New rules for listed companies: two steps forward, one step backward

The “Hearing on the consultation papers on technical advice and technical standards under the Market Abuse Regulation” took place in Brussels two days ago. This would hardly be worth mentioning, were it not for the fact that the Directive endorsed in early July 2014 will usher in a new era for several hundred listed companies.

In fact, the EU’s Market Abuse Regulation - MAR for short - means that companies traded in the Open Market will have to observe a significantly higher number of ongoing obligations. Until now, companies whose shares are traded in the Open Market have been exempt from certain rules under the German securities trading act (WpHG) such as the publication of ad hoc statements, the disclosure of directors’ dealings and the keeping of insider lists. When the new regulations come into force in July 2016, this relief granted to companies traded in the Open Market will largely end, save for their exemption from the duty to prepare their annual accounts to IFRS. In addition, they will also remain exempt from publishing six-monthly reports, unless they are registered in a quality segment (Entry Standard, M:access) of the Open Market.

Another EU initiative, paradoxically called “Transparency Directive”, runs counter to this rule in that it provides for the abolition of quarterly reports. In contrast to the above-mentioned MAR, this initiative by the European regulators will not be binding on the national stock markets. Consequently it will be up to Deutsche Börse whether to retain or abolish the duty to publish quarterly reports in its Prime Standard, the segment requiring the highest level of transparency. According to Deutsche Börse, this issue “is currently being explored in close conjunction with the issuers listed in this segment”. The Directive is to be transposed into national law no later than November 2015.

What implications do these two initiatives have for…

companies listed in the Open Market:

Given that companies listed in the Open Market tend to be smaller, compliance with the new MAR rules will require greater manpower and financial resources (ongoing assessment of need for ad hoc disclosure, keeping of insider lists). On the positive side, the enhanced transparency might make these companies attractive to new investor groups.

companies listed in the Regulated Market:

For companies listed in the Regulated Market, the new MAR rules merely bring certain modifications of existing rules. The additional resources required will be more or less negligible once these modifications are fully understood and the relevant processes have been adjusted. However, an abolition or trimming of the quarterly reports would mean substantial manpower and cost relief for companies listed in the Prime Standard segment.

potential IPO candidates:

The enhanced requirements in the Open Market will raise the barriers for potential IPO candidates. This will increase medium sized companies’ reluctance to go to the capital market. In contrast, an abolition of the quarterly reporting requirement would make an IPO more attractive for those companies which have so far been deterred by the need to produce quarterly reports.

In conclusion:

Abolishing the obligation to publish quarterly reports is meant to reduce the bureaucratic burdens on smaller companies. However, most smaller listed companies are traded in the Open Market where quarterly reports are not mandatory anyway. This means that the original objective of this EU initiative will not be met.
The enhanced requirements in the Open Market and the objective of unifying the standards for listed companies conflict with the “Markt 0” objective stipulated in the federal government’s coalition agreement. Conceived as an entry-level segment for growth companies, “Markt 2.0” is meant to improve the sentiment for risk capital in Germany. This problem could potentially be avoided by creating such a segment in the form of an “SME growth market”, thereby making it eligible for some of the exceptions provided under MAR.
As happens so often, EU officials are trying to serve two masters at the same time, namely investor protection on the one hand and improved access to capital through the securities markets for small and mid-sized companies on the other. However, the means they have chosen defeat their original purpose - more stringent investor protection rules will tie down substantial resources and hold the threat of potential penalties of up to EUR 15 million, which is bound to deter small and mid-caps, in particular.
However, there are also some positive aspects to these initiatives. First: it is high time the quarterly reports were trimmed down, although abolishing them completely would make sense only if the other financial markets (USA, Asia) were to go along. As a compromise, one could look at the Interim Statements published in the Anglo-Saxon world or the “Zwischenmitteilungen” already mandatory in the General Standard segment of the German securities market. Second, the MAR rules will strengthen confidence in companies traded in the Open Market, potentially attracting new investors.

Fabian Kirchmann, managing partner, IR.on AG