Main Market companies and companies with debt securities listed on a regulated market will no longer have to publish an interim management statement (IMS) in each half of their financial year when the FCA implements changes to the Transparency Directive that have just been approved by the Council of the EU. For issuers whose home Member State is the UK, the requirement is expected to be removed at some point in the first half of 2014 through changes to chapter 4 of the Disclosure and Transparency Rules (DTR 4). But companies will be free to publish interim management statements or other forms of mid-period trading statement voluntarily. At the same time, the FCA is also expected to extend the deadline for publishing half-yearly (interim) financial results from two months to three months after the end of the relevant reporting period.
Removing the obligation to publish IMSs is designed to reduce the burden on listed companies, particularly smaller ones for whom the cost of publishing IMSs is likely to be disproportionate to the benefit to investors. IMSs have also been criticised for encouraging short-termism and unreliable financial reporting. Not all Member States will necessarily abolish the requirement for IMSs, however: the amended Directive allows Member States to continue to require IMSs if doing so (i) “does not constitute a disproportionate financial burden in the Member State concerned, in particular for small and medium-sized issuers”; and (ii) the information required to be included “is proportionate to the factors that contribute to investment decisions by the investors in the Member State concerned”. Some overseas legislation and stock exchanges may therefore continue to require issuers (particularly those with shares admitted to a “premium” market segment, or those of a certain size or operating in an industry of structural importance) to publish IMSs or something similar.
Of course, if a development occurs during a half-year period that constitutes inside information (i.e. broadly, unpublished price-sensitive information that is sufficiently precise for an investor to rely on), it will continue to be necessary to make an announcement as soon as possible unless one of the (narrow) exemptions applies.
Other changes to the Transparency Directive are likely to be implemented later, probably around the end of 2015. The other changes include:
• EU-listed companies and large unlisted EU-incorporated companies involved in the extractive (e.g. oil, gas and mining) industries or in the logging of primary forests will have to disclose payments of EUR100,000 or more made to governments of countries in which they operate on both a country- and project-specific basis. The information will have to be included in the annual report, which must be published no later than six months after the end of each financial year. The new requirement, which is intended to discourage corruption and tax evasion, is based on guidelines developed by the Extractive Industry Transparency Initiative (EITI) and is similar to rules that are being introduced under the US Dodd Frank Act. For more details see the LawNow article “Transparency in the extractive industry: a step closer to reality” published on 22 July 2013.
• Half-yearly and annual reports will have to remain publicly available for ten (rather than five) years.
• Some technical amendments may be made to the major shareholding notification regime in chapter 5 of the Disclosure and Transparency Rules (DTR 5). At present, a Member State’s regime must cover holdings of shares and financial instruments that give the holder a right to acquire shares that are in issue (such as stock-settled call options), but it need not cover cash-settled derivatives. This “notification gap” can allow an investor – especially a would-be predator – to acquire a large stake in a listed company without having to make public the level of its holding. The amended Directive therefore requires Member States to extend the major shareholding notification regime to financial instruments that have a similar economic effect to holding shares, or to an instrument that entitles the holder to acquire shares, even if settlement can be only in cash, and it specifies in fairly broad terms how such rules should work. The details will be specified in guidance to be published by the European Securities and Markets Authority (ESMA) and/or adopted by the Commission in due course. As the FCA chose to extend DTR 5 to such instruments in June 2009, and the provisions in the amended Directive appear to be heavily based on the UK rules, few substantive changes to DTR 5 are likely to be needed. However, some points of detail may need to be changed. DTR 5 also applies to UK-incorporated companies with shares traded on AIM.
• Annual financial reports will have to be prepared in a single reporting format from 1 January 2020. ESMA will develop draft regulatory standards for adoption by the European Commission.
• By January 2018 there will be a web-portal that will provide a single electronic access point to regulated information published by issuers in all Member States. At present, investors must search for regulated information through 27 separate national storage mechanisms.
