The Prospectus Directive Creating a Single European Passport

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PLCPRACTICAL LAW COMPANY PLCGlobal Counsel The Prospectus Directive Creating a single European passport

The Prospectus Directive (2003/71/EC) • The replacement of the current • An application for admission to (the Directive) (see Glossary), amend- mutual recognition procedure with a trading of securities on an EU regu- ing the Consolidated Admissions and new “single-passport” procedure. lated market. Reporting Directive (2001/34/EC) (CARD), forms a major component of Both EU and non-EU issuers need to (Article 3(1) and 3(3), Directive.) the Financial Services Action Plan, be aware of the changes that the new which aims to create a single market in regime will bring about. This article Exemptions to the obligation to file financial services for the EU. explains how that regime will oper- and publish a prospectus on a public ate, focusing in particular on: offer or an admission to trading exist The Directive came into effect on its for conversion offers, takeovers, merg- publication on 31 December 2003 and • When a prospectus will need to be ers, bonus issues and employee and di- requires member states to implement filed and published. rector stock ownership programmes, its provisions by 1 July 2005. A regula- subject in certain cases to alternative tion implementing the general princi- • The prescribed format and con- disclosure requirements (Article 4, Di- ples contained in the Directive through tent of the prospectus. rective). detailed technical measures (Commis- sion Regulation (EC) 809/2004, OJ • How a prospectus will need to be Offer of securities to the public 2004 L149/1) (the Prospectus Regula- approved. To ensure harmonisation through- tion), was adopted by the European out the EU, the Directive introduces, Commission on 29 April 2004 and will • Other requirements set out by the for the first time, a pan-European be directly applicable as law in mem- Directive relating to language, publi- definition of an offer of securities to ber states from 1 July 2005. cation and advertising, and annual the public: “a communication to disclosure. persons in any form and by any Once implemented, the Directive, as a means, presenting sufficient infor- maximum harmonisation directive, • The practical implications of the mation on the terms of the offer and will constitute a major step forward in new regime for issuers. the securities to be offered, so as to the integration of the European securi- enable an investor to decide to pur- ties markets, in particular through: Filing and publication chase or subscribe to these securities” (Article 2(1)(d), Directive). • A new EU-wide definition of what A prospectus will need to be filed for While this definition is broad, it is an “offer to the public” is and EU-wide approval with the competent national unlikely that it would capture com- transactional exemptions for non- regulator (see below Approval) and munications that do not refer to an public offers. published (see Other matters: Publi- offer price. cation and advertising) on either of • A single regime throughout the EU two events. These are: The following public offers are ex- governing the content, format, ap- empt from the obligation to file and proval and publication of such • An offer of securities to the public publish a prospectus (exempt public prospectuses. within the EU. offers):

28 PLCGLOBAL COUNSEL • JUNE 2004 • www.practicallaw.com/aboutglobal

Pierre-Marie Boury and Raj Panasar of Cleary Gottlieb Steen & Hamilton analyse the new EC regime governing prospectuses, and consider the implications for EU and non-EU issuers.

www.practicallaw.com/A40700

• Offers made to qualified investors.

• Private placements made to fewer than 100 persons (other than qualified investors) in each member state.

• Offers with a minimum total consideration per investor or specified denomination per unit of EUR50,000.

• Offers of securities with a total consideration of less than EUR100,000 in any 12-month period.

Note that the above exemptions are not available in respect of an application for admission to trading on an EU regulated market.

Member states will not be able to allow any offer of securities to be made to the public within their territories without prior publication of a prospectus (Article 3(1), Directive). Given the broad definition of a public offer, and the absence of clear language in the Directive, there has been some discussion as to exactly what this requirement means for secondary market trading of listed securities. Un- der the broadest interpretation, any resale of listed securities would require a further prospectus or its own exemption. This interpretation would place either:

• An onerous obligation on investors to file and publish a prospectus; or Illustration: Liz Couldwell

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The Lamfalussy process and CESR’s role

The legislative process followed by the Prospectus Directive (2003/71/EC) is the so-called “Lamfalussy process”, which pro- motes a four-level approach to harmonisation of financial services regulation throughout the EU:

Level 1 Directives set out the broad framework principles and the European Commission’s powers to implement level 2 technical measures.

