Committee Reports > List of Committees > Joint > 1976 > Committee on the Secondary Legislation of the European Communities > Report No. 48 - Stock Exchanges

REPORT

A. INTRODUCTION

1. Proposals relating to Securities

The Joint Committee has examined a number of proposals made by the Commission to the Council for Directives dealing with the securities of public companies. The proposals examined are the following:—

Amended proposal for a sixth Council Directive on the co-ordination of the guarantees required in Member States for the purpose of protecting the interests of members of companies and of third parties as regards the content, checking and distribution of the prospectus to be published when securities issued by companies are admitted to official stock exchange quotation [R/3128/75];

Amended proposal for a Council Directive co-ordinating the conditions for the admission of securities to official stock exchange quotation [R/2638/76]; and

Proposal for a Council Directive concerning indirect taxes on transactions in securities [R/923/76].

The amended draft sixth Directive on prospectuses is one of a series of proposals based on Article 54(3) (g) of the EEC Treaty aimed at the harmonisation of company law. The original proposal was sent by the Commission to the Council in October, 1972. Subsequently an amended proposal taking account of the opinions expressed by the European Parliament and the Economic and Social Committee was submitted by the Commission in December, 1975.

The proposal concerning the conditions governing the admission of securities to stock exchange quotation is also based on Article 54(3)(g) of the EEC Treaty and was originally submitted by the Commission in December, 1975. However, following on the receipt of the opinions of the European Parliament and the Economic and Social Committee the proposal was amended by the Commission and resubmitted to the Council in November, 1976.

The third proposal which concerns indirect taxes on transactions in securities is based on Articles 99 and 100 of the EEC Treaty, the former of which deals with the harmonisation of national taxation legislation and the latter the approximation of national laws in general. It was sent to the Council originally in April, 1976.

All three proposals are also seen by the Commission as steps towards the eventual establishment of a European Capital Market.

B. COMPANY PROSPECTUSES

2. Scope of Proposal

The draft sixth Directive, as amended, seeks to co-ordinate on a Community basis and to improve the type of information made available to investors by companies which apply for the admission of their securities to quotation on a stock exchange. The proposal specifies how and when a prospectus is to be published and prescribes the minimum information which it must contain.

The Directive is to apply to every application for a quotation on a Community stock exchange irrespective of the domicile of the issuer of the securities. It will not apply to unit trusts or to securities issued by Member States or by their local authorities. However, there is also a proposed Council Recommendation that Member States should voluntarily introduce for securities issued by themselves, by another State or by local authorities, a prospectus along the lines of that proposed under the draft Directive.

There is provision in Article 12 for simplification of the prospectus requirements to accord with sound international practice where the securities issued by corporate bodies under public law are guaranteed both as to the redemption of loan and interest by the Member State. Although the concept of public law is foreign to Irish law, it is apprehended that the issues of State or semi-State bodies would be covered by the Article.

In each Member State a national authority is to be appointed to ensure that, before securities are admitted to official quotation on a stock exchange, the prospectus issued complies with the rules of the Directive.

The minimum information which must be contained in the prospectus is set out in Schedules A, B and C in the draft depending on whether shares, debentures or certificates representing shares are involved. The Joint Committee is advised that certificates representing shares in the sense of the draft Directive do not at this time exist in this country (although technically the issue of bearer shares is permissible under Company Law, any such issue would require the approval of the Central Bank as the Exchange Control authority).

The draft Directive would allow Member States to grant general exemption, in whole or in part, from the obligation to publish a prospectus in the case of certain specified categories of securities. These exemptions could be availed of, in general, where the securities involved are either identical to those already quoted or entail no new subscription of capital. In addition the national authority administering the Directive would be entitled in individual cases to allow the omission from a prospectus of certain information laid down in the Schedules if (a) the information was immaterial; (b) disclosure of the information would be contrary to the public interest or detrimental to the issuer.

