EU Prospectus Regulation - Future incorporation by reference of new annual or interim financial information: supplement not required

Key Points

• Under the Listing Act reforms, issuers are now permitted to incorporate by reference in a base prospectus certain financial information published after the date of approval of the base prospectus
• However, there has been uncertainty as to whether or not the issuer is still obliged to publish a supplement upon incorporation by reference of any such financial information where such information constitutes a significant new factor which may affect the assessment of the securities
• ESMA has now given clear guidance in newly released Q&As that the obligation to produce a supplement does not apply in such circumstances
• Notwithstanding such guidance, issuers may wish to consider a number of practical and legal complications before deciding to take advantage of this new permission

New permission to incorporate by reference certain future financial information, but uncertainty with regard to the supplement requirement

With effect from 4 December 2024, a new Article 19(1b) has been introduced into the EU Prospectus Regulation by Regulation (EU) 2024/2809 (as part of the Listing Act package) to permit the incorporation by reference into a base prospectus of new annual or interim financial information which is published electronically after the date of approval of the base prospectus:

An issuer, an offeror or a person asking for admission to trading on a regulated market shall not be required to publish a supplement pursuant to Article 23(1) for new annual or interim financial information published when a base prospectus is still valid pursuant to Article 12(1). Where that new annual or interim financial information is published electronically, it may be incorporated by reference in the base prospectus in accordance with paragraph (1), point (d), of this Article. However, an issuer, an offeror or a person asking for admission to trading on a regulated market shall be entitled to voluntarily publish a supplement for such information.

However, this has led to uncertainty with regard to the obligation to publish a supplement to a base prospectus under Article 23 of the Prospectus Regulation:

• Does new Article 19(1b) mean that, even in circumstances where the new annual or interim financial information includes a "significant new factor, material mistake or material inaccuracy relating to the information included in a prospectus which may affect the assessment of the securities" under Article 23 of the Prospectus Regulation, there is no requirement to publish a supplement in respect of such financial information? OR
• Does it mean that there is no systematic requirement to publish a supplement on the publication of new financial information and that it is up to the issuer to make a judgement in each case?

Uncertainty resolved: no supplement is required

In its new ESMA_QA_2259, ESMA has come down firmly on the side of the first interpretation above: "[the] obligation to produce a supplement under Article 23 of the [EU] Prospectus Regulation shall not apply to new annual or interim financial information when it is incorporated by reference under Article 19(1b).".

What is the impact of the use of this new authority on each of the following items?

Right of withdrawal / walkaway rights: As EU Prospectus Regulation walkaway right are only triggered on publication of a supplement, then the automatic incorporation of new financial information on its publication will not trigger walkaway rights. This is the case even if any of the new financial information constitutes a significant new factor which may affect the . assessment of the securities.

Where an issuer includes in its base prospectus a provision to automatically incorporate new financial information by reference on its publication, but did wish to nevertheless grant walkaway rights to investors upon such publication, it could:

• produce and publish a prospectus supplement in any event, on a voluntary basis; or
• grant walkaway rights outside of the framework of the EU Prospectus Regulation via publication of notice to investors.

Notice to investors: When any new information is incorporated by reference into a base prospectus pursuant to Article 19(1b), none of the issuer or financial intermediaries are required to notify investors of that fact. Article 19(1b) only permits the information to be incorporated by reference if it is "published electronically", so it appears that investors are now presumed to be capable of monitoring all relevant information "published electronically" without the need for it be published in the manner required, for example, for publication of the base prospectus itself or for "regulated information" under the Transparency Directive regime. Of course, issuers which have securities admitted to trading on a regulated market in the EU will already be under an obligation under the Transparency Directive regime to publish new annual and half-yearly financial reports as "regulated information" thereunder. Also, the EU Market Abuse Regulation regime and/or applicable listing rules are likely to place similar obligations on issuers if they have securities admitted to trading on a multilateral trading facility (MTF) in the EU.

The registration document: In its new Q&As, ESMA_QA _2260 clarifies that where the base prospectus is drawn up as separate documents, if new annual or interim financial information is to be incorporated by reference it must be incorporated in the registration document and that information can be incorporated by reference for as long as the base prospectus remains valid.

The issue specific summary: In the case of an issue of securities under a base prospectus, a summary document specific to that issue must be drawn up once the final terms are filed and that summary must be annexed to them (there are exceptions, essentially for wholesale securities). As this summary must be a summary of the relevant parts of the base prospectus as completed by the final terms and must contain a summary of key financial information regarding the issuer (and any guarantor), it seems clear that this key financial information in an issue specific summary must include relevant information from any new information which is incorporated by reference under Article 19(1b) before the date of filing of the final terms. However, if a supplement is not published, there may not be a basis upon which to update and amend a final terms and issue specific summary.

No significant change statement: A typical no significant change statement in a base prospectus reads:

"[Save as disclosed in [insert name of section] [on page[s] [insert page number[s]] of this Base Prospectus]/[insert description] (which are incorporated by reference in this Base Prospectus), there has been no significant change in the financial position or financial performance of the Group since [insert whichever is the most recent of the date of the last published audited financial information or interim financial information of the Group] and there has been no material adverse change in the prospects of the Issuer [or the Guarantor] since [insert date of last published audited financial statements]."