Level 2 Measures implementing the directives adopted by the Commission with the prior approval of the European Securities Committee (comprised of high-ranking officials of member state governments), or in certain cases by the EU Council of Ministers and based on the advice of the Committee of European Securities Regu- lators (CESR), an advisory committee comprised of representatives of member states’ national regulators.

Level 3 Strengthened co-operation between the competent authorities of the member states under the auspices of CESR to achieve a uniform application of EC regulation across the EU.

Level 4 Strengthened enforcement by the Commission to ensure member state compliance with EC legislation.

On 4 March 2004 CESR began the consultation process for the creation of guidelines on the disclosure requirements contained in the Prospectus Regulation (Regulation 809/2004/EC), with the objective of ensuring consistent application throughout the EU. These guidelines, if CESR concludes they are necessary, will constitute level 3 measures and are intended to be completed by December 2004.

• An obligation to transfer the secu- Admission to trading of securities ing on an EU regulated market (but rities pursuant to a separate exempt The Directive uses the term “admis- note that these exemptions are not public offer, which would be un- sion to trading on a regulated market” available in respect of an offer of se- workable in the context of anony- (as defined by reference to the Invest- curities to the public). mous dealer trading systems where ment Services Directive (93/22/EEC)), the identity and number of ultimate rather than the concept of “admission Format counter-parties are not known. to official listing” contained in the CARD. Regulated markets will in- A prospectus must consist of three One alternative, and preferable, include the major EU stock exchanges, principal components, which can be terpretation is that the provisions re- but may also include other markets de- combined in a single prospectus or lating to prospectuses for public of- signed for small- and medium-sized is- kept separate: fers (including the restriction on suers where securities currently may resale of securities initially sold in an not be regarded as “admitted to offi- • A summary. This must, briefly and exempt public offer) are not applica- cial listing.” Member states will each in a non-technical manner, convey ble if the securities are or will be ad- provide a list of regulated markets the essential characteristics and risks mitted to trading on an EU regulated within their jurisdiction. The inclu- associated with the issuer, any guar- market. Under this interpretation, sion of these smaller markets will sig- antor and the securities. the provisions requiring a prospec- nificantly increase the costs of a listing tus for an application for admission for small- and medium-sized issuers, • A registration document. This to trading would apply instead (see as the disclosure requirements for a must contain information relating to below Admission to trading of secu- listing on these markets will become the issuer. rities) and sellers in the secondary similar to those applicable to a listing market could ignore the restrictions on a main stock exchange. • A securities note. This must pro- on public offers. If the securities vide details of the securities to be of- were not admitted to trading on an In certain cases, where the class of fered or admitted to trading. EU regulated market, a prospectus securities is already admitted to would only be required for a subse- trading on a regulated market, appli- (Article 5(3), Directive.) quent resale where the original offer cations for admission to trading may was an exempt public offer. This benefit from an exemption from the This tri-partite format facilitates the would effectively maintain the cur- obligation to file and publish a shelf-registration system introduced rent position in many EU member prospectus, including where the ad- by the Directive. Under this system, states. It remains to be seen whether mission to trading is for less than registration documents that have al- this interpretation will be confirmed 10% of the number of shares of the ready been approved and filed with by implementing legislation. same class already admitted to trad- the relevant national regulator (see

30 PLCGLOBAL COUNSEL • JUNE 2004 • www.practicallaw.com/aboutglobal

Prospectus disclosure requirements: a comparison

The following table sets out disclosure requirements for share, retail debt and wholesale debt prospectuses under the Prospectus Directive (2003/71/EC) (see also box, Further concessions for wholesale debt, available online at www.practicallaw.com/A40700).

