June 2005
Homburger Bulletin
June 6, 2005
New Rules in the European Financial Market—Implications for Swiss Companies
The new SWX listing rules: what they mean for SMI companies
Companies with shares listed or traded on a regulated market in a member state of the
European Union (EU) will be governed by new rules as from July 1, 2005. These new rules
will affect Swiss companies included in the Swiss Market Index® (SMI), since the shares of
SMI companies are traded on virt-x, a trading platform in London. While the new rules have
little immediate effect, their long-term impact will be significant: SMI companies will
eventually have to adapt their reporting and disclosure standards to the new EU regulatory
framework.
Last week, the SWX Swiss Exchange (SWX) informed interested parties of the long-awaited
changes to the listing regime for SMI companies.
The new SWX rules have become necessary due to
the entry into effect, as of July 1, 2005, of new EU
regulation on financial instruments.
Current rules for SMI companies
Today, the shares of the 27 largest Swiss companies which form the SMI are listed on the main
board of the SWX Swiss Exchange, but traded on
virt-x in London. The current regulatory approach
distinguishes between listing rules and trading
rules:
• all rules relating to listing as well as ongoing obligations for listed companies (such
as the disclosure of price sensitive information and management transactions) are
governed by Swiss law;
• trading rules, such as rules on reporting requirements for securities traders, are governed by UK law.
The new rules will change this regime, in particular
by giving the UK authorities authority in listing
matters.
New rules in the European Union
As part of the EU Financial Services Action Plan,
several new directives have been enacted that
are designed to create a unified European capital
market. The most important directives are as follows:
• the Prospectus Directive sets out the rules
governing the prospectus to be published
when financial instruments are offered to
the public, or admitted to trading on a
regulated market, in a member state of the
EU. The directive and its implementing
regulations contain detailed requirements
on the contents of a prospectus as well as
rules governing the admission procedure
by EU member state authorities.
• The Market Abuse Directive contains provisions designed to prevent the abuse of
inside information and market manipulation in connection with listed financial instruments. Among other things, the Market Abuse Directive contains provisions on
when inside information has to be made
public (ad hoc publicity), what precautions
companies must take if information is kept
confidential, rules on share buybacks and
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rules on the disclosure of management
transactions.
• The Transparency Directive, scheduled to
enter into effect only in 2007, will provide
additional rules on financial reporting, notably with respect to quarterly reporting
and accounting standards.
The EU member states are now in the process of
enacting legislation implementing the applicable
EU directives. The UK implementing legislation will
have a direct impact on SMI companies, since virtx is a "regulated market" as that term is understood under the EU directives.
Response of the SWX to the new EU rules:
two market segments for SMI companies
As from July 1, 2005, SMI companies will be given
the choice of two market segments on virt-x: the
EU regulated market segment or the UK exchange
regulated market segment. Returning to a wholly
Swiss regulated regime is not an option for SMI
companies, since they cannot request exclusion of
their shares from the SMI.
The EU Regulated Market Segment: only few immediate changes...
SMI companies that do not of their own accord
elect to be traded on the UK exchange regulated
market segment will, by default, form part of the
EU regulated market segment. No declaration
must be given to this effect.
The EU regulated market segment will allow companies to benefit from the EU "single passport" for
making public offers in all EU member states.
However, unless the issuer has financial instruments (shares, bonds, derivative instruments)
listed on another EU regulated exchange, the full
EU regulatory framework will apply only partly for
the time being. In fact, as long as a SMI company
does not request the admission of additional
shares for trading on virt-x (nor lists any financial
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instruments on another EU regulated market),
certain key features of the Market Abuse Directive will not apply:
• the ad hoc disclosure obligations pursuant
to EU and UK law, which are similar but
not identical to SWX rules;
• the obligation to draw up insider lists, i.e.,
lists of persons involved in a project that is
price-sensitive but not yet public;
• the EU disclosure rules for management
transactions. On this topic, the SWX and
the UK Financial Services Authority take
the view that SWX rules continue to apply,
even though the text of the Directive is not
entirely clear. Under the SWX rules on
management transactions, directors and
officers must disclose transactions in
shares of their company to the public only
if they exceed CHF 100,000 per month.
Under the EU rules, transactions will have
to be reported not only by directors and
officers, but also by their family members
and other related parties; in addition, all
trades above EUR 5,000 per year will have
to be disclosed, and member states can
lower this threshold (as is expected in the
UK, where all trades may have to be reported).
It is important to note that, with the exception of
the above rules, the Market Abuse Directive and
its implementing legislation must be observed by
all SMI companies whose securities, by choice or
default, are traded in the EU regulated market
segment. These rules include provisions on the
stabilizing of share prices and on share buybacks.
