Following a lengthy review and consultation process by the European Commission, the Prospectus Directive (Directive 2003/71/EC) (PD) has been amended after Directive 2010/73/EU (the Directive) came into force on 31 December 2010.
Issuing a full prospectus under the PD is a long, complex and expensive process. The objectives of the Directive are to reduce some of the obligations under the PD that the Commission has identified as being excessively burdensome on companies, to introduce a new proportionate (ie reduced) disclosure regime, and to make it easier for smaller companies to raise equity finance.
This article aims to take stock of the current regime under the PD and to highlight the significant changes to be introduced by the Directive, which member states must implement by 1 July 2012.
CURRENT REGIME UNDER THE PROSPECTUS DIRECTIVE
The PD was implemented in the UK on 1 July 2005 with the aim of creating common standards for the issue of securities and to allow the ‘passporting’ of approved prospectuses throughout the EU. The PD sets out when an issuer needs to publish a prospectus, what the contents of a prospectus must be and the mechanism for approval of a prospectus. The PD was implemented in the UK by:
- amending Part VI and Schedules 7-11 of the Financial Services and Markets Act 2000 to set out the basic content requirements for a prospectus, several exemptions and the process for approving a prospectus;
- introducing the Prospectus Rules that set out the detailed content requirements for a prospectus and additional exemptions; and
- repealing The Public Offers of Securities Regulations 1995, which had implemented the previous and less onerous prospectus objective.
A prospectus must be published and approved by a competent authority (which in the UK is the Financial Services Authority (FSA)) in the following two situations:
- where there is an offer of transferrable securities to the public in any country in the EU (the public offer trigger); and/or
- when securities are admitted to trading on a regulated market in the EU (the regulated market trigger).
Issuers can avoid having to publish a prospectus by relying on one of several exemptions depending on whether the public offer or regulated market triggers (or both) apply.
Exempt public offers
- An offer of securities of less than €2.5m over a 12-month period;
- an offer solely to ‘qualified investors’;
- an offer to fewer than 100 people per member state (other than qualified investors);
- an offer for wholesale securities where the minimum consideration per investor, or the minimum denomination per unit, is over €50,000; and
- an offer where the total consideration is less than €100,000 over a 12-month period.
Exempt admissions of securities to a regulated market
- Where the shares offered represent, over 12 months, less than 10% of the number of shares of the same class already admitted to trading on the same regulated market;
- where the shares are converted or exchanged from other transferable securities or from the exercise of rights conferred by other transferable securities; and
- where the shares are already admitted to trading on another regulated market.
Exemptions that apply to both triggers
- Where shares are issued in substitution for shares of the same class already issued;
- where securities are issued in connection with a takeover by means of an exchange offer (although in practice there will often be an equivalent offer document);
- where securities are offered or allotted in connection with a merger;
- where shares are offered free of charge to existing shareholders and dividends are paid out in the form of scrip dividends; and
- where securities are offered under an employee share scheme provided the company’s securities are already admitted to trading on a regulated market.
Before the PD took effect, rights issues in the UK were subject to a relatively relaxed disclosure regime comprising a circular as opposed to a full prospectus. The 1989 Prospectus Directive (which was repealed by the PD) only required a prospectus to be published when securities were offered to the public ‘for the first time’. The PD, however, treats each share issue as discreet so any rights issue to over 100 persons in any member state, or an offer by a company admitted to the regulated market (of over 10% of the existing issued share capital of the company or that otherwise is not exempt) will require a full prospectus. A report prepared by the Rights Issue Review Group in November 2008 highlighted that full prospectuses, in the context of rights issues, are not valued by recipients and recommended that the disclosure requirements should be significantly reduced.
The consequence for smaller companies has been that they have tended to raise their funds through a placing to a limited number of investors to avoid having to produce a full prospectus and so excluding many existing shareholders. Open offers and rights issues, which used to be common for smaller companies, are now virtually non-existent.
KEY CHANGES MADE BY THE DIRECTIVE
Following the review and consultation process, the Directive makes several changes to the prospectus exemptions, prospectus content and the process for publishing a prospectus. The key changes include:
- Increasing the public offer exemption from 100 persons to 150 persons per member state.
- Increasing the total consideration exemption for public offers from €2.5m to €5m.
- The introduction of a proportionate disclosure regime for pre-emptive offers (ie open offers and rights issues). However, this will only apply where the issuer has not disapplied statutory pre-emption rights. This could prove problematic in practice as companies generally disapply pre-emption rights on a rights issue to avoid problems with overseas shareholders and fractional entitlements, which is why companies routinely renew the disapplication annually. Unless the Companies Act 2006 is amended to provide that pre-emption rights do not apply to overseas shareholders and fractional entitlements, UK companies may not be able to take advantage of the new proportionate disclosure regime.