The proposal also provides for the setting up of a Contact Group to facilitate the harmonised application of the Directive, to co-ordinate any improvements to the prospectus which Member States are permitted to introduce at national level and to aid the Commission in drawing up proposals for amending the Directive if necessary.

3. Effect on Ireland

The Companies Act, 1963, specifies the required contents of any prospectus to be issued whether the securities offered are proposed to be admitted to quotation on The Stock Exchange or not. When admission to quotation is sought the prospectus is also governed by the rules of The Stock Exchange as set out in that institution’s Yellow Book. However, in such a case the Companies Act, 1963 permits, in certain circumstances, exemption by the issue of an appropriate certificate from the statutory requirements regarding the contents of a prospectus.

In the main the requirements of the draft Directive as to the detailed information to be supplied in prospectuses are along the lines of the existing practice in this country though the amount of information to be given is more extensive and in some areas the draft proposes important innovations which may be found unduly onerous.

Generally speaking the Joint Committee has no objection to the draft Directive in principle but it has some comments to offer on particular provisions and some changes to suggest which it believes would make the Directive more acceptable in this country.

4. National Authority

At present The Stock Exchange—Irish, is the body in Ireland which grants official listing of securities. The draft Directive proposes that each Member State should appoint “an authority” to check prospectuses. It is manifestly desirable that the existing Irish practice, which is operating smoothly, should be interfered with as little as possible and consequently it would seem eminently sensible to designate The Stock Exchange—Irish as the appropriate authority for the administration of the Directive. It has, however, been suggested to the Joint Committee that this may be difficult to effect since The Stock Exchange—Irish resulted from an amalgamation with Government approval with the London Stock Exchange. This fact may indeed constitute a technical difficulty but if it cannot be overcome, as the Joint Committee thinks desirable, it is suggested that the Minister for Industry and Commerce be made the nominal national authority with power to delegate the de facto administration of the Directive to The Stock Exchange—Irish.

5. Contents of Prospectus

In general the Joint Committee questions the advisability of specifying rigidly what each and every prospectus must, as a matter of law, contain. As between different companies the circumstances may so differ that what one should certainly be obliged to include would be wholly inappropriate in the case of another. If every company is required to follow the same pattern it is by no means clear that the end product will be as helpful as it might be to intending investors.

Accordingly the Joint Committee would prefer the Directive to allow national authorities to adopt a flexible approach while at the same time ensuring that the policy of the Directive is observed.

As the draft stands at present the Joint Committee finds the disclosure requirements unduly stringent. It cannot agree that an issuer should be required to reveal information which could be used to his detriment by his competitors. In particular it has in mind the obligation to disclose information about breakdown of activities, sources of supply, and research and development. In the Joint Committee’s view it is not sufficient that the national authority be empowered to dispense with the general requirement in particular cases because this power should be used only in exceptional circumstances. The Joint Committee is advised that dispensations from the requirements will be availed of to a considerable extent if this requirement is not relaxed. There may be a real conflict here between the general desirability of disclosure of information with which the Joint Committee is sympathetic and the social necessity of securing rapid growth in the Irish economy which, if maintained, would come in relief of EEC social and regional subventions and the Joint Committee is satisfied that no impediment to that growth should be created by any provision of Company Law other than that which is strictly necessary.

In other respects the Joint Committee considers that the quality of the information disclosed could be improved. It believes that there should be provision in appropriate cases for attaching to the prospectus an auditor’s report, audited accounts and, if a group is involved, group accounts.

If a prospectus cites an expert opinion there should be an express statement that the expert has consented to the citation and has not withdrawn his consent. It should also be clear that the present civil and criminal liabilities specified in the Companies Act, 1963 are, in the case of every prospectus, maintained.

6. Waiver of Publication of Prospectus in whole or in part

Article 4 of the draft Directive would allow Member States to specify conditions under which some requirements relating to prospectuses could be waived or exemption from the obligation to publish any prospectus granted in the case of certain securities.

