I move: "That the Bill be now read a Second Time."
I am very pleased to bring this Bill before the House. The Companies (Amendment) (No. 3) Bill, 1999, is designed to introduce amendments in two areas of existing law, those relating to insider dealing and disclosure of interests in securities. These amendments are designed to bring Irish company law into line with international practice by permitting a mechanism known as price stabilisation to be used in connection with new issues or offers of securities on the Irish Stock Exchange.
The fundamental purpose of the insider dealing legislation introduced in the Companies Act, 1990, is to prevent manipulation of the stock market. Such manipulation would impede the stock market from functioning as an independent pricing mechanism and undermines the integrity and fairness of the market. However, in the case of new issues or offers of securities on the stock market large volumes of a particular security may be released onto the market at one time. This may lead to large fluctuations in the price of the newly issued security in the immediate aftermath of the issue. Such volatility in the first few weeks after an issue is undesirable for all those involved, whether they be investors, the company or those selling the securities. Price stabilisation may be used to minimise this volatility, thus helping the price of the issued security to settle in a more orderly fashion.
Although price stabilisation may appear to permit the type of manipulation which the insider dealing legislation is designed to prohibit, a closer examination shows that when appropriately regulated it is an effective mechanism for fostering a more orderly aftermarket for the new issues and offers of securities. The Bill strikes a balance between exempting stabilisation actions from the prohibition on insider dealing and laying down appropriate safeguards to ensure that the mechanism is only used as intended.
Before going into the detail of the Bill I will briefly explain how a Companies (Amendment) (No. 3) Bill has become necessary so soon. In February of this year, a Private Members' Bill was tabled by Deputy Rabbitte. That Companies (Amendment) Bill had as its sole objective the amendment of section 21 of the Companies Act, 1990, in relation to the disclosure of information which becomes available as the result of investigations carried out by inspectors or officers appointed by the Minister under section 19 or section 20 of Part II of the Companies Act, 1990. That Bill has still to be discussed.
In March of this year the Companies (Amendment) (No. 2) Bill, 1999, was published. That Bill deals primarily with amendments to the Companies (Amendment) Act, 1990, which introduced the process of examinership into Irish company law, the removal of the statutory audit requirement for certain small private limited companies and introduces a number of company law amendments as part of an overall package involving both company law and finance law to tackle the problems created by Irish registered non-resident companies. I hope that Bill will be brought before the Dáil for its Second Stage in the very near future.
While the Company Law Review Group also made recommendations for a number of changes in the insider dealing provisions contained in Part V of the Companies Act 1990, because of the diversity of the areas examined by the group, the decision was taken early on to progress implementation of the recommendations on a phased basis. Work on the preparation of proposals to implement the changes recommended by the group to Part V has not yet been progressed.
This Bill arises in the context of the proposed flotation of Telecom Éireann. Given the size and importance of the proposed offering, the Government has decided that it would be appropriate that price stabilisation be available on the Irish Stock Exchange, which will be the principal market for the shares. Subject to certain rules and limitations price stabilisation is already permitted on the other two stock exchanges where it is proposed to list Telecom Éireann, namely London and New York. It makes sense that if this mechanism is to be made available for the flotation that it be available on all three stock exchanges. Given that the flotation is planned to take place later this summer, there is an urgency in having the Bill enacted without delay.
However, under the Bill the stabilisation mechanism will be available for all companies making issues or offers on the Irish Stock Exchange, be they private or state owned enterprises. It is equitable and desirable in the light of the increasingly global nature of the equity markets that those trading on the Irish Stock Exchange can avail of this mechanism, which has been permitted for a number years in many other countries and has become accepted practice for large issues of securities.
It might be helpful to the House if I were to outline the reason this legislation is needed to permit price stabilisation. Part V of the Companies Act, 1990, introduced into Irish law provisions to deal with the issue of insider dealing in relation to the securities of companies. Insider dealing occurs when people who are in possession of price sensitive information use that information to buy or sell shares to realise a gain or avert a loss. Thus, section 108 of the Companies Act, 1990, provides that it shall not be lawful for a person who is at any time connected with the company to deal in any securities of that company if by reason of his or her connection with the company he or she is in possession of information that is not generally available, but if it were would be likely materially to affect the price of those securities. The section goes on to prohibit people who indirectly obtain price sensitive information from dealing, as well as people seeking to have the dealing done by procuring other people to engage in the deal on their behalf.
