the new eu propsectus directive (pdf) - slaughter …€¦ · 3.2 exemptions 15 iv. the “eu...

June 2004

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The New EU Prospectus Directive

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table of contents

I. INTRODUCTION AND SUMMARY OF KEY POINTS 1

1.1 Introduction 1

1.2 Key Points 1

II. LEGISLATIVE CONTEXT 7

2.1 Background 7

2.2 Legislative Approach 8

2.3 Other Related EU Legislation 9

2.4 Implementation of the Prospectus Directive 11

III. SCOPE 12

3.1 Obligation to Publish a Prospectus 12

3.2 Exemptions 15

IV. THE “EU PASSPORT” 22

4.1 Authorisation and Competent Authority 22

4.2 The Determination of the Home Member State 23

4.3 Passporting 27

V. FORMAT AND CONTENTS 28

5.1 Format of the Prospectus 28

5.2 The Summary 29

5.3 Language of the Prospectus 30

5.4 Contents of the Prospectus 30

5.5 Risk Factors 34

5.6 Financial Information 34

5.7 Base prospectus 37

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5.8 Subsequent disclosure of the fi nal offer price 38 and the amount of securities

5.9 Supplement 39

5.10 Incorporation by reference 39

5.11 Publication 40

VI. OTHER PROVISIONS 42

6.1 Advertisements 42

6.2 Annual information 43

6.3 Liability 44

1 slaugh ter and may

i. introduction and summary of key points

1.1 Introduction

1.1.1 On 31 December 2003, Directive 2003/71/EC on the prospectus to be published when securities are offered to the public or admitted to trading (the “Prospectus Directive” or the “Directive”)1 entered into force. The Directive must be implemented by Member States by 1 July 2005.

1.1.2 The Directive is supplemented by a Commission Regulation (the “Implementation Regulation”) which contains detailed implementation provisions, in particular as to the contents of prospectuses. The Implementation Regulation was adopted on 29 April 2004 and will have effect from 1 July 2005.

1.1.3 This document is intended to provide an overview of the main provisions of the Prospectus Directive and Implementation Regulation and describe their practical implications. A number of uncertainties about the impact of the Directive remain, some of which may become clearer as the Commission and the Committee of European Securities Regulators (“CESR”) give further guidance and the implementing legislation at Member State level takes shape.

1.1.4 The main objective of the Prospective Directive is to introduce an effective single passport regime for issuers of securities in the EU. By harmonising the requirements for drawing up, approval and distribution of a prospectus, the Directive seeks to enable issuers to use a single prospectus after approval by the competent authority of one Member State (the “Home Member State”) for public offers and admission to trading on regulated markets throughout the EU. The approval of the prospectus by the competent authority of the Home Member State must be recognised by all other Member States (“Host Member States”), which are not entitled to require further authorisation procedures. In this way it is hoped to facilitate the raising of capital by issuers in a single European capital market, as well as to implement an equal high level of investor protection throughout the EU. The Prospectus Directive replaces Directive 89/298/EEC (the “Prospectus Directive 1989”) and the provisions on listing particulars to be published for the admission of securities to offi cial stock exchange listing in Directive 2001/34/EC of 28 May 2001 (the “Admission Directive”).

1.2 Key Points

1.2.1 The following are the main changes to be introduced by the Directive and the Implementation Regulation:

Single passport for issuers

1.2.2 The centrepiece of the Directive is the single passport for issuers. Subject to translation requirements, which may in some cases be limited to a requirement to provide a translation of the prospectus summary, a prospectus approved by the Home Member

1 OJ 2003 L 345, p. 64 (also available at http://europa.eu.int/eur-lex/pri/en/oj/dat/2003/l_345/l_34520031231en00640089.pdf).


State is valid for a public offer or admission to trading in any number of other Member States; no Host Member State may require approval or administrative procedures with respect to a prospectus already approved by the Home Member State.2

1.2.3 In theory, therefore, the Directive will facilitate offers or applications for admission to trading which are made at the same time in several EU Member States, as prospectuses will in future only require authorisation by a single competent authority. In particular, public offers made in more than one Member State will be simpler and should be less expensive under the new regime. The extent to which these advantages are realised in practice, however, will depend on the implementation of the Directive by Member States.

Limited freedom to choose Home Member State

1.2.4 The issuer’s freedom to choose a Member State for authorisation of a prospectus has been considerably limited. In future, authorisation of the prospectus will not necessarily be granted by the competent authority of the state where an offer or application for listing is made. In the case of an EU-incorporated issuer of securities (other than non-equity securities with a denomination of more than €1,000, or its nearly equivalent value in another currency, and convertible or exchangeable securities where the underlying securities are not issued by the same issuer or its group) the Home Member State is always the state in which the issuer has its registered offi ce. This means that an EU incorporated issuer of shares or low denomination (less than €1,000) debt securities must always apply for authorisation of its prospectus in the state of its registered offi ce, even though the securities may be offered or listed solely in another Member State. For issuers of equity securities or low denomination debt securities incorporated outside the EU, the Home Member State is generally the Member State where the issuer has offered securities to the public for the fi rst time after entry into force of the Directive or where the fi rst application for admission to trading has been made; there are, however, considerable uncertainties resulting from the relevant Directive provisions.

1.2.5 These rules on the determination of the Home Member State remain controversial. The requirement that the Home Member State for EU-incorporated issuers of equity securities and debt securities with a denomination of less than €1,000 will always be the state where the issuer has its registered offi ce is designed to avoid competition between competent authorities and may therefore disadvantage Member States which have hitherto attracted issuers from other Member States because of their swift and effi cient authorisation procedures.

1.2.6 Non-EU issuers have greater freedom of choice, but run the risk of inadvertently fi xing their Home Member State under ambiguous rules which have been applicable since the Directive’s entry into force (31 December 2003). The provision relating to non-EU issuers which already have securities listed on a regulated market in the EU is particularly unclear. We recommend

2 Article 17.


that non-EU issuers seek specifi c legal advice about the determination of their Home Member State and, until that determination is made, take particular care when conducting offers or placements of securities (including private placements and employee share scheme offers) or when applying for the admission to trading in the EU of further securities.

Single regime for offers and admission to trading

1.2.7 The Prospectus Directive introduces a single prospectus regime for offers of securities to the public and admissions of securities to trading on a regulated market. The current distinction between prospectuses and listing particulars will disappear.

Resales of listed securities

1.2.8 The wording of the Directive suggests that a prospectus is required not only when securities are offered to the public for the fi rst time (as under the Prospectus Directive 1989) but also in the case of a resale of securities which were previously offered to the public or which are already admitted to trading on a regulated market. However, in our view resales of securities that are already admitted to trading on a regulated market should not trigger a prospectus requirement.

1.2.9 Pending clarifi cation of this issue in the implementing national legislation, persons acquiring a signifi cant shareholding from an issuer who wish to keep open the option of selling the shares in a public offering may be well advised to seek (to the extent national law permits) an agreement with the issuer, similar to a US-style “registration rights agreement”, requiring the issuer to co-operate in the production of a prospectus if requested.

Secondary markets

1.2.10 The requirement to publish a prospectus for admission to trading now extends to the admission of securities to trading on secondary markets, if they are regulated markets, and is thus wider than the obligation under the Admission Directive, which only related to offi cial listings.

1.2.11 Unlisted public offers and admission to secondary markets may thus become more burdensome. This may particularly affect smaller companies using secondary markets as well as public offers to raise capital outside regulated markets. Although the Directive requires consideration to be given to the situation of SMEs, the Implementation Regulation does not contain any relaxation of disclosure requirements for SMEs.

Multiple listings

1.2.12 Issuers who have securities listed on a European regulated market and who have published listing particulars under the Admission Directive, the earlier Directive 80/390/EEC on listing particulars or a prospectus under the new Prospectus Directive may obtain the admission of those securities to trading on other regulated markets in the EU without being obliged to publish a new prospectus.


Takeovers and Mergers

1.2.13 The Prospectus Directive provides that an offer to the public is exempt from a prospectus requirement if the securities are offered in connection with a takeover or a merger. However, unlike the position under the Prospectus Directive 1989 this exemption is only available if a document is published which is regarded by the competent authority as being equivalent to that of a prospectus. The Directive will, therefore, not only govern prospectuses in a narrow sense but will also have repercussions for take-over and merger documentation.

Language

1.2.14 Where offers are made in several countries, the prospectus may be drawn up in a language “customary in the sphere of international fi nance”, which is understood to mean English. However, if the offer is also made in the Home Member State, the competent authority of the Home Member State may prescribe publication in the local language, except where securities of a denomination of at least €50,000 are offered. The competent authority of a Host Member State may require a translation of the summary of the prospectus into the offi cial language of the Host Member State.

1.2.15 The rules on the language of prospectuses will, to some extent, simplify cross-border offers. Prospectuses drawn up in English will have to be accepted in the Host Member State, subject only to translation of the summary where the competent authority requires. However, the Home Member State may still require the prospectus to be drawn up in its offi cial language if the offer is made there. Member States whose offi cial language is English or who permit prospectuses to be drawn up in English may be more attractive Home Member States for issuers, where they have a choice.

Form and Content of Prospectus

1.2.16 While the Prospectus Directive 1989 and the Admission Directive only provided for minimum requirements as to content and format of the prospectus, the Prospectus Directive provides for a maximum harmonisation regime which sets out comprehensive requirements.

1.2.17 In addition to the traditional form of a prospectus in a single document, the Directive allows issuers to split the prospectus into three separate documents (a registration document, a securities note and a summary note). Issuers who prepare a registration document in advance of any specifi c issue of securities may fi nd it easier and cheaper to make issues subsequently, since only a securities note and summary note will be required as long as the registration document is up to date. However, this option is likely to be of interest principally to frequent or large issuers, including in particular those who already prepare an annual registration statement to fi le with the SEC on Form 20-F or 10-K.


1.2.18 The Directive and the Implementation Regulation prescribe in detail the requirements for format and content of prospectuses, which will be based on IOSCO3 disclosure standards. The Directive will therefore lead to further international convergence in the format and content of prospectuses and it can be expected that in due course a standard international style of prospectus will be adopted throughout Europe. This style will be very similar to US prospectuses.

Annual Information List

1.2.19 The Directive provides that issuers whose securities are admitted to trading on a regulated market must annually provide a document that lists all information they have published during the preceding 12 months under securities laws or regulations in any jurisdiction, including jurisdictions outside the EU.

Accounting Standards

1.2.20 As a general principle, the fi nancial information about the issuer to be included in a prospectus must be drawn up under IAS/IFRS. EU-incorporated issuers may publish their fi nancial information under local GAAP to the extent that they are entitled to use local GAAP under the IAS Regulation4. Non-EU incorporated issuers may present fi nancial information in accordance with their national accounting standards if these are recognised as equivalent to IAS/IFRS; otherwise they will have to restate their fi nancial information in accordance with IAS/IFRS. Equivalence will be judged according to a mechanism to be established by the Commission. It appears that US GAAP will be accepted as equivalent, but there is as yet uncertainty about other accounting standards.

Transition to the New Regime

1.2.21 The Directive does not provide for transitional arrangements during the implementation period or for co-ordination of its transposition into the laws of the Member States. Problems for cross-border offers and applications for listing during the implementation period may arise where a Home Member State has already implemented the Directive but the Host Member State in which the offer is made has not yet implemented the Directive. This might result in the issuer being obliged to prepare two prospectuses and to apply for authorisation twice. This problem will be particularly acute if some Member States miss the deadline of 1 July 2005 for implementation of the Directive.

