As the days and weeks slip swiftly by toward January’s launch of the euro, it would seem prudent for all investor relations professionals in the region to take a long hard look at how a major new reserve currency will affect them.
At the very least they would do well to prepare and update their private dossiers about the likely impact of the currency on portfolio managers (see Investor Relations, July 1998). But the best-prepared IROs should also be making themselves aware of other euro-related issues which could impact their working lives over the next few years.
And that’s regardless of whatever may be happening along the hushed corridors of your finance or company secretarial departments; and regardless of whether you’re domiciled in or out of the euro-zone. If you are in the region, you are going to be affected. Indeed, some companies well out of the region may also find themselves subject to a significant IR impact.
A number of euro decisions which are out of the IR department’s hands at the moment may eventually become key IR issues. In some cases it will mean reshaping the messages sent out to shareholders, in others it may even require obtaining shareholder approval. As LucasVarity learnt to its cost, the latter doesn’t always get nodded through as easily as expected.
For IROs, gaining a basic knowledge of a number of accounting and reporting procedures could prove a real bonus. It should certainly make it quicker and easier to help management craft messages to shareholders. This view is backed up by the Federation of European Accountants which suggests there are a number of areas which some non-accountants – such as IROs – should also know about and understand. These include euro-induced changes to book-keeping, internal financial records and preparation of external financial statements. Perhaps of most relevance to the IR community in the euro-zone is that all published external financial statements must be in euros from January 1, 2002 (although this remains subject to implementation in the various member states).
Conversion complications
But it’s not as straightforward as it first looks. While most conversions from national currency to euro will adhere to a fixed conversion formula, conversion of par value share capital leads to a whole range of problems. For one, there’s a potential legal question involved; for another, it can be downright awkward. The Federation of European Stock Exchanges (FESE) has been trying to ease the pain with a number of solutions documented in a paper it released earlier this year, The redenomination of equity capital: nil par values as a solution.
First up there’s the ‘top-down’ method. This entails converting nominal share value to a non-rounded sum in euros. This can result in a nominal value at several decimal places, which would produce an elongated figure on the balance sheet. It would also be awkward to accommodate in annual reports, company statutes and other points of reference.
However, it’s probably the simplest conversion method as it doesn’t entail any action on the part of the company except, IROs note, for the passing of a resolution at a shareholders’ meeting. Legal opinions differ, but it may be sufficient in some EU countries to ‘seek shareholder approval’ by merely sending out a voting circular and ratifying the response at the next scheduled meeting. Some national legislatures, like the UK’s, are looking to amend their company law so that a resolution of the board of directors will suffice. In the UK’s case, such a resolution would be permitted during transition to the euro.
After 2002, when all companies domiciled in euro-zone countries will have to change to full reporting in euros anyway, companies will also have to adhere to the EC’s second company law directive which will require broader shareholder consultation. This assumes the directive has been implemented by national legislatures.
The ‘bottom-up’ method using the fixed conversion rate and official rounding rules would redenominate the par or nominal value of shares to the nearest euro-cent or round euro. Total share capital would be the sum of the nominal values of the shares in issue.
FESE suggests that this second method would require changing the actual amount of share capital. If the result were an increase in capital, the company would need sufficient capital reserves to meet this. If rounding to the nearest cent or euro produces an effective reduction in share capital, then, says the federation, national law must be consulted to avoid adverse fiscal or legal consequences.
Option three, much favored by the federation, is to abandon nominal par values entirely. Not such a bad idea some might think – it’s already feasible in Belgium and Luxembourg where shares without designated par value are permitted by law and widely used.
Confusion reigns
To date, there is no strict harmonization on which conversion method should be adopted. Rather, for the most part, confusion rules. Few people know where responsibility for the issue lies. Paul Arlman, secretary general of the Federation of European Stock Exchanges, gives some idea of the level of confusion when he says that while the bottom-up method seems to be the most common approach, the federation is an unashamed advocate of the nil par value method.
‘In Germany, companies are already using nil par value shares and similar noises are coming from other countries,’ says Arlman. ‘The ones who appear to be holding out against this a bit are the Dutch. They fear that it will have a major impact on things like taxation and corporate law.’ He hopes the federation’s paper has created a momentum toward nil par value shares but concedes that, apart from the de facto evidence in Germany, no-one else has actually chosen it as the best course.
‘It’s most important that governments and other national bodies start discussing the issues involved. Changing corporate law in continental Europe is always a lengthy process and, in that sense, there is real urgency. However, there is no requirement for this to be done and dusted by January 1 next year. We have until 2002.’
Arlman adds that whatever conversion method is used, the shareholder consultation process will depend on each country’s documentation arrangements, including the extent to which shares are dematerialized. If shares exist physically shareholders will require a new piece of paper.
‘In most European countries all you need to do is tell a central computer to change its denomination,’ adds Arlman. ‘However, it does mean companies will have to start being active, if only to tell investors this change won’t affect their rights in terms of voting, dividends, and so on. They need to stress that this redenomination is simply a different way of expressing the same capital.’
Out of the pack
The UK feels even less inclined to start thinking about these issues. It may, after all, never even join the euro pack. The Department of Trade and Industry (DTI) still appears to be deciding which is the best method of conversion and many IROs are unaware the issue exists.
