Brexit: Implications for Shareholders with Threshold Interests
As yet another deadline approaches for the United Kingdom to either leave the European Union with a withdrawal agreement in place or else exit effective immediately in a “no-deal” scenario, it is worth examining how this would affect asset managers subject to the UK regimes for major shareholdings, short selling, and dealing disclosures.
First, the latest political developments. The deadline date is 31 October 2019. By that date, if the UK and EU haven’t come to agreement on the terms of the UK’s departure, the UK leaves the EU effective immediately, unless a deadline extension is provided for in the interim. The possibility of such a no-deal scenario caused enough concern in the UK Parliament that it recently passed a law requiring the UK Government, led by the Prime Minister Boris Johnson, to formally request from the EU another extension of the deadline by 19 October 2019 if a withdrawal deal is not struck by that time. That extension would push the new Brexit deadline date to 31 January 2020. But there is no guarantee that the EU would grant the extension. Moreover the Prime Minister is reportedly searching for procedural ways in which to avoid requesting the extension in the first place, having proclaimed repeatedly that the UK will leave the EU by 31 October 2019 “with or without a deal,” despite his apparent legal obligation to request the extension.
Alternatively, if a withdrawal agreement is in fact struck between the UK and the EU before 31 October, its terms would provide for a transition period during which EU laws would continue to apply in the UK. Under the provisional withdrawal agreement agreed to in principle between the UK and the EU in March 2018, that transitional period lasts until 31 December 2020 and may be extended by two years beyond that date. (It remains to be seen whether the UK will decide to formally accept that form of withdrawal agreement.) EU laws that would continue to apply in the UK would include the EU Transparency Directive, the EU Short Selling Regulation, MiFID II and the rest of the pertinent EU financial legislation affecting asset managers and other market participants.
For shareholders with interests subject to UK threshold reporting obligations, the following is what they can expect in the event that the UK departs the EU without a deal in place on 31 October, based on statements made by ESMA and the UK’s FCA:
Applicable rules including the thresholds (at 3% and greater interests) and notification form will be retained, but the scope of issuers that trigger filings will change. The FCA has stated that issuers trading on relevant UK markets will be in scope. This will be the case even for such issuers that currently have their EU Home Member State outside of the UK, and even if that would subject their threshold shareholders to notification requirements in both the UK and a separate EEA jurisdiction. (Currently with the UK still part of the EU, the only issuers in scope are those with the UK as their Home Member State).
As for UK-registered issuers trading on relevant EEA markets outside the UK – typically these issuers currently have the UK as their Home Member State – ESMA has urged them to declare a new Home Member State within three months, or else a Home Member State would be declared for them. (Such new Home Member State would in principle be an EEA jurisdiction in which their securities are trading, and according to ESMA could even result in an issuer assuming multiple Home Member States if its securities happen to be cross-listed in multiple such jurisdictions.)
The relevant rules such as thresholds (at 0.2% and higher) and notification procedures will continue, but the list of “Exempted Shares” not subject to UK short position filings will cease to be published by ESMA. Instead the FCA will publish its own list of Exempted Shares, which will require asset managers and other short position holders to use that data source instead. Moreover, the FCA will no longer be required to provide ESMA with information about relevant net short positions on UK markets. Additionally, the EU’s “FIRDS” database, which according to previous ESMA guidance may be relied upon to understand where to file short position notifications (and which provides other useful data about ISINs listed on EEA markets), will no longer receive information fed by the UK.
Holdings in issuers within an offer period
For long holdings in issuers that are subject to a takeover bid and within an “offer period,” the threshold filing requirement (at 1% interest and subsequent dealings) will remain, but the scope of relevant issuers will change. While most such issuers based in the UK (as well as in Guernsey, Jersey and the Isle of Man) will still trigger filing requirements, “shared jurisdiction” issuers will cease to be relevant. “Shared jurisdiction” issuers can include UK-registered companies trading on a regulated market in another EEA country, or else an issuer registered in the EEA (outside of the UK) that trades on a regulated market in the UK. (When in November 2018 the UK’s Takeover Panel outlined this change to occur upon Brexit, it listed 36 issuers as falling within this “shared jurisdiction” category that will no longer trigger such filings.)
The above is based largely on what ESMA, the FCA and the Takeover Panel have stated in the run-up to prior deadlines, which came and went on 29 March and 12 April 2019 pursuant to extensions granted by the EU. In case any of that guidance changes or further updates published, leading into the next deadline date of 31 October, market participants are urged to monitor the latest developments at ESMA, the FCA and the Takeover Panel. (Consult for example the FCA’s Brexit-related web pages accessed here, or its dedicated Brexit phone line at 0800 048 4255.)
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