Issuance Programmes

1.2.22 There are also unanswered questions about the transition for issuance programmes from the present regime to the new regime. There is no provision for existing programme documentation to be valid for a period after the Directive is implemented; as a result,

3 International Organisation of Securities Commissions.

4 EU Regulation 1606/2002.


some issuers may face the prospect of having to produce two offering circulars for their issuance programmes during 2005.5 In addition, multi-issuer programmes face uncertainties where the issuers have different Home Member States under the Directive. The Implementation Regulation states, in its recitals6, that in such cases “the respective competent authorities should act in co-operation and, where appropriate, transfer the approval of the prospectus ... so that approval by only one competent authority is suffi cient for the entire document”. However, it remains to be seen how this works in practice.

5 In the April 2004 edition of “List!”, the UKLA stated that “we cannot approve a document for compliance with [the Prospectus Directive]

requirements before 1 July 2005 ... we will put procedures in place so that issuers can submit their PD compliant programme documents to us for vetting some months before 1 July 2005”.

6 Recital (27) to the Implementation Regulation.


ii. legislative context

2.1 Background

2.1.1 Until now the publication of prospectuses in the European Union (“EU”) has been governed by two directives: Directive 2001/34/EC of 28 May 2001 on the admission of securities to offi cial stock exchange listing and on information to be published on those securities (the “Admission Directive”), into which the earlier Directive 80/390/EEC on listing particulars was incorporated; and Directive 89/298/EEC coordinating the requirements for the drawing-up, scrutiny and distribution of the prospectus to be published when transferable securities are offered to the public (the “Prospectus Directive 1989”). Those directives required the publication of a prospectus for an offer of securities to the public or an application for admission to listing and set out minimum requirements to be prescribed with respect to prospectuses and listing particulars under the national laws of EU Member States.

2.1.2 Notwithstanding this harmonisation, the directives entitled Member States to allow various exceptions. Moreover, the directives’ provisions on mutual recognition of prospectuses among Member States have proved to be insuffi cient to facilitate the use of a single prospectus for offers or admission to trading in several Member States. The competent authority of a Host Member State may, for example, require that a prospectus authorised in another Member State includes certain additional information related to the domestic market of the Host Member State. In addition, in most cases a translation of the prospectus into the language of the Host Member State is required. Moreover, the Prospectus Directive 1989 does not contain a defi nition of the term “offer to the public” and, therefore, essentially leaves it to Member States to determine its scope of application. Finally, only the Admission Directive prescribed rules for the authorisation procedure. Therefore, regulations and practices continue to vary widely in Member States and in practice it remains diffi cult or impossible to raise capital in several Member States on the basis of a single prospectus.

2.1.3 In its Risk Capital Action Plan (RCAP) of June 1998 the European Commission envisaged for the fi rst time the amendment of the existing directives on prospectuses and listing particulars in order to facilitate the raising by companies of cross-border capital. In May 1999 the Commission published the Financial Services Action Plan (FSAP) which included a catalogue of measures to realise a single European market in fi nancial services. In order to achieve this objective the FSAP listed forty-two measures to be implemented at short notice. One of the proposed measures with highest priority was to upgrade the existing directives on prospectuses in order to overcome obstacles to the effective mutual recognition of prospectuses and facilitate the raising of capital on an EU-wide basis.

2.1.4 The Lisbon European Council in March 2000 reaffi rmed both RCAP and FSAP, and stipulated that all measures of the RCAP should be implemented by 31 December 2003 and the measures of the FSAP by 31 December 2005. The EU Economic and Finance Council of Ministers on 17 July 2000 established a Committee of Wise Men on the Regulation of European Securities Markets to work out a road map for the implementation of these measures. In its fi nal report of 15 February 2001 (“Lamfalussy


Report” named after the chairman of the Committee) the Committee proposed, as a matter of priority, the creation of a single prospectus for issuers, with a mandatory shelf registration system and the modernisation of listing requirements. This proposal mirrored ideas presented in the May 2000 consultation paper of the Forum of European Securities Committees which had suggested the revision of the existing prospectus directives and the creation of a “European Passport for Issuers”, i.e. a prospectus which is recognised throughout the EU.

2.1.5 On 30 May 2001 the Commission published a proposal for a new Prospectus Directive which met with considerable criticism, in particular from market participants, as, despite an express recommendation in the Lamfalussy Report, the Commission had failed to submit its proposals to public consultation prior to initiating legislative procedures. On 14 March 2002 the Parliament adopted its opinion, which included 62 amendments to the Commission’s proposal. The Commission then withdrew the initial proposal and presented an amended proposal in August 2002. The Council reached agreement on this proposal on 5 November 2002, making a number of amendments, including on the choice of the Home Member State and the right of national competent authorities to delegate specifi c tasks. The European Parliament adopted the new text of the Directive on its second reading with 21 amendments. Commission and Council approval of those amendments followed and, with publication of the Directive in the EU Offi cial Journal on 31 December 2003, the Directive entered into force.

2.2 Legislative Approach

2.2.1 The Prospectus Directive has followed a new legislative procedure (“Lamfalussy procedure”) which was proposed in the Lamfalussy Report and endorsed by the Stockholm European Council in March 2001. This new approach, conceived for EU legislation affecting securities markets, is intended to achieve an effective and fl exible procedure to introduce and implement new legislation in order to meet the needs of an innovative fi nancial market and (politically most important) to ensure that the tight timetables of the FSAP can be met. The Lamfalussy procedure distinguishes four levels of decision-making:

> On Level 1 community legislation is to be adopted by the Council and the European Parliament, upon a proposal by the European Commission, under the Co-decision Procedure, laying down framework principles for the measure to be implemented and defi ning implementation powers of the Commission.

> On Level 2 the Commission must lay down the technical details for the principles agreed on Level 1 under the so-called Comitology Procedure. This means that the legislative tasks are mainly delegated to specialised committees. In accordance with the Lamfalussy procedure, the Commission has mandated the Committee of European Securities Regulators (CESR) to provide technical advice on possible implementation measures based on consultation with market participants. On the basis of the advice of CESR the Commission must propose an implementation


measure to the European Securities Committee (ESC), which is composed of Member State nominees and chaired by the European Commissioner responsible for securities issues. The ESC decides upon the proposal by qualifi ed majority which, in the case of a favourable vote, is formally adopted by the European Commission. The whole process is supervised by the European Parliament which has the right to adopt resolutions with regard to proposed implementation measures.

> On Level 3 CESR works on non-binding joint interpretation recommendations, guidelines and common standards to facilitate day-to-day implementation of EC law.

> Level 4 comprises the Commission’s supervision of the Member States’ compliance with EC law. This includes legal action which the Commission may take against a Member State which is in breach of EC law.

2.2.2 With the entry into force of the Directive, the legislation on Level 1 has been completed. The Implementation Regulation contains much of the Level 2 implementation, although further Level 2 measures will be required, including as to documents published in connection with a takeover or merger and whether they fulfi l the requirement of equivalence (Article 4(3)) and the circumstances in which information may be omitted from prospectuses (Article 8(4)). It is expected that CESR will produce Level 3 guidance in a number of areas: it has suggested7 that this guidance should be extensive, and include selected fi nancial information; operating and fi nancial review; trend information; administrative, management and supervisory bodies and senior management; related party transactions; historical fi nancial information; and clarifi cation of accounting terms and on the information required in particular cases.

2.3 Other Related EU Legislation

2.3.1 The Prospectus Directive is part of a broader legislative initiative proposed in the FSAP and in other measures to reform the legal framework of capital markets in Europe. Other legislative measures in this context which are closely linked to the Prospectus Directive are the Market Abuse Directive, the Transparency Obligations Directive, the IAS Regulation and the Takeover Directive.

The Market Abuse Directive

2.3.2 The Market Abuse Directive8 entered into force on 12 April 2003. It must be implemented by the Member States by 12 October 2004. The Market Abuse Directive sets out rules to combat insider dealing and market manipulation. It requires Member States to prohibit use of inside information for trading of fi nancial instruments, undue disclosure of inside information and activities which constitute market manipulation.

7 CESR press release CESR/04-060 of 4 March 2004, available at www.cesr-eu.org.

8 Directive 2003/6/EC of the European Parliament and of the Council of 28 January 2003 on insider dealing and market manipulation (market

abuse), OJ L96, p. 16 (also available at http://europa.eu.int/eur-lex/pri/en/oj/dat/2003/l_096/l_09620030412en00160025.pdf).


The directive also introduces a number of obligations for issuers related to disclosure or confi dentiality of inside information, such as a duty to inform the public as soon as possible of inside information, an obligation to draw up a list of persons acting on behalf of an issuer who have access to inside information and a duty to notify directors’ dealings.

The Transparency Obligations Directive

2.3.3 In March 2003 the Commission presented a proposal for a Transparency Obligations Directive9 which is intended to be implemented by Member States by mid-2005. The Transparency Obligations Directive, which partly replaces and amends the Admission Directive, sets out ongoing disclosure obligations for issuers of securities which are admitted to trading on a regulated market. In particular, it imposes yearly and half-yearly reporting and disclosure of major shareholdings and rules for the dissemination of information among security holders. It is expected that the Transparency Obligations Directive will be adopted shortly following the EU Parliament’s approval of various compromise proposals.

The IAS Regulation

2.3.4 The IAS Regulation10 entered into force on 22 July 2002. It provides that for each fi nancial year starting on or after 1 January 2005 companies whose securities are admitted to trading on a regulated market must prepare their consolidated fi nancial accounts in conformity with international accounting standards (“IAS/IFRS”). Member States may extend this obligation to companies whose securities are not publicly traded. For companies which (i) have only issued debt securities or (ii) have securities admitted to public trading in a non-member State and which, for this purpose, have been using internationally accepted standards11 Member States can provide that IAS/IFRS should only apply as of 1 January 2007.

The Takeover Directive

2.3.5 The Takeover Directive12 entered into force on 20 May 2004. It must be implemented by Member States by 20 May 2006. The Takeover Directive sets out some general principles as minimum requirements of takeover regulation. Not all of the principles have been

9 Proposal for a Directive of the European Parliament and of the Council on the harmonisation of transparency requirements with regard

to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC (an unoffi cial consolidated version which includes the amendments proposed by the European Parliament is available at http://europa.eu.int/comm/internal_market/securities/docs/transparency/directive/2004-05-unoffi cial_en.pdf).

10 Regulation (EC) 1606/2002 on the application of international accounting standards, OJ L 243, p.1 (also available at http://europa.eu.int/

eur-lex/pri/en/oj/dat/2002/l_243/l_24320020911en00010004.pdf).11

The term “internationally accepted standards” has not been defi ned. However, the Commission has stated that this term includes US GAAP.

12 Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on takeover bids, OJ 2004 L 142, p. 12 (also

available at http://europa.eu.int/eur-lex/pri/en/oj/dat/2004/l_142/l_14220040430en00120023.pdf).


fully translated into concrete rules and, though most of the directive is mandatory, Member States are allowed to opt out of the provisions which prohibit frustrating action. As a minimum the directive provides that a person who acquires a stake in a target company must make a mandatory offer to all the shareholders at an “equitable price” (i.e. the highest price paid by the bidder during a period fi xed by the competent authority). However, the level constituting control will be defi ned by the Member State in which the target company has its registered offi ce. The directive provides that bidders must prepare an offer document containing certain specifi ed information. The offer document must be recognised in all Member States, subject to translation, after it has been approved by the relevant supervisory authority.

