Convertibles and Listing Market

In the issuance of convertible bonds, some investors are particularly interested in the bond instrument itself, while others are more focused on the underlying equity that is listed on a recognized financial market at the time of the issuance of the convertible securities. The investor assumes that the equity will remain listed on the same market when they have the opportunity to acquire it, although a transfer of listing to another market is not impossible.

To protect against such a transfer, which would drastically alter the "rules of the game" established at the time of issuance—potentially involving, for instance, an early redemption of the convertible bonds (subject to approval by the bondholders' general assembly)—the issuance contract may incorporate and define the concept of a "similar market." Thus, for example, a transfer of listing might no longer constitute a case for early redemption.

In the terms and conditions of convertible issuances, the "similar market" related to the listing market of the underlying convertible bonds, and in reference to the regulated market as defined by Directive 2014/65/EU of the European Parliament and Council of May 15, 2014 (the “Directive”) (or Directive 2004/39/EC of the European Parliament and Council of April 21, 2004 for older issuance contracts), is frequently mentioned, often without being defined, or defined merely as a market similar to the regulated market as per the Directive.

According to the Directive, a regulated market is “a multilateral system, operated and/or managed by a market operator, which brings together – within itself and according to its non-discretionary rules – multiple buying and selling interests expressed by third parties for financial instruments, in a manner that results in the conclusion of contracts concerning financial instruments admitted to trading under its rules and/or systems, and which is authorized and operates regularly in accordance with Title III of this directive.”

Given these rather broad definitions, what should be understood by “similar market”?

• A market outside the European Union, such as NASDAQ or NYSE, which are considered markets offering a level of transparency similar to European regulated markets but which nonetheless adhere to distinct regulations and may not be accessible to all participants in European regulated markets, which could be detrimental to holders of convertible bonds; or
• A European market, such as Euronext Growth, which corresponds to a multilateral trading system as defined by the Directive, offering investors the same trading opportunities as a regulated European market but without providing the same level of issuer transparency to investors?
• Or another market?

While the term “similar market” may be understood conceptually, in practice, it is highly unlikely that a truly similar market exists that does not disadvantage investors in some way. Therefore, the criteria to prioritize in maintaining the notion of a “similar market” should include the geographical location of the stock exchange, the known liquidity of the new exchange, the level of transparency offered by the new market, the listing procedures of the new exchange, and so forth.

It therefore seems necessary to consider a definition of “similar market” to be included in the terms and conditions of convertible securities issued by issuers, specifying the so-called “similar markets” to the current stock exchange for shares. Additionally, issuers contemplating a transfer of listing for their shares may need to consider the necessity of amending the terms and conditions of their existing convertible bonds, which would require convening and obtaining approval from the general meeting of convertible bondholders.