- There will also be a proportionate disclosure regime for (a) issuers with a ‘reduced market capitalisation‘ (which is a new concept) defined as companies listed on a regulated market with an average market capitalisation of less than €100m over the past three years, and (b) for small and medium-sized enterprises (SMEs) defined as companies that meet two of the following three criteria: an average number of employees of less than 250 employees; a total balance sheet net asset value not exceeding €43m; and an annual net turnover not exceeding €50m. The precise details of the reduced disclosure regime will be set out in implementing measures at a later date.
- Increasing the minimum consideration and denomination thresholds for wholesale securities from €50,000 to €100,000. This change is intended to address the problem of retail investors often falling within the previous lower threshold.
- Amending the definition of ‘qualified investor’ to match the ‘professional client’ and ‘eligible counterparty’ definitions used in the Markets in Financial Instruments Directive (2004/39/EC).
- Providing that financial intermediaries placing or subsequently reselling securities to investors (ie a ‘retail cascade’) can rely on the initial prospectus subject to the written consent of the issuer. This fixes a problem that potentially required a prospectus to be produced at every level of the ‘cascade’.
- Extending the employee share exemption to include issuers that do not already have their shares admitted to trading on a regulated market. This is a welcome change that extends the exemption to companies with their shares admitted to trading on AIM, the PLUS-quoted market and companies listed outside the European Economic Area (for example, on the New York Stock Exchange) provided that the company’s head office or registered office is in the EU.
- Amending the content and format requirements for the summary section in a prospectus to include ‘key information’ that comprises specific disclosures and general information on the issuer and the securities.
- The requirement to publish an annual information update will be abolished.
Member states have until 1 July 2012 to implement the Directive but can do so earlier, as the UK intends to do for two specific amendments.The UK government announced on 1 November 2010 that it intends to implement the increased threshold for exempt offers (from €2.5m to €5m) and the increased exemption for limited investors (from 100 persons to 150 persons per member state) before the 1 July 2012 deadline. It is unclear exactly when these changes will be implemented but the government has said that it will consult early this year on implementing the amendments. To date, no further details (including an implementation timetable) have been given by the government, the treasury or the FSA about implementing the remaining changes made by the Directive. Potential disruption could be caused by member states implementing the Directive on differing dates before the 2012 deadline, thereby subjecting issuers to different thresholds and exemptions in different member states.
The Commission must also publish implementing measures that will set out the detailed provisions relating to several of the key changes under the Directive (for example what is meant by ‘proportionate’ disclosure for pre-emptive offers and for SMEs). The measures relating to the form and content of the summary section must be published by 1 July 2012, whereas the remaining measures must be published by 31 December 2014. It is somewhat unsatisfactory that the new measures are not being introduced at the same time. Given that the objective of the Directive is to reduce the burden on companies, it is hoped that the Commission will introduce the measures as early as possible.
In light of the reduced requirements introduced by the Directive, it could be time to re-examine the role of standard listings on the main market of the London Stock Exchange (LSE), which requires companies to meet only the minimum EU requirements.
On 6 April 2010, the Listing Rules were amended to introduce a new two-tier listing regime: premium and standard listings. A premium listing is the same as the previous regime’s super-equivalent primary listing, which imposed more onerous standards than those required by the PD. Standard listings are only subject to the minimum EU requirements with regard to ‘regulated markets’.
Although it is early days for the market, there have been very few standard listings, which is no doubt partly caused by several significant concerns. There are concerns as to whether there is sufficient liquidity in the market for shares in companies with standard listings, in particular because they are not included in any of the FTSE UK indices, which has ruled out a large number of funds and institutional investors. In addition, there is the concern that the less stringent regulations for standard-listed companies, for example lower corporate governance requirements and the absence of a sponsor or nomad to police transactions, will leave the door open to abuse.
Nevertheless, standard listings could offer SMEs and companies with a ‘reduced market capitalisation’ another option, as they will be subject to a reduced disclosure regime once the Directive has been fully implemented. Although a standard listing would still require a prospectus to be prepared, the reduced disclosure regime could give such companies considerably easier access to the main market of the LSE.
A standard listing offers several potential benefits that may appeal to issuers:
- giving companies access to the main market of the LSE;
- there is no need to appoint a financial sponsor, which can result in a significant cost saving (although in practice issuers seeking a standard listing often have to make their own arrangements with brokers and market makers to support the market in their shares); and
- shareholder approval is not required for significant transactions under the class tests, which could be a major benefit for acquisitive companies and cash shells that can use a standard listing as a stepping stone to a premium listing.
The Directive introduces some welcome measures that will reduce the regulatory and administrative burden on companies. The Directive should, in particular, make it easier for smaller companies to access equity capital markets in the EU by raising the thresholds for certain exemptions and by introducing a proportionate disclosure regime for SMEs and issuers with a reduced market capitalisation.
Unfortunately, the details of a large number of the amendments made by the Directive will remain unknown until the implementing measures are published, potentially not until 31 December 2012.