Shares Retail debt Wholesale debt

Risk factors

Risk factors - issuer/industry Risk factors regarding issuer's ability to fulfil Same as retail debt. its obligations.

Financial information

Three years' IFRSs accounts or in accordance with Two years' IFRSs accounts or in accordance Two years' accounts - any generally accepted an equivalent standard (see box, The impact of with an equivalent standard. accounting principles but include qualitative analysis IFRSs for more detail). of differences with IFRSs.

Unaudited half-year interim financial statements if Same as shares. N/A prospectus is dated more than nine months after the end of the last audited financials.

Operating and financial review, or "MD&A" section. N/A N/A

Issuer's capital resources and cash flow, including a N/A N/A working capital statement (which need not be "clean" - that is, can disclose how any additional working capital will be provided).

Description of significant change in respect of finan- Same as shares. Same as shares. cial or trading position of the group since last financial statements or negative statement.

Significant recent trends in production, sales and No material adverse change statement regard- No material adverse change statement regarding inventory, and costs and selling prices since last ing prospects of the issuer since last audited prospects of the issuer since last audited accounts. financial year. Information on known trends, uncer- accounts.Information on known trends, uncer- tainties, demands, commitments, events that are tainties, demands, commitments, events that reasonably likely to have a material effect on issuer's are reasonably likely to have a material effect prospects for current financial year. on issuer's prospects for current financial year.

Statement of indebtedness no older than 90 days N/A N/A before the date of the prospectus.

Pro-forma financial information in the event of cer- N/A N/A tain significant transactions, and a report on this prepared by an independent auditor.

Shareholders and management

Extensive disclosure regarding members of admin- Disclosure limited to the names, address and Same as retail debt. istration, management and supervisory bodies, functions and any conflicts of interest. including description of: • Employment history. • Relevant expertise and experience. • Conflicts of interest. • Remuneration. • Share options. • Shareholdings in issuer.

Information on persons holding directly or indirectly Disclosure limited to description of any direct Same as retail debt. a notifiable share interest under national law. or indirect “control”, including measures in place to ensure such control is not abused. Description of any direct or indirect “control”, including measures in place to ensure such control is not abused.

Issuer

Description of issuer's current principal invest- Disclosure limited to description of the issuer's N/A ments and principal investments in the preceding principal investments since the date of the last three years or to which issuer has committed to published financial statements and to which (including method of financing). the issuer has committed to for the future (including the anticipated sources of funds).

Summary of material contracts entered into by the Brief summary of such contracts that could be Same as retail debt. issuer or a group member in the previous two years material to the issuer's ability to meet its oblig- outside the ordinary course of business; and any ations in respect to the securities. other contract outside the ordinary course of business containing provisions that are material to the group.

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A European home for non-EU issuers