Article 4 appears to apply to a “bonus” or capitalisation issue of shares. It does not, however, apply to a “rights” issue i.e. an offer to existing shareholders or debenture holders to subscribe for further shares in or debentures of the company. Nor does it apply to further issues where continuing information is available through stock exchanges. In such cases it would certainly be very expensive for the company concerned to have to issue a full prospectus and in the Joint Committee’s view it is wholly unnecessary to require it to do so. The waiver provisions should also apply in the case of convertible debentures already quoted on the Stock Exchange whether the shares resulting from the conversion are already quoted on the Stock Exchange or not provided that the rights attaching to the shares are unaltered from those specified at the time of admission to quotation of the convertible debentures.

The waiver provision would also apply where the number of securities amounted to less than 5 per cent of securities already listed if their aggregate value did not exceed 500,000 units of account over a period of two years. In the Joint Committee’s view up to 15 per cent should be permitted without the need for a full prospectus. In such cases the present Irish practice should suffice whereby The Stock Exchange requires the company to produce a minimum of information depending on the size of any acquisition or realisations involved. The Joint Committee also believes that the figure of 500,000 units of account is much too low and questions the necessity of having such a threshold at all. It represents less than 1 per cent in the case of companies with market capitalisation of over £25 million. It is recommended that this particular limitation on the waiver provision be deleted.

7. Responsibility for Prospectus

It is a principle in Irish company law that the directors or promoters are legally responsible for the contents of a prospectus. Assuming that the draft Directive does not intend to alter this position the Joint Committee believes that the draft does not give sufficient weight to the principle. It is not sufficient that persons assuming responsibility for a prospectus should declare that it is “in accordance with the facts and that there are no omissions likely to affect the bearing of the information”. It is intended that each prospectus will be checked by a national authority before it is issued to the public. In the Joint Committee’s view the Directive should make it clear that the national authority (or any body to which it may delegate its functions) should not be required to accept any responsibility to investors arising out of the discharge of its functions.

Article 13 provides that national authorities may authorise publication of a prospectus only “if it is of the opinion that the prospectus satisfies all the requirements of the present Directive, and if it has good reason to believe that it contains no particulars or omissions likely to mislead the public”. In the Joint Committee’s view it should be sufficient if the national authorities ensure compliance with the terms of the Directive. The words, “and if it has good reason to believe that it contains no particulars or omissions likely to mislead the public” should be omitted. In any event it would have been phrased better in the first instance if it had read:— “and if it has no good reason to believe that it contains particulars or omissions likely to mislead the public”. In addition, it should be stated that the words do not import any legal liability of the national authority (or of any body to which it may delegate its functions) to members of the public.

8. Mergers

It is not clear to the Joint Committee whether Article 10 of the draft Directive, which deals with merging or splitting up of companies, is intended to cover take-overs. If it is, Article 10, as drafted, does not appear to be appropriate. A take-over does not necessarily call for a general meeting of the acquiring company nor does it require the issue of a full prospectus and furthermore Irish circumstances would make any such general requirements undesirable. The Joint Committee recommends that this provision be re-examined.

C. ADMISSION OF SECURITIES TO OFFICIAL STOCK EXCHANGE QUOTATION

9. Contents of Proposal

The amended proposal [R/2638/76] seeks to oblige Member States to make the admission of securities to official quotation on a stock exchange situated within their territory subject to specified basic conditions. These conditions are in general minimum requirements and Member States may require more exacting conditions if they wish. Schedules A and B to the draft Directive deal with conditions which must be met before admission is granted to shares and debt securities (debentures) respectively, the conditions in both Schedules being nearly the same. Schedules C and D deal with conditions to which the issuer of securities is subject while his securities are being quoted. The obligation to provide continuing information stipulated in Schedules C and D is regarded as simply establishing principles which will subsequently need more detailed treatment at Community level.

Member States will be obliged to establish machinery for an appeal to a court against decisions refusing admission to official quotation, discontinuing quotation or establishing quotation without application (the latter having no application in this country).

