11502/02
Com (2002) 460
EXPLANATORY MEMORANDUM ON EUROPEAN COMMUNITY DOCUMENT
Proposal for a Directive of the European Parliament and of the Council on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC
Submitted by HM Treasury September 2002
SUBJECT MATTER
Background
Successive European Councils have emphasised the importance of access to capital as a key factor for job creation, raising productivity, developing entrepreneurship and supporting growth in Europe. The importance of this issue is reflected in both the Financial Services Action Plan and the Risk Capital Action Plan.
2. The existing Public Offers Directive is meant to provide a framework, through the mutual recognition of procedures, for enterprises within the EU to offer securities in several Member States using a single prospectus. In practice, however, for each additional jurisdiction in which an offer is to be made, the issuer may be required to provide one or more of a new translation, a reformatting of the prospectus, and additional information specific to the country in which the offer is made. This results in a considerable cost at the margin of extending the offer to each additional country. The present system means that pan-European offers are cost effective for very few companies.
3. The European Commission first adopted the Prospectus Directive (PD) on 30th May 2001 (9674/01, Com (2001) 280). It has since been the subject of extensive discussions at Council working group, whilst the European Parliament amended the text on 14 March 2002. The first Commission text was passed for scrutiny by both the Commons’ and Lords’ Scrutiny Committees earlier this year.
4. In a bid to speed up the process, the Commission has put forward an amended proposal. It is this amended proposal that is the subject of this Explanatory Memorandum.
5. The Consolidated Directive on the admission of securities to official stock exchange listing and on the information to be published on those securities (CARD – 2001/34/EC) repealed the Admission to Listing Directive (ALD – 79/279/EEC), the Listing Particulars Directive (LPD – 80/390/EEC), the Interim Reports Directive (IRD – 82/121/EEC), and the Major Shareholding Directive (MSD – 88/627/EEC). The PD would repeal the Public Offers Directive (POD – 89/298/EEC), and that part of the CARD (Title III) that deals with initial disclosure and derives from the LPD.
Objectives of the directive
6. The PD deals with the contents of prospectuses that have to be produced and approved by the competent authority when either a public offer is made or a security is to be admitted to trading on a regulated market.
7. The purpose of the directive is to provide for an effective passport for issuers and so to ensure that a prospectus, once vetted and approved in one Member State, is accepted in any other Member State.
8. The key features of the new system would be:
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The possibility to publicly offer securities, or admit securities to trading on a regulated market, in other member states, on the basis of a simple notification of the prospectus approved by the home competent authority;
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The introduction of disclosure standards for the public offer of securities and admission to trading on a regulated market, that are in line with international standards; and
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Use of the comitology process, following the Stockholm European Council’s endorsement of the Lamfalussy Report.
MINISTERIAL RESPONSIBILITY
9. The Chancellor of the Exchequer is responsible for UK policy regarding the regulation of financial services and the single market in financial services.
LEGAL AND PROCEDURAL ISSUES
(i) Legal basis
Articles 44 and 95 of the Treaty establishing the European Community.
(ii) Legislative procedure
The co-decision procedure applies.
(iii) Voting procedure
Qualified majority voting applies.
(iv) Impact on UK law
10. The current law is contained in Part VI of the Financial Services and Markets Act 2000, and in the Public Offers of Securities Regulations 1995. These provisions implement, respectively, that part of Directive 2001/34/EC that is derived from the LPD (80/390/EEC), and the POD (89/298/EEC). If the new directive is adopted, UK law will need to be changed to reflect the extent to which the new directive amends current EC law.
(v) Application to Gibraltar
11. This directive applies to Gibraltar
APPLICATION TO THE EUROPEAN ECONOMIC AREA
12. The single market extends to the EEA.
SUBSIDIARITY
13. The establishment of the single market in financial services falls within Community competence.
POLICY IMPLICATIONS
14. The integration of the EU’s capital markets has economic benefits if it improves the efficiency with which capital is allocated, and the cost of allocating such capital is reduced, whilst ensuring acceptable levels of investor protection.
15. The Government believes that the Directive represents a significant improvement over the May 2001 text. The most important changes include the following:
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Differentiated models of disclosure for wholesale markets. The directive now explicitly differentiates between the disclosure requirements of securities sold to retail investors and wholesale market investors;
- Definition of home state. For the purposes of prospectus approval, issuers of high denomination debt securities may choose the competent authority from amongst those Member States where it is incorporated, making a public offer, or admitting to trading on a regulated market;
- Shelf registration and mandatory annual updates. Issuers of high denomination debt securities would not be obliged to update their registration document annually. SME issuers would face a lighter updating requirement.
- Risk capital. Issuers that raise less than €2.5 million (c. £1.5 million) from offers of securities would have the benefit of the passport but would be exempted from the requirement to produce a prospectus.
- Definition of qualified investor. The definition of qualified investors has been broadened to include natural persons who have knowledge and experience of capital markets.
- Effectiveness of the passport. The text now specifies that issuers can only be held liable for a local language summary that is misleading when read together with the full prospectus. The original text had given rise to concerns that liability issues would either result in large (and therefore potentially costly) local language summaries, or simply discourage issuers from raising capital on a pan European basis.
- Private and institutional placements. The text now better accommodates market practices in respect of private and institutional placements.