2.4 Implementation of the Prospectus Directive

2.4.1 Member States must transpose the Prospectus Directive into their national laws by 1 July 2005.

2.4.2 The Directive does not provide for the co-ordination of the transposition of the Directive into the national laws of Member States. However, signifi cant issues could arise if the Directive becomes law in the various Member States on different dates, because the Directive’s single authorisation system assumes that the Directive applies in all Member States simultaneously. In the absence of such co-ordination, an issuer might be obliged to prepare two prospectuses and to apply for approval of the prospectus twice. If, for example, an issuer incorporated in Germany applied for admission to trading of its low-denomination debt securities on a regulated market in the UK, and Germany had already implemented the Prospectus Directive while the UK had not, the issuer would be required to seek approval of the prospectus by the competent authority in Germany (as Germany is its Home Member State) under the legislation implementing the Directive there, and at the same time the issuer would have to seek approval of its listing document from the UKLA under existing Listing Rules. It is therefore expected that the Commission will endeavour to ensure that all Member States will transpose the Directive into their national laws with effect from 1 July 2005.13 It remains to be seen whether this simultaneous implementation is achieved; in a number of Member States, implementation of the Directive will require primary legislation, which may not be possible by 1 July 2005.

13 This is refl ected in Article 36 of the Implementation Regulation which provides that the Regulation should apply from 1 July 2005.


iii. scope

3.1 Obligation to Publish a Prospectus

3.1.1 Article 3 of the Directive provides that a prospectus must be published when:

> securities are offered to the public in the EU (Article 3(1)), or

> securities are admitted to trading on a regulated market in the EU (Article 3(3)).

3.1.2 The scope of these obligations is determined by the defi nitions of the terms “offer to the public”, “securities” and “regulated market” as well as the various exemptions from these obligations which are set out in Articles 1, 3(2) and 4.

Defi nition of “offer of securities to the public”

3.1.3 Article 2 (1) (d) defi nes “offer of securities to the public” as “a communication to persons in any form and by any means, presenting suffi cient information on the terms of the offer and the securities to be offered, so as to enable an investor to decide to purchase or subscribe to these securities.” This defi nition is a signifi cant change from the Prospectus Directive 1989, which left it to Member States to defi ne the term “offer to the public”. The defi nition should be generally suffi cient to distinguish between a public offer and the disclosure of general information or promotional materials. The defi nition does not, however, explain whether the use of the word “public” in the defi ned term has any signifi cance. As the defi nition only requires a communication to “persons”, it is arguable that any communication to more than one person which meets the requirements of the defi nition may be an “offer to the public”.

Defi nition of “regulated market”

3.1.4 The defi nition of “regulated market” refers to the defi nition in the Investment Services Directive 93/22/EEC14. Under Article 1(13) of the Investment Services Directive (“ISD”), a regulated market is one of the markets appearing on a list of regulated markets in the EU which is drawn up by the Member States and annually published by the Commission subject to certain regulatory qualifi cations (which in practice are less important as there is a strong presumption that those markets on the list of the Member States are regulated markets). Pursuant to this list, regulated markets in the UK are currently the Domestic Equity Market, European Equity Market, Gilt Edged and Sterling Bond Market, Alternative Investment Market15, International Retail Service, International Order Book, London International Financial Futures and Options Exchange, OM London, Virt-x, Coredeal MTS and Jiway.

14 OJ 2004 L 141, p. 27 (also available at: http://europa.eu.int/smartapi/cgi/sga_doc?smartapi!celexapi!prod!CELEXnumdoc&lg=EN&numdo

c=31993L0022&model=guichett).15

We understand that in the future (presumably before implementation of the Directive) AIM will cease to be a regulated market within the meaning of the ISD.


3.1.5 The scope of the Prospectus Directive includes, therefore, trading on a number of secondary markets. It is thus considerably broader than the provisions on listing particulars in the Admission Directive which only cover applications for “offi cial listing of securities”.

3.1.6 It should be noted that a new Investment Service Directive (Financial Instruments Market Directive (FIMD))16 entered into force on 30 April 2004. It will replace the old ISD by 30 April 2006. Thereafter, references to the old ISD will be automatically regarded as references to the FIMD.17 This could theoretically broaden the scope of the Prospectus Directive, as the FIMD no longer leaves it to the Member States to defi ne regulated markets by drawing up a list but provides for a defi nition which comprises every authorised market that meets certain regulatory requirements. However, markets may decide not to meet certain requirements of a regulated market if they do not wish to be subject to provisions (including the Prospectus Directive) which apply to regulated markets.

Defi nition of “securities”

3.1.7 The scope of the Directive is further determined by the defi nition of “securities”. The Directive refers to the defi nition in Article 1(4) of the ISD, which includes the following types of transferable securities if they are not money-market instruments with a maturity of less than 12 months:

> shares in companies and other securities equivalent to shares in companies;

> bonds and other forms of securitised debt which are negotiable on the capital market; and

> any other securities normally dealt in giving the right to acquire any such transferable securities by subscription or exchange or giving rise to a cash settlement, excluding instruments of payment.

3.1.8 In particular the last of these categories is very broad and aims to catch convertibles, warrants and covered warrants, including index warrants and depositary receipts.

Prospectus requirement for secondary offers?

3.1.9 The broad defi nition of “offer to the public” and the wording of Article 3(1) has led some commentators to conclude that under the new Prospectus Directive the obligation to publish a prospectus will also arise when securities are offered to the public which have

16 Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in fi nancial instruments amending

Council Directives 85/611/EEC and 93/6/EEC and Directive 2000/12/EC of the European Parliament and of the Council and repealing Council Directive 93/22/EEC, OJ 2004 L 145, p. 1 (also available at http://europa.eu.int/eur-lex/pri/en/oj/dat/2004/l_145/l_14520040430en00010044.pdf).

17 Article 69 of the FIMD.


previously been offered to the public or which have been already admitted to a regulated market. While Article 1(1) of the Prospectus Directive 1989 expressly limited the prospectus requirement to “securities which are offered to the public for the fi rst time provided that these securities are not listed on a stock exchange situated or operating in a Member State”, there is no such exclusion in Article 3(1) of the new Prospectus Directive. Although it can be argued that Article 3(1) does not apply to a public offer of securities for which a prospectus has already been published, because Article 3(1) expressly says that there shall be no offer of securities to the public “without prior publication of a prospectus”, Article 9(1) provides that a prospectus loses its validity for public offers 12 months after its publication.

3.1.10 This result would be a surprising one and we do not think that the Directive should be interpreted in this way. While the renewed publication of a prospectus for unlisted securities might be justifi ed to ensure investor protection where the initial public offer was made a long time earlier, so that the information in the original prospectus might be out of date, it is diffi cult to understand why a prospectus should be necessary in case of a public offer of securities which are already traded on a regulated market; investors should be suffi ciently protected by ongoing disclosure requirements. No such extension of the prospectus requirement was considered or discussed during the legislative procedure and Recital (3) to the Directive suggests that the Prospectus Directive was intended to consolidate the requirements of the Prospectus Directive 1989 and the Admission Directive rather than introduce new triggers for publication of a prospectus. Moreover, although Recital (16) and Article 3(2) expressly affi rm that any resale of securities which were already previously part of a public offer is to “be regarded as a separate offer” and requires publication of a prospectus if such offer falls within the defi nition of “offer to the public”, these provisions only relate to the situation where the initial offer of securities was exempted from the prospectus requirement in accordance with Article 3(2). It appears, therefore, that no general extension of the prospectus requirement to the resale of securities or the public offer of listed securities is intended.

3.1.11 If a prospectus were required for secondary offers, including an offer of securities already admitted to listing, this would represent a major change in English law; there is currently no requirement to publish a prospectus for a secondary public offering of listed securities (although fi nancial promotion rules would apply to any offering document). It is also not clear how such a requirement could work in practice: the wide defi nition of “public offer” in the Directive would make it diffi cult to draw a line that avoided catching ordinary secondary market trading activities; and no provision is made in the Directive for a selling shareholder to have access to all the necessary information to produce a prospectus.

3.1.12 However, we understand that the Commission has recently informally expressed the view that secondary offers would require the publication of a prospectus under the Directive. Pending clarifi cation of this issue in the implementing legislation of Member States, persons acquiring a signifi cant shareholding from an issuer who wish to keep open the option of selling the shares in a public offering may therefore be well advised (where national law permits) to enter into an agreement with the issuer, similar to a US-style “registration rights agreement”, requiring the issuer to co-operate in the production of a prospectus if required.


Prospectus requirement for admission to trading on secondary markets

3.1.13 The new Prospectus Directive extends the prospectus requirement to the admission of securities to trading on secondary regulated markets. While the Admission Directive only applies to the admission of securities to offi cial stock exchange listing, the new Prospectus Directive relates to admission to trading on all regulated markets, which is signifi cantly broader. Admission to trading on secondary markets will be subject to the same disclosure requirements as admission to offi cial listing. The Prospectus Directive has therefore been criticised on the ground that it will signifi cantly increase the costs for SMEs to raise capital, as they would have to comply with the same disclosure requirements as blue chip companies.

A single prospectus regime for public offers and admission to trading

3.1.14 The Prospectus Directive also abolishes the existing differences in requirements for public offers and admission to trading, providing a single prospectus regime for both situations.

3.2 Exemptions

3.2.1 The Directive provides a number of exemptions from the obligation to publish a prospectus. Most of these exemptions already exist under the Prospectus Directive 1989 and the Admission Directive. However, in contrast to those directives, the implementation of most of these exemptions is no longer subject to the discretion of Member States. Technically, the Directive distinguishes between exemptions from the Directive’s scope (Article 1(2)) and exemptions from the prospectus obligation (Articles 3(2) and 4).

Exemptions from the scope of the Directive

3.2.2 The fi rst category includes in particular securities issued by Member States or public international bodies, associations with legal status or non-profi t-making organisations. The most relevant exceptions from a securities market perspective are probably:

> units issued by collective investment undertakings other than the closed-end type;

> deposit-related securities, i.e. non-equity securities issued in a continuous or repeated manner by credit institutions which materialise reception of repayable deposits and are covered by a deposit guarantee or which are part of an offer with a total consideration of less than €50 million per year (excluding subordinated, convertible or exchangeable securities or securities which include options to acquire or subscribe to securities or are linked to derivatives); and

> securities included in an offer with a total consideration of less than €2.5 million over a period of 12 months.


3.2.3 The limit of the exemption for small offers has been considerably increased by comparison with the existing limit in the Prospectus Directive 1989.18 However, small offers of below €2.5 million will not necessarily be exempted from a prospectus requirement in any Member State. As it is an exemption from the scope of the Directive, Member States are entitled to impose disclosure requirements for small offers under their national laws. However, Article 1(3) grants issuers the right to opt in to the regime of the Directive (whatever the position under local law) and take advantage of a European passport by drawing up a prospectus in accordance with the requirements of the Directive.

Exemptions from the prospectus requirement

3.2.4 Articles 3 and 4 provide for a number of exemptions from the prospectus requirement. Unlike the exemptions from the scope of the Directive and unlike the exemptions provided under the Prospectus Directive 1989 and the Admission Directive, these exemptions must be implemented by Member States. This means that if a public offer or admission to trading falls within one of the exemptions provided for in Articles 3 and 4, the offer or admission to trading will be exempted from prospectus requirements throughout the EU.

Article 3(2)

3.2.5 Article 3(2) lists a number of exemptions for public offers (but not applications for admission to trading) which are addressed to qualifi ed investors19 or which do not reach or exceed certain thresholds, such as:

> an offer addressed to fewer than 100 persons per Member State;

> an offer addressed to investors who acquire securities for at least €50,000 per investor;

> securities of which the denomination per unit is at least €50,000;

> an offer with a total consideration of less than €100,000 over a period of 12 months.

