CONSOB's Communication No. 1/23 of 3 May 2023

CONSOB introduces a systematic regulation of disclosure requirements related to capital enhancement transactions reserved for sole investors (i.e. SEDAs, SEFs and non-standard Convertible Bonds (”CBs”))

With Communication No. 1/23 of 3 May 2023, CONSOB provided indications aimed at systematically regulating disclosure obligations of issuers with shares listed on regulated markets or traded on MTFs related both to certain capital increase transactions reserved to sole investors called Stand-by Equity Distribution Agreements ("SEDA") and Step-Up Equity Financing ("SEF") and to operations aimed at raising financial resources by issuers through issuing convertible bonds, usually associated with a warrant, reserved to sole investors called "non-standard CBs" as well as to all other transaction types having similar characteristics.

At the same time, CONSOB repealed its previous Communications No. DME/6083801 of 20 October 2006 and DEM/DME/DSG/8065325 of 10 July 2008, which had provided indications for public disclosure obligations only to companies listed on regulated markets and only in relation to SEDAs and SEFs. As a matter of fact, CONSOB noted that following the publication of such repealed Communications, certain changes had occurred in the operating environment, primarily brought about by the use of non-standard CBs which was, in fact, accompanied by a substantial desuetude in the use of SEDAs and SEFs.

These non-standard CBs differ from a traditional or standard convertible bond issue because the latter is addressed either to shareholders or to one or more third-party investors and it is characterised by a conversion ratio, predefined ex ante, such that, in order for it to become convenient for the subscriber to exercise conversion, the market share price must increase significantly.

On the other hand, non-standard CBs are characterised by the following elements: (i) they are addressed to a sole investor; (ii) the companies issuing them are, usually, facing financial difficulties; (iii) based on the issuer’s specific requests, the investor undertakes to subscribe in one or more tranches, a predetermined number of bonds convertible into shares (usually cum warrants) and receives a commitment fee for this commitment; iv) after the conversion, the issuer delivers the shares issued for the non-standard CBs, and the number of shares subject to each conversion is determined on the basis of a conversion price equal to a certain percentage (between approximately 90% and 95%) of the volume-weighted average price of transactions in the company's stock, determined over a period preceding the receipt of a conversion notice (over a horizon of approximately 10 to 15 trading days); v) the conversion mechanism is such as to be at a discount from the very outset of the transaction, and therefore making it advantageous for the lender to convert the bonds into shares.

In the communication, CONSOB specifies that the provision of the new disclosure requirements is in any event without prejudice to any further disclosure obligations to which companies are subject pursuant to Article 17 of Regulation (EU) No. 596/2014 ("MAR") on public disclosure of inside information.

More specifically, with this Communication, CONSOB formulates requests concerning:

(A) the content of the information that companies with shares listed on regulated markets and/or traded on MTFs must disclose with reference to the transactions in question, as well as the relevant methods, at the following times: (i) the moment at which the agreement with the investor is signed, (ii) the moment at which the transaction is resolved upon, (iii) the implementation and conclusion of the transaction, and (iv) the possible suspension or termination of the agreement underlying the transaction;

(B) the content of the information to be published by the sole investors;

(C) the information to be provided by issuers that are already subject to monthly or quarterly supplementary disclosure requirements pursuant to Article 114(5) of Legislative Decree No. 58/1998 ("TUF");

(D) the material information on the convertible bonds to be disclosed in periodic financial reports.

With particular reference to the information referred to under (B), i.e. the information to be provided by sole investors, please note that the Communication requires to sole investors holding, also in their capacity as borrowers holding voting rights, an interest in an issuer with shares listed on regulated markets at least equal to the thresholds set out respectively by Article 120, paragraph 2 of the TUF, the publication, in the period between the date the contract is entered into and the month following the date the last tranche is subscribed for and/or converted, of information on the purchases and sales carried out on the shares of the same issuer, as well as on any instruments linked thereto, as defined by Article 152-sexies, paragraph 1, point b, of the Issuers Regulation.

This information must be provided in table form, indicating in each line the transactions on a daily basis and specifying at least the following elements: date of execution, sign of the transaction, quantity bought/sold, weighted average price, value and execution venue. This information must be published on a specific and easily identifiable page and/or section on the website of the investor, if any, or of the issuer, by the fifth trading day following the end of each calendar month. This publication is not required if there have been no changes and/or updates to the previously published monthly information.

The same requirements are also recommended for investors holding an interest below the above-indicated thresholds in companies whose shares are listed on a regulated market and for investors holding an interest of at least 5% in the share capital of an issuer with shares traded on MTFs.

Communication No. 1 /23 enters into force as from its publication on CONSOB’s website (i.e. 4 May 2023) and applies to: (i) SEDAs, SEFs, non-standard CBs and other types of transactions with similar characteristics entered into after the entry into force of the Communication; and (ii) SEDAs, SEFs, non-standard CBs and other types of transactions with similar characteristics entered into prior to the effective date of the Communication and still in force on that date, with the necessary specifications. Specifically, in the latter case, referring in particular to the information to be provided by the sole investors, the latter must follow the indications provided (as mentioned above), in relation to any trades made after the effective date of the Communication on shares and related instruments of companies whose transactions are still in progress on the same date.

This disclosure requirement has certainly implicit and inherent positive aspects as it allows for a form of control of the hyper-dilutive effects that are often triggered on the shareholding structure by this type of transactions, as well as the monitoring of the share price depreciation risk (which effects are due to the circumstance that the shares issued for the CBs are often immediately resold by the investor benefiting from the conversion right). However, as these obligations are not provided for by the European regulations, they risk creating a fragmentation in the European internal market slowing down or even blocking the execution of these non-standard CBs and other transactions with similar features.