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CSDR – or Centralised Securities Depositories Regulation – was originally introduced back in 2014 in conjunction with MiFD II and EMIR, with the intention of improving securities settlement and securities infrastructure across the European Union. It has been a complicated process implemented in multiple phases, but this is now coming towards a conclusion. The final phase, formally known as Article 3 which abolishes paper certificates and ensures that any tradable security only exists in an electronic format, was always intended to be split into two stages. By the start of 2023, any new issuance would only be legally recognised if produced in a dematerialised form, whilst by January 2025, all existing paper certificates would need to be transferred to electronic holdings.

Despite the UK’s recent departure from the EU, plans to enact Article 3 of CSDR into law remain very much on Westminster’s statue books, so this is a challenge issuers of all securities – and their advisers – need to be mindful of. However, a recent turn of events in Dublin has served to focus minds in Ireland – note this included Irish registered, London-listed entities too – as Ireland has now elected to take a big bang approach. Instead of phasing the dematerialisation across two deadlines two years apart, all tradable Irish securities must now be dematerialised from 1 January 2023. From this point in time, paper certificates will no longer be considered a legal representation of ownership. Holder records will only be permissible in book entry form with the respective registrars or via agents in the relevant Centralised Security Depository.

Our take on Article 3 of CSDR

Clearly this migration presents a significant burden for the majority of issuers, who will need to firstly start tracking down holders of physical certificates and then ensure these investors can find a suitable way of accessing dematerialised records. Anecdotally, we know that even the smaller listed equity issuers can have hundreds of shareholders with physical certificates, so resolving this requires a lot of coordination between company secretaries and registrars.

But whilst this is an immediate burden, not only does it help bring share ownership into the 21st century, removing the need for safe custody of physical certificates – and potentially insurance costs too – it also makes the accurate tracking of ownership significantly easier, too. That’s not only important when it comes to the buying and selling of holdings, but also in the event of corporate actions. Ensuring that issuers can quickly contact beneficial owners allows them to exercise their rights as securities holders – something which has at times been challenging to implement. This can be about more than just the efficient collection of dividends, too, with directors better placed to galvanise the support of many smaller investors should it be needed, for example during hostile takeover attempts.

Why does this matter for UK issuers?

Whilst there’s still some debate as to whether politicians in Westminster will attempt to use “Brexit freedoms” to avoid Article 3 of CSDR, this would jar with efforts to make the London market more accessible and innovative. As such, whilst we can’t absolutely rule out any change of sentiment here, it would be sensible for advisers and issuer to be mindful of these imminent changes. There’s nothing to suggest the UK will aim to mirror Ireland’s “Big Bang”, but independent industry representation has already been made to The Department for Business, Energy & Industrial Strategy (BEIS) as well as HM Treasury to support digitalisation of shareholding and subsequent shareholder communications in the UK.  There is more heavy lifting needed but with this on the agenda of key market participants, and with that first phase of dematerialisation now just over nine months away, momentum is gathering pace. Issuers could therefore benefit from starting to prepare for these changes now, consulting with advisers to ensure they’re across the necessary uplift here – and once again at Avenir we’re ready to support existing and new clients alike manage this transition.

This article originally appeared in the March 2022 version of AIM Journal. You can download a printable version here.

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