This Alert summarizes certain key changes to the EU Prospectus Directive (2003/71/EC) which were approved by the EU Parliament on June 17, 2010 (the "Amending Directive"). These changes are the result of several months of discussions among the European Commission, the European Parliament and the European Council and various market participants.
The Amending Directive will come into force 20 days from publication in the Official Journal, which is expected to occur in September or October of 2010. EU Member States are required to implement the Amending Directive into national law within 18 months following its entry into force (March or April 2012). Accordingly, issuers will have some time to consider the proposed changes for debt and equity offerings in the EU. However, issuers of wholesale debt securities with minimum denominations of EUR 50,000 (or equivalent) that are listed on an EU-regulated market should note that the Amending Directive increases the minimum denominations to EUR 100,000 both for purposes of the Prospectus Directive and the Transparency Directive (2004/109/EC). As a result, issuers wishing to continue to benefit from the exemption from periodic reporting for issuers of wholesale debt securities under the Transparency Directive will need to ensure that they issue in denominations of EUR 100,000 if issuing after the date of entry into force of the Amending Directive.
In addition, it will be necessary for the EU Commission to make certain changes to the EU Prospectus Regulation (809/2004/EC) as a result of the Amending Directive, and the timing of these changes is unclear. The Commission will be assisted by the European Securities and Market Authority (ESMA), the new European securities regulator which is expected to be established by 2011 and will replace the Committee of European Securities Regulators (CESR).
Offer and admission exemptions
The Amending Directive includes a number of changes to the offer and admission related exemptions from the requirements of the Prospectus Directive.
Increase of wholesale debt minimum denominations to EUR 100,000
Under the Prospectus Directive, issuers of debt securities with minimum denominations of EUR 50,000 (or equivalent) can offer these securities to the public without publishing a prospectus. Issuers who seek to list wholesale debt securities on an EU-regulated exchange have to publish a prospectus, but can do so in accordance with the lighter "wholesale" disclosure regime under Annexes IX and XIII of the Prospectus Regulation. The Amending Directive increases the minimum denomination per security to EUR 100,000, or its equivalent in another currency. Debt securities which have already been admitted to trading will be grandfathered.
The Amending Directive also changes the minimum denominations for purposes of the relevant provisions in the Transparency Directive. Under the Transparency Directive, issuers of wholesale debt securities that are admitted to an EU-regulated market are exempt from the obligation to publish annual and half-yearly reports. Issuers whose securities are admitted to trading before the date of entry into force of the Amending Directive will be grandfathered. Any securities to be admitted to an EU-regulated market after that date will need to be issued in denominations of EUR 100,000 in order to benefit from this exemption.
Increase of 100 person exemption
There is currently no obligation to publish a prospectus if an offer to the public of securities is addressed to fewer than 100 natural or legal persons per Member State (other than qualified investors). The Amending Directive increases the threshold of this exemption to fewer than 150 natural or legal persons per Member State.
Merger exemptions expanded
Under the current regime, securities offerings to the public or listings on an EU-regulated market in connection with a merger are exempt from the obligation to publish a prospectus, provided that a document is available containing information which is regarded by the home Member State regulator as being equivalent to that of the prospectus. These exemptions have been extended to include securities offered or listed in connection with a "division", such as a demerger.
Thresholds for offers outside the scope of the Prospectus Directive
The Prospectus Directive currently provides that offers of securities below a certain size are outside of its scope, and the Amending Directive increases these size limits as follows:
- Securities in an offer where the total consideration of the offer in the EU is less than EUR 5 million over a 12-months period (increased from currently EUR 2.5 million); and
- Non-equity securities issued in a continuous or repeated manner where the total consideration of the offer in the EU is less than EUR 75 million (increased from currently EUR 50 million).
The Amending Directive will give the EU Commission powers to adjust the relevant Euro-limits again in the future.
Extension of the exemption for employee share schemes
The current exemption from the requirement to publish a full prospectus for offers to employees is limited to companies with securities listed on an EU-regulated market. Under the Amending Directive, this exemption will be extended to apply to companies with securities admitted to trading on an 'equivalent' third country market. The EU Commission will have to make a positive decision as to specific countries' regimes being equivalent, in accordance with criteria set out in the Amending Directive as to the equivalence of the legal and supervisory framework of the corresponding regulation of markets in the third country. It is expected that registration with the Securities and Exchange Commission (SEC) and listing on major U.S. exchanges, including the NYSE and NASDAQ, will be determined to be 'equivalent'.