The close interaction between the mission considers the issue of equiva- applied, countless non-EU issuers that Prospectus Directive (2003/71/EC) (the lence of accounting standards on a Eu- have issued securities in the EU or other- Directive) and the proposed Trans- rope-wide level. wise made communications about secu- parency Directive for the purposes of rities - including placements to profes- designating a home member state is of Non-EU issuers should, to the extent sionals of bonds, offers to employees of particular importance to non-EU issuers practicable, be careful not to take any shares through share purchase plans of equity or low denomination debt. inadvertent action after 31 December and even seemingly innocuous actions, 2003 that may either be deemed an offer like the delivery of communications to Under the Directive, non-EU issuers will of securities to the public or an applica- employees about options that had been be “locked into” a single national regu- tion for admission to trading (see main granted years earlier – may be deemed lator for all public offers and admissions text, Filing and publication), and as a re- to have elected a home member state. It to trading of equity securities and low sult select a home member state without is unlikely that this was what the Direc- denomination debt. This home mem- full consideration of the implications. tive intended. ber state will also be the home member The potential for an inadvertent elec- state for the purposes of the Trans- tion is compounded by the uncertainty The important elements in the choice of parency Directive, which applies when over how the concept of an “offer of se- home member state include: an issuer has securities admitted to trad- curities to the public” should be inter- ing on a regulated market in the EU. preted between 31 December 2003 and • An assessment of the risk of onerous This is of importance, as the designation the implementation date of the Direc- provisions being imposed by a member of home member state for the purposes tive in 2005. state beyond the minimum floor of fi- of the Transparency Directive will de- nancial reporting obligations set out in termine the applicable financial report- The Commission has on a non-binding the Transparency Directive. ing obligations on an issuer (over and basis indicated that until the Directive is above the minimum pan-European re- implemented by national legislation, the • An assessment of the home member quirements set out in the Transparency definition of “public offer” in the rele- state’s language requirements to deter- Directive). vant national securities law (and any re- mine if such requirements are practica- lated exemptions for private offerings) ble for the issuer. Unlike the Directive, the Trans- is applicable. However, member states parency Directive is not a maximum may take the view that the concept of • Whether member states will accept harmonisation directive and allows “offer to the public” should be applied particular national accounting stan- home member states to impose more using the wider pan-European defini- dards before the Commission deter- onerous requirements on issuers. In tion contained in the Directive when de- mines the question of equivalence on a addition, under the latest proposals termining whether an issuer’s actions pan-European level. for the Transparency Directive, mem- after 31 December 2003 elects a home ber states are given the choice to im- member state. This assessment will obviously be easier plement specific grandfathering provi- to make once competent authorities sions and exemptions to the financial The uncertainty as to which interpreta- give an indication of their position to reporting obligations. Most impor- tion will be implemented into national market participants. However, the de- tant perhaps is the discretion given to legislation makes it impossible to deter- sire to “wait and see” needs to be bal- member states to accept annual re- mine accurately, until national imple- anced against the potential benefit of ports containing financial information mentation legislation is finalised in taking early specific action to choose a prepared in accordance with third 2005, how an issuer’s actions after 31 permanent home member state under country national accounting stan- December 2003 will impact on the elec- the Directive to eliminate the risk of in- dards deemed to provide a “true and tion of a home member state. If the defi- advertently selecting a different home fair view,” until the European Com- nitions contained in the Directive are member state. below Approval) will be valid for 12 Those persons who have tabled the ment in the local language (see Ap- months (subject to the requirement summary, including any translation of proval) and consequently relied on to to update with supplements, if neces- it, will be subject to civil liability if it is a greater extent than if the rest of the sary (see Supplements), and can be “misleading, inaccurate or inconsis- prospectus were also in the same lan- combined with a summary and secu- tent when read together with the other guage, remains to be seen. rities note for further offerings or ap- parts of the prospectus” (Article plications for admission to trading 5(2)(d), Directive). Whether market Issuers of securities using debt pro- within this period. The summary participants will take comfort from grammes can continue to produce a and securities note will, however, re- this limitation on liability in a context prospectus in the format that is cus- quire separate approval. where the summary is the sole docu- tomarily used in these markets at the

