Disclosure and Accountability: Corporations and Investors ELI Workshop Vienna, 23 June 2017 Dr. Konstantinos Sergakis University of Glasgow

Prospectus Disclosure obligations - Initial Public Offering (IPO): admission of shares to trading on a regulated market - Simplification of capital raising operations and encouragement of cross-listings and investment: a) identical information requirements (harmonisation) b) comparability and accessibility of information - Single passport regime (12 months) Disclosure rationale: reduction of informational asymmetry

Prospectus disclosure obligations (Prospectus Directive) Prospectuses need to ‘contain all information which … is necessary to enable investors to make an informed assessment of the assets and liabilities, financial position, profit and losses, and prospects of the issuer’. Single or tripartite document: registration document (the main source of information related to the issuer that relates to periodic information) securities note (description of the securities offered, their terms and conditions) summary (includes in a concise manner and in a non-technical language key information for the securities offered)

Periodic disclosure obligations (Transparency Directive) Disclosure rationale: price efficiency Annual and half-yearly reports Annual reports (audited financial statements, the management report and statements made by persons who are responsible within the issuer that the financial statements give a true and fair view of the issuer’s overall position and that the management report includes a fair view of the business’ development and performance and the issuer's position along with a description of the principal risks and uncertainties). Half-yearly reports (condensed set of financial statements, interim management report and statements referring to the condensed set of financial statements giving a ‘true and fair view’ of the issuer’s overall position and to the interim management report including a fair review of all its required components). Abolition of the additional requirements for quarterly reports with the 2013 Transparency Directive (long-termism).

Episodic disclosure obligations (Market Abuse Regulation and new MAD) Market Abuse Regulation: article 17 Disclosure of inside information as soon as possible (ad hoc). Inside information is an information which is precise, it has not been made public and it relates, directly or indirectly, to one or more issuers (or to one or more financial instruments) and that it would be likely to have a significant effect on the price of the related financial instruments if it were made public. But issuers can legitimately delay the disclosure of inside information (prejudice, not misleading and confidentiality).

EU enforcement trends/Outline The imposition of sanctions in the area of corporate disclosure obligations, has proven to be a particularly complex task. The Prospectus and Transparency Directives and Market Abuse Regulation deal with sanctions applicable to the breach of disclosure obligations for prospectus, periodic and episodic disclosure obligations. Discrepancies between national laws as well as opening space for regulatory competition.

Prospectus disclosure obligations (Prospectus Directive) Civil liability: art. 6 – identification of responsible persons (issuer or others) BUT variable legal regimes (facilitating or making civil claims very difficult) Criminal sanctions: up to MS (7 years UK, 3 years Germany). Rare… Administrative sanctions: effective, proportionate and dissuasive. Art. 36 Proposal for Regulation: minimum maximums: at least up to €5 million or 3% of the total annual turnover for legal persons and up to €700.000 for natural persons.

Periodic disclosure obligations (Transparency Directive) Civil liability: no identification of responsible persons (‘at least issuer or others’: most MS only issuers…) Variable legal regimes (facilitating or making civil claims very difficult) Criminal sanctions: up to MS (7 years UK, 3 years Germany). Rare.. Administrative sanctions: effective, proportionate and dissuasive. Art. 28b: at least up to €10 million or 5% of the total annual turnover for legal persons and up to €2 million for natural persons.

Periodic disclosure obligations (Transparency Directive) Member States can provide for higher levels of pecuniary sanctions, along with additional sanctions or measures. Indirect harmonisation: The gravity of the duration of the breach, the degree of responsibility and the financial strength of the natural or legal person, the importance of profits as well as the losses suffered by third parties due to the breach, the level of cooperation with the competent authority and any eventual former breaches.

Episodic disclosure obligations (Market Abuse Regulation and new MAD) Civil liability: Variable legal regimes (facilitating or making civil claims very difficult) Criminal sanctions: few MS have provisions. The new MAD does not apply to disclosure obligations…(only to to serious and intentional infringements of some market abuse practices, such as insider dealing, unlawful disclosure of inside information and market manipulation ).

Episodic disclosure obligations (Market Abuse Regulation and new MAD) Administrative sanctions: effective, proportionate and dissuasive. Art. 28b: natural and legal persons can be subject to maximum pecuniary sanctions of at least €1 million and €2 million (or 2% the total annual turnover) respectively. Member States can provide for higher levels of sanctions.

