MEMO/03/68
Brussels, 26th March 2003
Proposal for a Directive on transparency requirements for listed companies frequently asked questions - (see also IP/03/436 )
Why has the Commission proposed this Directive?
Investors cannot invest in a reasonable way, for themselves and for the wider economy, if they do not have all the information they need about the companies they are investing in. Transparency concerning publicly traded companies is therefore essential for the proper functioning of capital markets, enhancing their overall efficiency and liquidity. Companies cannot expect trust and loyalty from investors if they are not transparent, in particular on their current financial situation.
The proposed Directive should markedly improve the information made available to all investors about publicly traded companies on regulated securities markets within the European Union. It will help integrate further Europe's securities markets and make them more liquid, by making it easier to compare information from different companies, made available in different Member States. It will enhance investor confidence in the financial position of issuers, increase the availability of funds for investment and therefore contribute to reducing the cost of capital.
When will the Directive come into force?
The proposal will now go forward to the European Parliament and the Council of Ministers for adoption under the so-called co-decision procedure. The Commission hopes it will be swiftly adopted. It is a priority under the Financial Services Action Plan (FSAP), endorsed by Heads of State and Government at the Lisbon European Council in March 2000. The aim is for Member States to have successfully implemented the Directive by 2005 at the latest - a commitment affirmed by Heads of State and Government at Stockholm in March 2001 and at Barcelona in March 2002.
Who would benefit from this proposal?
All market participants would benefit from the proposed Directive, which would ensure the transparency and information necessary to combine sound investor protection with market efficiency.
All investors would be in a position to base their decisions on publicly available information. Capital markets should not depend on information only passed to a few people (supervisory boards, shareholders, analysts and institutional investors). More frequent disclosure of information would mean better and more comparable information for investors situated abroad; those investors would not be limited to ad-hoc information disclosed at the discretion of issuers. Finally, investors would protected by more regular information on company debt, which is fundamental for investors in deciding to which company to allocate their capital.
Issuers would also benefit. The introduction of new, robust transparency requirements, the same across the EU, would lead to the removal of existing national barriers imposed on issuers seeking access to regulated markets in other Member States as well as their own. Under the proposed Directive, issuers could seek listing on several regulated markets across Member States without facing a further patchwork of national rules on interim financial reporting, disclosure of major shareholdings, the use of languages in financial information and on the media for disseminating information.
In the longer term, all Europeans would benefit from the proposed Directive, in that it would help ensure that capital was allocated more efficiently, to the best performing companies who provide, to the highest quality and at the best value, the goods and services consumers and businesses need. That would in turn boost growth and jobs.
Does the proposal aim for a "maximum harmonisation" of transparency requirements throughout the European Union?
No. An issuer's home Member State would be able to continue to impose more stringent transparency requirements than the ones provided for under the Directive.
However, the proposal would put in place effective transparency requirements, in which investors and regulators could have confidence, across the EU. Host Member States would no longer need or be able to impose more stringent transparency requirements on issuers from elsewhere in the EU, provided they comply with the European standards. Thus, companies would no longer be discouraged from seeking listing in several host Member States, by the burden of having to meet different sets of national transparency requirements in each. Encouraging issuers to list in several Member States, thus stimulating cross-border investment, is a key plank of the Financial Services Action Plan.
What are the links with other initiatives under the Financial Services Action Plan, in particular the Market Abuse Directive and the Prospectus Directive?
The proposal is part of a strategy for overhauling securities markets legislation and in particular for achieving a greater level of transparency and information from issuers whose securities are traded on regulated markets.
The proposal belongs therefore to a very important "disclosure and transparency agenda", a major strand of corporate governance, on which the EU is currently moving forward and which includes:
- the Regulation on the application of International Accounting Standards (IAS) (see IP/02/827 and IP/01/200 and MEMO/01/40), which will make IAS mandatory for annual accounts for all companies whose securities are admitted to trading on a regulated market and who prepare consolidated accounts, from 1 January 2005 (with limited exceptions given until 2007). The proposed Directive on transparency requirements will build on the IAS Regulation by applying IAS to interim financial reporting
- the Directive on Market Abuse (Directive 2003/6/EC), which among other things, requires issuers to publish inside information (i.e. price sensitive information). The current proposal will cover certain related issues: the use of languages, the Member State where ad hoc information must be disclosed and the media to be used for disseminating such information. None of these important matters was regulated under the Market Abuse Directive
- the proposed Directive on Prospectuses (see IP/02/1607 and IP/02/1209 and MEMO/02/180), which will deal with initial disclosure requirements at the point where securities are offered to the public and/or admitted to trading on a regulated market. That proposal aims to create a "European passport" for prospectuses, so that a prospectus authorised by one Member State would automatically be recognised in all the others. The proposal now presented on transparency deals with requirements after securities have been admitted to trading on a regulated market. It already takes into account the Council's political agreement on prospectuses of 5 November 2002. There are strong linkages between the two proposals in several areas, in particular the choice of the home Member State, equivalence rules with regard to third country issuers and rules governing the determination of competent authorities.
