As part of the continued preparation for a No-Deal Brexit, the European Securities and Markets Authority (ESMA) on January 31, 2019 and subsequently on April 8, 2019, amended some of its Questions and Answers (the Q&A) regarding the Prospectus Directive—Directive 2003/71/EC1 (PD), as supplemented by the EU's Prospectus Regulation as well as Transparency Directive—Directive 2004/109/EC2 (TD). The changes will apply only in the event of the UK leaving the EU with no UK-EU Withdrawal Agreement in place i.e. in the event of a No-Deal Brexit. On April 12, 2019, ESMA also clarified on its website that the references to the original Brexit "Exit Date" to March 29 or April 12, 2019 ought to be read as referring to the new potential "No Deal Brexit Date" of October 31, 2019.3
This Client Alert assesses the relevance and impact of the amendments in light of Brexit regardless of the timeline to departure. The clarifications introduce a number of very important considerations for existing and future issuers as well as investors in securities that have a nexus to the UK. Both the PD and TD provide that issuers of equity securities such as shares and non-equity securities such as bonds, structured finance issuances etc. that are offered to the public in, or admitted to trading on, a regulated market in the European Economic Area (EEA)4 are required to select and notify a "home" Member State in the EEA. Upon a No-Deal Brexit, issuers from non-EEA jurisdictions and thus "third countries" as well as EEA issuers that have chosen the UK as their home Member State will need to choose a new home state in order to comply.
How did we get here?
To recap, the PD regime harmonizes the requirements for drafting, approving and distributing prospectuses published when securities are offered to the public or admitted to trading on a regulated market in the EU/EEA or the European Free Trade Association States (EFTA).5 The TD's aims are to ensure transparency of information about issuers whose securities are admitted to trading on a regulated market through a regular disclosure of periodic and on-going information and the dissemination of such information to the public.
More specifically, the clarifications set out in the Q&As impact:
- Issuers of equity securities and non-equity securities with denominations below €1,000 who currently have the UK as their PD home Member State. Were they to choose a new Member State, they should choose between the EU-27 Member States and/or the EEA/EFTA States in which they have activities after the Brexit Exit Date (either offers/admissions made after the withdrawal or admissions made before the withdrawal which continue after the withdrawal);
- Issuers admitted to trading on a regulated market within EU-27/EEA/EFTA who currently have the UK as their TD home Member State, these are then required to choose and disclose their new home Member State without delay following the Brexit Exit Date;
- Additionally, as the UK will be a third country, prospectuses and supplements approved by the UK FCA before the Brexit Exit Date cannot be used in the EU-27/EEA/EFTA after a no-deal Brexit as the right to passporting expires thus affecting new prospectuses in as much as the right to supplement those legacy passported prospectuses also expires; and
- Prospectuses which have not been passported into the EU-27/EEA/EFTA from the UK will not be permitted to be passported.
In relation to the PD, two new questions were included in January in the Q&A under numbers 103 and 104 and updated in April. The purpose of the Q&A is to promote convergence in the supervisory approaches in the application of the PD, and this is all the more relevant in light of the UK's transition to become a third country for the purposes of the prospectus regime. The two questions concern the choice of a home Member State for third country issuers, and even more specifically, the use of prospectuses approved by the UK post a no-deal Brexit. These are outlined below.
Question 1: Choice of home Member State for the purposes of the PD for third country issuers
Should there be no Withdrawal Agreement struck between the EU and UK, then the UK will become what the EU terms a "third country". The rules of EU access from third countries are not uniform, but they depend on the type of financial market transaction and target investor/counterparty.
Third country issuers with the UK as their home Member State and issuers who currently have the UK as their home Member State for Prospectus Regulation purposes will have to choose a new home Member State for offering securities to the public or to be admitted to trading in the EU-27/EEA/EFTA.
According to Article 2(1)(m)(iii) PD, third country issuers not mentioned in Article 2(1)(m)(ii), may choose as their "home" Member State the Member State where the securities are intended to be offered to the public for the first time after the date of entry into force of the amended TD or the Member State where the first application for admission to trading on a regulated market is made.
Article 2(1)(m)(ii) applied namely to any issuers of:
(i) Non-equity securities whose denomination per unit amounts to at least €1,000;
(ii) Non-equity securities giving the right to acquire any transferable securities or to receive a cash amount, as a consequence of their being converted or the rights conferred by them being exercised provided that the issuer of the non-equity securities is not the issuer of the underlying securities or an entity belonging to the group of the latter issuer;
(iii) Non-equity securities in a currency other than euro, provided the value of such denomination is nearly equivalent to the EUR sum in (i),
in which case the "home" Member State is the Member State where the issuer has its registered office, or where the securities were or are to be admitted to trading on a regulated market or where the securities are offered to the public, at the choice of the issuer, the offeror or the person asking for admission.
