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Nordic Market Newsletter 1/2012

9 February 2012


European Commission - Change of Audit Regulation
In 2010, the European Commission published a so-called Green Book regarding auditors and audit. As a result, the Commission is now proposing changes to Directive 2006/43/EC on statutory audits of annual accounts and consolidated accounts and introducing an EU regulation on specific requirements regarding statutory audits of public-interest entities (2011/0359).

The revision of the directive implies no major changes. However, the new audit regulation will have a significant effect for financial companies and listed companies because of the high level of detail of the regulation. For example, the proposal contains a suggestion on the mandatory rotation of auditing firms after six years and the prohibition for auditing firms to provide non-audit services to their audit clients. In addition, there will be a total ban for firms over a certain size to provide non-audit services at all. The purpose of this criterion is to strike directly against the “Big Four” (Deloitte, Ernst & Young, KPMG and PwC) and the significant market share they hold.

European Securities and Markets Authority

Proposed Interpretation of the Prospectus Directive
The ESMA has proposed an interpretation of the Prospectus Directive as amended by Directive 2010/73/EU. The purpose of the document is to seek comments on the technical advice that the ESMA proposes to give to the European Commission. The proposal concerns articles 3, 5 and 7 of the Prospectus Directive.

Regulation Regarding Short Selling and Certain Aspects of Credit Default Swaps
In November 2011, the European Council and the Parliament voted on a Regulation on short selling and certain aspects of credit default swaps. The regulation is soon to be published and will enter into force on 01 November 2012. The ESMA has to submit technical standards to the Commission by 31 March 2012 and is accepting feedback until 13 February, before they submit their final report to the European Commission. Additionally, the ESMA will provide advice on all the delegated acts contained in the regulation by the same date, also at the request of the Commission.


Projections by Issuers under Uncertain Market Conditions
The Finnish Financial Supervisory Authority (FSA) has urged issuers to be more prudent and cautious when predicting their future outlook. If the future development of a company’s business is difficult to forecast, the company must pay special attention when describing future development in order to avoid giving misleading projections.

In an article published in “Markkinat”- bulletin (4/2011, pp. 3-4), the FSA has listed factors that should be considered by issuers when evaluating prospects for the year 2012. Some companies have opted not to give detailed projections of future developments in investor presentations and quarterly reports. All companies must, based on applicable accounting standards, include an estimate of probable future development in their annual reports. Periodic reports and investor presentations should correlate with statutory reports and, thus, all issuers should issue information on likely future developments. In addition, the explanatory statement and the interim report must give an assessment of the likely development of the company during the current financial period to the extent that this is possible and an explanation of the factors on which the assessment is based.

The FSA is stressing the importance of being more prudent and cautious when companies present future projections. Although the FSA recommends that the projections be forecasts of results, the companies themselves may decide on the extent of the forecasts and projections. Companies may decide whether only a general outlook is given instead of a forecast of results.

Under volatile trading conditions, companies may also consider whether to shorten the term of the projection. The FSA noted that companies should disclose the reasons for an unusual or inconsistent presentation of a company’s prospects. If a company fails to give a projection due to uncertainty in the market, it has an increased duty to disclose the development of its financial situation and when a reliable evaluation may be made. When a company refers to uncertainty in the market, the FSA has highlighted the importance of explaining the relevant factors on the business and the outlook given.

An example of an inadequate analysis and interpretation of a company’s results in light of previously disclosed information and, thus, market expectations, can be seen in the NASDAQ OMX Helsinki Disciplinary Committee’s decision on 19 January 2012. The Disciplinary Committee issued a warning and imposed a fine of EUR 20,000 on Tectia Corporation for breaching the Rules of the Stock Exchange. Tectia Corporation issued a profit warning only one day before it disclosed its interim report for the second quarter. Further, Tectia Corporation issued a second profit warning only ten minutes before it disclosed its interim report for the third quarter. The Disciplinary Committee stated that the company’s management had not taken actions required due to the changes in the company’s financial development without undue delay and in an efficient manner. According to the Rules of the Stock Exchange, the company must, without undue delay, disclose information about decisions or other facts and circumstances that are price sensitive. Furthermore, when the company reasonably expects that its financial results or financial position will deviate significantly from a projection disclosed by the company and such a deviation is price sensitive, the company must disclose information about the deviation without undue delay. The company must also have sufficient monitoring systems in place to follow the actual development in comparison with previous projections.

Deviations from the Recommendations of the Corporate Governance Code
The Finnish Securities Market Association has issued guidelines on explaining deviations from the recommendations of the Finnish Corporate Governance Code (the “Code”).

The Code for listed companies is based on a comply-or-explain principle. Companies must comply with the recommendations or explain and reason the deviation. Companies have, however, disclosed explanations on the deviations in varying ways and, in many cases, insufficiently. Based on the new guidelines, an explanation that openly, clearly and exhaustively includes both reasons for the deviation and the company’s alternative line of action is considered an acceptable explanation. Further, companies should describe the process and measures taken to comply with the stipulations of the Code.

