25 October 2011

Commission published review of the Transparency Directive

The Commission reviews periodic reporting requirements and improves disclosure of major holdings.

1. What are the existing EU rules on transparency for listed companies?

The existing Transparency Directive (2004/109/EC) requires issuers of securities traded on regulated markets within the EU to ensure appropriate transparency through a regular flow of information to the markets. This information consists of:

• yearly, half-yearly and quarterly financial information;
• on-going information on major holdings of voting rights; and
• ad hoc information disclosed pursuant to the Market Abuse Directive (e.g. inside information has to be made public as soon as possible to the market under the conditions of the Transparency Directive).

2. Why is the Commission proposing to modify the existing Transparency Directive?

• The existing Directive foresees a number of notification thresholds for acquirers when they reach a certain stake in a listed company. However, the current rules contain a notification gap: holdings of certain types of financial instruments that can be used to acquire economic interest in listed companies without acquiring shares are not currently covered by the Directive’s rules for disclosure. This was much less of an issue in 2004 when the existing Directive was adopted. But it can eventually lead to secret stake-building in listed companies with a view to acquire significant influence which in turn can give rise to possible market abuse situations, low levels of investor confidence and the misalignment of investor intentions with long-term interests of companies. There are several reported examples of such behaviour, such as the recent "LVMH"/Hermes case. Louis Vuitton Moët Hennessey ("LVMH") announced in October 2010 that it had built a 17.1 per cent stake in Hermès International at a purported 50 per cent discount by using cash-settled equity swaps, without any previous disclosure of its holdings of such instruments. Consequently, LVMH acquired significant interest in Hermes without Hermes and the market being aware. This created an information asymmetry with possible incorrect market pricing of the underlying Hermes shares.
• In addition, some of the current transparency requirements result in a disproportionate administrative burden: the requirement to publish quarterly financial information contributes, in particular for small and medium-sized issuers, to the high costs of compliance linked to listing on the regulated markets. This requirement is also perceived as a regulatory incentive encouraging the culture of short-termism on financial markets.

3. What are the main elements of the proposal to modify the Transparency Directive?

• In order to close the existing gap in the notification requirements, the proposal to modify the Transparency Directive would require disclosure of major holdings of all financial instruments that could be used to acquire economic interest in listed companies and had the same effect as holdings of equity. The proposal would also provide for more harmonisation concerning the rules of notification of major holdings in particular by requiring aggregation of holdings of financial instruments with holdings of shares for the purpose of calculation of the thresholds that trigger the notification requirement.
• In order to reduce the administrative burden and to encourage long term investment, the requirement to publish quarterly financial information would be alleviated. Companies could of course continue to publish quarterly information on a voluntary basis if they wished to.

MEMO

Full text of the proposal 

© European Commission