Chapter Two of Part IV of the Companies Act, 1990, deals with the disclosure of information in the shareholding of a company. In particular, a person who has an interest of 5 per cent or more of the share capital of the company has to disclose that information to the company. In addition, where as a result of buying or selling securities, the interest increases or decreases by one percentage point, that information has also to be disclosed.
In the context of the public issuing or offering of securities, international practice permits those organising the issue or offer to engage in price stabilisation for a limited period after the issue or offer takes place. As already mentioned, the reason price stabilisation has been allowed in other jurisdictions is essentially to help the price of the security which has been issued or offered to settle in a more orderly fashion. However, as Irish law currently stands, such action would be in contravention of Part V of the Companies Act, 1990, prohibiting insider dealing if carried on within the State.
The regulations made by the then Minister for Industry and Commerce in 1992, clarified that stabilisation activity carried on outside the State, for example on the London, New York or Tokyo stock exchanges, could be carried on without breaching Part V of the 1990 Act. Accordingly, to permit price stabilisation in Ireland it is proposed in the Bill to provide an exemption from the insider dealing, and certain of the disclosure requirements in the Companies Act, 1990, but only for a limited period and only where certain criteria are met. In this respect the legislation is modelled on best international practice.
In broad terms the rules and limitations that apply to stabilisation action are as follows: the fact that stabilisation may take place in a particular issue must be disclosed widely in the documentation relating to the issue, to ensure that potential investors are made aware of the fact; stabilisation is only permitted to stabilise or maintain the market price of a security and for no other purpose; stabilisation may only occur within a 30 day period after the allocation of the securities; the stabilisation manager may only purchase securities in the open market at the prevailing market price or the issue price, whichever is the lower; and the stabilisation manager must ensure that procedures are in place to keep an accurate and detailed record of any stabilisation transactions that take place and must disclose these records to the Irish Stock Exchange. These are the general requirements that must be met before stabilisation can be engaged in.
The Bill contains seven sections and a Schedule containing the stabilisation rules, which must be observed by parties engaging in stabilisation activity. Section 1 contains the interpretation and definition of a number of terms that are used subsequently in the legislation. I draw attention to the definition of "stabilising period" and to the fact that it defines this period within the jurisdiction by reference to the stabilisation rules. The stabilising period for stabilising action outside of the jurisdiction is specifically defined in the definition. While the latter definition is similar to that applying within the jurisdiction, it is not identical, because the same control will not apply to stabilisation conducted outside of the jurisdiction.
Section 2 is the main operative part of the Bill as regards exempting stabilising action from the prohibition contained in Part V of the Companies Act, 1990, in relation to insider dealing. Paragraph (a) exempts stabilising action conducted within the State for the purpose of stabilising or maintaining the market price of securities once it is done in conformity with stabilisation rules. Paragraph (b) on the other hand, exempts stabilising action undertaken outside the State, but only if the action taken is in all material respects permitted by or is otherwise in accordance with all relevant requirements, applicable to such actions in the jurisdiction where the stabilising action is undertaken, including, if the securities are listed on a stock exchange in the jurisdiction, the rules or other regulatory requirements governing that stock exchange.
Section 3 exempts acquisitions or disposals of interests in the relevant share capital of the company which is acquired by a person conducting stabilising actions during the stabilisation period from the disclosure requirements contained in sections 67 to 79 of the Companies Act, 1990. This exemption only lasts for the duration of the stabilising period. At the end of the stabilising period, if the person engaging in the stabilising actions on behalf of the party issuing or offering, still holds securities, then disclosure will have to be made in accordance with the relevant sections.
The disclosure that is required by the relevant sections is a holding of 5 per cent or more of the share capital of the company in question. Where a person has such a holding, disclosure must be made to the company. Moreover, where a person holds more than 5 per cent and engages in purchases or sales of securities which result in a one percentage point change in the amount of securities held, that must also be disclosed to the company concerned.
