Securities intermediation is a business for financial intermediaries, e.g. banks, providing income from executing orders as well as securities portfolio administration fees. The intermediation of other EU member state public offerings of securities is one potential window for financial intermediaries seeking possibilities to increase their revenues. In general, under the Article 3 (2) of the Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading, as amended, (the “Prospectus Directive”) a public offering of securities is any offering of securities to the public unless it meets at least one of the following criteria:
- it is addressed solely to qualified investors;
- it is addressed to fewer than 150 natural or legal persons other than qualified investors;
- it is addressed to investors who acquire securities for a total consideration of at least EUR 100 000 per investor, for each separate offer;
- it has a denomination of at least EUR 100 000; or
- it has a total value in the EU, over a period of 12 months, of less than EU 100 000.
From the legal perspective this raises the question whether intermediating cross-border public offerings of securities call the need to passport the public offering prior it can be subject to securities intermediation or not. Most likely the issuers as well as securities’ intermediaries search for possibilities to sell securities without passporting the another EU member state registered public offering for keeping the costs low and also taking into account potential extra legal liability that may rise. This article covers two main situations that may arise in connection with the intermediation of the other EU member state public offering of securities: (i) securities intermediaries’ communication as a custodian for its clients and (ii) regular securities intermediation without acting as a custodian for the clients.
Communication by a Custodian to its Clients
Regularly, custodians have a (contractual) duty to notify their clients about corporate events of issuers held in client’s securities portfolio. This duty involves secondary public offerings and rights issues. As Articles 13 (1) and 13 (1) of the Prospectus Directive set forth an obligation to register, incl. passport, any public offering of securities, this raises a question whether the communication made by a custodian to its clients in connection with a rights issue or other type of secondary issue in another EU member state (where a prospectus has been approved) is itself an “offer of securities to the public” and therefore would not be permitted unless a passport had been obtained in order to make public offers in the Member State where the custodian clients reside?
Authors of this article believe that the Prospectus Directive should not be interpreted in a way that limits cross-border share ownership or restricts the ability of custodians to comply with their contractual duties. The European Securities and Markets Authority (“ESMA”) has, in its Prospectus Directive Q&A dated 9 June 2011, set forth that a communication of a custodian bank informing its clients in one Member State about their pre-emption rights in relation to a public offer of new shares taking place in another Member State or in a third country does not mean that the custodian is making a public offer in the other Member State. Such a communication would constitute a public offer by the custodian only if it meets the following two conditions:
(i) it provides to its clients with the terms of the offer and the shares that would enable them to decide to subscribe the shares; and
(ii) it acts on behalf of the offeror or issuer when making such a communication (answer No 42).
Based on the ESMA, it can be said that providing the shareholders (custodian’s clients) located in Member State “B” with the terms of the offer enabling them to decide whether to subscribe the shares related to Member State “A” registered offering does not constitute a public offering in Member State “B” within the meaning of the Prospectus Directive. This also means there is no need to passport the offering to the Member State “B”. However, if the custodian provides its clients with the information enabling a client to decide whether to subscribe the public offering of the Member State “A” and the custodian acts on behalf of the offeror or issuer when making such communication, this constitutes a public offering within the meaning of the Prospectus Directive in Member State where custodian provided the aforesaid information, e.g. Member State “B”. Authors of this article believe that the phrase “custodian acting on the behalf of the offeror or the issuer” can be interpreted so that a direct financial benefit for the custodian shall arise under the legal relationship between the custodian and the issuer/the offeror related to the relevant public offering.
In short, there is no need for passporting another EU member state public offering to the member state where a custodian fulfils its contractual duty to notify its clients about another EU member state public offering, i.e. corporate event, if the custodian does not act on behalf of the offeror or issuer when making such a communication.
Communication by a Securities Intermediary to its Clients
It is possible for residents in Member State “A” where a public offer does not take place to subscribe for securities in the EU member state “B” where the public offer takes place directly or through their securities intermediaries acting on behalf of these investors. ESMA has set forth that there is no need for the offeror to publish a prospectus in EU member state “A” as no public offer is made in such a country. This, however, does not prevent investors in Member State “A” to subscribe or buy the securities which are subject of a public offer in another EU member State. In this case it is important that a prospectus is published in the EU member state “B” where the public offer takes place (Prospectus Directive Q&A dated 9 June 2011, answer No 43).
A different situation occurs when a Member State “A” resident finds out about the public offering in Member State “B” with the help of financial intermediary and such financial intermediary’s action does not fall under any exceptions provided in the Article 3 (2) of the Prospectus Directive, i.e. a financial intermediary itself voluntary and without no obligation to communicate to its client in any form provides its clients with the information enabling the clients to decide whether to subscribe the shares related to Member State “B”. Such voluntary communication not falling under any matter set out in Article 3 (2) of the Prospectus Directive brings along the need to passport EU member state “B” public offering of securities to the EU member state “A” prior the offering can be carried out in the Member State “A”.
It is possible to intermediate Member State “A” public offering of securities without the need to passport the public offering to Member State “B” if securities intermediary acts as a custodian fulfilling its duties to its clients in Member State “B”. This presumes that, at the same time, the custodian does not act on behalf of the offeror or issuer when making such communication, e.g. the custodian does not receive direct financial benefit from the issuer or the offeror when making such a communication. On the other hand, securities intermediation based on securities intermediary’s initiative not falling under any exception set out in Article 3 (2) of the Prospectus Directive brings along the need to passport the public offering of securities of EU member state “B” to the EU member state “A” prior to the offering being carried out in the Member State “A”.