Implementation of the EU transparency directive

January 2006

The EU Transparency Directive (TD) (2004/109/EC) introduces a new European transparency regime for EU listed companies. The TD affects those companies whose securities are admitted to trading on a regulated market within an EU member state. Member states must implement the TD by 20th January 2007.

The TD requires these companies to disclose periodic and ongoing information for investors on a Pan-European basis.

The TD will require substantial revisions to the Listing Rules, particularly Chapter 9, which sets out some of an issuing company's Continuing Obligations. It also expands the scope of FSA's regulation to include major shareholding disclosures (which is currently regulated by the DTI). The TD is a minimum harmonisation directive so the UK may choose to impose additional requirements where it deems it appropriate to do so. Implementation of the TD will require careful consideration regarding any additional requirements.

All whose securities have been admitted to trading on a regulated market situated or operated within the EU, will be covered by the TD.

This briefing identifies some key TD issues for companies listed in the UK. They include requirements relating to:

periodic financial reporting (including new requirements for quarterly reports or management statements and for responsibility statements);
a new regime for disclosure of major shareholdings (which will run in parallel with, in effect, the current section 212 regime).

The TD replaces and updates parts of existing EU legislation - the "Consolidated Admissions and Reporting Directive" (CARD). The Directive is designed to enhance transparency on EU capital markets by establishing minimum requirements on periodic financial reporting and on the disclosure of major shareholdings for issuers whose securities are admitted to trading on a regulated market in the EU. The TD also deals with the mechanisms through which this information is to be stored and disseminated.

The FSA Rules Instrument is available at: http://fsahandbook.info/FSA/InstrumentsByDate.jsp?year=2006, and the text of the Transparency Directive is available at: http://europa.eu.int/comm/internal_market/securities/transparency/index_en.htm

KEY OBJECTIVES

The key objectives of the Directive are:

To improve annual financial reporting by issuers of securities through the disclosure of an annual report;
Increased disclosure of periodic financial information by issuers of shares through a mix of quarterly financial reporting for the first and third quarters of the financial year, and a more detailed half-yearly financial report;
To introduce half-yearly financial reporting for issuers of only debt securities;
More frequent disclosure of changes to major shareholdings within stricter disclosure deadlines;
To introduce a transitional provision to ensure that companies with existing authority to communicate with shareholders electronically will be able to rely on this authority to continue doing so; and
A requirement for firms covered by TD to disseminate information in a non-discriminatory way on a Pan-European basis. Each Member State must ensure that they appoint at least one official means of doing this.

IMPACT ON FIRMS

Electronic communications with customers

Companies, wishing to use electronic communication, which do not already have authority to use websites to communicate with shareholders, must:

obtain the agreement of each individual shareholder to do so; and
pass either a shareholders' resolution or amend their articles to permit the company to use website communications as the default.

If a shareholder fails to respond within 28 days, he will be deemed to have consented to website communication. The company must notify each shareholder whenever relevant shareholder information is published on the website.

The shareholder preference mailing can be undertaken in advance of the resolution or amendments to a company's articles and at least one Official List company has already canvassed shareholder preferences. It would be practical for companies to elicit shareholder preferences in advance of their next AGMs. They could do this by canvassing opinion when they send out their notice of AGM or their next shareholder mailing.

Dissemination and storage of regulated information

Issuers, with securities admitted to trading on a regulated market, will be required to disseminate regulated information in a fast, non-discriminatory manner on a pan-European basis. In addition, all regulated information will need to be stored and be easily accessible. A key issue for both CESR and subsequent member state implementation of the directive is the requirement imposed by the TD on each Member State to ensure that there is at least one officially appointed mechanism for this.

Increased liability for accuracy of reports

The new TD requirements may increase the liability of a listed company and its directors and auditors for the accuracy of financial reports. It is arguable that liability might extend beyond existing shareholders to all potential investors, and might also arise under the laws of each of the 27 member states.

Companies should give some thought to whether or not the processes and procedures they follow for producing and verifying the accuracy of their periodic financial reports should change to reflect the possibility of increased liability.

Major shareholdings - disclosure and investigation - dual regime

The TD contains new requirements for the notification of major shareholdings. The FSA Transparency Rules and the repeal of existing Companies Act provisions by the Company Law Reform Bill, will implement this provision in the UK. The new notification obligations on shareholders under the FSA's transparency rules will be different in several ways from their obligations to disclose information in response to a Section 212 notice under the Companies Act.

Disclosure of major shareholders' transactions

A notification requirement is triggered when the size of one's holdings reaches, exceeds or moves below certain thresholds. The DTI is currently responsible for this area of regulation under the Companies Act sections 198 - 208. Upon implementation of the TD, responsibility for major shareholding disclosures will move to the FSA. The thresholds and resulting notification requirements are subject to some exemptions and modifications. For example, the notification requirement does not apply if the shares are acquired for the sole purpose of clearing and settlement within the usual short settlement cycle; the 5% threshold may not apply if it is reached, exceeded or moved below by a market maker acting in its capacity as market maker; and there is no requirement for asset management companies to aggregate their voting rights if certain tests are met.

PERIODIC FINANCIAL REPORTING

Quarterly reporting

The TD aims to ensure that the financial information provided by listed companies is standardised and provided frequently and quickly. A key part of this strategy is the requirement that an issuer of shares must issue either quarterly reports or an interim management statement that, broadly:

gives a general description of its financial position and performance during the relevant period; and
explains material events and transactions and their impact on the financial position.

The FSA suggests that listed companies may be able to use trading statements to satisfy this obligation if they include the stated information. The FSA is not planning to issue any guidance to help listed companies to interpret these requirements.

Responsibility statements

The persons responsible within the listed company - usually the directors - will be required to state publicly that:

to the best of their knowledge, the annual financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the company's consolidated assets, liabilities, financial position and profit or loss; the annual management report includes a fair review of the development and performance of the business and the company's position, with a description of the principal risks and uncertainties that it faces (the same wording as used in the new directors' report business review requirements in the Companies Act 1985); and
the half-year management report includes a fair review of the important events that have occurred in the first six months of the financial year and their impact on the financial statements, with a description of the principal risks and uncertainties for the remaining six months (there are additional requirements relating to related parties' transactions).

IMPLEMENTATION DATES

The FSA proposes that the TD financial reporting rules should apply for reporting periods starting on or after 20 January 2007. It is not yet clear how this will work in practice and in particular when the obligation to produce quarterly reports/interim management statements takes effect.

ACTION REQUIRED

All companies listed in the UK must ensure they comply with the FSA Transparency Rules. Chief Executives, Company Secretaries, Financial Directors or other senior officers with responsibility for reporting must ensure they are familiar with the requirements and diarise for appropriate actions.

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