5.10 Shares as a Source of Cash 227Stabilisation will not always be deemed to constitute market abuse.^458 Some
forms of stabilisation can “contribute to greater confidence of investors and
issuers in the financial markets” and therefore be compatible with Community
law.^459 However, behaviour which is not directly related to that purpose is
considered as any other action and may thus be prohibited.
In practice, only such modalities of the greenshoe method and the buy-back
programme should be used which comply with the exact terms set out in the
Directive on market abuse^460 and implementing legislation, in particular
Regulation 2273/2003. Regulation 2273/2003 lays down the permitted conditions
for “ancillary stabilisation”.^461 For example, whereas the issuer will always decide
on the limits of stabilisation measures, the decision to actually take those measures
should be left to an investment bank rather than the issuer.
Due diligence. There is often a due diligence inspection of the issuer by the
investment bank. The investment bank requires a due diligence for three particular
reasons (for risk management in general, see Volume I).
First, the investment bank cannot fulfil its obligations without useful
information. A due diligence helps the investment bank fulfil its obligations.
Second, the investment bank must carry out a due diligence in order to mitigate
its own risk of prospectus liability. According to rules on prospectus liability,
persons who are responsible for the prospectus are also responsible for its
truthfulness and completeness. Prospectus liability is based on the Prospectus
Directive.^462
Third, the investment bank should try to protect its reputation. (Whether those
who work for the investment bank actually have a vested interest in the bank’s
long-term reputation may depend on personal incentives. In practice, it may be
based on fees generated by deals.)
In addition to a due diligence, the investment bank will need the co-operation
of the issuer’s management when the prospectus and other documents are drafted.
Drafting of a prospectus usually requires many drafting sessions with the issuer’s
management.
Drafting of an offering circular. An offering circular (also called an offering
memorandum) can be prepared when no prospectus is required. An offering
circular can be used in private placements or when neither the Prospectus
Directive nor provisions of Member States’ laws implementing it require the
publication of a prospectus.
For example, the publication of a prospectus is not required for offers limited to
qualified investors. In contrast, any resale to the public or public trading through
admission to trading on a regulated market requires the publication of a
prospectus.^463
(^458) Recital 2 of Regulation 2273/2003.
(^459) Recital 11 of Regulation 2273/2003.
(^460) See Article 8 of Directive 2003/6/EC (Directive on market abuse).
(^461) Article 11 of Regulation 2273/2003.
(^462) Articles 6(1) and 6(2) of Directive 2003/71/EC (Prospectus Directive).
(^463) Recital 16 of Directive 2003/71/EC (Prospectus Directive).