TheEuropean Commission presented a package of proposals to strengthen the Capital Market Union. The main proposals concern a reform of the regulation in EU law of listing and they contain many good initiatives to reform the current regulation that forms the backbone of EU securities trading. However, the package also contains a proposal for a directive to introduce multiple voting shares in all Member States for national SMEs that seek admission to an SME growth market. The article focuses on the latter directive proposal and argues that contrary to the main proposals on a listing, harmonisation is unwarranted in this area of national law on corporate governance.
Professor, Dr. Jur. & LL.M., University of Copenhagen, Faculty of Law.
Until 2008, the Swedish corporate bond market was of limited importance as a source of funding for non-financial corporations and was dominated by a handful of large and established industrial companies. However, over the past twenty years, and especially since the 2008 financial crisis, the market has developed and grown significantly, both in terms of market capitalisation and the number of companies using the market for their debt financing. At the end of 2021, the total outstanding amount of non-financial corporate bonds was USD 77 billion, more than double the amount at the end of 2008. Over the same period, financing through the issuance of corporate bonds has also increased in importance. After remaining stable at a low level of between nine and eleven percent between 2000 and 2012, market-based debt financing had increased to 16 percent of corporate debt financing by 2020. The market has furthermore evolved significantly at the issuer and issue level. Between 2000 and 2010, the average number of issuers was eight per year, while the average between 2011 and 2021 was 39. Issues above USD 500 million accounted for one-third of issuance between 2000 and 2010 (in 2007, 62 percent). Issues below USD 100 million accounted for no more than nine percent on average during this period. The median issue size declined sharply after 2010, reaching USD 60 million in 2021, a decrease of more than 90 percent compared to about ten years earlier. In the same year, issues under USD 100 million accounted for 68 percent of total issuance, while the largest category (over USD 500 million) accounted for only five percent. Over the period, the number of issuers has thus increased significantly while the median issue size has decreased, mainly due to an influx of smaller domestic companies.
The risk profile has also changed. First, the credit quality of the market has declined. For bonds issued in 2021, the average volume-weighted credit rating was just above BBB-, which is historically low. This also applies to the share of BBB bonds among investment-grade issues. In 2021, BBB bonds accounted for almost 76 percent of investment-grade issues, up from an average of less than eleven percent over the period 2000-2008. By far the largest corresponding decrease has occurred in the category of A-rated bonds. In addition, a significant proportion of Swedish corporate bonds have no credit rating at all. Of all the issues carried out between 2000 and 2021, 46 percent had no credit rating. In addition, covenant protection, especially for non-investment grade bonds and bonds with lower credit quality, has also weakened during the period 2011-2021, likely in part as a result of investors accepting higher risk for higher returns in a low interest rate environment.
Two other risk profile trends concern the maturity of the outstanding bonds and the share of bonds issued at floating rates. With regard to the maturity of outstanding bonds, this is lower in Sweden than the global average. The value-weighted average maturity of Swedish non-financial corporate bonds in 2021 was 8.4 years, which is 11 percent lower than the global average. At the same time, the share of variable rate bonds of the total amount issued in Sweden has increased significantly over the past decade: from 18 percent in 2010 to 53 percent in 2021. From the company's perspective, this increases the exposure to interest rate increases. Ultimately, this can also have consequences for the financial stability of the bond market in general, if the proportion of debt with variable interest rates is high. If cost levels become unsustainable for a sufficiently large number of firms, this could in turn lead to widespread defaults and further pressure on capital markets. When firms have large amounts of debt maturing within a short period of time, they are exposed to refinancing risks. If a large share of the total outstanding bonds in a market matures in a relatively short period of time that coincides with a general decline in the availability of debt financing, this can lead to a systemic risk for the market that could reinforce a general downward economic trend and affect the real economy.
Finally, the composition of investors has also changed over the past twenty years. An important development is that investment funds have grown as an investor group since 2012. In 2011, investment funds held around 2 percent of total outstanding bonds (by value), which increased to 17 percent in 2020. Counting only domestic ownership, they account for 43 percent, compared to 6 percent in 2011. This has been partly matched by a decline in the ownership of banks, money market funds and credit institutions, which now account for 12 percent of domestic ownership, compared with 46 percent in 2009. Although the direct participation of private individuals (households) in the bond markets is very low, private investors have thus gained increased exposure to the market through the funds.
The Swedish corporate bond market development is over all positive: it opens up new financing opportunities for more companies, especially SMEs, and gives investors new options. But it does also give rise to some concerns. The market has evolved from a niche market for financing a handful of large industrial companies to a market one and a half times the size of the public equity market, now accounting for a significant share of total corporate debt financing, but without any accompanying positive developments in liquidity or transparency. The number of non-financial issuers has increased by 800 percent over a couple of decades, mainly due to an influx of smaller companies making smaller but more frequent issues with shorter maturities, variable interest rates and lower covenant protection, as well as with lower credit quality.
Overall, the market has thus gained significant economic importance, while at the same time it seems to have become more exposed to economic fluctuations, and the risk for investors has increased. If systemic stability and (or) investor risk are assumed to be reasons for regulation, this picture probably raises questions about how the regulation of the market looks and works. For understandable reasons, regulation has not evolved at the same pace as the market, and in a number of areas the need and conditions for regulation (in some form) should be examined:
Disclosure in connection with issues: market developments combined with market practice mean that the information a company provides in connection with an issue is not subject to prospectus or other equivalent regulation. To ensure that investors receive adequate information in connection with issues and to reduce information asymmetries, there is reason to consider whether the information provided in connection with an issue should be regulated.