The Draft Directive proposes the setting up of a Contact Committee under the aegis of the Commission to promote the harmonised application of the Directive. It also seeks to establish procedures for co-operation between the competent national authorities.

If adopted the Directive will normally apply to admission to quotation in a Member State of securities issued by the private or the public sector, national or foreign. It will not, however, apply to unit trusts or to Government securities issued on their national stock exchange. The position with regard to local authorities is not yet clear.

10. Effect on Ireland

The Joint Committee is advised that in general the provisions of the draft Directive are compatible with the current practice of The Stock Exchange in this country. The Stock Exchange has informed the Joint Committee that with very minor reservations it is almost entirely happy with the proposal.

11. Views of the Joint Committee

In general the Joint Committee has no objection to the proposed Directive and wishes merely to comment on a few particular aspects.

It is noted that in contrast to the normal harmonising Directive, which sets minimum standards to be adopted by Member States, the proposal now under consideration lays down a number of mandatory requirements which Member States must observe. It is proposed in Schedule A to the draft Directive that the foreseeable market capitalisation of the shares for which admission is sought, or, if this cannot be established, the net assets of the company must be at least one million units of account; there is provision for Member States to derogate from this requirement if there is an adequate market for the shares. This is in line with current Irish practice. It has been represented to the Joint Committee that the derogation provision should only be availed of in exceptional circumstances. While there have been few applications for listing from Irish companies in recent years it is thought likely that the one million units of account figure would be too high in our circumstances. The unit of account to be used is the EUA which is based on the concept of a basket of currencies and the conversion rate fluctuates according to changes in the parities of the currencies involved. The current conversion rate is £1 = 1.5 U.A. and the market capitalisation requirement is approximately £667,000. In the Joint Committee’s view the element of rigidity introduced by the specification of a minimum for market capitalisation should be resisted and a more flexible approach adopted.

The proposed provision for an appeal to a court would constitute an innovation for this country. The Joint Committee has no objection to it but as it doubts that a court case would do anything to enhance the market for securities it cannot envisage it being used much to contest a decision rejecting an application for admission to quotation.

D. INDIRECT TAXES ON TRANSACTIONS IN SECURITIES

12. Contents of proposal

In the case of Member States which impose a tax on transactions in securities the third proposal [R/923/76] seeks to prescribe that a tax may be imposed on the disposal or the acquisition of securities for valuable consideration at rates not exceeding 0-15% in the case of bonds and 0-3% in the case of other securities. By way of derogation Ireland and the United Kingdom would be allowed to continue to treat the disposal and acquisition of registered securities as a single transaction but the maximum rate of taxation which such a transaction would attract would be double the appropriate rate mentioned above. In addition to several common exemptions, existing national exemptions from such taxes may continue but new exemptions would require the consent of the Commission. Discriminatory treatment based on the residence of the issuer of the securities or on the residence of those involved in the transaction is to be prohibited

13. Effect on Ireland

The adoption of the Directive would involve an alteration of the stamp duty payable in Ireland on transactions in securities. At present the rate is 1% in the case of Irish registered securities and 2% for non-Irish registered securities. The new rates would be 0.3% for bonds and 0.6% for other securities. Some loss of revenue would be involved but the Joint Committee is informed that it would not be significant. The Joint Commitee has no objection to the proposal.

E. CONCLUSION

14. Acknowledgements

The Joint Committee wishes to record its appreciation of the considerable assistance it received from the following bodies in examining these proposals:—

Consultative Committee of the Accountancy Bodies in Ireland.

The Stock Exchange.

The Incorporated Law Society of Ireland.

The Investment Bank of Ireland Ltd.

Allied Irish Investment Bank Ltd.

The Industrial Credit Company Ltd.

The Confederation of Irish Industry.

(Signed) CHARLES J. HAUGHEY.

Chairman of the Joint Committee.

9th December, 1976.