According to the Finnish Securities Market Association’s guidelines, a company must announce in their Corporate Governance Statement and on their web page to what extent the company has complied with the Code and all the recommendations from which the company has opted to deviate. The most common recommendation from which companies deviate is recommendation 9, concerning the gender distribution of the board of directors. The Finnish Securities Market Association regards an explanation as insufficient if it merely states that a suitable female member could not be found or that the shareholder’s meeting has decided on the composition of the board of directors. In order to have an adequately reasoned explanation for this deviation, the company should describe the process and measures taken to comply with the stipulations of the Code.


The Supreme Court: Interpretation of “All Shares” when Making a Public Tender Offer
On 29 December 2011, a verdict from the Supreme Court (Ö 245-11) was made regarding the special regulation in chapter 14(a), section 2, of the Insurance Business Act (2010:2043) (a corresponding provision can be found in chapter 22, section 2, in the Companies Act). The special regulation states that if more than nine-tenths of the shares owners accept the tender offer, the purchaser is given the right to redeem the remaining shares for the same purchase price as was offered in the public tender. The Supreme Court had to interpret the meaning of “all shares”, which is a necessary condition to apply the special provision.

Even though some shareholders were excluded from the offer (for example, shareholders from the USA) in accordance with Swedish market practice, the Supreme Court stated that the special provision was applicable. As justification, they stated that the use of the special provision would otherwise have been severely limited.

The Court of Appeal - Possibility to Claim Damages for Subsidiaries’ Actions
On 12 January 2012, the Court of Appeal for Southern Norrland (Case T 1364-12) tried a damage claim against a limited company. Since the complainant made a direct claim against defense limited company subsidiaries’ actions, a prerequisite for the claim was lifting the corporate veil. The Court of Appeal ruled that lifting the corporate veil is possible between a parent company and its subsidiary. However, in this case, doing so would require the subsidiaries’ actions to be grossly negligent. The subsidiaries had failed to keep expenses down but not in such a careless manner to qualify as gross negligence. Therefore, the claim was dismissed.

The Swedish Securities Council
The Swedish Securities Council has issued five statements concerning mandatory bids and exemptions from takeover rules.

  • In Statement 2011:33 (Cloetta), Cloetta AB planned to purchase a company through an issue in kind. In connection with the acquisition, both the owners of the retrieving company and Cloetta’s largest shareholder requested an exemption from the mandatory bid obligation in the takeover rules. The request was granted to both of them since the mandatory bid obligation only arose temporarily as an integrated part of the acquisition.
  • In Statement 2011:34 (Obducat) European Nano Invest requested an extension of the four-week period before a mandatory bid had to be made when exceeding the 30 percent threshold of control of the voting share in Obducat. The request was denied because the Council stated that all possible solutions to decrease the voting share below the 30 percent threshold had not been exhausted by European Nano Invest.
  • In Statement 2012:01 (Paradox Entertainment), Beagle Investments S.A. exceeded the 30 percent threshold of control of voting rights in Paradox Entertainment AB, which triggers the mandatory bid obligation. However, since the mandatory bid obligation arose because of Beagle Investments S.A.’s preemption right in a share issue, the Council exempted the mandatory bid obligation in accordance with previous practice.
  • In Statement 2012:02 (Stingbet Holding) the Swedish Securities Council exempted Henrik Kvick AB from the mandatory bid obligation. As required for the exemption, the Council decided that the shareholders must be duly informed at the general meeting and that two-thirds of the shareholders support the direct share issue.
  • In Statement 2012:03 (Aspiro), Schibsted did not have to include warranties in its public tender offer for Aspiro AB since they were owned by a wholly owned subsidiary to Aspiro AB.
  • For Statement 2012:5, please see NASDAQ OMX below.

On 22 December 2011, NASDAQ OMX Stockholm decided to delete section 4.1 from the Rule Book for Issuers regarding transactions with closely related parties. The Swedish Securities Council made a statement (2012:05) on 31 January 2012 to replace the section. The statement complies with the former provision with one amendment. A prohibition for shareholders to vote on proposals at the general meeting regarding transfer or acquisition concerning themselves has now been included.

The Disciplinary Committee of NASDAQ OMX
The Disciplinary Committee of NASDAQ OMX Stockholm has in statement 2012:1 found that in four instances, Pareto Öhman has contravened the Exchange’s rules and regulations pertaining to an automatic order entry caused by a programming defect in Pareto Öhman’s software for algorithm trading and order entries that did not reflect the current market value. The Disciplinary Committee of NASDAQ OMX Stockholm has therefore ordered Pareto Öhman to pay a fine of SEK 500,000.

New rules for prospectus
The memorandum, Ds 2012:1 New rules regarding prospectus, sets out proposals for legislative changes to implement the Directive 2010/73/EU. The purpose is to strengthen the protection for investors and reduce administrative costs for companies.