18 Article 2(1)(c) of the Prospectus Directive 1989 provided for a limit of €40,000.

19 Qualifi ed investors, as defi ned in Article 2(1)(e), are (1) legal entities which are authorised or regulated to operate in the fi nancial markets

such as credit institutions or investment fi rms, (2) national and regional governments, central banks and certain international and supranational institutions such as the International Monetary Fund or the European Central Bank, (3) large enterprises, (4) certain natural persons who satisfy specifi ed criteria in relation to their investment experience and who are upon their request specifi cally authorised by a Member State (subject to mutual recognition) to be considered as qualifi ed investors, and (5) certain SMEs which are upon their request specifi cally authorised by a Member State (subject to mutual recognition) to be considered as qualifi ed investors.


3.2.6 This last exception for offers with a total consideration of less than €100,000 appears to be inconsistent with Article 1(2)(h), which provides that offers with a total consideration of less than €2.5 million per year are excluded from the scope of the Directive altogether. This disparity can only be understood by looking at the legislative history of the Directive. The Commission’s original proposal provided that offers with a total value of less than €2.5 million should be exempted from the prospectus requirement under Article 3, but there was political disagreement about the appropriate threshold for this exemption. The Council therefore decided in its Common Position of 24 March 2003 to move this exemption from Article 3 to Article 1, making it an exemption from the Directive’s scope and thereby allowing Member States to set their own thresholds for offers with a value of less than £2.5 million.20 However, this would have meant that even offers of a de minimis size could have been subjected to a prospectus requirement under the national laws of Member States. Article 3(2)(e) was therefore inserted to ensure that very small offers with a value of less than €100,000 were exempted from a prospectus requirement in all Member States.21

3.2.7 Whilst the Council’s intention is clear, the wording of Article 3(2)(e) does not correspond to that intention. It was the Council’s intention, as explained in its explanatory statement, that Article 3(2)(e) should apply where an offeror of securities with a total consideration of less than €2.5 million decides to “opt in” (i.e. submit itself to the regime of the Directive) in accordance with Article 1(3). If the value of the offer is also less than €100,000, Article 3(2)(e) should provide an exemption from the obligation to draw up a prospectus. However, the right to “opt in” under Article 1(3) can only be exercised by drawing up a prospectus and, logically, an exemption from the obligation to publish a prospectus cannot apply after an offeror has opted in.

3.2.8 In view of the clear intention of the Council, it may be argued that Article 3(2)(e) must be interpreted as an exception to Article 1(2)(h), requiring Member States generally to exempt offers with a value of less than €100,000. While some commentators have taken this view, it remains to be seen whether national legislators will follow it. In order to ensure a uniform interpretation, clarifi cation of the meaning of Article 3(2)(3) through Level 3 advice would be desirable.

Article 4

3.2.9 The exemptions listed in Article 4 relate to securities offered in exchange for already existing securities or securities resulting from specifi ed transactions, such as takeovers, mergers, scrip dividends or the offer of already listed securities under management or

20 Common Position (EG) No. 25/2003 of 24 March 2003 adopted by the Council, OJ 2003 C 125, p.21 (available at: http://europa.eu.int/

eur-lex/pri/en/oj/dat/2003/ce125/ce12520030527en00210057.pdf).21

The passage in the Council’s explanatory statement reads: “Article 3(2) refers to the types of offer set out in the deleted Article 2(2) of the amended Commission proposal, see above. It is thus made clear that these offers are covered by the scope of the Directive, but not by the obligation to publish a prospectus. The limit set out in Article 3(2)(e) was amended, from 2,500,000 euro to 100,000 euro, compared to Article 2(2) of the amended Commission proposal, since small offers are now excluded from the scope of the Directive, see above, but with an option to ‘opt in’. However, when they ‘opt in’ the very small offers will still not be subject to the obligation to publish a prospectus because of the Community wide exemption of the publication of a prospectus for such offers.” (Common Position (EG) No. 25/2003, page 50).


employee incentive schemes. In addition, Article 4(2) exempts the admission to trading on a regulated market of shares which represent less than 10 per cent. per year of the number of shares of the same class already admitted to trading on the same regulated market. Most of these exemptions were already contained in the Prospectus Directive 1989 and the Admission Directive. However, the exemptions have been narrowed.

Exemption for takeovers offers and mergers

3.2.10 In case of a takeover or a merger, the Prospectus Directive requires that a document must be made available containing information which is regarded by the competent authority as being equivalent to that of a prospectus under the Directive.22 Currently, only the Admission Directive contains such a requirement,23 while the Prospectus Directive 1989 exempted mergers and takeover offers without any limitation.24 A prospectus is therefore not currently required when securities are offered as part of a merger transaction or as consideration for a takeover offer. Only when the securities offered in a merger or takeover context are to be admitted to offi cial listing must a document that is regarded by the competent authorities as containing information equivalent to that of listing particulars be published (unless an exemption is available).

3.2.11 Many forms of statutory merger in different jurisdictions do not involve an “offer to public”, because there is no offer and acceptance mechanism involved: the defi nition of “offer of securities to the public” in Article 2(1)(d) of the Directive envisages an offer which an individual investor can decide to accept. A mechanism such as a Scheme of Arrangement under the Companies Act 1985 probably involves no “offer to the public”, because the transaction is effected through a proposal that, once approved by the requisite shareholder vote, is effective to bind all shareholders by virtue of a court order. In such cases, the Directive will not change the current position. However, a traditional takeover offer will probably constitute an “offer to the public” for the purposes of the Directive25 and, if it involves the issue of securities, will give rise to a requirement to publish a prospectus-equivalent document under the Directive whether or not the securities are to be admitted to trading on an EU-regulated market.

3.2.12 It appears that the Directive will therefore impose signifi cant additional requirements in a number of takeover situations:

> Where a non-EU offeror offers securities which are only to be admitted to trading on a non-EU market, a prospectus-equivalent document will be required if the transaction amounts to a public offer (although fi nancial promotion rules are likely

22 Article 4(1)(b) and (c), (2)(c) and (d).

23 Article 23(1) of the Admission Directive.

24 Article 2(2)(d) and (e) of the Prospectus Directive 1989.

25 The Directive (Article 2(1)(d)) refers to an investor’s decision to “purchase or subscribe” to securities. It was decided in Government Stocks

v. Christopher [1956] 1 All ER 490 that the documentation for a securities exchange offer was not subject to the prospectus provisions of the Companies Act 1948 because the word “purchase” in those provisions only applied to the offer of existing issued securities, whereas the word “subscribe” applied to taking securities for cash and not as consideration under an exchange offer. However, it seems clear from the inclusion of the exemption in the Directive for takeovers and mergers that the Directive’s wording is to be interpreted more broadly than this.


to apply). Under existing UK law no prospectus is required for such an offer. So if, for example, members of the public in the UK hold shares of a US company which is the subject of a securities exchange offer from another US company, it may in future be necessary for the US offeror either to produce an EU-compliant prospectus or to exclude EU shareholders from the offer.

> In the UK context, cash takeover offers are commonly accompanied by an alternative offer of an unlisted loan note, which assists UK capital gains taxpayers to defer and mitigate their liability. Currently, the document for such an offer is not treated as a prospectus in English law; its contents are prescribed by the City Code on Takeovers and Mergers but it is not required to be submitted to any competent authority. It remains to be seen to what extent the requirement that the competent authority satisfi es itself as to the existence of a prospectus-equivalent document will impose additional content and approval requirements for such transactions.

> It is at present uncertain whether, in a case where an offeror offers securities which are to be admitted to trading on an EU regulated market, a prospectus-equivalent document will always be required if the transaction amounts to a public offer. Article 4(2)(a) preserves the current exemption for a new issue amounting to less than 10 per cent of an existing class of securities that are admitted to trading: the better view, and the one which gives effect to this exemption, is that it will continue to relieve the offeror from any prospectus requirement even if a public offer of the new securities is involved (see discussion at 3.1.9 and 10). However, the Directive is unclear, and it is arguable that Article 3(1), requiring a prospectus where a public offer is made, will apply as there is no “10 per cent” exemption to this obligation. It remains to be seen how Member States will deal with this uncertainty in implementing national legislation.

3.2.13 The wording of the Directive suggests that the determination of equivalence is not based on objective criteria but on the assessment of the competent authority, raising the question of whether the Directive will achieve harmonisation of practices within the EU in this area. The extent to which the assessment of equivalence will be based on objective criteria will depend on the Level 2 implementation measures about the meaning of equivalence which are to be adopted in accordance with Article 4(3). However, it seems that the offer document will, in any event, have to be approved by the competent authority of the Home Member State as being equivalent to a prospectus. This would mean that the offer document will require approval by two authorities – the competent authority of the Home Member State and the authority which supervises the takeover. These will in many cases not be identical.26 This creates a potential for confl icting requirements from the two authorities. Moreover, this result seems to confl ict with the Takeover Directive which provides that the offer document, after having been approved by the supervisory authority, must be recognised in all other Member States without further approval of the local authorities being required.27

26 According to the Takeover Directive the competent supervisory authority which has to approve the offer document is either the

authority located in the Member State where the target company has its registered offi ce or where it has admitted securities to trading on a regulated market. Under the Prospectus Directive the equivalence of the document will have to be determined by the competent authority of the Home Member State, which, in case of equity or low-denomination debt securities, will be the Member State where the bidder has its registered offi ce.

27 Article 6(2) of the Takeover Directive.


Exemption for securities offers to directors and employees

3.2.14 Article 4(1)(e) and Article 4(2)(f) provide an exemption where securities are offered to existing or former directors or employees. In this case, the publication of a document containing information on the number and nature of the shares and the reason for and details of the offer is suffi cient. However, unlike the corresponding exemptions in the Prospectus Directive 1989, an exemption is only available in the case of a public offer if the employer offering shares to the directors or employees already has securities admitted to trading on a regulated market. For companies that have not issued securities which are admitted to a regulated market, employee incentive schemes may become more diffi cult to implement. However, incentive schemes of smaller companies may, if they do not exceed €2.5 million, be eligible for the exemption for small offers.

No exemption for Eurobonds

3.2.15 The exemption for public offers of Euro-securities which are not the subject of a generalised campaign of advertising or canvassing, as provided for under Article 2(2)(l) of the Prospectus Directive 1989, has been completely repealed. Offers of Eurobonds to non-qualifi ed investors which have hitherto been exempted from a prospectus requirement may therefore become subject to a prospectus requirement under the Prospectus Directive. However, where Eurobonds are offered to non-qualifi ed investors by credit institutions in a continuous or repeated manner and the total consideration of the offer is less than €50 million in a year, the offer will not fall within the scope of the Directive by virtue of Article 2(2)(j).

Exemption for the admission to trading of a small amount of shares

3.2.16 Under Article 4(2)(a), the admission to trading on a regulated market of shares representing less than 10 per cent. per year of the number of shares of the same class already admitted to trading on the same regulated market is exempt from the obligation to publish a prospectus. However, this exemption is confi ned to admissions of securities to trading on a regulated market and a similar exemption does not exist for public offers. The better view is that the public offer prospectus requirement in Article 3(1) does not apply to securities which are admitted to trading (see discussion at 3.2.12, third bullet point); accordingly, the exemption continues to apply. However, the contrary argument is certainly tenable, to the effect that a prospectus must be published if the shares to be admitted to trading on the relevant regulated market are offered to the public and no other exemption applies. As in practice it is diffi cult to envisage the admission of shares to trading without there being an offer to the public, it seems that the 10 per cent exemption would never be effective, on this view. It is hoped that implementing legislation will clear the matter up consistently throughout the Member States.


