Impact of new prospectus rules on ECM questions answered.

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1 June 2012 Impact of new prospectus rules on ECM questions answered. Amendments to the Prospectus Directive will come into force in the UK and other member states on 1 July This note is intended to provide a brief overview of the practical implications of these changes for UK equity capital markets practitioners and companies with shares listed in London. In the UK, the changes will be made through amendments to the Financial Services and Markets Act 2000 ( FSMA ) and the FSA s prospectus rules, pursuant to Directive 2010/73/EU (the Amending Directive ). What will new-style summaries look like? One of the goals of the Amending Directive is to enhance investor protection. To this end changes are made to the rules relating to the summary, which is required in prospectuses for shares and retail non-equity issues. Under the new rules, prospectus summaries can be longer than at present, but must follow a strictly prescribed format and provide key information under standard headings. In place of the 2,500 word guideline maximum for summaries, the new rules prescribe a maximum length of 7% of the length of the prospectus or 15 pages, whichever is longer. Contents What will new-style summaries look like?... 1 What is the proportionate disclosure regime and when can it be used?... 2 Are any exemptions being removed?... 3 Are there any new exemptions?... 4 When will a supplementary prospectus be required?... 5 How will withdrawal rights operate under the new regime?... 5 Other changes... 7 Appendix... 8 A new Annex XXII contains a list of items that have to be included in a summary. These must be set out in the same order as they are set out in the Annex, and if there is no information to be disclosed under any heading it must be stated that it is not applicable. The main items of information required in the summary are the business description and key factors relating to the issuer s activities, as well as key information relating to the risks specific to the issuer or its industry. This means that the key risk factors may need to be picked out and described in more detail rather than the current practice of listing the headings to all the risk factors. This approach may result in the risk disclosure in the prospectus looking more like the disclosure of principal risks and uncertainties required in a company s annual report. Descriptions under any particular heading should be brief but crossreferences to specific parts of the prospectus are not allowed. 1

2 In drawing up summaries, issuers and their advisers need to be aware of the purpose of the summary as defined by the Amending Directive. This is to provide key information, which is defined as meaning essential and appropriately structured information provided to investors with a view to enabling them to understand the nature and the risks of the issuer and the securities and to decide which offers of securities to consider further. In other words, there is an assumption that investors may be choosing between different securities and the summary is intended to enable them to compare key features before deciding whether to read the prospectus in more detail. In particular, the standardised format is intended to aid comparisons between similar products, with a particular focus on providing information for retail investors. Under the new regime, as before, there is a specific safe harbour against liability on the prospectus summary alone. Under the new rules this applies unless the summary, when read with the rest of the prospectus, is misleading, inaccurate or inconsistent or does not provide the key information. What is the proportionate disclosure regime and when can it be used? The proportionate disclosure regime is a series of reduced content requirements which apply to certain pre-emptive issues and to issues by small and medium enterprises as well as to certain issues of non-equity securities by credit institutions. Pre-emptive issues: the reduced disclosure regime is available for issues of shares made in accordance with statutory pre-emption rights or near identical rights. In practice this means that the regime will apply to rights issues, even if statutory pre-emption rights have been disapplied (in order to simplify dealing with overseas holders and fractional entitlements). It will also apply to open offers, but if pre-emption rights have been disapplied, holders entitlements must be sold for their benefit at the end of the offer period (i.e. a compensatory open offer similar to that conducted by Lloyds Banking Group Plc in 2009). The specific conditions laid down for the proportionate disclosure regime to be applicable where the issue is not in accordance with statutory pre-emption rights are as follows: > the rights must be offered free of charge > entitlements must be in proportion to shareholders existing holdings or, where other securities give a right to participate in the share issue, in proportion to their entitlements to the underlying shares > rights must be negotiable and transferable or else the shares not taken up at the end of the offer period must be sold for the benefit of those who did not take them up 2

3 > the issuer may impose limits or exclusions, or make arrangements, to deal with treasury shares, fractional entitlements, or the laws or regulations of any jurisdiction > the offer period must not be less than the statutory minimum, and > the rights must lapse at the end of the offer period. The proportionate disclosure requirements for pre-emptive issues are set out in Annexes XXIII and XXIV of the amended Prospectus Regulation. These annexes apply in place of Annexes I to III (the annexes which set out the full disclosure requirements for a prospectus relating to shares). The regime applies to prospectuses for classes of shares admitted to trading on a regulated market. Shares admitted to MTFs that have sufficient disclosure and market abuse rules are also able to take advantage of the regime. AIM satisfies these conditions. Issues by SMEs: SMEs can choose to prepare prospectuses either in accordance with the regular provisions in Annexes I to III (or other annexes applying to non-equity securities), or to take advantage of the proportionate disclosure regime provided for in Annexes XXV to XXVIII. This applies to prospectuses in connection with offers to the public by SMEs and to the admission to trading of securities on a regulated market. Practical implications: The ability to prepare a shorter, less onerous prospectus for a rights issue was one of the recommendations of the UK Rights Issue Review Group which reported in November The practical benefits of the reduced disclosure requirements may, however, be limited if companies or underwriting banks feel the need for fuller disclosure to be made in order to satisfy the general obligation of disclosure either under s.87a FSMA or under, in particular, US disclosure standards. Are any exemptions being removed? While no exemptions from the requirement for a prospectus are removed, there are a number of changes being made to existing exemptions: > Definition of qualified investors: the definition of qualified investors, to whom an offer of securities may be made without triggering the requirement for a prospectus, is being aligned to the categories of persons who can be treated as professional investors or eligible counterparties for the purposes of MiFID. The ability, which was not used in practice, for individuals to be treated as qualified investors by being registered as such with the relevant competent authorities has been removed. MiFID gives investors the right to opt out of professional investor status. This means that designation of a particular person as a qualified investor is not merely a question of ascertaining the size or nature of the potential investor, but also being certain that they have not opted out of being treated as a professional investor. The definition of qualified investor in s.86(7) FSMA effectively allows investors to opt out 3