32 PLCGLOBAL COUNSEL • JUNE 2004 • www.practicallaw.com/aboutglobal

(C) Legal & Commercial Publishing Ltd 2004. This article first appeared in the June 2004 issue of PLC Global Counsel and is reproduced with the permission of the publisher. Please see www.practicallaw.com/aboutglobal for more details. SECURITIES REGULATION: PROSPECTUS DIRECTIVE moment instead of using the single is- corporated by reference is subject to pean regime under which the relevant sue format outlined above (see box, the same restrictions on the use of lan- regulator of a single designated mem- Issuers of securities using debt pro- guages as the prospectus into which it ber state (the home member state) grammes, available online at is being incorporated and must have (for instance, the Financial Markets www.practicallaw.com/A40700). been previously or simultaneously Authority (Autorité des Marchés Fi- published, and approved or filed with nanciers) in France) is responsible for Supplements the home member state (see below Ap- approving prospectuses for equity A supplement to the prospectus must proval). In practice, the use of incor- and low denomination debt securi- be filed to reflect “every significant poration by reference as a disclosure ties, and ensuring compliance with new factor, material mistake or inac- technique will be restricted by these the Directive generally (Article 13 and curacy capable of affecting the assess- conditions. Article 2(m), Directive). In contrast, ment of the securities and which arises issuers of high denomination debt can or is noted between the time when the Content select a regulator on a case-by-case prospectus is approved and the final basis for each particular offering or closing of the offer to the public or the The detailed disclosure requirements application for admission to trading time when trading on a regulated mar- of a prospectus, broadly based on the (Article 13 and Article 2(m), Direc- ket begins” (Article 16(1), Directive). International Organization of Securi- tive). The appropriate regulator (see below ties Commissions disclosure standards Approval) must approve the supple- (see box, Related information) are in- For EU issuers of equity and low de- ment within seven working days. In- cluded in the Prospectus Regulation. nomination debt securities, the sin- vestors who have already agreed to gle home member state regulator purchase or subscribe for the securities The Prospectus Regulation adopts a will be the competent authority of will have the right under the Directive “building-block” approach towards the member state in which the issuer to withdraw their acceptances within the content of the prospectus (Arti- has its registered office. For non-EU a prescribed period. cle 3, Prospectus Regulation). Ac- issuers, this regulator will be the cordingly, the level of disclosure will competent authority of the member The requirement for separate regula- be determined by the identity of the state in which the issuer, the offeror tory approval of a supplement may issuer and the type of security in- or (in the case of an admission to well reduce the timing advantages of volved. The specific disclosure items trading) the person seeking admis- the shelf-registration system intro- to be included in a prospectus will be sion first makes an offer of such se- duced by the Directive. The practica- determined based on a combination curities to the public or first applies bility and efficiency of the new system of: for the admission of such securities will depend in large part on the will- to trading after 31 December 2003 ingness of competent authorities to ac- • Schedules. These will contain the (see box, A European home for non- commodate frequent issuers by reduc- minimum disclosure requirements for EU issuers). The Directive also ing approval periods for supplements the registration document and the se- makes provision for non-EU issuers to a minimum. curities note for different categories of already admitted to trading on an securities and issuers. EU regulated market to make a one- Separate regulatory approval of a sup- off election of their home member plement is also required in the context • Building blocks. These will contain state before 31 December 2005 by of debt programmes (see box, Issuers specific additional disclosure require- notifying the relevant national com- of securities using debt programmes, ments for pro forma information, petent authority. available online at www.practi- guarantees and asset-backed securi- callaw.com/A40700). As a result, it ties. The Directive provides that the com- will no longer be possible to include petent authority of the home mem- such information in the pricing sup- A table, attached as an annex to the ber state must approve a prospectus, plement, as is current practice in cer- Prospectus Regulation, will set out or a securities note in the case of an tain jurisdictions in the EU. Instead, how the schedules and building blocks issue relying on a previously ap- such information will need to be in- should be combined. proved registration document, cluded in a supplement, which will within ten working days of the sub- trigger an approval requirement. Be- (For details of the disclosure require- mission of the draft prospectus, or cause of this, issuers may find that in ments relevant to share, retail and 20 working days in the case of an ini- practice they cannot make offerings wholesale debt prospectuses see box, tial public offering. Where supple- under a debt programme for a certain Prospectus disclosure requirements: a mentary or omitted information is period of time after the occurrence of a comparison. For disclosure require- requested, these time periods will material event. ments in relation to financial informa- deem to commence when this infor- tion, see box, The impact of IFRSs.) mation is provided. The Directive Incorporation by reference does not attempt to harmonise the Information can be incorporated into Approval substantive review process across the prospectus by reference (Article the EU, and it is likely that depth and 11, Directive). The document being in- The Directive introduces a pan-Euro- methodology of review will vary

