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23 November 2010
In the event of a public offer of securities, in order for the securities to be offered legally to investors, a prospectus must be prepared, approved by the competent authority and published. However, Article 4 of the EU Prospectus Directive (2003/71/EC) contains certain exemptions from the obligation to publish a prospectus.
Several mergers(1) involving listed companies have recently taken place in Austria. In this context, questions have arisen as to whether these transactions constituted public offers of shares in the transferee companies and thus whether prospectuses should have been published. However, it is well established that in such instances an exemption from the obligation to publish a prospectus applies. Pursuant to Article 4(1)(c) and (d) of the directive, the obligation to publish a prospectus does not apply if securities are offered, allotted or to be allotted in connection with a merger, provided that a document is available containing information which is regarded by the competent authority as being equivalent to that contained in the prospectus, taking into account the requirements of EU legislation.
It is debatable whether the allocation of (newly issued or - in case of a downstream merger - existing) shares in the transferee should be considered a public offer at all. While shareholders vote in shareholders' meetings of the transferor and the transferee on whether to approve the merger, the shares issued in the course of the merger are allotted exclusively to the existing shareholders of the transferor. Those shareholders have no choice on whether to accept the allotted shares (if the merger is approved). Consequently, no subscription statement is required or made. Therefore, it could be argued that in such cases no offer of shares is made to the public.
This would also be consistent with the opinion of the Austrian regulator, the Financial Markets Authority, that an offer of new shares in a rights issue exclusively to the existing shareholders and with no trading of subscription rights is not to be considered a public offer. Still, in light of the wording of Article 4(1)(c) and 4(2)(d) of the directive and of Austrian legislation implementing the directive, the prevailing opinion in Austria is that the allotment of (new or existing) shares in the course of a merger should be considered a public offer, but that due to the above-mentioned exemption, no prospectus is required. The reasoning is that no exemption would be required if there were no public offer in the first place. This is also the prevailing opinion in Austrian legal writing.
Austrian law has implemented the exemption under the directive both in the Capital Markets Act regulating public offers of securities and in the Stock Exchange Act regulating the listing of securities on the stock exchange. The relevant exemptions are set out in Section 3(1)(8) of the Capital Markets Act and Section 75(1)(4) of the Stock Exchange Act. Hence, both the allocation of shares in the course of the merger and the admission of the newly issued shares to trading on the stock exchange are exempt from the obligation to publish a prospectus. In accordance with the directive, the Financial Markets Authority has issued a regulation on the requirements for equivalent documents in case of mergers. Section 3 of the regulation provides that the equivalent documents consist of all the merger documents which must be made available to the shareholders of the transferor and the transferee according to corporate law. The equivalent documents consist of the (draft) merger agreement, including:
In each case the reports of both the transferor and the transferee must be provided, unless joint reports have been prepared.
In practice, the merger reports of the managing boards of the participating companies are the most important documents, as they will describe the transaction in great detail and in particular elaborate on the exchange ratio. This document is the most 'prospectus-like' document.
Neither the directive nor Austrian legislation provides for any restriction on the exemption from the obligation to publish a prospectus if the transferee is not listed. In other cases where the exemption is availed of, the directive and Austrian legislation explicitly state shares of the same class must already be admitted to trading (eg, see Article 4(2)(a), (2)(b) or (2)(e) of the directive). For this reason, the exemption should also apply in situations where the shares of the transferee are not yet listed on the stock exchange. However, the exemption will apply only to those shares which are allocated to the shareholders of the transferor as a consequence of the merger; existing shares of the transferee which remain with the existing shareholders of the transferee cannot be listed without a prospectus.
According to the Committee of European Securities Regulators (CESR),(2) the directive passporting regime does not apply to the exemptions listed in Article 4 of the directive. Therefore, the evaluation of equivalence must be made in each member state where the exemption is to be availed of. If the competent authorities so wish, they may refer to the work previously carried out by another authority when assessing equivalence, and authorities are encouraged to cooperate in assessing equivalence.
This means that no real passporting is possible with respect to equivalent documents according to Article 4(1)(c) and 4(2)(d) of the directive and issuers cannot rely on passporting in that regard. Even though CESR encourages competent authorities to cooperate in such instances, experience shows that some authorities take a rather restrictive approach and request significantly more in-depth documentation than is required in the home member state (eg, a document which is similar to a full prospectus and/or a full translation into the local language). In that regard, a single European market has not yet developed.
In September 2007 CESR took the position that the exemption should also apply in the event of demergers, provided that the documents are essentially the same as for a merger. The proposed amendment to the EU Prospectus Directive will explicitly include demergers (divisions) in the exemption.
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