Corporate Law Update
- ESMA issues advice on the regulation of initial coin offerings and cryptocurrencies
- There was no detriment to a shareholder on a cross-border merger because the shareholder’s participation rights had been adequately replicated
ESMA publishes advice on coin offerings and cryptocurrency
The European Securities and Markets Authority (ESMA) has published a report setting out its advice to other EU institutions on initial coin offerings and crypto-assets. The advice clarifies the existing EU rules which apply to categories of crypto-asset that qualify as “financial instruments”. It also explores gaps and issues in the current EU financial regulatory framework for consideration.
Crypto-assets, or cryptocurrencies, are digital assets that use strong cryptography and are designed to work as a means of exchange. Effectively, they can be thought of as encrypted on-line money. There are over 4,000 types of cryptocurrency now circulating, with well-known examples including Bitcoin, Ethereum, IOTA, EOS, Monero, Cardano, Ripple and Litecoin.
Unlike traditional currencies, cryptocurrencies are not controlled centrally by a bank or monetary authority. Rather, they operate through open and modification-resistant distributed ledger technology, typically blockchain. Whilst this can make cryptocurrency transfers very secure, the lack of any meaningful fiscal oversight or policy means the value of cryptocurrencies can fluctuate significantly and the assets themselves can potentially become vehicles for financing unlawful activities.
An initial coin offering (ICO), also known as initial token offering or initial currency offering, is a form of fundraising in which investors are issued cryptocurrency in the form of “coins” or “tokens”, rather than shares or other tradeable securities. Those coins or tokens may themselves be exchangeable for another kind of crypto-asset, typically Bitcoin and Ethereum.
ESMA has previously issued warnings both to investors about the high risks of investing in ICOs and to regulated firms about carrying on activity in relation to token offerings.
In its latest report, ESMA notes that some types of coin or token may not qualify as “transferable securities”. In this case, the coin issuer will not be required to draw up a prospectus as part of the ICO, removing a valuable protection for investors. Likewise, if the crypto-assets are not admitted to a regulated market (and in most cases, they will not be), the coin issuer may not be subject to requirements to issue periodic and annual financial statements or to report on changes in who holds its securities and voting rights.
In addition, if the crypto-assets are not admitted to a trading facility (which, for coins or tokens, is most likely to be a private “organised trading facility”), the Market Abuse Regulation will not apply. Investors would not be protected against potential insider trading or market manipulation, and the issuer would not be required to disclose inside information or report trades by its managers.
Even if these requirements do apply, ESMA notes that current regulation is not specifically geared towards coins, tokens and other crypto-assets.
Unsurprisingly, for crypto-assets that are currently regulated, ESMA has recommended extending the legislation so that it better reflects the nature of the assets. For those assets that are not regulated, ESMA is recommending putting protections in place, including anti-money laundering measures and suitable risk disclosures.
The report follows on from the UK Cryptoassets Taskforce’s report in October last year. You can read more about this in our blog here.
Shareholders did not suffer material detriment on cross-border merger
The High Court has held that the shareholders of an Austrian company that proposed to merge into a UK company did not suffer a “material detriment” because their participation rights were preserved. It therefore allowed the merger.
Under the EU cross-border mergers regime, a cross-border merger (CBM) is not effective until the appropriate authority gives a final order to this effect. The appropriate authority is the authority in the country in which the “transferee” company is registered. In the UK, this is the High Court.
Before the High Court can give final approval for a CBM, it must ask itself whether the stakeholders in the merging companies would suffer a “material detriment” if the CBM were to proceed (Re Diamond Resorts (Europe) Ltd).
In Re CT Infrastructure Holding Ltd, the High Court readily found that the merging companies’ employees and creditors would suffer no detriment. However, the shareholder of the Austrian company enjoyed participation rights of a kind that do not exist in English law. The concern was that it would lose these rights if the CBM proceeded.
To address this, the UK company had created a new class of B ordinary share which attempted to replicate the Austrian participation rights as closely as possible. The High Court was satisfied that the rights that the Austrian company’s shareholders would receive in the UK company were not merely equivalent to the Austrian participation rights, but in fact better.
It therefore found there was no material detriment to the shareholders either. The position was helped by the fact that both companies shared a single, common shareholder.