Chapter Two of Part IV of the Companies Act, 1990, also implemented an EU directive on the disclosure of major shareholdings. In this context where a shareholder crosses certain defined thresholds, that is where a holding moves between the threshold of 10 per cent, 25 per cent, 50 per cent or 75 per cent, then disclosure must also be made to the competent authority, which in the case of Ireland is the Irish Stock Exchange. Section 3(3) provides that the obligations in respect of such disclosure will continue to apply even to the activities of any manager of an issue or offer of securities which is otherwise exempt from the earlier disclosure requirements described.
With regard the background to section 4, in 1991, the then Minister for Industry and Commerce made regulations under section 121 of the Companies Act, 1990, to modify section 110 to facilitate the operation of Part V. Specifically, a number of clarifications were made in respect of the activities undertaken by underwriters in offerings and issues of securities. The opportunity is being taken in the Bill to revoke this statutory instrument and to replace it by the content of section 4.
Section 5 is designed to enable the Minister by regulation to make what would be termed minor adjustments to the stabilisation rules to remove any difficulty that may arise in their operation. Any such amendments would obviously be within the policies and principles in the present legislation.
Section 6 revokes two statutory instruments which were made by the Minister of the day, and which I have already briefly referred to, on the basis that the present legislation effectively replaces them. Section 7 contains the Title, collective citation and arrangements for the commencement of the legislation.
The Schedule to the legislation contains the stabilisation rules which must be observed by par ties who wish to engage in stabilisation activity. Rule 1 contains a number of definitions which set out precisely what the terms mean within the rules. Of particular note are the definitions of "introductory period" and "stabilising period" which set the limits on the periods during which certain actions must or can be taken. Rule 2 defines the scope of application of the rules and the securities to which they apply. Essentially, any issue or offer of securities for cash which are not already dealt with on a stock exchange will be covered once arrangements are made for the securities in question to be listed on the exchange. In respect of an offer of securities for cash where the securities are already listed, the offer will have to be for at least £15 million. This is designed to ensure the exemption provided stabilising action is not used in normal sales of securities on the Stock Exchange.
Rules 3 and 4 set out the action or ancillary action that may be taken by the stabilising manager and includes the purchase or sale of securities or associated securities. The stabilising manager has to be satisfied that he or she meets the other conditions set out in later rules. Rule 5 sets out the information that must be contained in any preliminary announcements or other publicity that are issued prior to the actual offering or issue taking place. Rule 6 prohibits stabilising action in relation to associated securities where the basis on which the associated securities may be exchanged for or converted into relevant securities had not been finally settled and been made the subject of a public announcement.
Rule 7 imposes limits on the price that the stabilising manager may pay for the securities. Essentially, the issue price is the maximum that may be paid. However, if a stabilising manager undertakes intervention at a lower price, he or she can intervene again at that price or if there had been an independent deal in the marketplace at the market price. Rule 8 is designed to deal with the early termination of stabilising actions and provides that notification must be made to the Stock Exchange where this occurs. This will have the effect of ending the period during which interventions may be made by the stabilising manager.
Rule 9 sets out the requirements as regards records to be kept by the stabilising manager and the fact that these must be communicated to the Irish Stock Exchange where the stabilising actions take place within the State. The Irish Stock Exchange is the competent authority in respect of the examination of possible breaches of Part V of the Companies Act, 1990, in relation to insider dealing and it is considered appropriate that it should be informed of any actions undertaken by the stabilising manager in the course of an issue or offer. In this instance, however, the information which is communicated to the Stock Exchange will not be disclosed by the Stock Exchange to the market. However, it will help the Stock Exchange better understand how and why prices may be moving in the marketplace.
That is a brief overview of what is contained in the Bill. The Government has decided that the ability to engage in price stabilising activities in the context of the forthcoming Telecom Éireann flotation is considered appropriate and, accordingly, there is an urgency in having the Bill enacted without delay. I thank the House for its co-operation in arranging this early debate and look forward to the Bill passing all remaining Stages. I commend the Bill to the House.