Exemption for securities already admitted to trading on a regulated market

3.2.17 Finally, a prospectus is not required for an application for admission to trading on a regulated market if the securities have been admitted to trading on another regulated market for more than 18 months and a summary document in accordance with the requirements of the Prospectus Directive is made available to the public in a language accepted by the competent authority in the relevant Member State. This requires, however, that for securities fi rst admitted to listing after the entry into force of the Prospectus Directive, a prospectus must have been published in accordance with the Directive, and for securities fi rst admitted to listing after 30 June 1983, listing particulars must have been approved in accordance with the requirements of the Directive 80/390/EEC or the Admission Directive. This is an important expansion of the European passport regime, as issuers who have securities listed on a European regulated market and who have published listing particulars under the Admission Directive or a prospectus under the new Prospectus Directive may now obtain the admission of those securities to trading on other regulated markets in the EU without being obliged to publish a new prospectus. Article 23(4) of the Admission Directive provided for Member States to have the option, but not the obligation, to implement a similar exemption; however, many chose not to do so, or to impose additional requirements.


iv. the “eu passport”

4.1 Authorisation and Competent Authority

4.1.1 Before a prospectus may be published, it must be approved by the competent authority of the Home Member State.28

The competent authority

4.1.2 Each Member State must designate a central competent administrative authority which will be solely responsible for the authorisation of prospectuses in accordance with the provisions of the Directive.29 This means that, in contrast to the current regime, prospectuses relating to the admission of securities to be traded on domestic second regulated markets, as well as prospectuses relating to public offers which are not connected with offi cial listing, will require the approval of a central authority. However, for a transitional period of eight years Member States may allow their competent authority to delegate tasks to market organisations and stock exchanges.

The authorisation process

4.1.3 In order to obtain the approval of the competent authority, the issuer must submit a draft prospectus. The competent authority has 10 working days (or 20 working days in the case of an issuer which does not have any securities admitted to trading on a regulated market and which has not previously made a public offer) to decide on the application.30 If the competent authority fi nds that the documents submitted are incomplete, the time limits apply from the date on which the additional information is submitted by the issuer. Failure of the competent authority to give a decision in due time does not constitute authorisation. Provisions under national laws, such as German law, which provide for automatic approval after a certain time, will not be consistent with the Directive. However, the Directive does not prevent Member States from providing for shorter time limits under their national laws.

4.1.4 The Prospectus Directive contains a provision enabling the competent authority of the Home Member State to refer the approval of the prospectus to the competent authority of another Member State.31 This provision may help to address the issues that would otherwise arise in dealing with multi-issuer programme documentation where issuers from more than one Member State are involved. The Implementation Regulation states in a recital that in such cases “the respective competent authorities should act in co-operation and, where appropriate, transfer the approval of the prospectus .... so that the approval by only [one] competent authority is suffi cient for the entire document”.32 It remains to be seen how and whether competent authorities will actually negotiate the transfer of jurisdiction in such cases.

28 Article 13.

29 Article 21(1).

30 Article 13(2) and (3).

31 Article 13(5).

32 Recital (27) of the Implementation Regulation.


4.2 The Determination of the Home Member State

4.2.1 The determination of the Home Member State is a key element of the Prospectus Directive: it defi nes which competent authority in the EU will be responsible for the approval of the prospectus. The approval of the prospectus by the competent authority of the Home Member State must be recognised throughout the EU, enabling an issuer to use the prospectus for public offers or applications for admission to trading in any Member State.

The defi nition of the Home Member State

4.2.2 The “Home Member State” is defi ned in Article 2(1)(m):

> for issuers incorporated in a Member State of the EU (“EU issuers”) issuing equity securities or non-equity securities with a denomination of less than €1,000 (excluding convertibles or derivatives where the issuer or an entity belonging to its group is not the issuer of the underlying securities) as the state where the issuer has its registered offi ce;

> for issuers incorporated in a third country (“non-EU issuers”) issuing equity securities or non-equity securities with a denomination of less than €1,000 (excluding convertibles or derivatives where the issuer or an entity belonging to its group is not the issuer of the underlying securities) as the Member State where the securities are intended to be offered to the public for the fi rst time or where the fi rst application for admission to trading on a regulated market is made after the Directive’s entry into force, at the choice of the issuer or offeror, subject to a subsequent election by non-EU issuers if the Home Member State was not determined by their choice; and

> for all issuers issuing non-equity securities with a denomination of at least €1,000 (or its near equivalent in another currency) and for any issuers of convertibles or derivatives where the issuer or an entity belonging to its group is not the issuer of the underlying securities, as the Member State where the issuer has its registered offi ce or the Member State where the public offer is made or where the securities are to be admitted to trading, at the choice of the issuer.

4.2.3 It should be noted that a Home Member State is always determined in relation to the individual entity issuing securities, and not in relation to a group. Different issuers in a group may have different Home Member States.

4.2.4 Compared to the current regime, the Directive considerably restricts the issuer’s choice of competent authority. Even if equity securities or non-equity securities with a denomination below €1,000 are to be listed solely on a stock exchange in another Member State, authorisation of the prospectus will have to be granted by the competent authority of the state where the issuer has its registered offi ce. The defi nition of the


Home Member State under the Directive is designed to limit competition between the competent authorities and was subject to extensive political debate. Only at the last stage of the legislative process was a compromise reached granting issuers of non-equity securities with a denomination of at least €1,000 the freedom to choose the Home Member State for that issue of securities.

4.2.5 In case of securities denominated in a non-Euro currency, it may be diffi cult to determine what “nearly equivalent to €1,000” means. It is not entirely clear whether it is suffi cient if the denomination of the non-equity security is at least the equivalent of €1,000 at the time the prospectus is submitted to the competent authority, if this is no longer the case by the time that the prospectus is approved.

The Home Member State of non-EU issuers of equity securities or low denomination debt securities

4.2.6 While the determination of the Home Member State for EU issuers of equity and low-determination debt securities is relatively clear-cut, the determination of the Home Member State of non-EU issuers of such securities is ambiguous and leaves many open questions. According to Article 2(1)(m)(iii) the Member State in which, after the Directive’s entry into force, securities of a non-EU issuer are fi rst offered to the public or where the fi rst application for admission to trading on a regulated market is made will automatically become that non-EU issuer’s Home Member State. If a public offer and an application for admission to a regulated market are made in different Member States, the issuer has the right to choose between those Member States. It appears that the same principle will apply if securities are offered to the public in several Member States at the same time or an application for listing is fi led in various states, so that the issuer can choose between any of the Member States in question. Moreover, if the Home Member State was not chosen by the issuer, because a third party had offered its securities to the public or asked for admission to trading, the issuer may subsequently elect a different Home Member State.33 It is not clear, however, how the issuer may subsequently elect a different Home Member State. It seems that this choice must be made by either offering securities to the public or applying for admission to trading on a regulated market in the selected Home Member State and then submitting an election.

4.2.7 The question arises what “offered to the public” means in this context. We understand that the Commission has suggested that, pending the implementation of the Directive, “offer to the public” is to be construed in accordance with existing national rules. This view is, however, lacking in any clear legal basis, as normal principles of interpretation would mean that the Directive would be interpreted in accordance with the defi nitions in Article 2 of the Directive. Although the Directive has not yet been implemented, it is already in force, and provisions which are applicable prior to its implementation must

33 This is what the rather ambiguous wording “subject to a subsequent election by issuers incorporated in a third country if the home

Member State was not determined by their choice” appears to mean. The reasoning behind this provision is explained in the Council’s explanatory statement to its common position (cf. at http://europa.eu.int/eur-lex/pri/en/oj/dat/2003/ce125/ce12520030527en00210057.pdf, p. 30).


be construed consistently with the other provisions of the Directive. It seems, therefore, the better view that “offered to the public” must be construed in accordance with the defi nition of “offer of securities to the public” in Article 2(1)(d). This also appears to mean that every offer to the public and every application for admission to trading within the scope of the Directive would fi x a Home Member State, even if the offer or admission does not currently require a prospectus or listing particulars and would, after implementation of the Directive, be exempt from an obligation to publish a prospectus in accordance with Article 3 or 4. An offer of securities with an annual value below €2.5 million would therefore not entail an election of a Home Member State, as such an offer is excluded from the scope of the Directive, while an offer of securities with a greater value, which is only made to two “qualifi ed investors”, appears to fi x a Home Member State.

4.2.8 It is also doubtful what exactly the Directive means when it refers to securities being “intended” to be offered and how such intention becomes manifest. Will an internal decision by an issuer to make an offer in a particular Member State result in the fi xing of the Home Member State or is it necessary for the intention to become externally apparent, for example by the issuer applying for authorisation of the prospectus?

4.2.9 Given this uncertainty, non-EU companies should consider carefully any statements or actions which could be interpreted as an intention to offer shares or low denomination debt securities in order to prevent an inadvertent determination of their Home Member State. It should be noted that also offers to employees made under an employee share scheme could, in some circumstances34, constitute an offer to the public and thus fi x a Member State, notwithstanding that after 1 July 2005 such an offer may be exempt from the requirement to publish a prospectus. Issuers should also be aware that an application for admission to trading of shares or low denomination debt securities would also fi x the Home Member State. 35

4.2.10 In addition, Article 30 (which contains various transitional provisions) stipulates that non-EU issuers who already have securities listed on a regulated market in a Member State of the EU should “choose their competent authority in accordance with Article 2(1)(m)(iii) and notify their decision to the competent authority of their chosen Home Member State by 31 December 2005.” The wording of this provision and the reference to Article 2(1)(m)(iii) is very unclear. We understand that the Commission has suggested in a non-binding statement that such a non-EU issuer may select its Home Member State from among (i) the Member State in which the company’s securities are already admitted

34 Where the employee share scheme involves the offer of options, it is likely that there will not be an offer to the public of securities to

which the Directive applies. This is because employee options are not shares and, normally being non-transferable, are not securities normally dealt in that give the right to acquire shares. The offer of share options to employees will not normally be an offer of the underlying shares to the public within the meaning of the Directive, because the employees will not at that stage have suffi cient information to decide whether to subscribe to the shares (Article 2(1)(d)). However, the circumstances of each offer under an employee scheme should be analysed and specifi c legal advice sought.

35 Note that the approval process for some issuance programme documents involves the issuer submitting an application to the listing

authority which states that the issuer applies for listing of all securities that may be issued under the programme. For clarity, it is advisable that non-EU issuers who have not yet determined that this authority should be their Home Member State authority should modify this wording to make it clear that no application is actually made until the time of the relevant issue and that there is no current intention to make such an application.


to trading, (ii) the Member State in which the issuer’s securities were fi rst offered to the public or (iii) the Member State in which the issuer makes an offer to the public or applies for admission to trading after the entry into force of the Directive. However, it should be noted that this interpretation of the Directive is not binding and, given the ambiguity of Article 30, issuers should proceed with care. It seems likely that the choice of the Member State in which the issuer already has securities admitted to trading, by notifi cation to the competent authority, would be a valid choice. However, it is unclear whether such an issuer could still choose that Home Member State if, after the entry into force of the Directive, the issuer offers securities to the public or applies for admission to trading in another Member State. In order to achieve absolute certainty as regards its Home Member State, a non-EU issuer may wish to consider listing equity or non-equity securities with a denomination of less than €1,000 in the selected Member State in addition to notifying the competent authority of the selected Member State.