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A guiding framework for comitology. The directive’s recitals set out a number of principles to guide the activities of those persons responsible for establishing detailed rules through comitology.
16. However, there are a number of issues where further work is required. Examples include the need for competent authorities to have some flexibility in the implementation of models of disclosure, and for the annual updating regime to be made lighter.
17. A number of commentators have expressed concerns that the Prospectus Directive has negative implications for the UK’s corporate governance regime. However, disclosure in respect of share-dealings by directors in their own companies (the Model Code), shareholder notification or votes regarding major transactions (“Class tests”), and disclosure of compliance with corporate governance codes is currently made in order to comply with the ongoing disclosure requirements of the UK’s listing regime. The future of listing (and the ability of the UK to pursue corporate governance goals through listing rules) is not dependent upon the Prospectus Directive per se, but rather what happens to that part of the CARD that is derived from the Admission to Listing Directive (ALD).
REGULATORY IMPACT ASSESSMENT
18. A regulatory impact assessment is attached at Annex A.
CONSULTATION
19. The Government is concerned that the European Commission’s consultation on this directive, could have been much more thorough. The Government has worked closely with the FSA and has consulted extensively on the directive with representatives of the financial services industry, through a series of roundtable meetings have been held with interested parties, and detailed drafting advisory meetings.
FINANCIAL IMPLICATIONS
20. The cost to the FSA of approving public offer prospectuses in advance will ultimately fall on the financial services industry given the way that financial regulation is funded in the UK.
TIMETABLE
21. The European Parliament (EP) is holding a hearing on this directive on 2nd October, but it is not yet clear if the EP will insist on another 1st reading of the directive. Meanwhile, the Danish Presidency is aiming to get political agreement on the directive at the November 4th ECOFIN.
RUTH KELLY
FINANCIAL SECRETARY
HM TREASURY
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ANNEX A
REGULATORY IMPACT ASSESSMENT
COM (2002) 460: Proposal for a Directive of the European Parliament and of the Council on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC
Purpose
The purpose of the new directive is to improve the framework for investing and raising capital on an EU wide basis, and so to lower the cost of raising capital. The directive would achieve this goal by introducing a single passport for the issuers of securities in the EU.
Options
2. Successive European Councils have emphasised the importance of access to capital as a key factor for job creation, raising productivity, developing entrepreneurship and supporting growth in Europe. Following the Cardiff European Council a Risk Capital Action Plan was drawn up and measures concerning risk capital have also been included in the Financial Services Action Plan. The UK Government has endorsed this view (see HM Treasury, July 2000) .
Benefits
3. The proposed directive does indeed provide for a single passport for companies wishing to raise capital across the EU. Host state regulators will not be able to insist on additional disclosure, or on the translation of documentation (other than a summary note) into their domestic language.
4. The net effect should be significant cost savings in the preparation of prospectuses for cross-border offers of securities within the EU.
Compliance costs
5. The scope that exists for greater detail to be added through comitology processes, means that it is not yet possible to estimate a meaningful figure for compliance costs. The main likely sources of additional costs can be summarised as follows.
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The cost of the additional professional advice that will be required for public offers through the LSE’s Alternative Investment Market (AIM), as a result of the directive’s requirement that the FSA approve such prospectuses, is estimated to be of the order of £15,000 per offer. This compares with the cost of raising capital through AIM which currently stands at £250,000 - £350,000, plus 3-5% of the capital raised.
- The likely additional recurrent costs of annually updating shelf registration documents (which form part of the prospectus) for issuers whose low denomination securities have been admitted to trading on a regulated market. These costs are difficult to estimate precisely because the contents of registration documents will depend on the content requirements determined under comitology.
- Offers of securities through employee share ownership schemes are currently exempted from the requirement for a prospectus under the Public Offers Directive. In the PD, this exemption is conditional on issuers’ publishing a document ‘containing information on the number and nature of the securities and the reasons for and detail of the operation’. Most UK employee share ownership schemes provide some documentation to issuers (as a condition of benefiting from tax incentives). The extent to which comitology rules might increase the burden of documentation is not clear at this stage.
- The inclusion of convertible bonds in the definition of ‘equity securities’, as drafted, implies that issuers of convertible bonds that wish to admit those securities to trading on a regulated market in the EU will have to do so on the basis of retail, rather than wholesale, disclosure standards. Until the respective models of disclosure are completed under comitology it is not clear how much difference this might make in practice.
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The use of a minimum security denomination of €50,000 (approximately £31,500) as a proxy for securities traded by qualified investors (and so subject to wholesale market models of disclosure) would make it more difficult for small funds to manage their risks and to accurately match long term assets and liabilities.
Consultation
6. The Government continues to consult interested parties on the Prospectus Directive, through roundtable meetings, and meetings with a drafting advisory group on detailed issues. This group has drawn extensively on the expertise of experienced City lawyers.
Summary
7. The principal objective for the proposed new directive on prospectuses is that European companies should be better able to raise capital by making pan-European public offers of securities. This directive therefore has an important contribution to make to the implementation of the Financial Services Action Plan and the completion of the single European market for capital. The directive should improve the effectiveness of the European passport for issuers which should reduce costs, but implies some additional costs in a number of areas. The extent of these costs will be affected to a significant extent by the outcome of level 2 comitology processes provided for in the directive.