How would the proposed Directive regulate annual reporting by publicly traded companies?
The annual financial report must constitute a complete source of financial information about the issuer. For this reason it must comprise the issuer's financial statements and a management report approved by the person or governing bodies ultimately responsible. The financial statements must also be subject to an audit report, as already required under the Company Law Directives.
An important new requirement for publicly quoted companies under the proposed Directive would be that the final deadline for disclosing to the public an annual financial report would be three months after the end of each financial year. That report would have to be audited, though not necessarily yet approved by the shareholders in their annual general meeting. This would enable investors to better compare company performance across Member States.
The new proposal would thus improve existing EU law covering annual reports, which requires publicly traded companies to make available to the public, as soon as possible, their most recent annual accounts and annual reports, in accordance with standards laid down under the Company Law Directives. However, the timing for publishing annual financial information differs from Member State to Member State. In some Member States, issuers already have a deadline for the publication of the financial year end-results, whereas others ensure timely information for securities markets either by the publication of preliminary or abridged annual results or by a further interim report at the end of a financial year.
Does the proposed Directive include a requirement for publicly traded companies to provide quarterly financial reports?
The proposed Directive would require share issuers to disclose, within two months of the end of the first and third quarter of a financial year, quarterly financial information composed of those key data currently required under existing EU law for half yearly reporting (net turnover, profit and loss before or after deduction of tax), plus, if share issuers so choose, information about trends for the company's future development over a financial year (or an indication of the reasons why the company does not wish to make such a trend statement). This would enable investors not only to judge the issuer on the basis of the results obtained, but also to take due account of its long-term strategy.
The proposed Directive would not, on the other hand, promote the publication of "earnings guidance" or "forecasts" which may lead to short termism and undue pressure by analysts and fund managers on issuers. Instead, the proposal for trend information would allow companies, if they so choose, to update information to investors on the company's strategy and the development of its activities at least for the remaining part of the financial year.
At present, EU law requires only half-yearly reports to be published on a company's net turnover, profits and losses. However, many Member States already have stricter requirements. Current European-level disclosure requirements lag behind and no longer reflect best practice
What are the benefits of making quarterly financial information mandatory at EU level?
The benefits of mandatory quarterly financial information are multiple. Firstly, financial information would be disclosed to the investing public and not only to an élite few (supervisory boards, analysts and institutional investors).
Secondly, it will lead to an increased integration of EU capital markets. Investors in different countries will be in a position to obtain timely and comparable information across regulated markets in different Member States, without having to seek out the disclosure of widely varying ad-hoc information, the content of which depends on the policy of issuers and on differing market practices.
Thirdly, it will increase investor protection through better information about the financial situation of companies.
Finally, capital will in the long-term be allocated better among companies. Since investors will be able to take informed decisions on the basis of standardised information across Member States, they will invest in those companies whose consistent business performance rewards the capital invested in them.
The proposal would require a mix of more detailed half-yearly financial reporting and quarterly financial information. How exactly would this work?
In order to improve periodic disclosure of information by share issuers over a financial year, the proposed Directive would introduce a pragmatic policy mix of a more detailed half-yearly financial report and less demanding quarterly financial information for the first and third quarter of a financial year. This solution is a sensible middle way between two extremes. One extreme position would be to require three fully-fledged quarterly financial reports based on highest international standards, similar to the requirements in the US. The other extreme would be to stay at the level of corporate transparency where the European Union has been for twenty years. That would be to ignore the fact that capital markets now act and react much faster and that the allocation of capital amongst publicly traded companies is more competitive.
Under the proposed Directive, those investing in several Member States would benefit from more reliable and standardised financial information cycles instead of solely relying on ad-hoc disclosure by listed companies. Investors who want to benefit from the euro and to develop investment strategies across several Member States would be better able to follow the financial development of a company. At the same time, administrative burdens on companies would be kept reasonable and proportionate.
Will this mix of quarterly financial information and half-yearly financial report lead to short-termism and excessive volatility?