Once equivalence has been confirmed, this will be beneficial to many large U.S.-listed companies which do not maintain a listing on an EU-regulated market, as such companies will be able to use the short form disclosure document required in the Prospectus Directive rather than a prospectus complying with the more fulsome disclosure requirements under the Prospectus Regulation when operating their employee share plans in the European Union. Short form disclosure under the applicable exemption requires a document containing information on the number and nature of the securities offered, and the reasons for and details of the offer, which can usually be included in an explanatory booklet provided to employees.
The exemption is also extended to all companies whose head office or registered office is in the European Union. For European issuers with non-listed securities this may involve updating the disclosure document where necessary for an adequate assessment of the securities, as no ongoing disclosure requirements and rules on market abuse apply to such non-listed companies.
Abolition of annual information update
The current obligation to publish an annual information statement (which contains or refers to all information made available by the issuer to the public over the preceding 12 months) has been eliminated, as it was duplicative of the requirements under the Transparency Directive. Periodic disclosure requirements will continue to apply under the Transparency Directive.
Summary of the prospectus
The Prospectus Directive requires that a prospectus contain a summary of no more than 2,500 words. The Amending Directive has made some changes to the contents and format of the summary. It requires certain "key information" to be included in the summary, which consists of the essential characteristics of, and risks associated with, the issuer, any guarantor, and the securities offered, the general terms of the offer, including estimated expenses, and the risk associated with an investment. In addition, a summary will have to be comparable to summaries of similar products by ensuring that equivalent information always appears in the same position in the summary. The details of the proposed format will have to be set out in specific legislation to be adopted by the EU Commission.
The Amending Directive retains the current provision regarding civil liability which states that the issuer will not incur civil liability solely on the basis of the summary, unless it is misleading, inaccurate or inconsistent when read together with the other parts of the prospectus. However, a new provision has been added permitting civil liability if the 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".
It remains to be seen whether these modifications will increase issuers' liability. Given that the 2,500 word limit has not been abolished, the content of summaries may not change significantly, although the Amending Directive requires the Commission to work on implementing legislation to specify the detailed content and specific form of the summary, following the outcome of the EU Commission Communication on Packaged Retail Investment Products (PRIPs) of April 30, 2009, "aligning to the maximum extent possible the content and form of the summary for securities with that outcome". The result of this debate is currently unclear, and it remains to be seen what further rules will be adopted specifying the content and form of the summary.
Reduced disclosure regime for rights offerings
Currently, rights offerings are subject to extensive disclosure requirements under the share schedule set out in Annex I to the Prospectus Regulation. The Amending Directive introduces a "proportionate disclosure regime" for pre-emptive issues of equity securities, with a view to increasing the efficiency of capital raising by way of a rights issue. Application of the regime is subject to the conditions that (i) the shares offered are of the same class as shares of the issuer admitted to trading on a regulated market or on a multilateral trading facility that is subject to appropriate ongoing disclosure requirements and rules on market abuse, and (ii) that pre-emptive rights of existing shareholders are not excluded.
For instance, current practice in the UK is to disapply pre-emptive rights, but it is possible that following implementation of the new regime, UK practice will change. In addition, the new reduced disclosure regime will be subject to further rules to be developed by ESMA. Therefore, it is not clear at present what level of disclosure the short-form prospectus will contain.
For large rights offerings of European issuers which include an offering into the U.S. under Rule 144A, it is likely that underwriters will continue to require a full-scale prospectus rather than the short form prospectus allowed by the Amending Directive due to liability considerations and the need for U.S. counsel to provide a 10b-5 disclosure letter.
Prospectus supplements and withdrawal rights
The Prospectus Directive provides that an issuer must publish a prospectus supplement if a significant new factor, material mistake or inaccuracy relating to the information included in a prospectus arises which is capable of affecting the assessment of the securities to which that prospectus relates, after approval of the prospectus and before the final closing of the offer or the time when trading on a regulated market begins. A prospectus supplement has to be approved by the home Member State regulator in a maximum of seven working days. Investors who have already agreed to purchase the securities before the supplement is published are allowed to withdraw their acceptances within a certain time limit not shorter than two working days. The Amending Directive clarifies these requirements in a number of ways:
- The period during which the publication of a prospectus supplement is triggered ends at the later of the closing of the offer and beginning of trading in the securities.
- Investors have withdrawal rights only in relation to a public offer, not in the context of prospectuses that have only been prepared in connection with an admission to listing.
- Withdrawal rights are only available where the circumstances which gave rise to the publication of the supplement arose before the close of the public offer and delivery of the securities.
- The period during which withdrawal rights may be exercised is set at two working days after publication of the supplement in all EU Member States (previously Member States could provide for longer), and the supplement has to state the final date of the right of withdrawal.
