Nordic Market Newsletter
Emphasis on Working Capital Statements
During the recent past the availability of financing for companies has been subject to more strain than usual. It has not been as clear as before that adequate financing has been available for current needs - in particular for companies with a challenging financial position. As equity fund raisings have taken place, there have at times been discussions on whether a company can give the usual statement in an offering prospectus that it has adequate funding for its needs for the next 12 months. In many cases, there has been considerable pressure to make a statement of this kind, i.e. a “clean” working capital statement, even if availability of financing would be unconfirmed.
Recently the Finnish Financial Supervision Authority announced enforcement action against a Finnish issuer with regard to such a working capital statement. The issuer had given a clean working capital statement in its prospectus, but within a few months was planning a new equity raise for, among other, working capital purposes. The FFSA investigated the matter and concluded that the company had not given appropriate disclosure when it gave a clean statement. The company had argued that the risks related to its refinancing situation had been disclosed in the risk factors of the prospectus. However, the working capital statement requirements and the related FFSA guidance emphasize that any uncertainty with regard to working capital must be very clearly disclosed and that in the case of a clean working capital statement the level of certainty regarding the sufficiency of working capital must be very high.
In preparing working capital statements there has been concern among issuers and their auditors that a “conditional” working capital statement (i.e. stating that funds may not be sufficient for the next 12 months) would raise going concern issues. Where prospectuses have been prepared at the same time as annual financial statements have been in the process of being finalized there have been concerns that conditional working capital statements and going concern issues would be related. However, the disclosure rules on working capital related to prospectus disclosure are specific to disclosure in that context and do not relate directly to going concern. In most cases, there has been sufficient comfort on the financing situation that companies have been able to report on a going concern basis even when a prospectus is being published at the same time with a conditional statement.
Other Recent Enforcement Action by the FFSA
The Finnish Financial Supervision Authority has been active in monitoring corporate disclosure and compliance during the past year. In the fall the FFSA focused on the timing of changes in future outlook. It was not unusual for companies to adjust their outlooks in connection with quarterly reports. The FFSA emphasized, however, that if it becomes apparent that the outlook must be adjusted, companies must give a results warning immediately and cannot wait until the next quarterly report. The FFSA position may pose some challenges for corporate routines as preliminary results may be subject to a committee analysis procedure times to coincide with quarterly releases. These routines may now have to be reconsidered in cases where management reporting starts indicating that previously announced outlooks are likely to change.
More recently, the FFSA has also focused on compliance and has issued two public censures to financial services firms for not maintaining adequate internal insider registers. The issues were related only to the formal requirements on maintaining registers and no in appropriate trading or similar activity was suggested. These actions seem to have raised concerns more broadly with respect to the formal requirements of insider registers and project specific insider lists, and practice in these areas seems to becoming more stringent than the FFSA requires. In particular, there is a lack of uniformity in maintaining project specific insider lists and the information that companies insert in these lists. Having arrangements in place that are adequate for identifying relevant persons to whom insider information is given together with a NDA is sufficient in a project context, for example.
Government bill regarding amendments to deposit insurance
On 7 April 2011, the Swedish Government submitted a proposal regarding amendments to the deposit insurance regulation. It is proposed that the payment schedule be shortened and take place within 20 working days instead of three months and that the savers should be able to claim even if an institute does not go into bankruptcy. The Swedish Financial Supervisory Authority is to have further powers to order insurance to be taken out. It is also proposed that institutes and relevant authorities will have further obligations to inform about the insurance cover and that an application for advance notification of the account types used to receive deposits be introduced for institutes to which the Swedish deposit insurance applies. The amendments are proposed to enter into force on 1 July 2011.
The Swedish Government Offices’ administration of state-owned companies
The administration of state-owned companies in Sweden is currently conducted by the Swedish Government Offices. On 8 April 2011, a committee reference was given to a special investigator to make proposals on how the activities in the various ministries currently responsible for the administration should be conducted and organised. The purpose of the study is to evaluate alternative organisational forms and investigate and report on other countries' experiences in corporate management and to make proposals for the organisation for the future management of state-owned companies. The investigation will review how to optimise the effective and efficient administration, while retaining insight and influence over the companies by the Riksdag and the Government. The outcome of the investigation is to be presented on 13 January 2012.
Implementation of the Investment Funds Directive (“UCITS IV”)
The Swedish Government has instructed the Swedish Council on Legislation to review the referral regarding the implementation of UCITS IV (2009/65/EC). The referral contains certain proposed changes in accordance with UCITS IV to the Act (2004:46) on Investment Funds as regards opening doors for foreign fund managers to manage Swedish investment funds and for Swedish fund managers to manage foreign investment funds. In addition, new rules regarding the merger of investment funds (both domestic and cross-border) are proposed, as well as new investment rules allowing the fund manager to invest all assets in one single fund. Furthermore, stricter rules pertaining to the information provided in the factsheet to the private investor are proposed.
Investigation of the marketing of funds
The Swedish Consumer Agency recently published a report on the marketing of funds. In order to ensure that fund marketing complies with the relevant law, the Agency investigated the marketing of 40 fund companies. The investigation was conducted under the auspices of the Swedish Market Act and the provisions of the agreement between the Agency and the Swedish Investment Fund Association on the marketing of funds. The investigation also covered the marketing of ethical funds and green funds, so called SRI funds. In the report the Agency concluded that the funds investigated were largely in compliance with the law. However, the Agency found a number of deficiencies which mainly concerned how fund companies present risk information and historical returns. The Agency assumes that the fund companies will take the criticism expressed in the report into account and, if needed, change their marketing.
