Tuesday, November 01, 2011

Proposed Changes to EU Transparency Directive Would Close Notification Gap and Eliminate Quarterly Financial Statements

The European Commission has proposed changes to the Transparency Directive (2004/109/EC) that would close an existing gap in the notification requirements by requiring the disclosure of major holdings of all financial instruments that could be used to acquire economic interest in listed companies and had the same effect as holdings of equity. The proposal would also provide for more harmonization concerning the rules of notification of major holdings by requiring aggregation of holdings of financial instruments with holdings of shares for the purpose of calculation of the thresholds that trigger the notification requirement. The Commission also proposes to eliminate the current requirement to publish quarterly financial information.

The Directive contains a number of notification thresholds for acquirers when they reach a certain stake in a listed company. However, the current rules contain a notification gap under which holdings of certain types of financial instruments that can be used to acquire economic interest in listed companies without acquiring shares are not currently covered by the Directive’s rules for disclosure. This was much less of an issue in 2004, said the Commission, when the existing Directive was adopted. But it can eventually lead to secret stake-building in listed companies with a view to acquire significant influence, which in turn can give rise to possible market abuse situations, low levels of investor confidence and the misalignment of investor intentions with long-term interests of companies.

The current Transparency Directive requires issuers of securities traded on regulated markets within the EU to ensure appropriate transparency through a regular flow of information to the markets consisting of yearly, half-yearly and quarterly financial information. In order to reduce the administrative burden linked to listing on regulated markets and encourage long-term investment, the requirement to publish quarterly financial information, which covers both interim management statements and quarterly reports, would be abolished for all listed companies. For the sake of efficiency and in order to provide for a harmonized regime for disclosure, Member States would not be allowed to continue to impose such an obligation in their national legislation. Listed companies would retain the discretion to voluntarily publish quarterly information.

After undertaking a thorough assessment, the Commission concluded that quarterly financial information is not necessary for investor protection even if it can provide useful information for some investors. In the Commission’s view, investor protection is already sufficiently guaranteed through the mandatory disclosure of half-yearly and yearly financial results, as well as through the disclosures required by the Market Abuse Directive. In addition, quarterly financial information as currently required by the Transparency Directive is not prepared according to accounting standards and therefore this information might not offer adequate quality, said the Commission, nor is it likely to give sufficient assurance to investors. Also, the quarterly information currently disclosed is not easily comparable at the EU level.

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