Accordingly, where an issuer wishes to use the new permission to future incorporate by reference new annual or interim financial information without the publication of a supplement, it will need to be mindful of the above representation it makes on each occasion and, it will need to ensure to replace references to any specific dates with more generic "evergreen" terms which reference new annual or interim financial information when incorporated by reference in the base prospectus, assuming that this is permitted by the relevant competent authority.

Hyperlinks: Article 19(2) of the EU Prospectus Regulation requires that a prospectus must contain hyperlinks to all documents containing information which is incorporated by reference into it. In its new Q&As, ESMA_QA_2257 clarifies that the requirement of Article 19(2) is satisfied in the case of new information incorporated by reference by virtue of Article 19(1b) by the base prospectus including, in the relevant section, a hyperlink to where the new annual or interim financial information will be published.

Dealer agreements: Dealer representations may need to be amended to contemplate any future financial information which may be incorporated by reference.

Potential inconsistencies with stock exchange rules: Applicable rules of stock exchanges often mirror the requirements of Article 23 of the Prospectus Regulation requiring that a supplement to the listing particulars be published upon the occasion of  a significant new factor which may affect the assessment of the securities. Presumably, for EU Prospectus Regulation compliant base prospectuses, exchanges may modify their rules to be consistent with ESMA; however, many programmes also include offering documents which are not Prospectus Regulation compliant but which may offer listed securities (e.g. on an MTF) and which therefore may be required to be supplemented even in circumstances where a base prospectus under the same programme is not.

What is the scope of the new permission and how does it operate in practice?

Article 19(1b) refers to "new annual or interim financial information published when a base prospectus is still valid". In its new Q&As, ESMA_QA_2255 clarifies that the "financial information" referred to in Article 19(1b) includes any of the information described in Article 19(1)(d) (annual and interim financial information), (e) (audit reports and financial statements), (f) (management reports including, where applicable, the sustainability reporting), (g) (corporate governance statements), (i) (remuneration reports) and (j) (annual reports or any disclosure of information required under the Alternative Investment Fund Managers Directive (Directive 2011/61/EU)).

For any information being incorporated by reference it is sufficient that the information is published electronically and it is not necessary that it be approved by or filed with any competent authority.

The base prospectus will need to include an operative provision which serves to automatically incorporate relevant information into the base prospectus upon publication. Careful thought will need to be given by issuers as to the drafting of such terms to ensure that the only information which is incorporated by reference is information for which the issuer is prepared to accept prospectus liability. For example, in respect of an annual report published after the date of approval of a base prospectus, an issuer may only wish to incorporate by reference the balance sheet, income statement, cash flow statement, the accounting policies and explanatory notes and the audit report, and may wish to exclude other information typically found in an annual report such as management reports, sustainability reports and forward looking statements.

Is ESMA's guidance subject to legal challenge?

Although ESMA does not have the power to legislate or give definitive interpretations of EU law, this statement appears to establish that Article 19(1b) contains an exception to the requirements of Article 23(1) of the EU Prospectus Regulation. Article 23(1) requires the publication of a prospectus supplement without delay whenever any significant new factor, material mistake or material inaccuracy which relates to the information included in a base prospectus, and which may affect the assessment of any securities described in the base prospectus, arises or is noted between the time when the base prospectus is approved and the closing of the offer period or the time when trading on a regulated market begins. ESMA now appears to be saying, without equivocation, that if any such new factor is described in any new financial information which is published after the date of approval of the base prospectus (or any material mistake or material inaccuracy is corrected by any such new financial information), and such new financial information has been incorporated by reference into such base prospectus, then, by virtue of Article 19(1b), the requirements of Article 23(1) do not apply in that case.

It remains to be seen whether anyone will challenge this interpretation in the courts. The possibility exists for an investor (or group of investors) which feels it has suffered a loss by virtue of significant new information appearing in financial information incorporated by reference into a base prospectus without the publication of a supplement and the consequent triggering of rights for investors to withdraw acceptances under Article 23(2). Withdrawal rights only arise under Article 23(2) if a prospectus supplement is published. However unless and until there is any such challenge it seems likely that ESMA's interpretation will guide market practice in this area.

Issuers which decide to take advantage of ESMA's new guidance should consider including express disclaimers in base prospectuses to the effect that information which may be significant to investors may be published after the date of the base prospectus and thereby form part of the base prospectus with investors neither being expressly notified of that publication nor of its significance. It may also be advisable to indicate where any such information would be published.

Concluding thoughts

Issuers may welcome the opportunity to dispense with the disruption and expense of supplements on publication of new annual or interim financial information. However, careful thought needs to be given to the precise scope of the information to be automatically incorporated by reference upon publication, the impact on other provisions in the base prospectus and other documents and legal and marketing considerations with respect to the use of the permission with regard to the publication of particularly prominent financial statements (e.g. annual reports, and financial statements of a parentco guarantor of securities).