In its September press statement the DTI indicated that amendments to the 1985 Companies Act would be made as soon as possible to remove the necessity for companies to seek court approval when looking to redenominate their share capital. It is also aiming to eliminate the need for UK companies to issue new shares and new share certificates – a move that will help the dematerialization process. Still, most sources indicate that the nil par value route is not really being considered.
Jeremy Hughes, senior press officer at the London Stock Exchange, notes: ‘Nil par value shares may not become a reality but we are still looking at it and the other options available. We’re assessing the process UK companies should adhere to for communicating with shareholders during redenomination. At the moment, we’re not advising companies one way or the other. We’ve consulted them and they have told us they want it to be possible to redenominate as quickly as possible if the conditions are right. So we’re putting the procedures in place to enable that. However, we’re not going as far as to recommend a course of action. That’s up to them and their corporate finance departments.’
Hughes also dismisses panicky speculation among UK-based IROs that the impending alliance with the Deutsche Borse in Frankfurt will force the London Stock Exchange’s members to convert share capital to a euro denomination before the UK joins the currency. In fact, the alliance will give UK companies access to German order books but will only affect the top 128 companies on the Sets automated settlement system. There will be no advice or pressure from the London Stock Exchange for those companies to redenominate their shares in euros.
Low down list
Elsewhere in corporate UK redenomination remains pretty far down IROs’ priority list. That’s because most UK IROs still see the effects of the euro as being in the dim and distant future. – a reaction that raises a few bemused eyebrows on the Continent.
At Barclays – a company which, like all major clearing banks, will be directly affected from day one by the arrival of the euro – preparations are well-advanced for trading and exchange requirements. But the company’s thinking on share capital redenomination appears less well-formed.
Emma Savage, investor relations manager, almost bypasses the redenomination question and explains: ‘In terms of reports and accounts we know it’s an issue but it’s not quite such a major issue for us because we already have ADRs in the US. To report in sterling as well as euros would be a similar communication exercise. While we’re looking at it on a regular basis we have not made any announcement about when we would go ahead and report in euros.’
Nor does she see any problem with being required to report in euros while different underlying national accounting standards remain in place. This, she explains, would be little different to the current situation with a number of currencies in play. She believes the same questions of IR communications and fund manager understanding will continue.
‘The value of reporting in euros and having one common accounting standard across Europe are two separate issues. As for the latter, fund managers already have to look not just at different accounting standards but at different currencies. In terms of future reporting and shareholder communications it’s very much a waiting game from the IR perspective.’
Barclays’ European subsidiaries already report their results and other financials in the currency of the country in which they operate. The assumption is that a switch to euros will not pose too many headaches in investor relations terms.
At food and drinks multinational Cadbury Schweppes, euro redenomination is also well down the list of priorities. Cathy Forest, acting investor relations manager (Sally Jones has since been appointed to the position), explains: ‘What’s higher up on our agenda is looking at how we can take advantage of what apparently is going to happen with some European fund management money. We’re keeping a watching brief to see whether, as is being speculated, there will be a flow of such funds into UK stocks like our own.’
The opposing argument suggests that some UK stocks might lose out due to not being part of the new currency. ‘A lot of issues surround the euro which may ultimately affect investor relations and make-up of shareholders,’ Forest adds. ‘These include the fact that continental Europeans are likely to be placing more money in their pension funds in the future. And pension funds previously restricted to dealing in only, say, French-franc denominated companies, will now have all those that are denominated in euros to choose from for their portfolios.’
Like Savage, Forest suggests that the redenomination of share capital will not really faze professional investors and their advisors because fund managers already use their own international lingua franca. ‘Analysts always look in terms of relatives which go beyond currency, in terms of earnings ratios per share and this is a common measure if you like,’ she points out.
Mandatory moves
At Peugeot’s headquarters in Paris, IR euro preparations are seemingly well advanced. The car manufacturer will be reporting its results in euros from next year, a mandatory requirement of the French regulator, the Commission des Opérations de Bourse (Cob). Shares on the French stock exchange must also be quoted in euros, not francs.
‘In our annual report we’ll have several figures expressed both in French francs and in euros and a few of them will only be in euros according to regulatory requirements,’ explains a Peugeot spokesperson, but she adds that the redenomination question is a different matter. It’s not mandatory. ‘However, if we wish to change the nominal value of shares then, as in the UK, we will have to convocate an extraordinary general assembly. But by the time we stage our next annual meeting in June we’ll not be at a point of changing the nominal value. We regard such a change as something for further in the future.’
‘Par values are all well and good and one must take care of the details but, relatively speaking, it is just a detail,’ says Thomas Krantz, deputy secretary general of the International Federation of Stock Exchanges. ‘The IR people we’ve spoken to from Europe and elsewhere cannot be more positive about the arrival of this major new reserve currency.’
Krantz cites a recent conference speech by Nokia’s IRO who noted the importance for Nokia of having its shares quoted in the euro rather than Finnish marks. ‘He’s over-the-moon simply because it will mean much more to many more people. He’s trying to get millions of people around the world to own Nokia shares. And now it will be easier for Nokia to place issues in euros than it will be for Nokia’s competitors at Ericsson in Sweden.’
Indeed, Krantz’s view is that the whole euro issue should be seen as an opportunity rather than a threat. Perhaps that way of thinking might be a means of ending the apparent confusion surrounding so many euro issues. It might help IR officers toward viewing technicalities like the redenomination of share capital as a communications opportunity rather than just an added burden.