PLCGLOBAL COUNSEL • JUNE 2004 • www.practicallaw.com/aboutglobal 33

Glossary

Equity securities. These include: troduces a pan-European regime under Minimum harmonisation directive. A which issuers of equity and low denom- minimum harmonisation directive only • Shares or transferable securities ination debt securities have the relevant prescribes a floor of regulation, leaving equivalent to shares. regulator of a single designated member member states free to build on the pro- state responsible for approving the visions contained in the directive with • Convertible bonds (that is, debt se- prospectus, and ensuring compliance “super-equivalent” requirements in na- curities convertible into equity securi- with the Directive generally. tional implementing legislation. ties of the same issuer). IFRSs. International Financial Report- Prospectus Directive. Directive • Exchangeable bonds (that is, debt se- ing Standards (formerly known as In- 2003/71/EC on the prospectus to be pub- curities exchangeable into equity secu- ternational Accounting Standards). lished when securities are offered to the rities of another issuer), but only where public or admitted to trading, amending the issuer of the overlying debt security Market Abuse Directive. Directive the Consolidated Admissions and Re- and the issuer of the underlying equity 2003/6/EC on insider dealing and mar- porting Directive (2001/34/EC). security are members of the same ket manipulation must be implemented group. by member states by 12 October 2004. Retail debt. Debt securities with a mini- Its primary purpose is to enhance in- mum denomination of less than Financial Services Action Plan (FSAP). vestor confidence in the market by fur- EUR50,000 (or its equivalent in a cur- The FSAP aims to integrate and create a ther harmonising the rules on insider rency other than euro). single market in financial services for trading and market manipulation in re- the EU by 2005/2006. The Prospectus spect of securities admitted to trading Transparency Directive. Establishes Directive, Transparency Directive and on an EU regulated market and requir- ongoing reporting requirements, in- Market Abuse Directive form a major ing issuers whose securities are admit- cluding the obligation to publish peri- component of the FSAP. ted to trading on such regulated mar- odic financial reports, for issuers with kets to disclose any non-public securities admitted to trading on an EU High denomination debt. Non-equity price-sensitive information as soon as regulated market. The text has been securities with a minimum denomina- possible, subject to certain limited ex- adopted by the European Parliament tion of at least EUR1,000 (or its equiva- emptions. and approved in principle by the EU lent in a currency other than euro). Council of Ministers, which is expected Maximum harmonisation directive. A to adopt the text, later this year, com- Low denomination debt. Non-equity maximum harmonisation directive pleting the legislative process. securities with a minimum denomina- achieves uniform regulation throughout tion of less than EUR1,000 (or its equiv- the EU by prohibiting member states Wholesale debt. Debt securities with a alent in a currency other than euro). from setting more onerous provisions, minimum denomination of at least in the implementing national legisla- EUR50,000 (or its equivalent in a cur- Home member state. The Directive in- tion, than those set out in the directive. rency other than euro).

from one competent authority to an- Other matters • A language accepted by the compe- other. tent authority of the home member Language state; and Once a prospectus has been approved When an issuer is to make a public by the competent authority of the offer or seek admission to trading in • A language that is accepted by the home member state, it can be used to one or more host member states, but competent authority of the host mem- offer securities to the public or for an not its home member state, the is- ber state or states or a “language that admission to trading in any other suer will have an option to produce is customary in the sphere of interna- member state (the host member state) the prospectus in a “language that is tional finance”. without requiring any further ap- customary in the sphere of interna- proval. The only requirement that can tional finance”, including, at least, Publication and advertising be imposed by a host member state is English (Article 19, Directive). Publication of the prospectus can be to translate the summary section into When an issuer is to make a public achieved using a number of prescribed the relevant local language (see above offer or seek admission to trading on methods, including by insertion in a Format). This is a very significant im- a regulated market in both its home newspaper, publication in electronic provement to the existing system of member state and a host member form (which may be required by some mutual recognition of prospectuses be- state or states, a prospectus must be home member states) and making it tween member states. prepared in: available for collection from prescribed

