Equity Capital Markets: 2019 - Changes to the Prospectus Regime Make for a More User Friendly Environment
05 December 2019
In this review of 2019 we highlight some of the main items impacting on equity capital markets. These include:
New prospectus regime effective from 21 July 2019
Institutional Shareholder Services Inc. (ISS) and Glass Lewis & Co. (Glass Lewis) have both recently released updates to their proxy voting guidelines
An outline of upcoming legislation
Changes to the laws relating to Prospectuses
In 2019 major changes took effect in the regulatory Prospectus framework, which is a multi-layered regime. Overall, the changes have two main purposes:
To reduce the burden on issuers, and
To make prospectuses more user-friendly
We highlight the main legislation, delegated acts, technical standards and rules which have come into effect in 2019 in this multi-layered regime.
The Prospectus Regulation (EU2017/1129) (the “Prospectus Regulation”) came into force in July 2017, and it repealed and replaced previous European Prospectus law on a phased basis, with the majority of the changes applying from 21 July 2019. See here for more in-depth discussion on the changes.
At a national level, the European Union (Prospectus) Regulations 2019 (the "Irish Regulations") came into force on 21 July 2019 and reflect the changes that came into effect from EU law. The Irish Regulations replace the existing Irish Prospectus (Directive 2003/71/EC) Regulations 2005.
Delegated acts applicable to prospectuses are:
Delegated Regulation on the format, content, scrutiny and approval of the Prospectus (Delegated Regulation (EU) 2019/980)
Delegated Regulation setting regulatory technical standards on the key financial information to be included in a summary; publication and classification of prospectuses; advertisements; and supplements (Delegated Regulation (EU) 2019/979), and
Delegated Regulation on the minimum information contents of an exempt document relating to a takeover or merger (ESMA published its Technical Advice on 29 March 2019)
European Securities and Markets Authority (“ESMA”)
In 2019, ESMA updated its Questions and Answers on the Prospectus Regulation (updated 4 December, version 3) to take into account the new Prospectus Regulation. The purpose of this document is to promote common, uniform and consistent supervisory approaches and practices in the day to day application of the Prospectus Regulation throughout Europe.
ESMA has updated other prospectus related documents too, including the ESMA guidelines on risk factors under the new Prospectus Regulation. The new Prospectus Regime introduces significant change to risk factors and summaries and a range of changes to disclosure requirements more generally. See here for our article on ESMA’s guidelines on risk factors under the new Prospectus Regulation.
See here for a link to the ESMA library which contains all the ESMA documents, guidelines and reports relating to prospectuses.
Irish Framework: main sources
On 21 July 2019, the Central Bank (Investment Market Conduct) Rules (S.I. No. 366 of 2019) came into force. The Central Bank (Investment Market Conduct) Rules are issued under Part 23 of the Companies Act 2014. The Central Bank (Investment Market Conduct) Rules repeal the Market Abuse Rules and the Transparency Rules previously issued by the Central Bank.
Finally, the Finance (Tax Appeals and Prospectus Regulation) Bill 2019 has recently been published which will amend the prospectus law provisions in Part 23 of the Companies Act 2014. The Bill was passed by the Houses of the Oireachtas and it should be enacted soon. The prospectus related amendments are mainly technical in nature. The Bill proposes to update the definition of ‘local' offer to reflect the increase in threshold to €8 million. This is a welcome change for SMEs. Once this change takes effect, SMEs making security offerings up to €8 million can submit a local offering filing to the Companies Registration Office instead of having to issue a full prospectus. Due to the increased threshold, additional disclosure requirements are to be inserted into the local offer regime to improve investor protections compared to those currently in place under the Companies Act 2014.
Proxy Voting Guidelines updates
ISS and Glass Lewis have updated their proxy voting policies for shareholder meetings held on or after 1 February 2020 (ISS) or 1 January 2020 (Glass Lewis). Although the Glass Lewis guidance does not expressly apply to Irish companies, traditionally its UK guidance has been applied to them. See links to the ISS proxy voting policy and to the Glass Lewis proxy voting policy. We have set out the key changes to the policies below.