4 of professional client status by agreement in writing at any time before the making of the offer, meaning that banks will need, potentially, to check the status of each client before sending them the offer. Note that the provisions of s.86(7) regarding opting out of professional status do not reflect any express provision of MiFID or the Amending Directive, and other member states may take different approaches to the manner or extent to which entities can opt out of professional status for the purposes of these provisions. Thus there will not necessarily be a standard approach across the EU as to the meaning of qualified investor. > Increase in minimum subscription threshold: a prospectus is not required for offerings where the minimum that may be subscribed by investors exceeds a minimum threshold. For these purposes the threshold amount, above which a prospectus is not required, is increased rom 50,000 to 100,000. The higher threshold means that issuers targeting investors between 50,000 and 100,000 will now not be able to use the exemption from publishing a prospectus. > Wholesale debt: the threshold for debt securities to be treated as wholesale (and subject to reduced disclosure requirements both in prospectuses and on an ongoing basis) is raised from 50,000 to 100,000. > Free shares: the exemption for shares allotted free of charge is removed. Are there any new exemptions? The Amending Directive raises the number of non-qualified investors to whom an offer may be made without a prospectus from 100 to 150, together with increasing the exemption for small offers from 2,500,000 to 5,000,000 total consideration. These changes were implemented in the UK in July Certain other exemptions are amended from 1 July 2012 so as to broaden their scope. In addition new provisions clarify when prospectuses can be used for retail cascades i.e. onward sales of securities by intermediaries to retail investors. > Employee share schemes: The exemption from the requirement for an offering of shares pursuant to an employee share scheme is broadened so that it applies not just to companies with securities admitted to trading in the EU but to any companies whose head or registered office is in the EU and to non-eu companies with securities admitted to trading either on an EU regulated market or an equivalent market outside the EU. In each case a document will need to be produced giving brief details of the offer. > Mergers and divisions: the current exemption for shares allotted in connection with a merger is extended to apply also to divisions (where a company is split into two or more parts). 4

5 > Retail cascades: Where securities offered under a prospectus are subsequently resold through a financial intermediary, in what is called a retail cascade, the new rules confirm that a new prospectus is not required so long as the original prospectus is still valid and the issuer agrees to its use in writing. For further details on retail cascades see our briefing here. When will a supplementary prospectus be required? The Amending Directive clarifies that where a prospectus relates to both an offer to the public and to admission to trading, the requirement for a supplementary prospectus can be triggered by a significant new factor, material mistake or inaccuracy being noted or arising not later than closure of the offer or admission to trading, whichever is later. This is implemented in FSMA by the insertion of a new s.87g(3a). Section 87G(3) continues to apply to a prospectus which relates either only to an admission to trading or only to an offer to the public. The combined effect of these two sections is that admission to trading will be the end point for the potential triggering of a supplementary prospectus unless a non-exempt public offering continues to be open after the admission date, as typically occurs, for instance, in a rights issue. However, this does not represent a change from previous practice, as the UKLA has always taken the view that the relevant period should end at the later of closure of the offer and commencement of trading (see the UKLA s Technical Note to PR 3.4.1R). For the impact of this change in relation to withdrawal rights, see below. How will withdrawal rights operate under the new regime? The amended rules There are three main differences between the Amending Directive and the previous rules: > Withdrawal rights do not apply where the trigger event for the supplement is a new event that arises after the securities offered have been delivered. > The period in which withdrawal rights can be exercised ends at the end of the second working day after the day on which the supplementary prospectus was published (a longer period may be permitted by the issuer or offeror but cannot be required by member states). > Under the Amending Directive withdrawal rights arise on publication of a supplement where the prospectus relates to an offer to the public. This is reflected in the amended s.87q(4) FSMA. See the Appendix for a flow chart showing the application of withdrawal rights. Practical implications 5

