On 25 January 2011, the European Commission published its request to ESMA for advice on possible delegated acts concerning the Prospectus Directive, as amended. In its Consultation Paper ESMA sets out its proposals for: (a) amendments to the Prospectus Regulation in order to achieve greater clarity; and (b) application of the proportionate disclosure regime to convertible/exchangeable debt securities.

Responses to Consultation Paper Proposals

Responses were received from major European banks (e.g. Deutsche Bank), shareholder representative groups and stock exchanges, such as NYSE Euronext.

Proposed Clarificatory Amendments

Respondants agreed that the Prospectus Regulation should be amended in order to create a legal basis for the provision in Annex XVIII according to which only the disclosure requirements in item 4.2.2 of Annex XII are applicable to underlying shares already admitted to trading on a regulated market.

ESMA had requested feedback as to whether industry participants thought it necessary to clarify the disclosure regime applicable to the issuer of underlying shares not admitted to trading on a regulated market when the issuer is an entity belonging to the same group as the issuer of the relevant convertible/exchangeable debt security. The feedback received is that such clarity would be welcome.

Proposed Application of Proportionate Disclosure Regime

There appears to be broad agreement among the responding parties that given the characteristics of convertible/exchangeable debt securities, prospectuses relating to debt securities convertible or exchangeable into third party shares not admitted to trading on a regulated market should inform investors of the essential characteristics and risks associated with the underlying shares.

Opinions differ as to the acceptability of ESMA’s proposal of limiting the application of items 3.1 and 3.2 of Annex III to debt securities convertible or exchangeable into shares which are or will be issued by the issuer of the security or by an entity belonging to its group which can be converted or exchanged within 12 months since the date of their issuance. For example, concerns have been raised about the administrative burden on issuers that might result from implementation of this proposal.

Finally, there is near universal agreement with ESMA’s view that rights issues in respect of debt securities convertible into issuer’s shares can take advantage of the new proportionate disclosure provisions of the Delegated Regulation, provided that the conditions envisaged by Article 7.2(g) of the Prospectus Directive are fulfilled.

Next Steps

ESMA will consider the feedback it has received in relation to this consultation in the third quarter of 2012 and expects to publish a final report and submit technical advice to the European Commission in the fourth quarter of 2012.

For further information, please contact one of the key contacts listed above or your usual contact in our Asset Management and Investment Funds Team.