The ISS changes include:
- A requirement for a board gender diversity policy
- Tenure to be considered as one of several key indicators relevant to the re-election of chairs
- The removal of the exceptions for smaller companies from (i) the expectation that at least 50 per cent of their boards, excluding the chair, should comprise independent directors (ii) the prohibition of chairs to sit on the Audit Committee
- For new directors, the alignment of pension arrangements with the wider workforce, and disclosure of whether this is the case
- For incumbent directors, companies to align contribution rates with the workforce over time, recognising that many investors expect this to be achieved in the near-term
- Outstanding LTIP awards should be pro-rated for performance and time served as an executive
- ISS will (rather than may) now normally recommend a vote against the Remuneration Report where bonus targets are not disclosed
- Formal notice of termination of employment should be served no later than the day on which an executive's leaving date is announced, and
- The discretion of Remuneration Committees has been amended
Glass Lewis's changes include:
- The inclusion of Board skills matrices in their analysis of director election proposals at all FTSE 350 companies (previously just FTSE 100)
- A likely recommendation against election of the Nomination Committee chair if the board has not addressed major issues of board composition (including achieving a 33% gender balance)
- A likely recommendation against the election of an Audit Committee chair where the Committee has not held a minimum of three meetings during the year
- Like ISS, all boards to be at least 50% independent and hold annual director elections. In 2020 it will accept an explanation in lieu of compliance, if the company intends to meet the Code's enhanced board independence expectation in 2021
- Salary increases and pension contributions to reflect those awarded to a company’s wider workforce
- All incentive plans to feature clear and transparent award limits, expressed as a multiple of base salary per employee
- Post-employment shareholding requirements are included among best practice features generally expected of remuneration policies
- Plans that allow for more than 25% (previously 50%) of an award to vest for threshold performance to be looked at sceptically, and
- Downward Remuneration Committee discretion expected where the company has suffered an exceptional negative event, even if formulaic targets have been met
Companies should review and consider the applicability of the new proxy guidelines in light of their individual situations.
Pending legislation impacting on ECM
The Second Shareholders’ Rights Directive
The second Shareholders’ Rights Directive (“SRD II”) was due to be transposed into Irish law by 10 June 2019. To date no Irish law is in force to transpose the SRD II. SRD II when transposed into Irish law will further strengthen shareholders’ rights in traded companies. It aims to encourage long-term shareholder engagement and transparency between traded companies and investors. We will update you when the implementing regulations are published.
Migration of Participating Securities Bill
As Euroclear UK, which operates the CREST settlement system, will cease to be authorised as a central securities depository (CSD), due to Brexit related consequences, it will be necessary for Irish companies’ securities held in their current CSD in Euroclear UK to be migrated to another EU based CSD. The Migration of Participating Securities Bill was published on 20 November 2019.
This Bill will facilitate the migration of these Irish listed securities from Euroclear UK. Most countries operate their own domestic CSD but for historic reasons, due to the close links between the Dublin and London stock exchanges, the Irish market regularly relies upon the CSD based in Euroclear UK. This Bill when enacted and in force will allow for a more coordinated migration of the relevant Irish securities to a CSD based in the EU and reduce the legal and administrative burden on issuers. This Bill will also make consequential amendments to certain provisions in the Companies Act 2014 to take into account the changes in the settlement model.
The Finance (Tax Appeals and Prospectus Regulation) Bill 2019
The Finance (Tax Appeals and Prospectus Regulation) Bill 2019 was passed by the Seanad on 3 December. We expect this legislation to be enacted soon.
We are waiting for some pending legislation to make its way through the Houses of the Oireachtas and to be enacted. We will keep you updated on any further developments on these Bills.
2019 has not been a stellar year for the Irish equity capital markets, with a number of companies taken private, including Independent News & Media plc, Green REIT plc and SCISYS plc, itself a recent and unusual Brexit inversion entrant to the Irish market, and with only one successful IPO, that of Uniphar plc. With IPOs generally in declining numbers in the US and in the UK, and recent failures such as WeWork and the fairly muted response to reputed valuations desired by the selling state shareholder of Saudi Aramco, now coming only to the local Tadawul stock exchange in Riyadh on 3 December 2019, together with an uncertain political backdrop, we think the Irish equity capital markets will probably track global trends and the uncertain outlook. It also remains to be seen whether or not the exit from the EU of CREST and the necessity for Irish public companies to migrate to the unfamiliar Euroclear platform for uncertificated trading will have any positive or negative effect on the market generally.
The content of this article is provided for information purposes only and does not constitute legal or other advice.