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From Securities Regulation Daily, June 3, 2013

EU Reaches Legislative Deal on Disclosure of Resource Extractive Payments and Termination of Quarterly Reporting

By Jim Hamilton, J.D., LL.M.

A European Parliament panel and the Council of the European Union have reached a deal on legislation requiring extractive companies dealing with oil, gas, and minerals to disclose full details of their payments to national governments for every project that they operate. The legislation also terminates the duty to issue corporate quarterly management statements. The legislation now has to be confirmed by the full Parliament, possibly on June 12, 2013 and formally adopted by the Council in order to come into force. The legislation would amend the Transparency Directive (2004/109/EC) for issuers of securities on regulated markets.

Similar to the Dodd-Frank Act, the amended Directive would require listed companies operating in the oil, gas, and mineral extractive, as well as the forestry industry, to disclose payments to governments in countries where they operate. With a major difference from Dodd-Frank, the EU legislation would extend the disclosure requirement to the forestry industry.

Disclosure of resource extraction payments. In order to provide for enhanced transparency of payments made to governments, issuers whose securities are admitted to trading on a regulated market and that have activities in the extractive or logging industries would disclose in a separate report on an annual basis payments made to governments in the countries in which they operate. The report should include types of payments comparable to those disclosed under the Extractive Industries Transparency Initiative (EITI). The legislative intent is that the disclosure of payments to governments should provide society and investors with information to have governments of resource-rich countries account for their receipts from the exploitation of natural resources.

MP Arlene McCarthy (S&D, UK), sponsor of the legislation, said that it is a major step forward in the global fight against corruption. Parliament maintained a strong line during the tough negotiations with the Member States, she noted, and, as a result, project-level reporting, a low materiality threshold for disclosure and no exemptions from reporting payments were secured in the legislation, giving communities in resource-rich countries the necessary tools to hold their governments to account for payments they receive from multinational companies.

MP McCarthy added that a major success for Parliament was to remove from the draft legislation a clause exempting companies from the reporting requirements where the host country's criminal law bans such disclosure.

Resource extraction projects. The legislation requires large extractive companies dealing with oil, gas, and minerals and loggers of primary forests to provide full details of their payments to national governments. Companies must publish payments to governments on a project by project basis, i.e. for each lease or license obtained to access resources, for example a mine or an oil field. All payments above €100,000 would have to be disclosed. There is also an anti-evasion clause to ensure that companies cannot artificially split or aggregate payments to avoid disclosure. In addition, all levels of government are concerned such that payments to federal, national, regional, and local governments will have to be reported. The types of payment to be reported include production entitlements, taxes, royalties, dividends, bonuses, fees, and payments for infrastructure improvements.

A review clause was added so that three years after entry of the amended Transparency Directive into force the European Commission will explore the possibility of including additional sectors and disclosure provisions.

Quarterly statements. The legislation abolishes the obligation to publish interim management statements or quarterly financial reports. This duty represents a significant burden, especially for many small- and medium-sized issuers whose securities are admitted to trading on regulated markets, without being necessary for investor protection. Those obligations also encourage short-term performance and discourage long-term investment. In order to encourage sustainable value creation and long-term oriented investment strategy, it was viewed as essential to reduce short-term pressure on issuers and give investors incentive to adopt a longer term vision.

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