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 securi- ties” (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 (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. FEATURE 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 con- sideration per investor or specified de- nomination per unit of EUR50,000. • Offers of securities with a total con- sideration of less than EUR100,000 in any 12-month period. Note that the above exemptions are not available in respect of an applica- tion for admission to trading on an EU regulated market. Member states will not be able to al- low 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 lan- guage 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 re- sale of listed securities would require a further prospectus or its own exemp- tion. This interpretation would place either: • An onerous obligation on investors to file and publish a prospectus; or Illustration: Liz Couldwell PLCGLOBAL COUNSEL • JUNE 2004 • www.practicallaw.com/aboutglobal 29 (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 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 cer- tain 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 con- tained 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 in- tended 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, in- clude 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.