Home Member State under the Transparency Obligations Directive

4.2.11 The Home Member State under the proposed Transparency Obligations Directive is, in principle, intended to be the same as the Home Member State under the Prospectus Directive. However, the defi nition of “Home Member State” under the Transparency Obligations Directive is not entirely consistent with the Prospectus Directive. The Transparency Obligations Directive provides that the Home Member State of issuers of “shares” and low-denomination debt securities is the Member State where the issuer is incorporated. The Prospectus Directive, however, uses the term “equity securities” rather than “shares”, which also covers securities equivalent to shares as well as any type of transferable securities exchangeable or convertible into shares or securities equivalent to shares, provided that the underlying shares are issued by the issuer of these securities or a member of its group.36 Under the Transparency Obligations Directive, an EU-incorporated issuer of this kind of securities would have the right to choose the “Home Member State” from among the Member State where it has its registered offi ce and those Member States which have admitted its securities to trading on a regulated market while under the Prospectus Directive the Home Member State would always be the Member State where the issuer is incorporated.

4.2.12 Moreover, the Prospectus Directive provides that issuers of convertible or exchangeable non-equity securities where the underlying securities are not issued by the issuer or its group may choose their Home Member State for the purposes of the relevant securities issues notwithstanding the denomination of these securities,37 while under the Transparency Obligations Directive the Home Member State would be the Member State where the issuer has its registered offi ce, if these are low-denomination securities which are not convertible or exchangeable into shares.

36 Article 2(b).

37 Article 2(1)(m)(ii).


4.3 Passporting

4.3.1 Once the prospectus is approved by the competent authority of the Home Member State it is valid for a public offer or the admission to trading of the securities in any number of Member States, provided that the competent authority of each Host Member State is notifi ed.38 The competent authority of the Host Member State is expressly prohibited from requiring approval or undertaking administrative procedures with respect to that prospectus.

4.3.2 The notifi cation of the Host Member State is to be made by the competent authority within 3 working days after being so requested by the issuer or within one day after approval of the prospectus, if the request was submitted with the draft prospectus.

4.3.3 However, unless the prospectus authorised by the competent authority of the Home Member State has been drawn up in English, the prospectus must still be translated into a language accepted by the relevant Host Member State.39 If the prospectus is drawn up in English but English is not the offi cial language of the Host Member State, the competent authority of the Host Member State may only require a translation of the summary.40 The Prospectus Directive does not provide for separate authorisation of the translation nor for any review by the competent authority of the Home Member State or any Host Member State as to whether the translation corresponds to the original. The translation process will raise additional liability questions and issuers will be well advised to keep the translation as close as possible to the original. It is therefore likely that issuers and underwriters will require certifi cation by a qualifi ed translator or an opinion by a law fi rm as to the accuracy of the translation.

38 Article 17.

39 For the language regime, see paragraph 5.3 below.

40 Article 19.


v. format and contents

5.1 Format of the Prospectus

5.1.1 The Directive contains few requirements as to the format of the prospectus. Generally, the issuer has a choice between drawing up a prospectus in the traditional form of a single document and splitting the required information into three separate documents.

The tripartite prospectus

5.1.2 A tripartite prospectus consists of:

> a registration document, which consists mainly of information relating to the issuer;

> a securities note, which contains the required information on the securities which are being offered to the public or admitted to trading; and

> a summary document.

5.1.3 For a tripartite prospectus, Article 25(2) of the Implementation Regulation provides that the security note and the registration note must each be composed of the following parts in the following order:

> a clear and detailed table of contents;

> the risk factors linked to the issuer or, as the case may be, the type of security covered by the issue; and

> the other information items included in the schedules41 to the Implementation Regulation and the building blocks42.

5.1.4 The advantage of a tripartite prospectus is that the registration document remains valid for a period of 12 months and may be used with a new securities note and summary note for further issues during that period. For the average issuer, the practical relevance of this option is questionable and it is unlikely that the tripartite prospectus will become the predominant format for prospectuses. However, the tripartite prospectus may be a useful option for frequent issuers, including banks or other fi nancial institutions. Where the issuer already fi les an annual registration statement with the SEC on Form 20-F or 10-K, production of the registration document envisaged by the Directive may not be particularly burdensome. Moreover, the annual publication of a registration document may speed up the publication of the prospectus for a particular issue.

41 The schedules are the lists of minimum information attached to the Implementation Regulation which describe the information that must

be included in a prospectus about a particular type of security or type of issuer.42

“Building blocks” are lists of additional information requirements, not included in the schedules, which are to be added to one or more schedules depending on the type of instrument or transaction for which the prospectus is drawn up.


The single document prospectus

5.1.5 The Implementation Regulation provides that a single document prospectus must be composed of the following parts in the following order:

> a clear and detailed table of contents;

> the summary;

> the risk factors linked to the issuer and the type of security covered by the issue; and

> the other information included in the schedules and building blocks according to which the prospectus is drawn up.

5.2 The Summary

5.2.1 The Directive requires that every prospectus (except for the admission to trading on a regulated market of non-equity securities with a denomination of at least €50,000) must contain a summary which sets out briefl y and in non-technical language the essential characteristics and risks associated with the issuer.43 The summary must read as an introduction to the prospectus. Under Recital (21) of the Directive the summary should not exceed 2,500 words.

5.2.2 The summary is of particular importance where a prospectus in English is to be used for an offer or an application for admission to listing in another Member State, as the competent authority of the Host Member State may require a translation of the summary, but not of the entire prospectus. As a summary may omit important information, the Directive provides that Member States must ensure that no civil liability will “attach to any person solely on the basis of the summary, including any translation thereof, unless it is misleading, inaccurate or inconsistent when read together with the other parts of the prospectus.44 However, the Directive does not give any guidance as to when a summary can be seen as “misleading, inaccurate or inconsistent”. The laws on the liability of the issuer in different Member States may vary on this point.

5.2.3 It should be noted that the Directive expressly excludes only “civil liability”. Criminal liability which may attach to information given in (or omissions from) the summary is not excluded.45 Furthermore, it is unclear whether the term “civil liability” includes civil remedies such as rescission rights. In any event, the drafting of the summary will require particular care, particularly if the summary is the only part of the prospectus to be translated into the language of a Member State where an offer is made.

43 Article 5(2).

44 Article 6(2).

45 For example, in the UK the dishonest concealment of material facts may be a criminal offence under section 397 of the Financial Services

and Markets Act 2000.


5.3 Language of the Prospectus

5.3.1 To date, one of the major obstacles for public offers of securities in several EU states has been the requirement to translate the prospectus into the language of each Host Member State. The Prospectus Directive now provides that where a public offer is made or admission to trading is sought in Member States other than the Home Member State, the prospectus may be drawn up in either the language accepted by the competent authority of the Host Member State or a language “customary in the sphere of international fi nance”, 46 which is generally understood to be English. If the prospectus is drawn up in English, the competent authorities of the Host Member State may only require a translation of the summary into the offi cial language of that state.

5.3.2 However, if the offer or the admission to trading takes place in the Home Member State, the competent authorities of the Home Member State may prescribe publication in the local language, except where admission to trading of securities with a denomination of at least €50,000 is sought. For issuers whose Home Member State is not an English speaking country, a translation of the whole prospectus may thus still be necessary if an offer is made or admission to trading is sought in the Home Member State and other Member States. The language regime, which is the result of a political compromise in the Council, disadvantages issuers which are making an offer in their Home Member State and other Member States by comparison with issuers which confi ne their offer to Member States other than the Home Member State. However, this may provide an incentive for Member States to provide for a liberal language regime under their national laws, and to allow the drawing up of prospectuses in English. A restrictive language regime might constitute a considerable disadvantage for their home securities market.

5.3.3 Translation of the whole prospectus into the language of the Host Member State will, however, be necessary in most Member States if the prospectus becomes the subject of litigation, as court procedures in most countries require the translation of documents into the offi cial language.

5.4 Contents of the Prospectus

5.4.1 The general principle laid down in Article 5(1) follows the existing regime: a prospectus must contain all information which is necessary to enable investors to make an informed assessment of the assets and liabilities, fi nancial position, profi t and losses, and prospects of the issuer and guarantor, and of the rights attached to the securities.

The disclosure requirements of the prospectus

5.4.2 The Directive only provides a general framework for the contents of prospectuses and leaves the details to be implemented by the Commission on Level 2 of the Lamfalussy Procedure. Article 7(2) gives some guidelines on different types of offers and admissions

46 Article 19.


to trading, securities, offers and issuers. The Level 2 implementation measures must therefore distinguish between prospectuses for equity and non-equity securities, prospectuses relating to public offers and admission to trading, the different types of non-equity securities including warrants, the particulars of non-equity securities which are issued in a continuous or repeated manner and the particulars of small or medium-sized enterprises (SMEs) or issuers of a public nature. Article 7(3) prescribes that the implementing measures must be based on international disclosure standards, in particular those developed by the International Organisation of Securities Commission (IOSCO), and the information items which are listed in the Annexes to the Directive. The information listed in the Annexes relies on the International Disclosure Standards for Cross-Border Offerings and Initial Listings by Foreign Issuers published by IOSCO.

The building block approach of the Implementation Regulation

5.4.3 The Implementation Regulation introduces a “building block” approach. Separate schedules attached to the Implementation Regulation contain the disclosure requirements for different types of securities, supplemented by particular disclosure requirements which are applicable in specifi c circumstances (building blocks). Issuers must combine the applicable schedules with the relevant building blocks in order to produce the prospectus content appropriate to the type of issuer and security concerned. The combinations of schedules and building blocks are set out in a table of combinations in Annex XVIII to the Implementation Regulation. The Implementation Regulation provides for the following schedules and building blocks:47

> a share registration document schedule for shares, other transferable securities equivalent to shares and securities convertible or exchangeable at the issuer’s or investor’s discretion into shares which will be issued by the issuer of the security and are not yet traded on a regulated EU or equivalent foreign market;

> a pro-forma fi nancial information building block;

> a share security note schedule applicable to shares and other transferable securities equivalent to shares;

> a debt and derivative securities registration document schedule for debt and derivative securities with a denomination of less than €50,000 per security and all equity securities other than shares and share equivalents;

> a securities note schedule for debt securities with a denomination of less than €50,000 per unit where the issuer has an obligation upon issue to pay the investor 100% of the nominal value plus interest payment, if applicable;

> a guarantees building block;

47 Articles 4 to 20 of the Implementation Regulation.


> an asset backed securities registration document;

> an asset backed securities building block;

> a debt and derivative securities registration document for debt and derivative securities and equity securities other than shares and share equivalents with a denomination of at least €50,000 per unit or securities without individual denomination, which can only be acquired for at least €50,000 per security;

> a depository receipts schedule;

> a bank registration document for debt and derivative securities and equity securities other than shares and share equivalents to be submitted by EU credit institutions and non-EU banks with a registered offi ce in the OECD;

> a securities note schedule for derivative securities which are not covered by the other securities note schedules;

> a securities note schedule for debt securities with a denomination of at least €50,000 per unit where the issuer has an obligation arising on issue to pay the investor 100% of the nominal value plus interest, if applicable;

> an additional information building block on the underlying shares with respect to convertible or exchangeable securities;

> a registration document for collective investment undertakings of the closed-end type;

> a registration document schedule for Member States, third countries and their regional and local authorities; and

> a registration document for public international bodies and for issuers of debt securities guaranteed by a member state of the OECD.

5.4.4 The problem with the approach of the Implementation Regulation is that, although it distinguishes between different types of securities, it makes little allowance for different types of issuers as expressly provided for by Article 7 of the Prospectus Directive. In particular, the Regulation does not provide for adjustments of the disclosure requirements for SMEs (except that Article 23(4) provides for some fl exibility permitting the omission of information where one of the information items under the schedules and building blocks is not relevant to an issuer). Article 23(1) provides that the competent authority may adapt the requirements of the relevant schedules and building blocks if the issuer belongs to one of the following categories:


> property companies;

> mineral companies;

> investment companies;

> scientifi c research based companies;

> companies with less than 3 years of existence (start-up companies); and

> shipping companies.