There is no evidence that such a mixed policy approach will lead to excessive volatility on stock markets. Excessive volatility is caused primarily by major political and economic uncertainties, often reverberating through global capital markets. Corporate governance scandals, threats of war, high, varying oil prices, terrorism or rescheduling major sovereign debt flows are recent examples.
The reporting requirements under the proposed Directive focus on disclosure of historical facts and trends, and would not, per se, give rise to short-termism. Short-termism can be provoked by, among other things, companies who post forecasts with analysts, or promise growth in earnings per share ("earnings guidance") at certain intervals and then modify them later. This is not the intent nor the substance of the Commission proposal. It is interesting to note that listed companies in the US often issue earnings guidance. However, critical voices have already urged them to stop doing so.
How many European share issuers already publish quarterly financial reports?
At present, about 1100 European share issuers (out of 6000 in total) publish quarterly financial reports under high standards such as national GAAP, IAS or US-GAAP and including, for instance, cash flow statements. The aim of the proposal is not to force the remaining 4900 companies to align to the same high standards, at least for the time being, but to bridge the considerable gap by a mix of more detailed half-yearly financial report (based on IAS 34) and less detailed quarterly financial information for the first and third quarter.
Many more publicly traded companies provide at least some information quarterly. Although a minority of all publicly traded European stocks, European companies producing quarterly financial reports dominate stock indices in several Member States (DAX-Index in Frankfurt, MIB-Index in Milan, IBEX-Index in Madrid, CAC-Index in Paris, and also the techMark segment on the London Stock Exchange).
How does this proposal compare with US requirements?
The way forward proposed by the Commission is very different from the US position on mandatory quarterly reporting. US regulations impose a much more demanding regime, since they require three fully-fledged quarterly financial reports based on the highest international standards. The Commission is seeking to achieve a balance combining provision of all the information investors need with the avoidance of undue burdens on issuers.
In the US, since 1946, publicly traded companies have been required to publish full quarterly financial reports for the first, second and third quarter. The conditions for doing so have been continuously upgraded over the last fifty years. There is no difference between share and debt security issuers.
The main differences between the US regulations and those the Commission is proposing for the EU are:
- the US requires a full financial statement for three quarters of the financial year whilst the Commission proposes a financial statement in condensed form only in the half-yearly report and only basic data (net turnover, profit and loss before or after tax) in the quarterly financial information
- the US requires a full management discussions and analysis report and other detailed non-financial information in each quarterly report, while the Commission is proposing only a half-yearly update of the last annual management report
- the US requires a limited review by auditors of each quarterly report, while under the Commission proposal, this would be optional for all interim financial information - that is to say, audit would be compulsory only for the annual report
- the US requires publication of the quarterly report within 45 days (and in future 35 days) of the end of the quarter, whereas the Commission is proposing a two month deadline for the half-yearly financial report and for quarterly financial information
- finally, since the Sarbanes-Oxley Act in 2002, the US requires certification of all financial information by Chief Executive Officers and Chief Financial Officers. The Commission is proposing a statement by the issuer or its supervisory or administrative body in the half-yearly financial report, accompanied by a liability for false information in all interim financial information.
What are the requirements for those who only issue debt securities on European securities markets and whose shares are not admitted to trading on a regulated market in a Member State?
Issuers of only debt securities are not subject to any interim reporting under existing EU law. This would change under the proposed Directive. They would be required to provide a half-yearly financial report, the contents of which would correspond to those required from share issuers. This is necessary to protect those investing in debt securities and to maintain a level playing field between share issuers and debt securities issuers. The proposed Directive would not, however, impose quarterly reporting requirements on debt securities issuers.
The proposed Directive also provides for differentiated treatment of wholesale markets and professional investors. Issuers who only issue debt securities in denominations of at least €50,000 per unit, such as operators on Eurobond markets, would not be subject to periodic reporting requirements (neither annual nor half-yearly financial reporting) under the Commission proposal.
How would the proposed Directive reform the disclosure of major shareholdings?
Existing EU law provides that a person acquiring or disposing of shares so that their holding in a publicly traded company reaches, exceeds or falls below certain thresholds informs the company, which is in its turn responsible for disclosing this information to the public. The current thresholds reflect differences in national company law on issues such as the thresholds necessary to muster blocking minorities at annual shareholder meetings, to achieve changes to the company's statutes or to exercise special rights, such as the nomination of special auditors, etc.
However, since their adoption almost 15 years ago, 12 Member States have introduced additional thresholds. Only three Member States still apply the original European thresholds.
