Our point of view

Nordic Market Newsletter 9/2012

15 October 2012


Proposed guidelines for application for exemption under the Short Selling Regulation

ESMA has published a proposal on guidelines on market making and the application of exemptions for market making activities and primary market operations under the Short Selling Regulation. The guidelines are intended to support the creation of a level-playing field, consistency of market practices and convergence of supervisory practices amongst national securities market regulators across the EEA. The guidelines should be used as a temporary benchmark for notification and application of the exemption. Comments on the proposal may be submitted to ESMA by 5 October 2012.

Propositions from the EU

Establishment of a Single Supervisory Mechanism for banks within the Eurozone

On 12 September, the European Commission presented a proposal for a Council Regulation regarding establishment of a Single Supervisory Mechanism (SSM) for banks within the Eurozone. This entails extensive powers for the European Central Bank (ECB), and the utmost responsibility, over certain surveillance-tasks related to the financial stability within banks in the Eurozone. It is proposed that the ECB will assume responsibility to authorise credit institutions, to assess qualified holding and to ascertain that these institutes have sufficient internal capital in relation to their respective risk profile. In order to fulfil its obligations it is proposed that the ECB be given investigation powers including the right to request information and to set a conditional fine. Obligations that are not directly assigned to the ECB, e.g. consumer protection and anti-money laundering compliance, will fall to the national supervisory institutions. The national supervisory institutions will furthermore take an active part in the daily surveillance as well as the preparations and implementation of decisions by the ECB.


New Management Remuneration Policy in State-owned companies

Early this fall the Finnish Government adopted a new policy on management remuneration in State-owned companies. According to the new policy remuneration must be predictable and transparent so that all parties involved can assess its efficiency. In all companies total remuneration is to be reined in. The State as an owner requires that the threshold for remuneration must be sufficiently challenging to reach and the maximum levels of remuneration shall require exceptionally good performance.

The policy points out that the board of directors should adopt a stronger role in setting performance targets for companies and related management remuneration processes. Performance-based bonuses must be based on factors the corporate management can affect with their own actions and the company's board of directors needs to set measurable criteria for performance that also promotes the company’s success in the long run. The State as an owner also sees that bonus schemes must have such payment terms that allow cancellation of bonuses or their reduction to a reasonable level as necessary. Further, the State considers that additional pension plans should not be used as remuneration. Other than performance-based remunerations may be justified in exceptional changes or crisis situations.

In contrast to the earlier policy, the new one gives due consideration to the fact that the State owns a range of different kinds of companies with varying levels of shareholding. In companies wholly owned by the State, no deviations from the policy are accepted without prior approval by the owner. Unlisted majority-owned companies must follow the guidelines unless otherwise required by the common interest of the shareholders. With regard to companies in which the State is a minority owner or companies transferred under the ownership of the government vehicle for managing financial investments, Solidium Oy, the guidelines set out the view of a major shareholder regarding good and acceptable remuneration principles. The policy underlines that public acceptability is an important value for all companies regardless of their ownership structure. Therefore, with the issued guidelines in the new policy, the State aims to affect remuneration practices and the openness of such practices not only in companies where State is a major shareholder but in other companies, too.


Proposal on new regulations on covered bonds

The Swedish Financial Supervisory Authority (FI) has issued a proposal on new regulations on covered bonds, which would replace Regulation (FFFS 2004:11) on Covered Bonds. The regulatory proposal concerns companies currently issuing covered bonds, companies that intend to apply for a licence to issue covered bonds in the future and independent reviewers. The purpose of the proposal is to update the regulations in relation to the Act (2003:1223) of Covered Bonds and the new EU rules on capital adequacy, CRD4, and to create effective and clear rules for companies that issue bonds. The proposal also aims to provide effective supervision to make such securities more transparent and safe for investors. It is suggested that the regulations will come into force on 1 March 2013.

A new legislative act that adjusts the Swedish legislation to the EU-regulation on short selling

On 14 March, the European Parliament and the Council adopted the regulation No. 236/2012 on short selling and certain aspects of credit default swaps (the regulation on short selling) which will apply from 1 November 2012. The regulation on short selling aims to decrease the risks that short selling contributes to create instability in the financial markets and creates obligation to notify and to announce certain short positions in financial instruments. The regulation on short selling also contains limitations on so-called naked short selling and empowers the European Securities and Markets Authority (ESMA) to take certain actions in exceptional circumstances. On 13 September, the Swedish government submitted a legislative proposal to parliament to adjust the Swedish legislation to the EU-regulation. The proposal states that the Financial Supervisory Authority is the competent authority under the regulation, and it is proposed that the Financial Supervisory Authority be given certain powers of surveillance and investigation as well as power to decide on sanctions for violation of the regulation. The legislative proposal also proposes adjustments in the Public Access to information and Secrecy Act (2009:400) aiming to classify such information, regarding individuals economic and personal situation, that is subject to the Financial Supervisory Authority’s surveillance and control pursuant to the new act. The new act and related legislative adjustments are proposed to be come into effect on 1 January 2013.

Adjustments and clarifications concerning procurement of capital through directed non-pre-emptive share issues

On 1 September, the investigator Rolf Skog delivered a memorandum to the Swedish Department of Justice regarding the legal principles governing new share issues in listed companies. The memorandum focuses in particular on whether the regulations governing directed non-pre-emptive issuance of shares, convertibles and warrants in public limited companies should be adjusted to facilitate the procurement of capital. The conclusions of the investigation are that the Swedish regulations essentially correspond to the regulations in other EU countries, but there are reasons to implement certain minor adjustments and clarifications. The memorandum proposes a clarification in the Swedish Companies Act on how and when directed new issues of equity shares, as a starting point, are permitted and also how shares, convertibles and warrants are to be distributed in case of oversubscription. Beyond these minor adjustments, it is also proposed that the Swedish Corporate Governance Board formulate a rec-ommendation to establish under which circumstances a directed non-pre-emptive issue would conform with generally accepted practice on the securities market. The proposition is expected to clarify the current law, which might in turn reduce costs for the concerned companies and improve the conditions for the procurement of capital.