However, under the Implementation Regulation the competent authority may only require adapted information which is additional to the items included in the schedules and building blocks. This could be problematic: fi rstly, because many of the specifi c information requirements in the schedules and building blocks will be inappropriate for issuers in these categories; and secondly, because it could give authorities the possibility to impose new requirements and thus undermine the harmonised prospectus standard envisaged by the Directive.

New instruments

5.4.5 If the prospectus relates to a security of a type which is not mentioned in one of the schedules to the Implementation Regulation but is comparable to one or more types of securities mentioned in a schedule, the issuer must choose the schedule for the most closely comparable type of security and add items listed in schedules for other securities, so far as relevant to the security in question.48 If the prospectus relates to a completely new type of security which is completely different from the various types of securities mentioned in the table of combinations49, the issuer must consult with the competent authority about the information to be included in the prospectus and the competent authority must inform the Commission.50 This provision leaves it to the relevant competent authority to determine the disclosure requirements applicable to new types of securities without stipulating any maximum requirements. This approach is intended to leave fl exibility to respond to innovations, while the obligation to notify derogations to the Commission allows the Commission to amend the Implementation Regulation and thereby in due course harmonise the requirements for new instruments.

48 Article 23(2) of the Implementation Regulation.

49 This is a table which shows which schedules and building blocks an issuer of a specifi c type of security must combine.

50 Article 23(3) of the Implementation Regulation.


Omission of information

5.4.6 Under Article 8(2) of the Directive, the competent authority may authorise the issuer to omit certain information required to be disclosed under the Directive or the Implementation Regulation, provided that:

> disclosure of such information would be contrary to the public interest;

> disclosure of such information would be seriously detrimental to the issuer and its omission would not be misleading the public; or

> such information is of minor importance for a specifi c offer or admission to trading and will not infl uence investors’ assessments.

Disclosure Requirements as provided under the Implementation Regulation

5.4.7 A detailed discussion of the disclosure requirements as provided in the schedules to the Implementation Regulation is beyond the scope of this memorandum. However, some requirements which may be of particular importance or cause problems for issuers are highlighted below.

5.5 Risk Factors

Under Article 25 of the Implementation Regulation the prospectus must include a section which sets forth the risk factors associated with the issuer and the type of security covered by the issue. In accordance with the schedules to the Implementation Regulation the issuer must disclose risk factors “that are specifi c to the issuer or its industry” and “risk factors that are material to the securities being offered and/or admitted to trading in order to assess the market risk associated with these securities”.

5.6 Financial Information

Historical Financial Information

5.6.1 The Implementation Regulation requires issuers to disclose historical fi nancial information which, as a general principle, must be prepared in accordance with IAS/IFRS as defi ned under the IAS-Regulation. EU-incorporated issuers may publish their fi nancial information in accordance with their local accounting standards to the extent permitted under the IAS-Regulation. This means that after 1 January 200551 or, to the extent that Member States have allowed a derogation52, 1 January 2007, EU issuers must publish their consolidated fi nancial statements in accordance with IAS/IFRS if their securities are admitted to trading on a regulated market. Non-EU issuers may present fi nancial information in accordance with their national accounting standards, if these are equivalent to IAS/IFRS.

51 Under Article 4 of Regulation 1606/2002, IAS/IFRS will become mandatory for the consolidated accounts of publicly traded companies.

52 Under Article 9 of Regulation 1606/2002, Member States may derogate from the mandatory introduction of IAS/IFRS for consolidated

accounts of publicly traded companies until 31 December 2006, if these companies only have debt securities admitted to a regulated market or their securities are admitted to public trading in a non-member state and they have been using internationally accepted standards for at least one fi nancial year prior to the publication of the Regulation.


5.6.2 In other cases, non EU-issuers will have to restate their fi nancial statements in accordance with IAS/IFRS. The Implementation Regulation does not give any guidance as to the criteria for the equivalence of standards, although it is thought that the Commission is likely to recognise US GAAP as equivalent. Article 35(3) of the Implementation Regulation states that the Commission is to set up a mechanism for the establishment of equivalence through a further Level 2 implementation measure.

5.6.3 Until 1 January 2007 third country issuers who have prepared historical fi nancial information according to “internationally accepted standards as referred to in Article 9 of Regulation (EC) 1606/2002” (i.e. US GAAP53) may use that information in any prospectus without being subject to restatement obligations. Issuers from third countries which do not use “internationally accepted standards” and which (i) have their securities admitted to trading on a regulated market on 1 January 2007 and (ii) have presented and prepared historical fi nancial information according to national GAAP of a third country will not have an obligation to restate the fi nancial information in accordance with IAS/IFRS until 1 January 2007. However, they must supplement their fi nancial information with more detailed or additional information if the fi nancial statements included in the prospectus do not give a true and fair view of the issuer’s assets and liabilities, fi nancial position and profi t and loss. This transitional provision is of limited help, as it remains unclear what constitutes “a true and fair view” and which information the issuer must add. Therefore, all non-EU issuers which do not use either IAS/IFRS or US GAAP may have to provide additional information.

5.6.4 Issuers of shares, securities equivalent to shares or depository receipts must disclose historical fi nancial information for the two previous years and issuers of debt and derivative securities and asset backed securities must disclose fi nancial information for the previous year in a form consistent with that which will be adopted in the issuer’s next published annual fi nancial statements. Issuers which change from local GAAP to IAS/IFRS for the next fi nancial year would accordingly have to restate the fi nancial statements for the previous two years or the previous year. However, Article 35(1) provides that no restatement of fi nancial accounts will be necessary for any period earlier than 1 January 2004 and Article 35(2) provides that issuers which prepare their fi nancial statements in accordance with national GAAP under the transitional national provisions of the IAS Regulation will not have to restate the fi nancial information for any period prior to 1 January 200654. Therefore, issuers with a calendar fi nancial year would, after changing from national GAAP to IAS/IFRS, only have to restate fi nancial information for the previous year (2005 or 2006, as the case may be); and in any event, if they have securities admitted to trading on a regulated market on 1 July 2005, will not be obliged to restate any fi nancial information until they have published their fi rst consolidated annual accounts in accordance with IAS/IFRS.

53 This is stated by the Commission in its note about the differences between the Implementation Regulation and the CESR advice (available

at http://europa.eu.int/comm/internal_market/securities/docs/prospectus/esc-42-2003/rev2_en.pdf).54

We assume that this requires restatement of fi nancial information for any period ending on or after 1 January 2006, although the wording is not clear.


5.6.5 Although issuers may use, in the circumstances described above, fi nancial information drawn up in accordance with national accounting standards, they may still be obliged to produce new fi nancial information. The schedules to the Implementation Regulation require that where the fi nancial information is prepared in accordance with national accounting standards, the minimum audited fi nancial information to be disclosed in the prospectus must include:

> a balance sheet;

> an income statement;

> a statement showing either (i) all changes in equity or (ii) changes in equity other than those arising from capital transactions with owners and distribution to owners;

> a cash fl ow statement; and

> accounting policies and explanatory notes.

5.6.6 While an audited balance sheet and income statement will be available under all local accounting standards, statements showing changes in equity and a cash fl ow statement are not required under all national accounting standards. Issuers may therefore have to produce these additional statements for the purpose of the prospectus.

5.6.7 An exception is made for issuers of asset backed securities, debt and derivative securities or depository receipts with a denomination of at least €50,000. They may disclose fi nancial information drawn up under their national accounting standards if they include in the prospectus a prominent statement that the fi nancial information has not been prepared in accordance with IAS/IFRS and a narrative description of the differences between IAS/IFRS and the accounting principles adopted by the issuer.55

Pro forma fi nancial information

5.6.8 Issuers of shares and securities equivalent to shares (including securities which are convertible or exchangeable into shares or give the right to subscribe for or acquire shares) must disclose pro forma fi nancial information if they have undergone a transaction which entails a signifi cant gross change.56 The pro forma fi nancial information, the details of which are set out in a separate building block in Annex II of the Implementation Regulation, must show how the transaction might have affected the assets and liabilities and earnings of the issuer, had the transaction been undertaken at the commencement of the period being reported on or the date reported.

55 Paragraph 8.2 of Annex VII, paragraph 11.1 of Annex IX, and paragraph 10.1 of Annex X to the Implementation Regulation.

56 Paragraph 20.2 of Annex I of the Implementation Regulation.


5.7 Base prospectus

5.7.1 For non-equity securities, including warrants and asset-backed securities which are issued under an offering programme or are issued in a continuous and repeated manner by credit institution, the issuer may choose to publish a base prospectus. A base prospectus is a prospectus containing all relevant information concerning the issuer and the securities, except that the fi nal terms for securities to be offered under the offering programme which are not known at the time of the publication of the base prospectus are omitted and published separately at a later time.57 Format58 and contents (except omission of the fi nal terms)59 of a base prospectus are, in general, the same as format and contents of a regular prospectus in single document form.

5.7.2 Neither the Directive nor the Implementation Regulation defi nes the expression “fi nal terms”. However, it follows from Article 22(2) of the Implementation Regulation that fi nal terms may be any information item to be disclosed under the appropriate securities note and building blocks which is omitted from a base prospectus because it is not known at the time the base prospectus is approved and can only be determined at the time of the individual issue. The Directive provides that the fi nal terms must be provided to investors and fi led with the competent authority as soon as possible and if possible in advance of the offer, but does not contain any provisions as to the form of the disclosure of fi nal terms. Article 26(5) of the Implementation Regulation provides in this regard that fi nal terms attached to a base prospectus shall either be presented in the form of a separate document containing only the fi nal terms, or by inclusion of the fi nal terms into the base prospectus.

5.7.3 In order to allow multi-issuer programmes, Article 26(8) clarifi es that several issuers or offerors can compile several base prospectuses in one single document. However, this provision does not help with the problem of multiple Home Member States in case of multi-issuer programmes involving issuers with different Home Member States. The single document will need the authorisation of the competent authority of each issuer’s Home Member State, as the single document is regarded as being composed of several base prospectuses (each of which requires individual authorisation from the competent authority of the relevant Home Member State). A UK company having a debt issuance programme also involving Dutch and US fi nancing vehicles may, it seems, have to submit the base prospectus for approval to the authorities in the UK and the Netherlands (as the Home Member States of the UK and Dutch issuers) and, if different, the Home Member State determined for the US issuer, unless the programme is restricted to non-equity securities with a minimum denomination of €1,000, exchangeable securities where the underlying securities are not issued by group entities and certain types of cash-settled warrant or option. In order to provide a practical solution, Recital (27) of the Implementation Regulation proposes that “the respective competent authorities should act in co-operation and, where appropriate, transfer the approval of the prospectus in

57 Article 2(1)(r) and Article 5(4) and Article 22(2) of the Implementation Regulation.

58 Cf. Article 26 of the Implementation Regulation.

59 Cf. Article 22(2) of the Implementation Regulation.


accordance with Article 13(5)” of the Directive, which allows the competent authority of the Home Member State to refer the approval of the prospectus to the competent authority of another Member State. However, it remains to be seen whether and how competent authorities will actually negotiate the transfer of jurisdiction in such cases.

5.7.4 There are also unanswered questions about the transition from the present regime for issuance programmes to the new regime. Existing programme documentation will not, it appears, be valid as from 1 July 2005; some issuers may therefore face the prospect of having to produce two offering circulars for their issuance programmes during 2005.60

5.8 Subsequent disclosure of the fi nal offer price and the amount of securities

5.8.1 While the omission of the fi nal terms and the publication of a base prospectus is only available for certain types of issue, Article 8(1) allows the publication of a regular prospectus in which the fi nal offer price and the amount of securities to be offered are omitted. Once the fi nal offer price and/or the amount of securities are determined, they must be fi led with the competent authority and published in accordance with the publication requirements for the prospectus under the Directive.