The Commission is now proposing a new system of thresholds. The introductory threshold would be set at 5% of the voting rights or the capital or both of a company, while the additional ones are set at intervals of 5%, up to 30%. This would reflect the situation which already exists in most Member States. The proposal would allow Member States to impose more stringent and/or additional thresholds.
In order to take into account specific situations, the proposal would allow Member States to decide whether they will set the first threshold at 10% where investment companies or other investors only acquire covered warrants or convertible bonds. The same flexibility is offered where life interests linked to shares are concerned.
The proposed Directive would also introduce tighter time limits for the disclosure of changes in shareholdings. At present, the shareholder is required to inform the issuer and the competent authority within seven calendar days. The issuer must subsequently inform the public of these changes in nine calendar days, or under certain circumstances in 21 calendar days. The proposed Directive would set a time limit of five business days for investors and three business days for issuers for the disclosure of relevant information.
What about languages?
At present, each Member State may insist that companies whose securities are traded on its markets disclose information to the public in its own official language(s). Responses to two consultation exercises undertaken by the Commission demonstrated that this is costly and burdensome for issuers whose securities are admitted to trading in several Member States.
The proposed Directive provides that such issuers would be able, in addition to the language of their home Member State, to use a language customary in the international sphere of finance when disclosing information to markets in Member States other than their home one. Specific rules are provided for wholesale bond markets. To the extent possible, this follows the line that has been already agreed for the Council common position on the proposed Prospectuses Directive.
The proposed language regime does not affect:
- the use of languages in judicial proceedings before courts
- companies whose securities are admitted to trading only in a Member State other than its home Member State since there is no reason to distinguish between these companies and those whose securities are admitted to trading only in their home Member State
- the existing Company Law Directives, according to which companies have already to translate their accounts into the official languages of those Member States where they open a branch.
In order to enhance not only cross-border acquisition of shares within the EU but also in order to attract more third country investors, the proposal also provides that investors should be able to notify changes in their shareholdings to the issuer in a language customary in the sphere of international finance. This rule concerns companies as addressees of such communications, and not other investors.
Does the proposed Directive determine the competencies of national supervisory authorities?
The proposed Directive would require the designation of a competent administrative authority in each Member State so as to achieve efficiency and clarity. The authority should be the same as under the proposed Prospectuses Directive.
How would the proposed Directive ensure the timely and effective dissemination of corporate information to the public?
At present, each Member State is free to decide which means of dissemination issuers should use. This has led to enormous diversity. Three main models are used: dissemination is organised by the national supervisory authority itself, by operators of regulated markets, or by other competing financial information providers. In addition, in many Member States, information about the same issuer cannot all be found in the same place.
These differing requirements can constitute a further obstacle in the whole chain of barriers preventing issuers from seeking access to regulated markets in several Member States. They also impede investors' decision-taking across Member States.
Therefore, under the proposed Directive, the dissemination of information through issuers' Internet sites, together with an efficient e-mail mechanism alerting the public about changes in the relevant information, would be considered as sufficient for issuers whose securities are traded in more than one Member State.
The proposed Directive also aims to establish that Member States should no longer impose the use of operators established on their territory or the use of different media for different types of information about the same issuer. However, they would be required to ensure that information disclosed by the issuer is accessible throughout their territory and abroad. The proposed Directive would allow for a list of appropriate media to be set up, if necessary, under technical rules drawn up under the Lamfalussy process (see IP/02/195).
Why does the proposal also include a "filing" system under which the competent authority of the home Member State acts as a repository ?
To build investor confidence, the home Member State would be responsible for enforcing European disclosure requirements through a system requiring companies to file their information, on the date of disclosure, with the national securities regulator, which would act as a repository. This is simply to ensure that mandatory disclosure deadlines are respected and would not mean the regulator would scrutinise the information for completeness, accuracy, and comprehensibility. Neither would it require the regulator to exercise a disclosure function: the competent authority would not be required to disclose the filed information to the public on a real-time basis.
To what extent does this proposal need to be complemented by rules implementing technical details under the "Lamfalussy" procedure?
Detailed technical rules are needed so that the European Union is able to respond effectively to fast-changing financial markets and developments in information and communication technologies. This includes in particular the capacity to respond promptly to crises in the financial markets. Technical rules also ensure uniform application of technical provisions throughout the European Union.
In substance, technical rules will, be needed for, among other things:
- clarifying certain definitions, such as disclosure by electronic means
- obligations for keeping publicly disclosed information available
- arrangements for filing corporate information with the competent authority in the home Member State
- arrangements for the timely and effective dissemination of information.