34 PLCGLOBAL COUNSEL • JUNE 2004 • www.practicallaw.com/aboutglobal

The impact of IFRSs

EU registered companies admitted to trading on a regulated interpreted to mean that any issuer (whether a seasoned or a market are required by the Regulation on the application of new public company) would have to consider, at the time of international accounting standards (Regulation any public offering or admission to trading on an EU regu- 1606/2002/EC) to publish consolidated financial statements lated market of its securities, whether the accounting stan- in accordance with International Financial Reporting Stan- dards and policies that will be applied to its next financial dards (IFRSs) for each financial year starting on or after 1 statements will be different to the standards that have been January 2005 (with comparative financial statements for the applied to its last two years of financial statements. prior year). Member states have the discretion to allow certain debt issuers and other issuers to delay the adoption of The issuer would then be required to restate in the prospectus IFRSs until the financial year starting on or after 1 January its historical financial statements to reflect the standards and 2007 (for more information on IFRSs, see International policies that will be applied to its next financial statements. financial reporting: regime change in the EU at www.practicallaw.com/A39825). If this broad interpretation is correct, the occurrence of financial statement restatements, with their associated liabil- Disclosure of financial information in a prospectus ity considerations, is likely to increase significantly in the Under the Prospectus Regulation (Regulation EU securities markets in the future. It seems, however, likely 809/2004/EC), issuers are required to disclose two or three that these provisions should (and were intended to) mean years of historical consolidated financial information, of that, for an issuer that becomes subject to IFRSs’ reporting which one, two or three years will have to be prepared or re- requirements for the first time as a result of an admission to stated in accordance with IFRSs or an equivalent standard trading, only the last one or two years (depending on the to IFRSs (depending on the type of security and the ultimate type of security) of historical financial information con- answers to the interpretive problems referred to below). tained in the prospectus would need to be restated in accordance with IFRSs or equivalent generally accepted account- The Prospectus Regulation contains grandfathering provi- ing principles (GAAP) from the previously used GAAP, and sions (Article 35, Prospectus Regulation) designed to ensure that the first year’s historical financial information can be that EU issuers do not have to provide consolidated finan- prepared under non-IFRSs, non-equivalent GAAP. cial information prepared in accordance with IFRSs in a prospectus for any period before the year for which compar- Ongoing financial reporting ative IFRSs’ financial information is required under the Subject to certain exemptions and limited grandfathering rules for first-time adoption of IFRSs. (These provisions, provisions, the current draft of the Transparency Directive however, suffer from a lack of clarity; in particular, whether will require annual and half-yearly financial statements of issuers that have a listing on 1 July 2005 may benefit from EU and non-EU issuers with securities admitted to trading such grandfathering provisions is open to doubt.) In addi- on an EU regulated market to be prepared in accordance tion, certain non-EU issuers will be given a grace period with IFRSs, or an equivalent standard. from the obligation to restate historical financial information contained in the prospectus to IFRSs for any prospectus Equivalence filed before 1 January 2007. The European Commission will determine the issue of equivalence of accounting standards for the purposes of the Overlying the obligation to include two or three years of his- Transparency Directive and the Prospectus Directive torical financial information is the requirement that the latest (2003/71/EC) and it is understood that the determination two or latest year(s) of financial statements are “presented should occur before the middle of 2005. It is expected that and prepared in a form consistent with that which will be the Committee of European Securities Regulators (CESR) adopted in the issuer’s next published annual financial state- (see box, The Lamfalussy procedure and CESR’s role) will ments having regard to accounting standards and policies be given a 12-month mandate to provide the Commission and legislation applicable to such financial statements” (con- with advice on this issue and will conduct a consultation ac- tained in several of the disclosure schedules attached as an- cordingly. The accounting standards to be considered in the nexes to the Prospectus Regulation). This language may be first round will include US, Canadian and Japanese GAAP.