Final terms
The Prospectus Directive provides that a prospectus used to offer non-equity securities, including warrants, can consist of a base prospectus containing all relevant information concerning the issuer and the securities, which is supplemented by final terms of the offer if not included in the base prospectus or a supplement thereto. The final terms do not need to be approved by the home Member State regulator and do not trigger any withdrawal rights.
The Amending Directive clarifies that final terms to a base prospectus, typically used in the context of EMTN or GMTN programs, should only contain information which is specific to the issuance and which can only be determined at the time of the individual issuance (such as issue price, maturity, coupon, exercise date, exercise price and redemption price and other terms not known at the time of the prospectus). This indicates that any material updates to the prospectus, such as additional risk factors or changes to the business section or operating and financial review should be included in a supplement, which requires the home Member State regulator's approval and triggers the withdrawal rights discussed above.
Retail cascades
Subsequent resales of securities by financial intermediaries constitute separate offers under the Prospectus Directive and require a separate exemption from the original offer, or publication of a prospectus. The amendments provide that no new prospectus is required in a subsequent resale or final placement of securities through financial intermediaries as long as a valid prospectus is available and the issuer or person responsible for the prospectus consents to its use by means of a written agreement. It is expected that an industry standard form of consent agreement will be developed.
Electronic publication of prospectuses
The Prospectus Directive allows publication of a prospectus in accordance with a number of methods listed in the current Article 14(2): (i) insertion in a newspaper with wide circulation, (ii) in printed form made available at the offices of the market on which the securities are being admitted to trading, or at the registered offices of the issuer and the financial intermediaries, (iii) in electronic form on the issuer's website and on the website of the financial intermediaries, (iv) in electronic form on the website of the regulated market where admission to trading is sought or (v) in electronic form on the website of the home Member State regulator. Home Member States currently have the choice of requiring electronic publication on an issuer's website in case issuers choose method (i) or (ii).
The Amending Directive introduces a choice of electronic publication on the issuer's or the financial intermediary's website for method (iii). Rather than leaving Member States the choice, it now also requires that prospectuses are always published in electronic form on the issuer's or financial intermediaries' website(s), where the prospectus is also published in a newspaper or in printed form under methods (i) or (ii). This is a useful harmonization of diverging practices in different Member States.
Definition of qualified investors
The Prospectus Directive contains an exemption from the obligation to publish a prospectus for offers addressed solely to qualified investors. Under the Amending Directive, the term "qualified investors" is defined as those persons that are classified as professional clients or eligible counterparties in accordance with Annex II of the Markets in Financial Instruments Directive (Directive 2004/39/EC, "MiFID").
This change was made to reduce the burden on financial intermediaries of checking investor status. In practice this means that investment firms can rely on their register of qualified investors under MiFID. The MiFID definition is broadly equivalent to the previous definition in the Prospectus Directive.
Passporting notifications
The Prospectus Directive provides that once the home Member State has approved a prospectus, it is valid for a public offer or admission to trading in any number of host Member States, only subject to notification of the competent authority of each host Member State by the competent authority of the home Member State (at the request of the issuer or person responsible for the prospectus). The only additional requirement is a translation of the summary into the official language of the host Member State, where applicable.
In the context of this passporting procedure, the Amending Directive imposes a new obligation on the competent authority of the home Member State to notify the issuer at the same time as it notifies the competent authority of the host Member States that a certificate of approval of a prospectus has been issued. This provides clarity to issuers as to when a notification has actually been made. In the past only the host Member State competent authority needed to be notified.
Choice of home Member State for sub-EUR 1,000 debt
Currently, issuers of non-equity securities can choose their home Member State for offerings of securities whose denomination is at least EUR 1,000 on an issue-by-issue basis. The Amending Directive provides that the EU Commission will review this limitation, following calls by the EU Commission and the Parliament to remove the EUR 1,000 threshold. Currently, for equity securities and non-equity securities below EUR 1,000, issuers incorporated outside the EEA effectively have a onetime choice depending on where the initial public offer or initial application for admission to trading is made.
Conclusion
The amendments mostly provide useful clarifications and streamlining of existing requirements, although the increase of the wholesale debt denominations to EUR 100,000 has been criticized as unnecessary. For non-EU issuers whose regimes are considered equivalent, the extension of the short-form disclosure regime for employee share offerings will provide a long-awaited exemption from the onerous requirements to publish a full prospectus in connection with employee share offerings in EU countries. A future liberalization of the regime for choosing a home Member State for sub-EUR 1,000 debt would be beneficial to non-EU issuers. Further EU rules regarding the content of the prospectus summary and the reduced disclosure regime for rights offerings are expected, which will help clarify the new requirements.