5.8.2 However, Article 8(1) requires that the criteria and/or the conditions in accordance with which the fi nal offer price and/or the fi nal amount of securities will be determined are disclosed in the prospectus. If only the offer price has been omitted, the indication of a maximum offer price in the prospectus will be suffi cient. If these disclosures are not made, investors will be entitled to withdraw their orders for at least two days after the fi nal offer price and amount of securities have been published. This provision may have some impact on practices, like bookbuilding, where the offer price will only be determined upon closing of the offer. However, in most of these cases it will be possible to set out in the prospectus the criteria for determining the fi nal terms of the offer determined or a maximum offer price.

5.9 Supplement

5.9.1 A supplement to the prospectus must be published when signifi cant new factors, material mistakes or inaccuracies relating to the information included in the prospectus arise between approval of the prospectus and the fi nal closing of the public offer or the time when trading on a regulated market begins.61

5.9.2 There are two aspects of the obligation to publish a supplement under the Directive which may cause diffi culty. First, the competent authority has 7 working days to approve the supplement. That period appears rather long if a supplement has to be published at short notice before the offer closes. However, a co-operative competent authority should be able to authorise a supplement in a shorter period. Moreover, as the Directive only defi nes a maximum period, Member States are not prevented from providing shorter

60 In the April 2004 edition of “List!”, the UKLA stated that “we cannot approve a document for compliance with [the Prospectus Directive]

requirements before 1 July 2005 ... we will put procedures in place so that issuers can submit their PD compliant programme documents to us for vetting some months before 1 July 2005”.

61 Article 16(1).


periods under their national laws. A greater potential diffi culty for issuers is that Article 16(2) provides that investors who have already agreed to purchase or subscribe for the securities before publication of the supplement have a right to withdraw their acceptance within a period of at least two working days after the publication of the supplement.

5.10 Incorporation by reference

5.10.1 In accordance with Article 11 of the Directive information may be incorporated in the prospectus (except the summary) by reference. However, incorporation by reference is only allowed for documents which have been approved by the competent authority of the Home Member State or fi led with it in accordance with the Directive. Under Article 28 of the Implementation Regulation such documents include in particular:

> annual and interim fi nancial information,

> documents prepared for specifi c transactions, such as mergers or demergers,

> audit reports and fi nancial statements,

> memorandum and articles of association,

> earlier approved and published prospectuses and/or base prospectuses,

> regulated information, and

> circulars to security holders.

5.10.2 However, not all of these documents will necessarily require prior approval by the competent authority. It is therefore unclear whether all these types of documents may actually be incorporated by reference. On the other hand, it will be suffi cient if the documents to be incorporated by reference have been fi led with the competent authority in accordance with Article 10 of the Directive, which requires fi ling and publication of a document containing (or referring to) all information which the issuer has published over the preceding 12 months (see paragraph 6.2 below). It is, however, unclear whether it will be suffi cient for incorporation by reference if the issuer has (as permitted by Article 10) merely fi led a list with references to the information it has published and has not fi led the underlying information with the competent authority. Neither the Directive nor the Implementation Regulation address this question. Finally the incorporation of documents by reference will be limited by the language of these documents, as incorporation by reference will, it appears, only be allowed if the incorporated document is drawn up in the same language as the prospectus or in English, to the extent an English prospectus would have been permitted under Article 19 of the Directive.62

62 Article 28(2) of the Implementation Regulation. The reference to Article 19 of the Directive is ambiguous.


5.11 Publication

5.11.1 The prospectus must be made available to the public a reasonable time before the public offer or admission to trading.63 In case of an initial public offer of a class of shares not already admitted to trading on a regulated market the publication must take place at least six working days before the end of the offer. Publication may be made by one of the following means:64

> by insertion in one or more national or supra-regional fi nancial newspapers;

> by making the prospectus available in printed form, free of charge, at the offi ces of the market where the securities are to be admitted to trading or at the registered offi ce of the issuer and the offi ces of the fi nancial intermediaries;

> by publishing the prospectus in electronic form on the issuer’s web-site and on the web-sites of fi nancial intermediaries;

> by publishing the prospectus in electronic form on the web-site of the market where the securities are to be admitted to trading; or

> by publishing the prospectus in electronic form on the web-site of the competent authority of the Home Member State, if that competent authority has decided to offer this service.

5.11.2 A Home Member State may provide that prospectuses which are published in paper form must, in addition, be published in electronic form on the issuer’s and fi nancial intermediaries’ web-site(s). In any case, the competent authority must publish on its web-site over a period of 12 months either the prospectuses that it has approved or a list of these prospectuses, including, if possible, a hyperlink to the prospectuses in electronic form. Where the prospectus is in electronic form, a paper copy must be delivered to investors, on request and free of charge. Text and format of the prospectus, whether made available in paper form or electronic form, must always be identical to the version approved by the competent authority. In addition, the Home Member State may require publication of a notice stating how the prospectus has been made available and where it can be obtained.

5.11.3 Article 14 promotes the publication of prospectuses on the Internet and this form of publication may be made mandatory by the Home Member State. Whether this will result in lower costs for issuers remains to be seen, as issuers will still be obliged to produce a paper copy and deliver it to investors, free of charge, on their request. The internet publication of prospectuses may raise a number of issues:

63 Article 14(1).

64 Article 14(2).


> Security. The Implementation Regulation provides that the “fi le format shall be such that the prospectus or base prospectus cannot be modifi ed”.65 This apparently refers to fi le formats such as .pdf. However, it is doubtful whether there are any fi le formats which provide absolute security against unauthorised modifi cation. It remains unclear who will bear the responsibility (and possibly, liability) for unauthorised modifi cation of the web-site.

> Availability. The Implementation Regulation requires that the prospectus must be easily accessible and investors must have the possibility of downloading and printing the prospectus.66 There is, however, no guidance on what should happen in the event of a technical breakdown during the offer period (which is not unlikely given that a large number of investors may be accessing the web-site at the same time).

> Breach of law in non-EU countries. There is the danger of the prospectus being accessed by residents in Member States or third countries where no public offer is permitted. Article 29(2) of the Implementation Regulation therefore requires the owners of the relevant web-sites to take measures, such as the insertion of warnings related to the addressees of the offer, to avoid targeting residents of other countries where no public offer is made. However, a mere warning may not be suffi cient to avoid issues under the laws of third countries which treat the publication of a prospectus on the internet, as an offer addressed to its residents.67 Issuers who publish their prospectus on the Internet should therefore take steps to ensure that the relevant web-site can only be accessed by persons who identify themselves as residents of the countries in which the offer is made.

65 Article 29(1) No. (2).

66 Article 29(1) Nos. (1) and (4).

67 See, for example, the SEC’s 1998 interpretive release on “Use of Internet Web Sites to Offer Securities, Solicit Securities Transactions, or Advertise Investment Services Offshore” (International Series Release 1125).


vi. other provisions

6.1 Advertisements

6.1.1 Any advertisement made by an issuer which relates to an offer to the public or to an admission to trading must comply with the following rules:68

> The advertisement must state that a prospectus has been or will be published and indicate where investors can obtain it.

> Advertisements must be recognisable as such and must not contain inaccurate or misleading information. The information contained in the advertisement must be consistent with the prospectus.

> All information concerning an offer or admission to trading, whether disclosed orally or in writing, must be consistent with the information contained in the prospectus.

> If no prospectus is required in accordance with the Directive, material information provided by an issuer or an offeror which is addressed to qualifi ed investors or special categories of investors must be disclosed to all investors to whom the offer is addressed.

6.1.2 Advertising activity will be supervised by the competent authority of the Home Member State. It appears that Article 15 establishes minimum requirements for the supervision of advertisements, but does not fully harmonise the different national rules on advertisements. Member States may, therefore, be entitled to apply stricter rules relating to advertisements. Article 34 of the Implementation Regulation contains a non-exhaustive list of means of dissemination of advertisements. The signifi cance of this list is unclear.

6.1.3 The requirement that advertisements or any other information relating to the offer or admission to trading must be consistent with the prospectus may appear to confl ict with obligations under the Market Abuse Directive 2003/6/EC if the issuer (or, arguably, a bank or other person acting on behalf of the issuer) produces or disseminates research on the securities. In this case the relevant research department is required to produce the research independently and irrespective of any interests the issuer might have.69 Presumably, the provisions of the Market Abuse Directive, as the more specifi c rule, should prevail in these circumstances, although it would have been preferable if the Commission had addressed the issue in the Implementation Regulation.

6.1.4 The Directive provides that, in the case of an offer for which no prospectus is required, material information provided by the issuer or offeror to some investors must be given to all investors.70 The precise scope of this obligation is not clear. Presumably it does not apply to securities transactions which are not “public offers”, such as negotiated

68 Article 15.

69 Article 6(5) of the Market Abuse Directive together with Article 6(2) of the Commission Directive 2003/125/EC implementing the Market Abuse

Directive (OJ 2003 L 339, p. 73, also available at http://europa.eu.int/eur-lex/pri/en/oj/dat/2003/l_339/l_33920031224en00730077.pdf).70

Article 15(5).


auction sales of private companies; this would appear to go beyond the Directive’s scope. However, where the transactions falls within the defi nition of an “offer to the public” in the Directive but an exemption applies so that no prospectus is required, the Directive appears to impose a new positive duty on issuers or offerors to ensure equality of material information given to investors. This could prove troublesome in a number of cases, such as offers of shares under employee share schemes made to both management and employees generally.

6.2 Annual information

6.2.1 Article 10 of the Directive requires issuers whose securities (with a denomination of less than €50,000) are traded on a regulated market to publish annually a document which contains or refers to all information they have published or made available during the preceding 12 months in one or more Member States or in third states under requirements of applicable laws and rules dealing with securities and securities markets. This document must be fi led with the competent authority of the Home Member State after publication of the issuer’s fi nancial statements and published by one of the means of publication which Article 14 of the Directive prescribes for the publication of prospectuses.71 There are no further requirements as to the format of the document. A list with references to the information an issuer has published during the year seems to be suffi cient. The limitations relating to the incorporation of information by reference in accordance with Article 11 do not apply to the publication required pursuant to Article 10; the document need only indicate where the information can be obtained. A list with hyperlinks published on the Internet should meet this requirement.

6.2.2 Article 10 has been criticised on the basis that it does not belong in the Prospectus Directive, but should have been addressed in the proposed Transparency Obligations Directive. Moreover, it has been argued that it could mislead investors if circulars or other information which were published during the preceding fi nancial year and may now be out of date are in effect published again after publication of the issuer’s fi nancial statements. This concern has been addressed in Article 27(3) of the Implementation Regulation, which provides that the document should include a statement indicating that some information may be out-of-date, if this is the case. However, this does not appear to oblige the issuer to indicate which information is outdated.

6.3 Liability

The Prospectus Directive does not harmonise the laws of the Member States on prospectus liability. However, Article 6 requires Member States to provide under their national laws that the issuer, its management or administrative bodies are liable for the information given in a prospectus. Member States must further ensure that their laws on civil liability apply to those

71 Article 10(2) of the Directive and Article 27 of the Implementation Regulation.


persons responsible for the information given in the prospectus who are to be named in the prospectus. Accordingly, the Directive requires that each Member State must have laws on prospectus liability, but the scope and application of those rules may vary widely between different Member States.

Slaughter and MayJune 2004

© Slaughter and May, 2004

This memorandum is for general information only. It is not intended to contain defi nitive legal advice which should be sought, as appropriate, in relation to any particular transaction. If legal advice is required please contact your usual adviser at Slaughter and May .

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