ESMA's Q&A aims to clarify what this means for entities with UK as their home Member State as the PD provision does not take into account a situation of a Member State withdrawing from the Union. As the provision presents third country issuers with a choice when determining their home Member State, ESMA thinks that it should be applied in a way allowing issuers to choose a home Member State as if choosing for the first time, resetting their choice at the time of the UK's withdrawal. This means that such issuers should choose between the EU-27/EEA/EFTA States in which they have activities after the UK's withdrawal—offers or admissions made after the withdrawal or admissions made before the withdrawal which continue after the withdrawal.
ESMA further clarifies that issuers would not be able to choose the Member State in which offers that opened and closed before the UK's withdrawal took place. As such, if an issuer has previously offered securities in one Member State but that offer is not closed, this Member State cannot be chosen but rather a different Member State(s) where the issuer wishes to offer securities to the public or/and to apply for admission to trading after the UK's withdrawal. Similarly, if an issuer has the UK as its home Member State and is admitted to trading in the UK and other Member States, after the UK's withdrawal, the issuer can choose these Member States, as it has an ongoing admission to trading there after the withdrawal, or a new Member State where it intends to offer securities to the public.
ESMA is of the opinion that the choice of home Member State under PD Article 2(1)(m)(iii) is definitive and thus should be made only once except where the specific circumstances described in that provision arise.
Question 2: The use of prospectuses approved by the UK post a UK withdrawal without a Withdrawal Agreement
ESMA splits this question in two parts in clarifying how prospectuses approved by the UK's Financial Conduct Authority (FCA), in its role as the UK Listing Authority and thus competent securities regulator, while the UK was a Member State are to be viewed in the EU-27/EEA/EFTA and how issuers with prospectuses approved by the UK before its withdrawal should proceed following the UK's withdrawal.
The first part of the answer states that in ESMA's opinion, prospectuses approved by the UK's FCA can no longer be passported to EU-27/EEA/EFTA states, as the UK will be a third country and no longer covered by the passporting mechanism of Article 18 PD. The same applies to supplements approved in the UK before its withdrawal. Similarly, prospectuses, if passported to one or several EU-27/EEA/EFTA States before the UK's withdrawal, can no longer be supplemented. Thus it will not be possible to complete an already passported prospectus by supplement as required by Articles 9 and 16 PD as the UK as a third country will no longer be able to approve documents under the PD and cannot passport documents into the EU-27/ EEA/EFTA.
Moreover, since it will not be possible to supplement these prospectuses, they cannot therefore be used, as this would entail a risk of a significant new factor, material mistake or inaccuracy arising without the issuer being able to inform investors in line with Article 16 PD. The absence of a supplement would in turn deprive investors of their withdrawal rights. Consequently, UK approved prospectuses that were passported into the EU-27/EEA/EFTA before the UK's withdrawal cannot be used after its withdrawal for new offers and admissions to trading or for offers which were commenced before the UK's withdrawal and which the issuer wishes to continue beyond the withdrawal date. "Grandfathering" is not contemplated.
The second part of the question deals with four issues: How to continue a public offering in the EU-27/EEA/EFTA; how to maintain an admission to trading on a regulated market in the EU 27/EEA/EFTA; how to make a new offer to the public in the EU-27/EEA/EFTA; and how to seek a new admission to trading on a regulated market EU-27/ EEA/EFTA. For all these scenarios ESMA considers that the issuer is not obliged to draw up an entirely new prospectus for the new approval within the EU-27/EEA/EFTA, i.e. the issuer would be able to submit the prospectus already approved by the UK FCA to the competent authority of its new home Member State.
So how can UK now third-country issuers continue an offer to the public in EU-27/EEA/EFTA post-Brexit?
If an issuer has an open offer to the public in an EU Member State which is based on a prospectus approved by the UK FCA and then passported to the Member State, and the issuer wishes to continue this offer beyond the date on which the UK withdraws, ESMA thinks that the issuer would need to have a prospectus approved in its new EU-27/EEA/EFTA home Member State for the part of the offer taking place after the UK's withdrawal.
It should be noted that the issuer can only choose a new home Member State when its existing home Member State has withdrawn from the EU. As such, it can only formally seek approval of a prospectus by its new home Member State before the Brexit Exit Date and, according to Article 3(1)PD, an offer of securities may not be made without prior publication of a prospectus. As approval by a new Member State may take more time than a day, it is likely that the issuer will have to start a new offer once a prospectus is approved within EU 27/EEA/EFTA.