6 Trigger events and timing of delivery: Withdrawal rights apply if a new factor, mistake or inaccuracy (which triggers the requirement for a supplementary prospectus) arises before the the delivery of the securities. The exclusion of withdrawal rights where securities have already been delivered before the new factor arose is similar to the approach that has previously been taken in the UK, namely that withdrawal rights do not apply where the contract has been completed ie where the securities are unconditionally allotted. The UKLA gave guidance on this in the specific context of takeovers and rights issues in its Technical Note of October 2010 on PR3.4.2R. In this note the UKLA set out its view that under the previous rules withdrawal rights ceased to be capable of applying once the securities had been unconditionally allotted (eg in the case of a takeover) or, in the case of a rights issue, when shareholders paid up their subscription in full. This interpretation made the application of withdrawal rights limited in practice as in many cases an unconditional contract arose upon acceptance. It is not known whether the UKLA intends to amend this note in the light of the changes to s.87q(4). Given that the availability of withdrawal rights is now expressly dependent on the relationship between the time of a significant new event arising and the delivery of the securities, it may be necessary to keep records so that the timing of acceptances/delivery is clear. However, if the trigger event for a supplement is a mistake or inaccuracy, it seems that withdrawal rights are not excluded even if the mistake or inaccuracy was not noted until after the securities were delivered. Withdrawal rights apply simply if the mistake or inaccuracy arises before delivery of the securities. It is not clear how this will operate in practice, given the difficulty is unwinding issues after delivery. The UKLA s Technical Note of October 2010 on PR3.4.1R and timing of supplemental prospectuses states: we consider it to be best practice in offer situations for the offer to be suspended between the trigger event and the publication of a supplementary prospectus. This ensures investors are not unconditionally allotted shares based on incomplete disclosure. In practice it should be considered whether such a suspension of the offer should also continue for a short period after publication of the supplementary prospectus. This would help to ensure that investors do not accept before the market has had time to become fully aware of its contents, bearing in mind they will not then have the benefit of withdrawal rights. Standardisation of withdrawal rights period: The two day period specified by the Amending Directive represents increased harmonisation of the rules across the EU: previously the Directive allowed member states to require a longer period for withdrawal rights, whereas this can now only be at the option of the issuer or offeror. 6

7 Institutional offers: The stipulation in the Amending Directive that withdrawal rights apply where the prospectus relates to a public offer has been interpreted by some commentators as meaning the right of withdrawal need not be applied in an institutional only offer where a prospectus is produced for listing purposes and is not required in relation to the offer. It is not clear, however, that this is the correct interpretation and in any event, issuers and banks will need to consider carefully what action to take if a supplementary prospectus is required while an offer is outstanding as investors may expect to be able to withdraw. Other changes Abolition of Annual Information Update: The annual publication of a document noting the regulatory announcements made by a company over the last 12 months is no longer required. This provision of the Prospectus Directive has been made redundant by the provisions on periodic reporting in the Transparency Directive. Contacts For further information please contact: Lucy Fergusson Partner (+44) lucy.fergusson@linklaters.com John Lane Partner (+44) john.lane.linklaters.com Inclusion of preliminary results in a prospectus: The treatment of preliminary results when published in a prospectus is clarified by the new regulations which confirm that preliminary statements of results for the past financial year will not be treated as a profit forecast provided they are accompanied by statements to the following effect: > the person responsible for the information (if different from those responsible for the prospectus in general) approves the information, > the auditors have agreed that the information is substantially consistent with the final figures to be published in the next annual audited accounts, and > the financial information has not been audited. Author: Lucy Fergusson This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts, or contact the editors. Linklaters LLP. All Rights reserved 2012 Linklaters LLP is a limited liability partnership registered in England and Wales with registered number OC It is a law firm authorised and regulated by the Solicitors Regulation Authority. The term partner in relation to Linklaters LLP is used to refer to a member of Linklaters LLP or an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. A list of the names of the members of Linklaters LLP together with a list of those non-members who are designated as partners and their professional qualifications is open to inspection at its registered office, One Silk Street, London EC2Y 8HQ or on and such persons are either solicitors, registered foreign lawyers or European lawyers. Please refer to for important information on our regulatory position. We currently hold your contact details, which we use to send you newsletters such as this and for other marketing and business communications. We use your contact details for our own internal purposes only. This information is available to our offices worldwide and to those of our associated firms. If any of your details are incorrect or have recently changed, or if you no longer wish to receive this newsletter or other marketing communications, please let us know by ing us at marketing.database@linklaters.com. One Silk Street London EC2Y 8HQ Telephone (+44) Facsimile (+44) Linklaters.com 7 A

8 Appendix Withdrawal rights under Article 16 Prospectus Directive (as amended) and s.87q(4) FSMA (as amended) Does the prospectus relate to an offer of securities to the public? Yes No Has a supplementary prospectus been published? No NO WITHDRAWAL RIGHTS Yes Did the event triggering the supplemental prospectus occur before the delivery of the securities to the investor? No Yes Did the investor s acceptance occur before the publication of the supplemental prospectus? Yes No WITHDRAWAL RIGHTS APPLY 8