by Jan von Hein
In contrast to the United States, there has until recently been no federal, or rather supranational, authority in the EU being at least partly responsible for the supervision of financial services (supervision of banking, securities and insurance financial supervision). This has in the past led to inefficiencies due to unnecessary multiple checks by Member State authorities and a cumulation of supervisory requirements as well as gaps in the supervisory process. Consequently, the establishment of a true single market (European internal market) for financial services was hampered. The lack of an integrated, unitary European supervisory authority created the need for harmonization of the decentralized system of supervision, ie that requirements with regard to content had to be unified to such an extent that the offerors could be exclusively supervised by their home Member State while being able to offer their products throughout the Union.
This is the basic idea behind the ‘European passport’, which is available in the different fields of financial services for issuers of prospectuses, financial institutes, other providers of payment services, investment companies, insurers and for takeover bids. After initially following an approach of minimum harmonization and mutual recognition, the EU later shifted the paradigm to full harmonization. The Prospectus Directive (Dir 2003/71) stands as an example for this. Whereas Directive 2010/73 of 24 November 2010 comprehensively revised the Prospectus Directive, it left the core of the European passport regime (Arts 17–19 Prospectus Directive) largely intact. Further changes have been introduced by Directive 2010/78 of 24 November 2010, which assigns tasks to the new European Securities and Markets Authority (ESMA). Compared to the US Securities and Exchange Commission (SEC), however, ESMA’s role is rather confined to supplementing the national authorities which remain responsible for the actual day-to-day supervision of the issuance of prospectuses.
Notwithstanding the model character of the Prospectus Directive, there are differences between the European passports found in the various fields. In particular, the creation of a useful European passport in investment law (investment funds) has proven difficult.
2. Securities prospectuses
a) Full harmonization
The European passport is the core of the Prospectus Directive. This Directive departs from the former concept of minimum harmonization and mutual recognition. The system of harmonized minimum requirements did not make it possible for cross-border issuances to be carried out at economically sustainable costs as the Member States had exercised their competence to regulate the remaining areas in different ways. Hence, the establishment of an integrated European capital market was hindered considerably. Instead, the Prospectus Directive represents a measure of full harmonization that is intended to establish a genuine free movement of prospectuses throughout the EU. Recent empirical surveys confirm that the ‘European passport’ is widely accepted by market participants.
b) Validity throughout the Union
Article 17 of the Prospectus Directive governs the Union-wide validity of prospectuses that have been approved by the home Member State (in Germany see §§ 17 and 18 of the Wertpapierprospektgesetz (WpPG)). According to Art 17(1)1 Prospectus Directive, an offer to the public or admission to trading on a regulated market in one or more Member States or in a Member State other than the home Member State simply requires ESMA and the competent authority of each host Member State to be notified in accordance with the procedure provided for in Art 18 of the Directive. In such a case, the prospectuses that are approved by the home Member State and any supplements thereto are valid for public offer or admission to trading in any number of host Member States. Competent authorities of host Member States are prohibited from undertaking any further approval or administrative procedures concerning the prospectuses (Art 17 (1)2 Prospectus Directive).
c) Home Member State
For issuances of ‘equity securities’ in the sense of Art 2(1)(b) Prospectus Directive (primarily shares and so-called depositary receipts) by issuers who are located within the EU (or the EEA), the home Member State is the Member State where the issuer has its registered office (Art 2(1)(m)(i) Prospectus Directive). Further requirements on the home Member State—such as the actual engagement in business activities—do not exist, in contrast to the Directive on Payment Services (bank transfers (cross-border)), for example. In respect of certain other transferable securities (‘non-equity securities’ according to Art 2(1)(c) and (m)(ii) Prospectus Directive), Art 2(1)(m)(ii) Prospectus Directive provides, under the conditions specified therein, a right of choice to the issuer, the offeror or the person asking for admission. In such a case, not only the Member State where the issuer has its registered office but also the Member State where the securities were or are to be admitted to trading on a regulated market or where the securities are offered to the public may be chosen. Attempts to extend the issuer’s right to choose to other types of securities or to delete the threshold of €1000 contained in Art 2(1)(m)(ii) Prospectus Directive have so far been unsuccessful. The Commission has to carry out a review of this question by 1 January 2016.