locations (Article 14, Directive). The The Directive contains very basic prin- Disclosure Prospectus Regulation stipulates that ciples in connection with advertising; Although the majority of ongoing re- where a prospectus is published on a most importantly any advertisement porting obligations for issuers admit- website, measures must be taken to must not be inaccurate or misleading ted to trading in an EU regulated mar- avoid targeting residents in countries and must be consistent with informa- ket will be contained in the where the offer does not take place (Ar- tion contained in the prospectus (Arti- Transparency Directive and Market ticle 29(2), Prospectus Regulation). cle 15(3), Directive). Abuse Directive (2003/6/EC), the Di-

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Related information

This PLCGlobal Counsel article can be found on PLCGlobal Counsel Web at www.practicallaw.com/A40700. The following information can also be found on www.practicallaw.com:

Know-how topics Securities markets and regulation www.practicallaw.com/T889 Practice notes Harmonisation of financial services: the Financial Services Action Plan www.practicallaw.com/A20719 Articles International financial reporting: regime change in the EU www.practicallaw.com/A39825 Prospectus Directive: offering a better regime? www.practicallaw.com/A32779 The Prospectus Directive www.practicallaw.com/A29185 Prospectus liability in Europe and the US: understanding the issues www.practicallaw.com/A32108 Weblinks International disclosure standards for cross-border offerings and initial listings by foreign issuers, International Organization of Securities Commissions www.iosco.org/library/pubdocs/pdf/IOSCOPD81.pdf European Commission (Prospectus Directive webpage) http://europa.eu.int/comm/internal_market/en/finances/mobil/prospectus_en.htm

rective will require issuers to provide ments in many European jurisdic- the financial statement require- an annual disclosure document to the tions will be improved by being ments, and the consequential cost competent authority in their home raised to a pan-European level that and liability implications for issuers, member state. This document must is similar in many respects to the ex- could drive issuers away from the contain or refer to all information that isting disclosure regimes of the European capital markets. the issuer has published or made avail- “gold-standard” European capital able to the public over the preceding market centres. • The concept of public offer could 12 months in member states and in be applied in a way that threatened non-EU countries in compliance with However, this potential could very secondary market trading. its obligations under EC or home easily be undone. For example: country securities laws. • Potential pan-European liability • The concept of home member issues could drive issuers away from Practical implications state could be applied in a way that the European capital markets. an issuer will be regulated by a mem- The practical implications of the Di- ber state that it has no desire to be • Inconsistent application of often rective will not be clear until the provi- governed by. unclear rules throughout Europe sions have been implemented in na- could result in a mass of confusion tional legislation and interpreted and • A narrow interpretation of those and a fragmented rather than unified applied by home member states. How- generally accepted accounting prin- European capital market. ever, there is an opportunity for the ciples that are equivalent to IFRSs Directive to be implemented and ap- could drive non-EU issuers away • A poorly implemented Trans- plied in a way that would represent a from the European capital markets. parency Directive could jeopardise significant advance in many respects the goal of creating strong and effi- to the existing regime. In particular: • The “wrong” interpretation of cient European capital markets.

• Potential access by issuers to regulation by a single home member state could make for a more efficient and Pierre-Marie Boury is a partner, cheaper European capital market. and Raj Panasar is an associate, at Cleary Gottlieb Steen & Hamilton • Pan-European offerings to the pub- in London. They would like to lic are likely to be much easier to un- thank Mohamed Hassam for his dertake. assistance in the preparation of this article. • The quality of disclosure docu-

36 PLCGLOBAL COUNSEL • JUNE 2004 • www.practicallaw.com/aboutglobal