A prospectus does not have to be prepared when transferable securities are offered to the public if the offer is directed to less than 150 persons other than qualified investors, within a EEA, if the offer relates to purchases of transferable securities with a value corresponding to at least EUR 100,000 for each investor. Further, a prospectus does not have to be drawn up if each of the of the transferable securities has a value of at least EUR 100,000 or the total amount that shall be paid by each investor, within the EEA and within twelve months, at most equals EUR 2,500,000. The term qualified investor shall be changed so that the definition complies with the definition in the securities market rules. The obligation to draw up an amendment to a prospectus shall apply until the application period for the offer of transferable securities to the public expires, or if it occurs later, the securities shall be admitted for trading on a regulated market. Investors shall have the right to withdraw an application or an consent to subscription within two working days from the offer.


The Danish Financial Supervisory Authority (the “DFSA”) Continues its Focus on Compliance

Profits Downgrade Came Too Late
On 9 January 2012, the DFSA reported Pandora to the police for non-compliance with its disclosure obligation pursuant to the Danish Securities Trading Act. The DFSA found that Pandora violated the disclosure obligation by withholding information about the company’s substantial downgrade of its expected growth in turnover. The downgrade was announced on 02 August 2011, whereas the DFSA found that Pandora, no later than 18 July 2011, had knowledge of the second quarter turnover and the worsened market conditions which led to the downgrade in early August.

On 2 August 2011, Pandora’s stock price dropped from DKK 147 to DKK 57; although the share price has not returned to its initial offer price, the shares have regained some of their value over the past months.

The DFSA has been quoted as saying that it is important that listed companies are equally responsive when it comes to downgrades due to poor results as they are when they upgrade due to success.

Website Screening
The DFSA has begun screening the websites of 30 Danish banks in order to establish whether the banks’ information on interest rates and yearly expenses comply with applicable rules. As of late January 2012, three banks had been reported to the police, and others have been criticised for the lack of price information provided to the banks’ customers on the internet. However, the DFSA expects that the final results of the screening will lead to additional charges.

Alternative to Danish Bank Collapses
Two distressed Danish banks, Vestjysk Bank (the 8th largest bank in Denmark) and Aarhus Lokalbank, have announced that they plan to merge. Vestjysk Bank plans to convert a DKK 300 million debt to the Danish state into share capital whereby the Danish state will become the primary shareholder in the new bank. The plan also involves issuing additional new shares in the range of DKK 250-300 million and raising a subordinated loan in the amount of DKK 200 million from other Danish banks.

Finally, the Danish National Bank will buy the banks’ portfolio of financial shares.

The transaction will raise the surviving bank well above the applicable capital adequacy requirement and strengthen the bank’s funding. Under Bank Package IV, Vestjysk Bank will, as a consequence of the merger, obtain a three-year postponement of the obligation to repay the DKK 9 billion guarantee previously provided to the bank by the Danish state.

The merger is still subject to the approval by the Danish Financial Supervisory Authority and the general meetings of the two existing banks, which are scheduled to take place in March, 2012.

Taxation Update
As mentioned in our November, 2011 newsletter, the Danish government had proposed certain changes to Danish tax laws. The proposals have now been adopted and imply, inter alia, that profits earned by an employee on the basis of the shares granted to, purchased or subscribed by such employee as part of an incentive scheme will be subject to income tax instead of the current (lower) capital gains tax on shares.

Transition rules permit the continued application of the former section 7A in respect to shares, options or warrants allotted to the employee before 31 December 2012, provided that the agreement to grant shares, options or warrants was entered into prior to 21 November 2011. For incentive schemes comprised by section 7H, section 7H will apply continuously to agreements on share grants, options or warrants entered into prior to 21 November 2011.

The taxable amount for employer-paid phones is now fixed at DKK 2,500 with a reduction of 25% for spouses who are both subject to the employer-paid phone tax. For comparison, the former rules on multimedia tax fix the taxable amount at DKK 3,000. Also, from 01 January 2012, health insurance is no longer tax exempt, and the maximum annual tax relief for contributions to annuity pensions has been lowered from DKK 100,000 to DKK 50,000.


Changes in Norwegian Companies Act
From 1 January 2012 a number of amendments of the Norwegian Companies Act entered in to force. For example the requirement for the minimum share capital of limited companies in Norway was lowered from NOK 100,000 to NOK 30,000. The share capital can now be used to cover expenses for the foundation of the limited company. Further, financial institutions, not just auditors, can confirm that the company has received the founding share capital.

Oslo Børs Bond Rules 12/2011: Information on Proposed Implementation of Changes to the Prospectus Directive and Transparency Directive
Circular 12/2011 describes proposed changes to the Transparency Directive and the Prospectus Directive, which are expected to be implemented into Norwegian legislation by 01 July 2012. The changes to these directives will require changes to the Oslo Børs Bond Rules. In addition, it may be necessary to make changes to the Oslo ABM Rules in order to ensure that issuers which are subject to the Bond Rules and the ABM Rules are treated equally wherever possible.