... but far-reaching changes in the long run
The grandfathering of Swiss rules in the EU regulated market segment will end as soon as a SMI
company takes explicit action, on or after July 1,
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2005, towards admission of its financial instruments to trading in an EU member state. This will
in particular be the case when the company is required to publish a prospectus as a result of the
admission of additional shares for trading on virt-x
(or another EU regulated market), and in all likelihood also as a result of a public offering of its
shares in the EU.
A prospectus under EU standards needs to be prepared (i) in connection with a new listing if the
company increases its share capital by 10% or
more within 12 months, or (ii) if a public offering of
financial instruments is made in any EU member
state, i.e., an offering to more than 100 investors
(other than certain institutional and other qualifying investors). The prospectus will have to comply
with EU standards as set out in an additional regulation that supplements the SWX listing rules. The
prospectus will have to be approved both by the
SWX and the UK Financial Services Authority, although the SWX will continue to serve as the principal point of contact to SMI companies.
Once a SMI company in the EU regulated market
segment has published a prospectus, the "grandfathering" of the Swiss disclosure rules will come
to an end, and EU rules regarding insider lists and
management transactions will apply. At this point,
the Swiss rules will be "switched off", thus preventing that the issuer must comply with both the
EU standards and the Swiss rules. As to ad hoc
publicity, the SWX takes the view that, given the
similarity of the Swiss and EU rules, Swiss standards will continue to apply even after publication
of an EU compatible prospectus.
UK exchange regulated Market Segment: No immediate change, but uncertain future
Alternatively, SMI companies can at any time elect
to have their shares included in the UK exchange
regulated market segment. All that is needed for
this segment change is a 30 days notice to the
SWX. This election is available for companies that
expressly opted for the EU regulated market seg-
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ment as well as for companies that were included
in that segment by default.
The UK exchange regulated market segment will,
in essence, continue the regulatory regime that
currently applies to SMI companies. The SWX listing and publicity requirements will apply, and so
will the UK trading rules. The Market Abuse Directive and its implementing EU legislation will not
apply to that segment.
It is important to note, however, that public offers
in an EU member state remain subject to the Prospectus Directive, and may require the publication of a prospectus under EU standards even for
companies in the UK exchange regulated market
segment. As long as the shares are traded only
on the UK exchange regulated market segment,
however, a public offering of shares in the EU is
not expected to trigger the rules of the Market
Abuse Directive regarding insider lists and management transactions.
Companies may at any time switch from the UK
regulated market segment into the EU regulated
market segment. This requires the publication of
a full prospectus in accordance with the Prospectus Directive. By contrast, entering the EU regulated market by default on July 1, 2005 does not
require the publication of a prospectus.
To assess its benefits and costs, the UK regulated
market regime (to the extent the UK rules differ
from the EU rules) is expected to be reviewed in
2008. This review may result in amendments of
the UK regulated regime.
Against this background, it is generally inadvisable immediately to opt into the UK regulated
market.
What should SMI companies do?
SMI companies with no secondary listing of
shares and no listing of other financial instruments in an EU member state do not need to take
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June 6, 2005
immediate action. They will effectively only have to
choose between the two segments once they consider:
• the listing of additional shares (though the
SWX expects this trigger only to apply if the
new listing relates to 10% or more of the
company's share capital in a 12 month period); or
• a public offering in an EU member state
which requires the publication of a prospectus in accordance with the Prospectus Directive.
Furthermore, SMI companies that consider or currently carry out a share-buy back must closely
monitor and analyze the UK legislation implementing the Market Abuse Directive. The EU safe harbor for share buy-backs requires that trades under
a buy-back program must not be in excess of the
price of the last independent trade and the highest
independent bid on the first trading line. This requirement could potentially impede the well-
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established buy-back programs of SMI companies
via a second trading line, as these programs generally require the payment of a small premium
over the prices on the first trading line.
Additional rules by EU member states
Non-EU companies will have a choice of a lead
regulator: they can designate a supervisory authority in one EU member state that is competent
for all regulatory issues in the single market. The
new SWX rules are relevant for all SMI companies, whether or not such companies choose the
United Kingdom (UK) as lead regulator.
Companies who have a secondary listing of their
shares, or a listing of any other financial instruments, on another stock exchange in the EU may
have opted for a different lead regulator. These
companies will be subject to additional requirements which are not discussed in this bulletin.
----------------------------------------------------------------------------------------------------------------------------------------------------------------Should you have any further questions relating to this newsletter, please get in touch with your regular contact at Homburger or with:
Daniel Daeniker
Flavio Romerio
([email protected])
([email protected])
Direct dial: + 41 43 222 1650
Direct dial: + 41 43 222 1647
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CH-8006 Zürich
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Fax +41 43 222 15 00
www.homburger.ch