Maples and Calder Capital Markets Update
This update summarises recent developments regarding the legal and regulatory rules which impact on Irish public company equity securities issuers, their investors and professional advisers and service providers.
New EU Shareholder Rights Directive
A revised Shareholder Rights Directive has recently been adopted by the European Council. The revised Directive is intended to enhance shareholder engagement in listed companies and to increase transparency and, in particular, to address concerns that have been raised about the short term nature of the investment strategies of institutional investors and asset managers.
Like the existing Shareholder Rights Directive 2007/36/EC, the revised Directive will apply to companies that have a registered office in an EU Member State and whose shares are admitted to trading on a regulated market situated or operating within a Member State.
It will enter into force on the twentieth day following its publication in the Official Journal of the EU. Member States will then have two years to incorporate the new provisions into domestic law. The main changes being introduced are as follows:
Additional transparency requirements
Institutional investors and asset managers will be required to either:
(a) develop and publicly disclose an engagement policy that describes how they integrate shareholder engagement in their investment strategy and publicly disclose annually how the policy has been implemented (including details of how they have cast votes in respect of significant shareholdings); or
(b) publicly disclose a clear and reasoned explanation why they have chosen not to comply with the above requirements.
Institutional investors will be required to publicly disclose how the main elements of their equity investment strategy are consistent with the profile and duration of their liabilities and how they contribute to medium to long-term performance of their assets.
Where an asset manager invests on behalf of an institutional investor, the institutional investor will also be required to publicly disclose how the arrangement incentivises the asset manager to align its investment strategy with the long term liability profile of the institutional investor; how it incentivises the asset manager to make investment decisions based on medium to long term performance; how it monitors portfolio costs; and how long the arrangement lasts.
Asset managers will be obliged to report to institutional investors on how their investment strategy complies with the arrangements with the institutional investor and contributes to medium to long term performance.
Proxy advisors will be required to publicly disclose the code of conduct that they apply and report on the application of the code of conduct or provide an explanation of why they do not apply a code of conduct.
Proxy advisors will also be required to publicly disclose annually the methodologies, information sources and other key information that they use in the preparation of their advice and voting recommendations.
Intermediaries and cross border voting
A number of requirements will be imposed on intermediaries who provide share safekeeping, administration or account maintenance services. These include obligations to provide information on shareholder identity if requested by an issuer; to transmit issuer information and shareholder instructions without delay; and to facilitate the exercise of rights by shareholders.
Intermediaries will also be required to publicly disclose any charges that may be levied for their services. Intermediary charges must also be non-discriminatory and proportionate in relation to the actual costs incurred in delivering services.
Shareholders' vote on remuneration policy
Issuers will be obliged to ensure that a directors' remuneration policy is drawn up and is put to a vote of the shareholders ("say on pay").
The policy must be submitted to a vote at general meeting on every material change and at least every four years. It must be clear and describe the different components of fixed and variable remuneration which can be awarded to directors, including all bonuses and other benefits.
Member States can either provide that the vote is binding or advisory.
If the vote is binding and the policy is not approved, the issuer will be obliged to continue to pay directors' remuneration in accordance with its existing practice.
If the vote is advisory the issuer will be obliged to pay directors' remuneration only in accordance with the policy submitted to the vote and, if the policy is rejected, to submit a revised policy to a vote at the following general meeting.
The policy and the results of the vote must be made public and issuers will also be obliged to draw up an annual remuneration report that must be submitted to an advisory vote at the company's annual general meeting.
Related party transactions
Companies will be obliged to publicly announce material transactions with related parties and EU Member States may provide that the announcement is accompanied by a report assessing whether or not the transaction is fair and reasonable. Where the related party is a director or shareholder, Member States must ensure that adequate protection is provided for non-related party shareholders regarding the approval process of the related party transaction.
New EU Prospectus Rules
The European Parliament and Commission have recently agreed a compromise text for a new EU Prospectus Regulation to replace the existing Prospectus Directive regime which currently applies to issuers who offer securities to the public or who list securities on a regulated market in the EU.