How can a UK now third-country issuer maintain an admission to trading on a regulated market in EU 27/EEA/EFTA?
If an issuer is admitted to trading on a regulated market in an EU Member State based on a prospectus approved by the UK's FCA and passported to that Member State, and the issuer wishes to continue to be admitted to this market beyond the UK's withdrawal date, ESMA is of the opinion that the admission to trading on a regulated market in the Member State remains valid, and the issuer would not need to apply for approval of a new prospectus within EU-27/EEA/EFTA to maintain the admission to trading.
How can a UK now third country issuer make a new offer to the public in EU 27/ EEA/EFTA?
If an issuer is considering conducing an offer of non-equity securities to the public in an EU Member State and has a base prospectus, approved by the UK's FCA and passported to that Member State before the UK's withdrawal, which still has a number of months left on its validity under Article 9 PD, ESMA considers that the issuer would need to have a prospectus approved in its new EU-27/EEA/EFTA home Member State in order to be able to make the offer to the public in the EU Member State.
How can a UK now third country issuer seek a new admission to trading on a regulated market EU-27/ EEA/EFTA?
If an issuer wants to seek admission to trading on a regulated market in an EU Member State and has a prospectus approved by the UK FCA and passported to the Member State before the UK's withdrawal, which still has a few months left on its validity under Article 9 PD, ESMA thinks that the issuer would need to have a prospectus approved in the new EU-27/EEA/EFTA home Member State first in order to seek admission to trading on a regulated market in the Member State.
Question 3: Choice of home Member State for the purposes of the Transparency Directive for third country issuers
Question 26 in ESMA's revised Q&A on the TD concerns the obligations which an issuer—which currently has the UK as its home Member State and is admitted to trading in one or more regulated markets in EU-27/EEA/EFTA—will have in relation to disclosing its choice of a new home Member State. ESMA is of the opinion that such an issuer must determine its TD home Member State according to the rules laid down in Article 2(1)(i) TD, namely that home Member State means in the case of an issuer of debt securities the denomination per unit of which is less than €1,000 or an issuer of shares where the issuer is incorporated in the EU, the Member State in which it has its registered office or where the issuer is incorporated in a third country, the Member State in which it is required to file the annual information with the competent authority.
The issuer would thus be required to disclose its new home Member State in accordance with Articles 20 and 21 TD and disclose its home Member State to the competent authority of the Member State where it has its registered office, the competent authority of the home Member State and the competent authorities of all host Member States.
In light of timing issues, ESMA believes that it would be better if issuers chose and disclosed their new home Member State under the TD without delay following the Brexit Exit Date. Should issuers not do that within three months following the UK's withdrawal, ESMA is of the opinion that the Member State where the issuer's securities are admitted to trading on a regulated market should be considered its home Member State. If the securities are admitted to trading on regulated markets situated or operating within more than one Member State, ESMA is of the view that those Member States should be considered the issuer's home Member State until a subsequent choice of a single home Member State has been made and disclosed by the issuer.
Outlook and next steps
The Brexit Exit Date may (certainly at the time of writing) be delayed to October 31, 2019, but the issues raised by ESMA's Q&A and what this might mean for offering documentation, investor communications and disclosures, tax and reporting both for existing, tap and future issuances should not be underestimated. Moreover, these changes, even if they are to apply only in the event of a No-Deal Brexit, are likely to require dedicated workstreams within issuers but may also require consents from stakeholders in addition to moves to select new "home" Member States and/or obtaining approvals from EU-27/EEA/EFTA listing authorities. Regrettably, as currently drafted, none of the national "emergency Brexit" laws of the EU-27 Member States6 provides relief to what is effectively ESMA reducing the usability of UK-approved prospectuses for new issuances across the EU-27/EEA/EFTA in the event of No Deal Brexit. This is perhaps counterproductive even if those national laws cannot contradict EU-level action.
Footnote
4. The EU Member States and the three EEA EFTA States (Iceland, Liechtenstein and Norway) as united into an Internal Market governed by the same basic rules aiming to enable goods, services, capital and persons to move freely about the EEA in an open and competitive environment, a concept referred to as the four freedoms.
5. EFTA is the intergovernmental organization of Iceland, Liechtenstein, Norway and Switzerland, set up in 1960 by its then seven Member States for the promotion of free trade and economic integration between its members.
6. See our dedicated coverage here.
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