Details of the notification procedure are regulated in Art 18 Prospectus Directive. According to paragraph 1 of this article, the competent authority of the home Member State provides the competent authority of the host Member State with a so-called certificate of approval and with a copy of the prospectus, normally within three working days after the request of the issuer. If applicable (see Art 5(2) Prospectus Directive), the notification shall be accompanied by a translation of the prospectus’ summary. Moreover, the home state supervisor shall notify ESMA of the certificate of approval (Art 18(3)1 Prospectus Directive). ESMA and the host state authorities ensure that the certificates of approval are available online (Art 18(3)2 Prospectus Directive). Finally, ESMA is responsible for a further standardization of the notification procedures (Art 18(4) Prospectus Directive).
d) Precautionary measures
The principle of Union-wide validity of approved prospectuses does not affect the subsidiary competence of the host Member State’s authorities to take precautionary measures under the strict conditions of Art 23 Prospectus Directive. Where the host Member State’s authority finds irregularities or breaches of obligations, it has to refer those findings to the home Member State’s authority and to ESMA (Art 23(1) Prospectus Directive). The host Member State’s authority is only allowed to take the appropriate measures in order to protect investors where the issuer or the financial institution in charge of the public offer disregards the measures taken by the home Member State’s authority or if the measures prove to be inadequate, and they may only be taken after having informed the home Member State’s authority and ESMA (Art 23(2) Prospectus Directive).
The question concerning the language of a prospectus is of major significance for the practical realization of cross-border issuances. Details are specified in Art 19 Prospectus Directive. This provision distinguishes between three scenarios that are especially relevant for the issuance of shares; certain non-equity securities are additionally governed by Art 19(4) Prospectus Directive.
(i) In the simplest case, the offer of a security to the public or the application of admission to trading on a regulated market is made in the home Member State only. In such a case, the prospectus needs to be drawn up in a language accepted by the competent authority of the home Member State (Art 19(1) Prospectus Directive).
(ii) In the second case, the home Member State and the Member State or the Member States where the security is offered to the public or admitted to trading on a regulated market differ from each other. Here, the issuer is not forced to translate the prospectus into the languages of all host Member States; instead, the issuer may choose ‘a language customary in the sphere of international finance’ (Art 19(2)1 Prospectus Directive). Obviously, this diplomatic phrasing means no other language than English. However, the competent authorities of each host Member State may require the summary of the prospectus, which is governed by Art 5(2) Prospectus Directive, to be translated (Art 19(2)2 Prospectus Directive). For the purpose of the scrutiny of the prospectus by the home Member State’s authority, the issuer may choose whether to use English or a language accepted by this authority (Art 19(2)3 Prospectus Directive).
(iii) In the third case, the security is issued in the home Member State as well as in one or more other Member States (Art 19(3) Prospectus Directive). Here, the prospectus has to be drawn up in a language accepted by the home Member State’s authority. Additionally, the issuer has the same choice (language of each host Member State or English) as in the second case.
f) Issuers from third countries
Finally, special rules govern issuers from third countries. They may also profit from the European passport subject to an equivalence test. Since these issuers do not have their registered office within the EU, they need to designate a Member State of the Union as their home Member State. Issuers of shares and other equity securities incorporated in a third country have the choice between the Member State where the securities are intended to be offered to the public for the first time after the date of entry into force of the Prospectus Directive and the Member State where the first application for admission to trading on a regulated market is made (Art 2(1) (m)(iii) Prospectus Directive). As for non-equity securities, the right of choice laid down in Art 2(1)(m)(ii) Prospectus Directive also applies to issuers incorporated in a third country because in this respect it is irrelevant in which country the issuers have their registered office. The competent authority of the home Member State defined in this way may approve a prospectus drawn up in accordance with the legislation of a third country, provided that the prospectus has been drawn up in accordance with international standards, especially the IOSCO disclosure standards, and provided that the information requirements are equivalent to the requirements under the Prospectus Directive (Art 20(1) Prospectus Directive). In order to ensure legal certainty, the Commission is empowered to adopt measures to establish general equivalence criteria by way of the procedure governing delegated acts (Art 20(3) Prospectus Directive). The above-mentioned Arts 17–19 Prospectus Directive that govern the free movement of prospectuses also apply to issuers incorporated in a third country (Art 20(2) Prospectus Directive). The extension of the European passport’s scope of application especially benefits issuers from the United States.
3. Supervision of banking → financial supervision
4. MiFID (Dir 2004/39) → markets for financial instruments
5. Payment transactions → bank transfers (cross-border)
6. Investment law
In investment, the European passport has long been the object of a discussion about reform which has recently come to an end with the adoption of the Directive on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS Dir 2009/65). This Directive rests on the proposal of 16 July 2008 which was intended to enhance the efficiency and practicability of the Passport for investment companies without compromising the high standard of investor protection.
The first version of the former UCITS Directive (Dir 85/611) already provided for a European passport for investment products that complied with its requirements. It therefore followed a market related approach (so-called Product Passport). With the revised version, in force since 2002 (Dir 2001/107), another European passport was added. It involves the investment companies themselves, provided they manage assets in accordance with the UCITS (Arts 6–6c of the consolidated UCITS Directive; in Germany, §§ 12 and 13 Investmentgesetz (InvG)). It is generally agreed that the European passport, in the sense of Arts 6 ff UCITS Directive, has failed. For one thing, it does not cover all types of funds since those of contractual nature are not included. Furthermore, the relationship between the Product Passport and the Passport for Offerors is not clear, so the marketing of foreign investment shares has thus far only been possible when holding both Passports.