The Prospectus Regulation will come into force once formally adopted by the European Council, which is expected this year. Once in force it will have direct effect in EU Member States although it is anticipated that there will be a two year period before it applies.
The [Prospectus Regulation will simplify the rules and administrative procedures for prospectus approval and make it cheaper and simpler for smaller businesses to access capital markets.
The following are among the main changes proposed:
(a) The requirement to produce a prospectus will not apply to issues of securities with a total value below €1,000,000 measured over a 12 month period.
(b) Member States will be entitled to exempt issuers from the prospectus requirements where the amount to be raised EU-wide by the securities issue is less than €8,000,000 in any 12 month period (the current threshold being €5,000,000). It is yet to be seen to what extent Irish government will avail of this exemption.
(c) There will be a carve out from the prospectus requirements for the admission of securities to trading on a regulated market where the same class of securities is already admitted to trading, if the new securities represent, over a period of 12 months, less than 20% of the number of securities already admitted.
(d) A shorter prospectus regime for secondary issuances by issuers already listed on a public market.
(e) A simpler 'growth' prospectus regime will be available for the following issuers:
(i) companies which meet certain defined criteria for an SME;
(i) other issuers admitted to trading on an SME growth market (the regime for which is to be implemented in 2018) who have an average market capitalisation of less than €500,000,000 over the last three years; and
(ii) Issuers with less than 500 employees undertaking an unlisted issuance of less than €20,000,000.
(f) A fast-track regime for frequent issuers will be introduced, similar to the 'shelf registration' process for securities issuers in the US. This procedure will allow the issuer to file a universal registration document each financial year, which can then be used as a base for subsequent prospectuses. After the issuer has had the universal registration document approved by the appropriate regulator in its home member state for two consecutive years, it will be able to file subsequent universal registration documents without prior approval.
Takeover Panel Rule 13 Guidance
The Irish Takeover Panel (the "Panel") has issued guidance concerning the inclusion of conditions in an implementation agreement for an offer to acquire an Irish public limited company which is regulated by the Irish Takeover Rules.
It has become customary for the conduct of a recommended offer to be subject to an implementation agreement entered into by the bidder and the target company. It is also customary for the parties to include a condition to the offer that the implementation agreement has not been terminated. The effect of such a condition is to also make the offer conditional on the termination events specified in the implementation agreement not having occurred.
Rule 13 of the Irish Takeover Rules regulates when parties can invoke a condition to terminate an offer.
The guidance confirms that Rule 13 itself does not automatically prohibit the inclusion of a condition to the offer that the implementation agreement has not been terminated or a condition that requires compliance by the target with specified terms of the implementation agreement. This will only be prohibited if satisfaction of the condition depends solely on subjective judgments by the directors of the party for whose benefit the condition is expressed or is within the control of such party. The Panel, for purposes of clarity, would however also expect the relevant termination events to be expressly included as conditions of the offer.
However this does not guarantee that a party would be entitled to withdraw an offer in the event of a termination event in respect of an implementation agreement arising. The general provisions of Rule 13 continue to apply in such circumstances. A condition to an offer can only be invoked if both of the following conditions are met:
(a) the condition is of material significance to the bidder in the context of the offer (i.e. it would incur material adverse commercial consequences in the context of the offer if it were compelled by the Panel to continue with its offer); and
(b) The Panel is satisfied that in the prevailing circumstances it would be reasonable for the bidder to invoke the condition. The Panel's view is that in most circumstance a bidder who has met the 'material significance' test set out above will also meet this 'reasonableness' test.
Bidders should therefore be advised at the outset of an offer about the implications of Rule 13 and its impact on the ability of the bidder to invoke conditions (including those arising from the implementation agreement) to terminate the offer once a takeover bid is launched.
Should you have any questions or would like to discuss the above, please contact your usual Maples and Calder contact.