What regulatory changes can issuers expect? For the Polish capital market, recent years have been quite intense, primarily in terms of amendments to regulations, both domestic and EU. The most significant changes in these regulations can be expected at the end of 2023.
The first significant change implemented into the Polish legal system is the introduction of capital bonds, commonly known in the Western countries as “CoCo bonds.” Capital bonds are nothing more than unsecured debt securities that can be automatically converted into shares by the issuer in case of a triggering event happening. The implementation of these changes is scheduled for October 1, 2023.
Another key change in terms of the capital market participants is proposed by the European Commission in the form of the “listing act” – a regulation intended to introduce changes to the prospectus regulation and MAR regulation. The proposed reforms aim to facilitate the issuance of securities by participants in the European market and, consequently, increase the attractiveness of the market.
How will capital bonds affect the Polish financial market? To ensure the stability of the financial sector, both Polish and EU regulations impose the requirement for certain financial institutions, such as banks, brokerage houses, insurance companies, and reinsurance companies, to maintain their own funds at appropriate levels. Without going into details, the capital of these institutions is divided into categories known as “Tiers.” For banks and brokerage houses, Tier 1 capital consists of basic and additional capital whilst for insurance and reinsurance companies, Tier 1 capital can consist of shares or instruments.
In the aforementioned context it is worth noting that the existing provisions of the Bond Act did not provide for the possibility of issuing financial instruments with features that would allow these instruments to qualify as Tier 1 additional capital or equity instruments for these entities. Therefore, a significant change that will take effect on October 1, 2023, is the introduction of regulations allowing a qualified group of financial institutions – the aforementioned national banks and brokerage houses, as mentioned in Article 95(1)(1) and (3) of the Trading Act, and national insurance and reinsurance companies – to issue a new category of debt securities, namely capital bonds. Through their issuance, financial institutions will be able to classify these bonds as equity capital, thus obtaining a new method of raising and accumulating capital.
Having explained the purpose of issuing capital bonds and who will be entitled to use this institution, it is worth clarifying what a capital bond is. Simply put, a capital bond is an instrument that can be converted into the issuer’s shares at the issuer’s initiative. It should be emphasized that in the case of capital bonds, the initiative regarding the conversion of bonds into shares lies with the issuer, not the bondholders. In other words, the conversion of bonds into shares is an issuer-shaping right, and bondholders have no means of objection. However, the issuer does not have complete freedom in making this decision. Conversion will only be possible in case of a triggering event happening, which the issuer has described in detail in the issuance conditions. Until such a condition defined by the issuer is met, the bond, in principle, functions like a conventional bond.
Another characteristic feature of capital bonds is the possibility of authorizing bondholders to receive interest on the bonds indefinitely while allowing the issuer to redeem the interestor part of the interest under the terms of issuance or suspend the payment of interest or part of the interest without the risk of considering such behavior by the issuer as non-performance or improper performance of the obligation or delay in the performance of the obligation. Therefore, the legislator grants the issuer significant flexibility in the use of capital bonds.
Finally, it is also necessary to explain the requirements that issuers and bondholders must meet in order to use this new legal institution. This is important since, in the case of capital bonds, the formal requirements for their issuance are higher than for the issuance of other bonds.
Firstly, the possibility of issuing capital bonds must be provided for in the company’s articles of association or statutes, and in specific cases, the supervisory board of the issuer must also approve the issuance. Furthermore, the issuance terms must contain appropriate information about the characteristic features of this type of instrument and a description of the risk associated with the redemption of interest (if the issuer foresees such a possibility). Secondly, due to the fact that capital bonds are a complex instrument that requires professional investment knowledge and experience, including a conscious assessment of risk, the Polish legislator has proposed a “limitation on the possibility of investing in capital bonds, both in the primary and secondary markets, exclusively to professional entities.” This limitation is justified because capital bonds cannot be secured in any way, which significantly increases the risk associated with this security. Another formal requirement is the determination of the minimum nominal value of bonds in the amount of PLN 400,000 or its equivalent in another currency. The above aims to increase the guarantee of acquiring bonds by bondholders who are exclusively professional entities.
In summary, it appears that due to the high costs associated with the issuance of new financial instruments, caused by the significant risk associated with the loss absorption mechanism and the inability to establish security for the bonds, the introduced debt securities may not enjoy significant popularity in the market.
Changes in the prospectus? Proposals included in the listing act: Often, the regulations concerning public offerings are a significant barrier to the development of small and medium-sized companies. In response to the needs of the market participants, the European Commission proposed changes aimed at simplifying the prospectus preparation procedure, which should increase the attractiveness of the capital market.
The proposed changes include expanding exemptions from the obligation to prepare and approve prospectuses for public offerings and admissions of securities to trading. The goal of this change is to enable the issuance of securities identical to securities already admitted to trading on the regulated market. The simplification mentioned above is expected to involve the obligation to prepare a summarized (informational) document instead of a highly formalized prospectus. If this change is implemented, it will be sufficient for the issuer to publish and submit a summarized document to the supervisory authority, which will not require approval by that authority. Detailed information to be included in the summarized document will be specified in an annex to the prospectus regulation.
Secondly, it is proposed to introduce further exemptions from the obligation to prepare a prospectus, which go beyond the existing exceptions. One of the more important changes is the increase in the exemption threshold from the obligation to prepare a prospectus from 20% to 30% and the extension of the exemption period from 12 to 18 months. This means that the obligation to publish a prospectus will not apply to the admission to trading on the regulated market of securities identical to securities already admitted to trading on the same regulated market, provided that, within 18 months, they represent less than 30% of the total number of securities already admitted to trading on the same regulated market.
Furthermore, the proposal by the European Commission includes the replacement of the simplified system of obligatory information regarding offerings of securities that are not identical to securities admitted to organized trading with a new EU Follow-on prospectus. On the other hand, a proposal directed at smaller and medium-sized enterprises is the new EU Growth issuance document.
These changes to the prospectus are expected to come into effect in 2024.
To what extent will MAR requirements be eased for companies? The aforementioned “listing act” project also covers changes regarding the disclosure of confidential information, as specified in the MAR regulation. One of the key changes relates to the delay in disclosing confidential information. Currently, in the case of a delay in disclosing confidential information by the issuer, the delay is notified to the Polish Financial Supervision Authority (KNF) simultaneously with the delayed information being made publicly available. With the implementation of the listing act, the notification of the delay would be submitted to the KNF immediately after the decision to delay is made. This would mean a return to the previously applicable regulation.
Nevertheless, an important change that the listing act is expected to introduce, is the limitation of the obligation to report stages of protracted processes. Thanks to the proposed change, in the case of a long-term transaction initiated by a company, for example, the issuer should have the option to publish only information about its completion, without the need to publish information about the completion of individual stages that make up the transaction.
Issuers can also expect a significant change regarding the insider lists. This concerns limiting the list kept by the issuer to individuals with continuous access to confidential information and specifying the obligation to create insider lists by entities acting on behalf of issuers.
These change are expected to come into effect in 2024.
By Piotr Wojnar, Managing Partner, and Hanna Szczepańska, Associate, Act Legal