The Swedish Securities Council

During September 2012, the Swedish Securities Council published the following two statements both concerning requests from the largest shareholder in a listed company regarding exemptions from the mandatory bid requirement. The requests were brought about because the shareholders share of votes in the company had fallen below the mandatory bid threshold due to the exercise of certain options which had increased the total number of shares.

In statement 2012:18 (Elekta) the Securities Council refused the shareholder’s application for an exemption from the mandatory bid requirement that would arise on an increase in his share of votes in the company. As grounds for this refusal the Securities Council stated first that the shareholder’s share of votes had been below the level of the mandatory bid requirement for a long period of time, second that this ownership situation had been public and known to the market and third that the shareholder had the possibility to monitor his share of votes and to act in order to preserve it. The fact that the shareholder had not exercised his opportunity to monitor his share of votes was a strong reason for the Securities Council’s refusal to grant an exemption.

In statement 2012:22 the Securities Council granted the shareholder, under certain conditions, an exemption from the mandatory bid requirement which might arise on the occasion of a conversion of convertibles to shares in in the company. The Securities Council confirmed, by reference to precedent, the Council's current practice of granting exemptions from the mandatory bid requirement when a shareholder exercises his pre-emption right to subscribe for shares at a new share issue. In the present case, the majority of the relevant convertibles had been acquired where the shareholder exercised his pre-emption right at a pre-emptive issue of convertibles, and the Council saw no reason for a different view on granting exemptions from the mandatory bid requirement in circumstances of conversion of such convertibles than on acquisition of shares in a pre-emptive issue of shares.


Intellectual Property Rights

A clarification of what type of consent is required by the Danish Executive Order on Cookies

The Danish implementation of the Data Protection Directive no. 2009/136 is an almost exact reproduction of Article 5(3). Hence the legislation does not clarify exactly what type of consent is required when a business on its website collects cookies. It has recently been clarified by the Danish Business Authority that the mere fact that a website contains information on their cookie policy, even if made very visible, cannot constitute a consent from a user in the form set out by the directive. Instead, an active consent is required. According to the Business Authority this can inter alia be done through the use of a pop up window which makes you able to accept or deny cookies or through a clearly marked warning sign which informs you that you accepts cookies if you click on to the next page. The use of such active consent forms through pop-ups is currently very limited if not almost non-existing on Danish websites.

Following the clarification, the Danish Business Authority has announced that it is most likely that it will start to enforce the law and perhaps impose fines in the near future, thus it is recommended for website owners to implement such new acceptance features on their websites.


Danish Government presents draft bill proposing to exempt certain portfolio shares from Danish capital gains tax

As part of the 2012 Tax Reform presented by the Danish Prime Minister on May 29 (described in ">Nordic Market Newsletter 8/2012">Nordic Market Newsletter 8/2012), the Danish Ministry of Taxation has now presented a draft bill proposing to exempt Danish corporates from capital gains taxation of certain non-listed portfolio shares, thus removing the so called “start-up” tax.

Under the current Danish tax regime, Danish corporates are generally subject to Danish capital gains tax on portfolio shares. The tax exemption is believed to stimulate SME’s ability to attract much needed venture capital.

The draft bill does not affect foreign shareholders as they are generally exempt from Danish capital gains tax on shares.

Alongside the tax exemption, a series of anti-avoidance rules are introduced in order to, among other things, counter attempts to avoid dividends tax (which will remain to apply to dividends on the concerned portfolio shares).

As a way of financing the tax exemption the law proposal contains a gradual increase of the payroll tax paid by sectors exempt from VAT.

Exempted shares

According to the draft bill, capital gains on portfolio shares are tax exempt under the following conditions:

  • The portfolio shares are non-listed
  • Ownership is below 10% of total shares in the portfolio company (higher percentage of ownership is already tax exempt)
  • The portfolio company is a Danish private limited company or a similar foreign company

Capital losses on exempted portfolio shares would not be tax deductible. However, losses realized on portfolio shares prior to the proposed rules entering into force will remain tax deductible in accordance with the current rules.

Anti-avoidance rules regarding dividend tax

All portfolio shares remain subject to Danish dividend taxation. In order to prevent that the Danish dividend tax rules are circumvented, the draft bill proposes to introduce an anti-avoidance rule which entails that capital gains realized on a sale of exempted portfolio shares are taxed as dividends if the seller acquires portfolio shares in the same company within a 6 month period following the sale. However, this anti-avoidance rule only applies if acquisition price for the new portfolio shares is lower than the price received at sale of the old shares.

Anti-avoidance rules regarding listed shares

Listed portfolio shares remain subject to capital gains taxation. To counter attempts to avoid such taxation, the draft bill proposes that non-listed portfolio shares will not be exempted from capital gains tax if listed shares make up more than 85% of the value of assets in the non-listed portfolio company.

If passed the proposed rules will enter into force on 1 January 2013.

Capital Markets

New rules on short selling

On 1 November 2012, the new EU Regulation 236/2012 on short selling and certain aspects of credit default swaps comes into force. Going forward short positions in shares and sovereign debt exceeding a certain level must be reported to the Danish Financial Supervisory Authority (the DFSA).

Market maker activities and primary dealers may be exempted from the reporting obligation provided that the correct procedure with the DFSA is followed. In order for the exemption to apply the DFSA must be in a position to identify, inter alia, which shares, sovereign debt or credit default swaps should be comprised by the exemption and the extent of the activities.