ESMA Clarifies The Application of The Prospectus Directive and Transparency Directive in The Event of a "No-Deal" Brexit

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In a series of votes on 29 January 2019, the parliament of the United Kingdom (the “UK”) rejected proposals aimed at preventing the UK from leaving the European Union (the “EU”) on 29 March 2019 without a Withdrawal Agreement in place. Although there was a narrow majority for a non-binding call to avoid a “no-deal” Brexit, the UK government has re-affirmed its position that the UK will exit the EU on 29 March 2019. With the EU repeatedly stating that it will not re-open negotiations on the text of the existing Withdrawal Agreement and a “no-deal Brexit” remaining a possibility, on 31 January 2019, the European Securities and Markets Authority (“ESMA”) updated its “Questions and Answers – Prospectuses” and “Questions and Answers – Transparency Directive (2004/109/EC)” guidance to clarify the application of certain provisions of the Prospectus Directive (“PD”) and Transparency Directive2 (“TD”) in the event that the UK withdraws from the EU with no withdrawal agreement in place (the “ESMA Guidance”)3. ESMA’s stated purpose in providing this guidance is to promote a common supervisory approach to a no-deal Brexit.

The updated guidance provides the following clarifications:

Home Member State

Under the PD and the TD, issuers of equity and non-equity securities that are offered to the public in, or admitted to trading on a regulated market in, the European Economic Area (the “EEA”) are required to elect a home member state in the EEA. 

Following a no-deal Brexit, non-EEA incorporated issuers (“Third Country Issuers”), certain other issuers who have chosen the UK as their home member state and issuers who currently have the UK as their home member state due to their registered office being in the UK, will have to choose a new home member state when they wish to offer securities to the public in the EEA or to be admitted to trading in the remaining 27 EU States (the “EU27 States”) or the European Free Trade Association States (the “EEA EFTA States”).

ESMA Guidance

The ESMA Guidance proposes that any issuers of equity securities and non-equity securities with denominations below €1,000 required to nominate a new home member state for purposes of the PD following a no-deal Brexit, should choose a state in which the issuer continues to have activities after the UK’s withdrawal on 29 March 2019. Such activities may include: (i) offers or admissions made after the UK’s withdrawal; or (ii) admissions made before the UK’s withdrawal which are continuing.

For the purposes of the TD, issuers with securities admitted to trading on a regulated market in the EEA who currently have the UK as their TD home member state, should choose and disclose their new home member state as soon as possible following 29 March 2019. If a new home member state is not disclosed within a period of three months following 29 March 2019, ESMA proposes that the member state where the issuer’s securities are admitted to trading on a regulated market should be considered its home member state. Where the issuer’s securities are admitted to trading on regulated markets situated or operating within more than one member state, those member states should be considered the issuer’s home member states until a subsequent choice of a single home member state has been made and disclosed by the issuer.

Passporting

Article 18 of the PD provides a passporting mechanism, which permits a prospectus approved by an issuer’s home member state to be passported into a “host member state” without the requirement for host member state approval.

Following a no-deal Brexit, the UK will be considered a “third country” and will no longer be covered by this passporting mechanism. Accordingly, any prospectuses approved by the UK Financial Conduct Authority (“FCA”) following 29 March 2019, will no longer be able to be passported into to EU27 States or the EEA EFTA States. 

ESMA Guidance

The ESMA Guidance proposes that prospectuses approved by the FCA prior to 29 March 2019 should be treated as follows:

  • prospectuses, which have not previously been passported to EU27 States or the EEA EFTA States will not be permitted to be passported; and
  • prospectuses, which have previously been passported to one or several EU27 States or the EEA EFTA States can not be supplemented (and, accordingly, can no longer be used if the disclosure in the prospectus requires update, which, in the event of a No Deal Brexit would be likely). 

The ESMA Guidance specifically notes that if an issuer proposes to: (i) continue an offer to the public in any of the EU27 States or the EEA EFTA States; (ii) make a new offer to the public in any of the EU27 States or the EEA EFTA States; or (iii) seek a new admission to trading on a regulated market in any of the EU27 States or the EEA EFTA States, on the basis of a prospectus approved by the FCA and passported into a EU27 State or the EEA EFTA State after 29 March 2019, the issuer will be required to submit the FCA-approved prospectus to the competent authority of the relevant state for approval prior to making any such offer or application for admission to trading.

UK HM Treasury Guidance

Issuers that wish to access the UK capital markets through an offer to the public or admission to trading of securities on a UK-regulated market following a no-deal Brexit should note that, in accordance with the “Explanatory information on draft Official Listing of Securities, Prospectus and Transparency (Amendment) (EU Exit) Regulations 20194, published by HM Treasury on 21 November 2018, they will also no longer be permitted to passport a prospectus approved by a competent authority in an EEA State into the UK.

Next Steps

UK Prime Minister Theresa May has announced her intention to seek revisions to the UK’s Withdrawal Agreement with the EU and report to the UK House of Commons on 13 February 2019. 

If a no-deal Brexit is avoided, and a withdrawal agreement is in place at the time of the UK’s withdrawal, the ESMA Guidance will not be applicable.

Issuers with the UK as their home member state should take the time to consider if their home member status or use of the passporting mechanism is likely to be affected in the event of a no-deal Brexit. If so, issuers should begin the process of determining their new home member state so that, in the event of a no-deal Brexit, this can be disclosed without delay following 29 March 2019. 

Footnotes

 

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