• Changes may be made to the sanctions that the FCA can impose on an issuer and/or its directors for breaching rules that derive from the Transparency Directive, in order to ensure that competent authorities across the EEA have similar powers of sanction.
• Some amendments to the concept of “home Member State” will be required. In particular, for companies who are able to elect their home Member State (e.g. some EEA issuers of debt securities with denominations above EUR1,000 and non-EEA issuers in certain circumstances), the Amended Transparency Directive sets out specific requirements as to when and how that election must be made and details of how and to whom it must be notified. This will prevent any suggestion that a company could circumvent transparency obligations by not nominating a home Member State. A consequential amendment has also been made to the definition of “home Member State” in the Prospectus Directive.
All Member States are required to implement the amended Directive by the date falling two years after its entry into force, which will be 20 days after it is published in the Official Journal (which is expected to happen in the next month or so).
Difficulties remain
The changes to the major shareholding notification regime are designed to ensure that all Member States treat holdings of contracts for difference and other cash-settled derivatives in the same way. But the Commission has decided not to harmonise the thresholds at which holdings must be notified. Under Article 9 of the Directive, Member States must require notification at 5%, 10%, 15%, 20%, 25%, 30%, 50% and 75%, but Member States can choose to require notification at lower and/or additional thresholds. The UK requires notification in most circumstances at 3% and whenever a holding goes through any whole percentage above 3%, whereas some other Member States require notification only at the thresholds specified as a minimum in the Directive. For banks, investment funds and other financial institutions that hold shares that are traded on a variety of EEA markets, or financial instruments that relate to such shares, complying with the notification regime of each market can cause significant practical difficulties and compliance costs. These difficulties will only be exacerbated when each Member State extends its regime to cover financial instruments with a similar economic effect to holding shares, or to an entitlement to acquire shares, so that market participants will have to put in place systems and procedures to track the holdings of such instruments, calculate the level of holding on a delta-adjusted basis, aggregate it with holdings of shares and stock-settled instruments, and notify the issuer of the total percentage holding broken down by category.
Background
The Transparency Directive (Directive 2004/109/EC) was adopted in December 2004 and had to be implemented in Member States by 20 January 2007. Among other things, Member States must require companies whose securities are listed on a regulated market in their territory to publish annual and half-yearly (interim) financial results and an IMS during each half-year period; and require persons holding voting rights in such companies to notify the company concerned, which in turn must notify the market, when their holding reaches or passes through certain percentages (as described in more detail above). In the UK the provisions of the Directive were implemented primarily through changes to the existing rules on financial reporting and through the replacement of the major shareholding notification regime in sections 198-211 Companies Act 1985 with new rules in DTR 5 that were similar in broad terms, but different in various points of detail, to the old CA 1985 regime.
In June 2009 the FCA extended DTR 5 to catch financial instruments with a similar economic effect to holding shares, or to an entitlement to acquire shares, and it published Q&As dealing with some of the technical issues that can arise in relation to the extended regime.
In 2009 the Commission consulted on whether improvements could be made to the Directive. On 17 October 2013, the Council of the EU adopted the Commission’s proposal for a Directive amending the Transparency Directive (the Amending Directive).
On 4 November 2013 the House of Commons Business, Innovation and Skills Committee published the Government’s response to the BIS Committee’s report following its inquiry into the Kay Review of UK Equity Markets and Long-Term Decision Making, and the Government’s response to that review. This says:
“The Government is committed to removing mandatory quarterly reporting for UK companies, and following publication of the new Directive in the Official Journal, intends to implement the relevant sections of the revised Directive in the UK as soon as is practical… The Government has asked the FCA to set out the timetable for [a consultation on the necessary changes to DTR 4] once the Directive comes into force.”
Sources
Amending Directive: http://register.consilium.europa.eu/pdf/en/13/pe00/pe00037.en13.pdf
Transparency Directive: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2004:390:0038:0057:EN:PDF
Government Response to the report of the House of Commons Business, Innovation and Skills Committee on the Kay Review: http://www.publications.parliament.uk/pa/cm201314/cmselect/cmbis/762/762.pdf
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