Comparability of bond terms: despite the fact that the Swedish Securities Market's template terms have been widely applied in the market, there are large variations between bond terms, including in terms of covenants. It can be considered whether regulatory measures should be taken to facilitate analysis and comparability between bond terms.
Equal treatment of bondholders: Chapter 16, section 3 of the Securities Market Act stipulates that the issuer shall treat all bondholders of the same status equally. How this principle of equal treatment is to be applied is unclear, however, and given the importance of the principle, there is reason to consider whether the principle should be concretised in the same way as on the stock market.
Issuer disclosure: it is unclear what applies to the obligation of issuers to disclose inside information under Articles 7 and 17 of MAR. Although regulation in any form seems less appropriate to clarify this, discussion among market participants to establish market practice is likely to be beneficial.
Regulation of the agent's role: the role of the agent is not subject to specific regulation in Sweden. Given the conflict of interest inherent in the agent's role, there is good reason to consider introducing regulation of the agent's role and obligations in relation to the bondholders, similar to what applies in the other Nordic countries.
Credit rating: Sweden has an unusually high proportion of issuers with no credit rating at all, which can be explained by the composition of the market and the costs of obtaining a credit rating, as well as certain historical reasons. However, credit ratings may fulfil an important function in the market and there is thus reason to consider measures that create further incentives for the use of credit ratings.
In 2022, there was only one judgment interpreting the company law directives, but there were several judgments addressing issues of secondary EU law linked to company law.
Today, companies wishing to become listed and their advisers undertake extensive work during an IPO process, including in connection with the drafting of the prospectus. However, spectacular cases such as the Hafnia, Bank Trelleborg and OW Bunker cases show that prospectus liability cases can arise in the wake of IPOs if things subsequently go wrong with the companies. This article shows that while the current Danish regulation makes it possible to draw up good and adequate prospectuses, it hardly contains such checks and balances which ensure that investors in all cases receive the information they could wish for. With the aim to maintain a sustainable stock market in Denmark, the article presents several recommendations primarily based on ATP’s many years of experience as investor in almost all Danish IPOs – including the OW Bunker-case. First, a listing candidate should try to act as a listed company as early as possible and should prepare the same information about the company as a listed company would. Second, a listing candidate and its advisers should ensure a thorough due diligence process to provide the basis for the preparation of the prospectus. Third, a listing candidate and its advisers should prepare the prospectus with the objective of providing a suitable and relevant level of information to enable potential investors to make well-informed investment decisions. Fourth, a listing candidate and its advisers should make sure that a separate and proper verification process is in place, making it possible for the verification attorney to confirm whether the information in the prospectus is correct and whether any significant facts or circumstances concerning the company have been left out. Following these recommendations will hopefully make it possible for many more Danish companies to raise capital via IPOs and thus increase the number of companies that seek a listing on Nasdaq Copenhagen.
. In the period 2013-2022 ATP participated in 12 out of a total of 15 ordinary listings (not counting transfers from First North, spin-offs and the listings a few financial institutions (two “sparekasser” and one real estate company)) on Nasdaq Copenhagen.
On 19 March 2019, the EU Regulation regarding the establishment of a framework for screening of foreign direct investments in the European Union was adopted (the “FDI Screening Regulation”). The FDI Screening Regulation did not in itself introduce any screening mechanisms in the Member States, nor did it impose an obligation on the Member States to establish any screening mechanism. Instead, the FDI Screening Regulation established a framework for coordinating screening mechanisms throughout the EU to protect sensitive European companies from foreign investments and influence.
The FDI Screening Regulation imposes an obligation on the Member States to share specific information about the foreign investments undergoing screening in a Member State, i.e., investments by investors residing in jurisdictions outside of the EU that may affect the security or public order within the EU. Furthermore, the framework establishes a right for the Commission to request information regarding foreign investments in a Member State not subject to screening. The FDI Screening Regulation therefore establishes a system, whereby the Member States and the Commission are allowed to present comments to ongoing investments in other Member States to which the receiving Member State is obligated to pay due consideration.
In order to establish the screening mechanism and procedures necessary to be able to screen and potentially block foreign investments within critical sectors in Denmark, and to be able to process any comments from Member States and/or the Commission under the FDI Screening Regulation, a general screening mechanism has been adopted in Denmark taking effect from 1 July 2021 with the Act on Screening a Foreign Investment (the “FDI Act”), which applies to all foreign investments closing after 1 September 2021. This article will describe the Danish regime and reflect on the practical administration of the FDI Act after its 1-year anniversary.
The FDI Act was introduced with the primary purpose to ensure that foreign investments in Denmark are screened on the grounds of national security and public order and to set the basis for a potential blocking or mitigating actions towards the foreign investment.
. Regulation (EU) 2019/452 of the European Parliament and of the Council of 19 March 2019 establishing a framework for the screening of foreign direct investments in the Union.
. Act no. 842 of 10 May 2021.
. The Danish Business Authority (the “DBA”) was appointed supervisory authority.
. Please refer to section 1.1 for a definition of national security and public order.