The provisions of the reformed directive regarding the European passport are nevertheless mainly based on the control system of their predecessors: Art 6(1) UCITS 2009 assigns the authorization of an investment company to the authorities of the home Member State, which has to be respected in all other Member States. Article 10(2) UCITS 2009 clarifies that supervision is exerted by the authorities of the home Member State as well. Additionally, Arts 16 ff UCITS 2009 restrict the further requirements imposed by other Member States in which the company has either established a branch or pursued some services once a management company has gained access to the market in one Member State. These provisions are detailed by Arts 91 ff UCITS. The abandonment of the product-pass principle is therefore generally implicated and can be seen as a major achievement of the Directive. Apart from this, the reform adopts the control system of the former directive and has not innovatively amended the cornerstone rules on the European passport.
7. Takeover law
The Takeover Directive (Dir 2004/25) transfers the concept of the European passport to the offer documents needed for takeover bids (Art 6(2) s 2 Takeover Directive; § 11a of the Wertpapiererwerbs- und Übernahmegesetz (WpÜG) in Germany). If the competent supervisory authority has approved of an offer document, it has to be recognized, subject to any translation required, in any other Member State on the market in which the offeree company’s securities are admitted for trading. Another approval by the supervisory authorities of the Member State concerned is not necessary. Those authorities may require the inclusion of additional information in the offer document only if such information relates to specific requirements of the market on which the securities are admitted to trading, to the formalities to be complied with or to the tax arrangements to which the consideration offered to the holders of the securities will be subject.
The European passport in takeover law differs from the Prospectus Directive with regard to the distribution of the national authorities’ competence to supervise. Whereas under the Prospectus Directive the home Member State’s authority remains competent even when placing securities in a Member State where the issuer does not have its registered office, under Art 4(2) Takeover Directive, competence is split and questions concerning the bid and the offer documents are assigned to the supervision of the market state if the securities of the offeree company are not admitted in the country of its registered office (capital markets law (international)). The European passport in takeover law is therefore particularly significant for the admission of securities in a number of Member States excluding the state of registered office (Art 4(2)(b)2 Takeover Directive).
8. Supervision of insurance insurance regulation
9. Summary and prospects
An overall look at the European passports leads to a mixed verdict. On the one hand, there is the successful model of the recently revised Prospectus Directive, while on the other, there are the, at least until recently, unsatisfying attempts to introduce a Passport for management companies in investment law. Between these two extremes, the Passports in the law of banking supervision and other securities (MiFID) have been moderately successful. It would be desirable for the Commission to step back to systematically evaluate the acquis on the European passport. Whether the establishment of ESMA will have a significant impact on the way the European passport operates in the field of prospectuses remains to be seen.
Eva Lomnicka, ‘The Home Country Control Principle in the Financial Services Directives and the Case Law’  EBLR 324; Dorothee Fischer-Appelt and Thomas Werlen, ‘The EU Prospectus Directive—Content of the Unified European Prospectus Regime and Comparison with U.S. Securities Laws’  La Revue Européenne de Droit Bancaire et Financier (EUREDIA) 379; Johannes Köndgen and Christian Schmies, ‘Die Neuordnung des deutschen Investmentrechts’  Zeitschrift für Wirtschaft- und Bankrecht Sonderbeilage 1; Christoph Sandberger, ‘Die EU-Prospektrichtlinie—“Europäischer Pass” für Emittenten’ (2004) Europäisches Wirtschafts- und Steuerrecht 297; Jürgen F Baur, ‘Investmentgeschäft- und Vertrieb’ in Heinz-Dieter Assmann and Rolf A Schütze (eds), Handbuch des Kapitalanlagerechts (3rd edn, 2007) § 20 paras 370 ff; Eilís Ferran, ‘Cross-border Offers of Securities in the EU: The Standard Life Flotation’ (2007) 4 ECFR 461; Peter Mattil and Florian Möslein, ‘Die Sprache des Emissionsprospekts’ (2007) WM 819; Robert Elsen and Lars Jäger, 'Revision der Prospektrichtlinie – Überblick wesentlicher Neuerungen’  Zeitschrift für Bank- und Kapitalmarktrecht 97; Anna Heidelbach, 'Commentary on the German Wertpapierprospektgesetz’ in Eberhard Schwark and Daniel Zimmer (eds), Kapitalmarktrechtskommentar (4th edn, 2010) 493; Thorsten Voigt, ‘Die Überarbeitung der Prospektrichtlinie’  Zeitschrift für Bankrecht und Bankwirtschaft 194.