Episodic disclosure obligations (Market Abuse Regulation and new MAD) - Indirect harmonisation: The gravity of the duration of the breach, the degree of responsibility and the financial strength of the natural or legal person, the importance of profits as well as the losses suffered by third parties due to the breach, the level of cooperation with the competent authority and any eventual former breaches.

Enforcement Rationales Deterrence and compensation at an equal footing? Depends on the type of enforcement (public v private). Public enforcement has a key role even in the absence of losses but inefficient at times. Does private enforcement combine both goals? Prospectus: private enforcement predominantly compensatory Periodic/episodic: private enforcement predominantly deterrent Shifting towards more deterrence in private enforcement?

Shareholder Duties/Accountability Duties aimed at protecting the investee company or company stakeholders: a) financial duties (duty to pay up share capital) b) disclosure duties, e.g notification of major shareholdings - TD) Duties aimed at protecting the market (e.g. Shareholder Rights Directive: institutional investors and asset managers are expected to be transparent about how they invest and how they engage with the investee companies). Duties aimed at protecting society’s interests (long term strategies, measures on monitoring non-financial performance, engagement with stakeholders)

Financial Intermediaries (Institutional investors/asset managers/proxy advisors) The revised Shareholders’ Rights Directive (adopted on 3 April 2017) Problems revealed during the financial crisis: - Excessive reliance upon intermediaries to analyse, evaluate and act upon disclosed information (communication gap and agency problems) - Shareholders’ excessive short-termism influenced management risk taking - Insufficient shareholder engagement - Insufficient transparency

Disclosure Obligations for Institutional investors and asset managers - They must publish an engagement policy about How engagement is integrated in the investment strategy How they monitor investee companies on a number of financial as well as non-financial issues How they conduct dialogue with investee companies How they exercise voting rights among other rights How they cooperate with other shareholders How they communicate with relevant stakeholders How they manage conflicts of interest

Disclosure Obligations for Institutional investors and asset managers Institutional investors and asset managers shall disclose: how their engagement policy has been implemented, including how they have cast their votes - The engagement policy and the engagement information must be disclosed on a comply or explain basis

Reflections upon Disclosure by Intermediaries - Mandatory disclosure but not mandatory engagement (i.e. not a duty to engage) - The incentive for institutional investors to engage or vote will be mostly relevant to financial considerations (namely it cannot be recommended as such in a generalised way) Increased disclosure may affect the engagement policy What about stakeholders and, more generally, non-financial issues? What about long-term value creation? Any pressure from ultimate beneficiaries on institutional investors to engage more? Any additional costs triggered?

Reflections upon Disclosure Trends Increasing disclosure may not the optimal way to encourage engagement. Risks of shifting the attention to formalistic compliance: lessons from the UK Stewardship Code. But it can only serve for educational purposes (which are still neglected and need further attention).

Enforcement of Shareholder Duties Legal a) private enforcement, e.g. contractual but reliance upon shareholders/company: uncertainty and different civil liability regimes. b) public enforcement: administrative (NCAs) or criminal - Social (reputational, name and shame, market discipline)

Social enforcement of shareholder duties What about the emerging disclosure-driven ‘engagement duties’ in the Shareholder Rights Directive? ‘No-man’s-land’ between private law and regulation. Would social enforcement only make sense?

From Social to Public enforcement? The gradual shift in corporate governance from private to public law has clear consequences for enforcement. Rather than the market and shareholders enforcing shareholders’ duties, securities regulators may play a greater role in ensuring that shareholders comply with their duties. De facto strengthening of administrative sanctions? But are regulators able to perform such role efficiently? Risks of over regulation, more complexity.

Conclusion (Disclosure) Disclosure a) Issuers: increasingly detailed disclosure requirements but of little if no use to retail investors (who are purportedly protected via this method) and potential abuse for institutional investors (excessive short-termism and pressure on management) b) Investors: Excessive reliance upon intermediaries to analyse, evaluate and act upon disclosed information (communication gap and agency problems) c) Financial intermediaries: increasing disclosure (Shareholder Rights Directive) is not the optimal way to encourage engagement (risks of shifting the attention to formalistic compliance) but it can only serve for educational purposes (which are still neglected).

Conclusion (Accountability) Issuer Accountability a) Convergence perspectives amongst NCAs are the only way forward (indirect harmonisation of administrative sanctions/measures) b) Civil Liability regimes largely dependent upon national trends c) Criminal sanctions: marginalisation Intermediaries Accountability a) Contractual remedies (but chain of different contracts…) b) Stewardship responsibilities (comply or explain) c) Emerging and disclosure-driven ‘duties’ [but not legal ones…so difficult to enforce]