Brexit & Shareholding Disclosures – Clarity amongst uncertainty

5 April 2019

Brexit is almost upon us and with it will come challenges for many businesses. It has been almost three years since the EU referendum, which has been followed by an extended period of uncertainty. Now that we are in the latter stages of the political negotiation, a conclusion is imminent, be it a soft Brexit, hard Brexit, further delays or even a second referendum.

With no one able to predict an outcome or the precise implications of each of the options, all scenarios must be considered by market participants. In fact, it is essential that financial industry participants stay abreast of these potential outcomes, as they will have a real impact on a range of business operations. One key example is the impact of different Brexit scenarios on shareholding disclosure requirements.

Currently, UK rules require shareholding disclosures to be reported to the UK regulator only. These reports are recognised by ESMA, making them valid across the European Economic Area (EEA). This requirement applies to any market participant holding a substantial percentage of the total voting rights of an issuer who has designated the UK as their home member state and who has shares admitted for trading on EEA-regulated markets.

In several potential Brexit scenarios, the UK will no longer be a part of the EEA. This raises some vital questions in relation to shareholding disclosure requirements. For example, how would the holdings of an issuer with UK home member state be monitored? It is also unclear how these holdings will be reported, or even where, when and to whom the reports should be submitted.

ESMA shed some light on this grey area on 31st January 2019 by publishing an update in their Transparency Directive Q&A document. For example, the ESMA rules now state that, in the case of a hard Brexit, any issuer with a UK home member state and with shares listed on the EEA-regulated markets must select a new home member state out of the remaining EU27 jurisdictions.

To elaborate, imagine ‘Issuer X’ had decided that its home member state before 29th March 2019 was the UK and that ‘Holder Y’ has shareholdings that must be disclosed. After a hard Brexit, ‘Issuer X’ would have to select a new home member state, such as France, and ‘Holder Y’ would then have to disclose its shareholdings to the regulator in France.

Moreover, there are further hard Brexit implications to consider. For example, what would happen to an issuer with EU listings if they fail to update their home member state from the UK by 29th March? In that case, disclosure obligations related to such issuers must be reported to all of the competent authorities of the other EEA regulated markets where their securities are admitted to trading.

Another complexity is that shareholders would need to be able to manage both the issuers who have updated their home member states and those who have not. In this sense, firms need to be able to enrich their data with updates to their issuers home member states and then be prepared to report disclosable events to multiple regulators as opposed to a just one.

To take the example of ‘Issuer X’ and ‘Holder Y’ again, imagine ‘Issuer X’ fails to change their HMS from the UK to a valid EEA one after a hard Brexit, while ‘Holder Y’ has disclosable shareholdings that must be reported. The key point is that, should ‘Issuer X’ fail to select an EU27 home member state, then ‘Holder Y’ must now disclose shareholdings to the all of the other EU27 regulators where the Issuer is listed and conform to each of their individual requirements.

Therefore, firms looking to make robust preparations for all Brexit scenarios, including a hard Brexit, will require a shareholding disclosure solution that can handle all eventualities. This entails having all the necessary reporting templates for all jurisdictions, as well as the functionality to populate these templates so that firms can submit their disclosures quickly and easily.

Finally, this example demonstrates that it is vital for firms to adopt a solution that is continually updated to reflect ongoing regulatory changes. While 29th March might bring some clarity to regulatory obligations, it would be prudent to expect more changes to shareholding disclosure requirements, as well as other regulations, in the coming months and years.