implementing measures by which provisions of non-eu countries can be judged to be equivalent. Transitional relief In a Decision dated 12 December 2008, the Commission stated that US GAAP and Japanese GAAP are equivalent to IFRS. In addition prior to financial years starting on or after 01 January 2012 a third country issuer is permitted to prepare its annual consolidated financial statement and half yearly consolidated financial statement in accordance with Chinese, Canadian, Korean and Indian GAAP. In a Regulation dated 21 December 2007 (the Equivalence Regulation), the Commission granted an additional three year transitional period to the requirement for third country issuers to prepare financial statements in accordance with IFRS where, broadly, the national accounting standard setter of the third country has publicly committed before 30 June 2008 to adopt IFRS before 31 December 2011 and certain conditions are met. Definition of equivalence The Equivalence Regulation states that a third country GAAP may be considered equivalent to IFRS if the financial statements enable investors to make a similar assessment of the financial status (including the assets and liabilities, financial position, profit and loss and prospects of the issuer under IFRS). To ensure consistency of approach, it is the Commission who will make the determination of equivalence not a Member State s competent authority. Options for third country issuers Third country issuers which do not wish to comply with the TD have the following options: transfer the relevant securities from their existing listing on the regulated market to an exchange regulated market (eg the Professional Securities Market (PSM) in London). HMRC has confirmed that the PSM, the Alternative Securities Market in Ireland and the Euro MTF in Luxembourg are categorised as recognised stock exchanges for the purposes of the quoted eurobond exemption. transfer the relevant securities from their existing listing on an EU regulated market to an exchange outside the EU, for example SWX in Switzerland, Channel Islands, Cayman Islands or Singapore. delist the relevant securities that fall under the TD. This might be difficult if there are a large number of investors who require their investment to be in listed securities. re-denominate the relevant securities to denominations of higher than 50,000. Issuers will need to consider the interests of noteholders and whether noteholder consent will be required if any such action is taken. Grandfathering There are limited grandfathering provisions available to an issuer in respect of debt securities which were admitted to trading prior to 01 January 2005. Under the DTRs, issuers of specialist debt securities (i.e. securities usually bought and traded by professional investors) will not be required to produce a halfyearly report for 10 years. Most debt and ABS securities issued prior to 01 January 2005 were listed under the specialist debt securities regime (under the old chapter 23 rules) and will, therefore, benefit from this exemption. In addition, the home member state may exempt third country issuers only in respect of debt securities admitted to trading on a regulated market prior to 01 January 2005 from drawing up a management report in accordance with Article 46 of Directive 78/660/EEC or, if such issuer is required to prepare consolidated accounts, in accordance with Article 36 of Directive 83/349/EEC provided certain conditions can be satisfied. 5

Information for holders of debt securities admitted to trading on a regulated market An issuer of debt securities admitted to trading on a regulated market must also: Equality of treatment Ensure that all holders of debt securities ranking pari passu are given equal treatment in relation to all rights attaching to such. Exercise of rights by holders Ensure that all the facilities and information necessary to enable such holders to exercise their rights are available publicly in the home Member State and that the integrity of data is preserved. Exercise of rights by proxy Provide that debt securities holders are not prevented from exercising their rights by proxy subject to the laws of the country in which the issuer is incorporated. In addition, such an issuer of debt securities must make available a proxy form, on paper or where applicable, by electronic means to each person entitled to vote at a meeting of debt securities holders. The proxy form must be made available either: (A) together with the notice concerning the meeting; or (B) after the announcement of the meeting. Appointment of financial agent Designate as its agent, a financial institution through which debt securities holders may exercise their financial rights. Publication of notices (2) the payment of interest; (3) the exercise of any conversion, exchange, subscription or cancellation rights and repayment; and (4) the rights of holders to exercise their rights in relation to paragraphs (1) (3). If only holders of debt securities whose denomination per unit amounts to at least 50,000 (or an equivalent amount) are to be invited to a meeting, the issuer may choose as a venue any EEA State, provided that all facilities and information necessary to enable such holders to exercise their rights are made available in that EEA state. Electronic communications Comply with the provisions dealing with the use of electronic means to convey information to debt securities holders. Additional information Make public without delay: any changes in the rights of holders of securities (other than shares), including changes in the terms and conditions of these securities which could indirectly affect those rights, resulting in particular from a change in loan terms or in interest rates details of new loan issues and in particular of any guarantee or security. This provision shall not apply to a public international body of which at least one Member State is a member. Publish notices or distribute circulars concerning: (1) the place, time and agenda of meetings of debt securities holders; In addition, an issuer must comply with its continuing obligations under the Market Abuse Directive which is beyond the scope of this note. 6

Language Liability for financial reports Information must be filed in a language acceptable to the home Member State of the issuer if its securities are only admitted to trading there. However, if an issuer s securities are admitted to trading in another Member State, it may choose whether to use the accepted local language or English. Publication of financial reports The TD requires the periodic reports to be made public and remain publicly available for at least five years. Any information must be disclosed without delay, in a manner ensuring that it is capable of being disseminated to the general public, fast and as close to simultaneously as possible in the home Member State and in other EEA states. Minimum standards have been proposed by CESR by which regulated information must be stored, filed and disseminated and guidelines are to be drawn up which ensure the creation of an electronic network within each Member State, as well as a single electronic network across all Member States. There is a concern that the TD extends the potential liability of issuers, their directors and auditors in respect of financial statements because it: states that the purpose of the reports and accounts is to enable investors to make an informed assessment of the issuer s situation requires a responsibility statement to be given, and mandates widespread dissemination of reports by requiring them to be made public throughout the EU (regardless of whether the issuer has securities admitted to trading or has made a public offer in that Member State). There is, therefore, a risk that investors could seek to assert that directors and auditors owe them a duty of care an extension of the current position. Publication throughout the EU also raises the risk of liability being claimed, and actions being brought, by investors under the laws of other EU Member States. In order to clarify the position and define the extent of the liability of issuers, the UK government has established a statutory liability regime for disclosures required under the TD. For further information on implications for issuers of equity securities and the share disclosure rules, please click here. 7

Further information If you would like further information on the Transparency Directive, please contact Jeremy Hoyland or Penny Miller. Jeremy Hoyland T +31 (0)20 890 99 16 E rene.vaneldonk@simmons-simmons.com Penny Miller T +44 (0)20 7825 3532 E penny.miller@simmons-simmons.com The decision tree and these notes together summarise certain regulatory requirements with respect to the Transparency Directive. They are not intended to be fully comprehensive or to provide legal advice. The information in the Transparency Directive decision tree and these notes is correct as at February 2009. 8