Statement by the Swedish Investment Fund Association’s ethical council on fund marketing
On 7 September 2010, the insurance companies Skandia and Skandia Fonder ("Skandia") made a complaint about Avanza Bank AB ("Avanza") regarding certain of Avanza’s marketing activities concerning a pension fund solution in which Avanza compared solution with one of the pension fund solutions provided by Skandia. Avanza’s comparison suggests that the consumer could double his pension by taking out a pension insurance product and invest the funds in the pension solution provided by Avanza. The Swedish Investment Fund Association’s council on fund marketing found in a statement of 14 April 2011 (matter 6/2010) that Avanza’s comparison between the funds had been designed in violation of good marketing because, the funds were not comparable with regard to differences in investment policies, risk levels, fees, management methods and comparison indexes. Against this background, the council also found Avanza’s assumption of future returns were contrary to good marketing, as well as Avanza's claim about doubling of the pension.
The Swedish Securities Council
In statement 2011:10 (Medivir AB) the Swedish Securities Council granted the bidder dispensation from the Swedish Takeover Rules in relation to the obligation to include certain warrants in a public takeover bid. The dispensation was granted on the ground that the warrants were held by a wholly-owned subsidiary.
Statement 2011:09 (Traction) regarded the company Traction, whose dominant principal owners intended to by gift hand over shares representing 9.2 per cent of the votes to their legally competent son. By accepting the gift the son, who already controlled 29.6 percent of the votes, would pass the mandatory bid threshold. The Securities Council found that family members are not to be regarded as related in accordance with the Act on Public Takeover Offers on the Stock Market but noted that the family members have never exercised their right to vote in different ways regarding the company. According to the Securities Council, this indicated that no change of control in fact occured by the son’s acquisition of shares. Exemption from the mandatory bid obligation was granted.
In statement 2011:11 (Episurf), the Securities Council granted exemption from the mandatory bid obligation to a dominant owner who, by discharging an issue guarantee in Episurf, would pass the mandatory bid threshold. The exemption was subject to the condition that the guarantee undertaking was framed in such way that the dominant owner was allowed to subscribe only to shares left over after the first shareholders, including the dominant owner, had been offered to buy shares and all shareholders, excluding the dominant owner, and the public thereafter had been offered to subscribe for the remaining shares without preferential right.
The Danish Financial Supervisory Authority (the DFSA) has submitted a proposal for an executive order on national and cross boarder merger and demergers of investment associations. The executive order forms part of the new proposed scheme for investment associations issued as a consequence of EU Directive UCITS IV. The new act on investment associations, which will incorporate new rules on investor information, cross border marketing and cooperation between the national supervisory authorities, is expected to come into force together with the executive order on mergers and demergers on 1 July 2011.
Also derived from the new investment association scheme the DFSA has submitted an executive order on investment associations’, special associations’ and approved restricted associations’ use of derived financial instruments.
A revised executive order presented by the DFSA on statements on base capital comprising the rules on base capital formerly included in the act on financial entities, the rules on the audit procedures for credit institutions’ recognition of current earnings in the tier one capital and a precision of the corporate procedure for the adoption of a decision that an agreement regarding tier one capital can include a conversion right for the lender, is expected to come into force 1 July 2011.
The DFSA has submitted a proposal for a revised executive order on investor protection in connection with securities trade - the MIFiD scheme. The objective of the revision is to introduce rules on securities traders’ delivery of a document containing key investor information for private clients who wish to invest in investment funds, special funds and hedge funds. The document shall identify the main characteristics and risks of investment in such funds.
Reporting of Transactions
Based on European Securities and Markets Authority’s decision of May 2009 to expand the duty to report securities transactions, the DFSA has submitted an executive order regarding reporting of securities transactions to the DFSA.
Pursuant to the new draft order the reporting of transactions in derivatives not quoted on a regulated market but based on instruments listed on a regulated market is now comprised by the securities traders’ duty to report transactions to the DFSA. The order is expected to come into force 1 September 2011.
Bank Package III
A new bill introducing a compensation scheme for banks in distress is to strengthen the possibilities for more market based solutions for handling of distressed banks. The bill was introduced on 29 April 2011.
The minister for Economic and Business Affairs stresses that Bank Package III has worked as intended, and is solely meant as a last resort for banks in distress and as an alternative to going into bankruptcy. Private solutions will always have first priority before turning to the use of Bank Package III. Based on discussions with the financial sector it has been suggested that the Depositors' Guarantee Fund gets the opportunity to offer compensation to a bank taking over a distressed bank. This will provide a tool for the Depositors' Guarantee Fund to take active part in finding and creating private solutions for handling distressed banks. The suggested compensation scheme entails that the Depositors' Guarantee Fund gets the opportunity to supply funds or provide guarantees against losses, when activities of a bank in distress is being transferred to another bank. A condition for using the compensation scheme is that - in the opinion of the Depositors' Guarantee Fund - this solution will be far more financially attractive compared to using Bank Package III. The compensation scheme will be financed by the contributing banks and thus the cost of the compensations scheme will be born by the financial sector itself if the bill is passed in its current form.