Does your business have transactions with entities in one of the European Economic and Monetary Union (the "EMU") countries? Does your business have a subsidiary, customers or suppliers in the EMU? Is your business subject to SEC Disclosure Requirements as an issuer of public securities, an investment advisor or an investment company? If you answered YES to any of the previous questions, your business is an "Affected Enterprise" subject to the Euro conversion requirements recently implemented.
The European Union.s (EU) goal of a barrier free trade zone for EU countries came closer to being realized on January 1, 1999 when a common European currency known as the "Euro" was introduced in eleven of fifteen EU member countries.Belgium, Ireland, Italy, Luxembourg, the Netherlands, Austria, Finland, France, Portugal, Spain and Germany (each a "Participating Member State" and collectively referred to as the "EuroZone"). The four remaining EU countries.Denmark, Greece, Sweden and the United Kingdom.are not included in the EMU at this time, although Greece has stated its intent to join by January 1, 2001. The Euro currently trades on currency exchanges and is available for non-cash transactions. Likewise, Member States will issue sovereign debt in the Euro and will redenominate outstanding foreign debt in the Euro. During the period from January 1, 1999, through December 31, 2001 (the "Transition Period"), Affected Enterprises may choose to transact business in either the Euro or the national currency. On January 1, 2002, referred to as "E-Day," the EU will introduce Euro notes and coins in the EuroZone; on July 1, 2002, the Euro will be the only legal tender in the EuroZone.
Since Affected Enterprises will need to be able to transact business with other Affected Enterprises which choose to use the Euro subsequent to January 1, 1999, Affected Enterprises will require two systems to conduct business. The costs associated with implementing and maintaining a dual system capable of processing transactions in the Euro or a national currency could be significant. Effective January 1, 1999, the rates of conversion between the Euro and national currencies of Participating Member States were irrevocably fixed by way of official EMU conversion tables. Conversion rates are now computed by way of a "triangulation" process that requires conversion between two national currencies of Participating Member States. Such conversions are now made via an intermediate amount in Euro, with defined accuracy, to ensure that one party does not benefit from a gain at the expense of the other.
The specific effect of the Euro conversion will depend upon the nature of the business conducted. For many Affected Enterprises, the Euro conversion will require adaptations of information technology and other systems. For European issuers and other entities with significant markets or operations in Europe (whether or not in the Participating Member States), the conversion will create many challenges to convert to doing business in a single currency across nations. Set forth below is a brief description of the main areas impacted by the Euro conversion.
1. Financial Information Systems ("FIS")
Affected Enterprises are encouraged to identify all FIS, including spreadsheet applications and databases, cash registers and other types of point-of-sale terminals that process financial information that may be affected by the Euro Conversion. Affected Enterprises will need to modify their FIS to: (i) convert the currency of participating nations to the Euro; (ii) convert one participating currency to another currency through the triangulation process; (iii) perform rounding calculations including corrections to six decimal places; and (iv) permit transactions to take place in both participating currencies and the Euro during the Transition Period.
In addition, although dual displays (on point-of-sale or similar devices) are not legally required at this time, Affected Enterprises may also be forced to display both currencies on computer systems and wherever prices are displayed during and beyond the Transition Period. The European Commission, the legislative body of the EU, requires that whenever both currencies are displayed at the point-of-sale, computer display or in a document, the conversion must be done in "strict accordance" with the conversion rates. In addition, the introduction of the Euro requires its incorporation into international computer keyboard standards. One task is to specify the location of the Euro symbol. It is essential that this be accompanied by the addition of the Euro to 8-bit character sets. A short-term proposal is to place the Euro on the "E" key. An additional long-term proposal has been made to the computer industry to place a new key in the same location on all major keyboard layouts.
2. Software Compliance and Dependency on Third-Party Software
Given the claims and attendant publicity about systems that are not Year 2000 compliant, it will be no surprise if claims emerge that FIS software and hardware vendors should be liable for failure to correct systems that are not Euro-compliant. Vendors and licensors should be alerted to the possibility of claims allegedly based on warranty and maintenance obligation provisions in license, sales and support agreements. Such allegations may be joined by claims for breach of contract, breach of express warranty, breach of implied warranty, negligence and fraud. It is essential that an Affected Enterprise inventory its FIS to ensure that they meet the particular functional requirements of the Euro Conversion. Affected Enterprises must plan enough time for the design, procurement, installation and testing of such systems.
3. Continuity of Contract
The transition to the Euro will have no impact on the majority of existing contracts because EU legislation provides that contracting parties will not be permitted to terminate or alter any contract on the basis of the transition to the Euro. Thus, the Euro conversion should not enable one party to unilaterally change its contractual obligations. In addition, state legislation (known as State Euro Acts) in New York, Illinois and California (and proposed legislation in Pennsylvania and Michigan) generally provide that performance of contractual obligations are not excused due to the substitution of the Euro in a contract that calls for payment in a different currency. Contracting parties may, however, avoid these provisions by contractually requiring payment in a specified currency. It is not clear whether contracts governed by the laws of a state or country that has not enacted specific legislation relating to the continuity of contract and the Euro conversion will become unenforceable as a result of the conversion. Fortunately, the proposed Uniform Commercial Code Section 2-614(2), if adopted, may provide some protection regarding the sale of goods. In the current draft the proposed section now provides that payment in Euro in a contract that calls for payment in a national currency will generally fulfill the paying party.s payment obligations. Affected Enterprises are encouraged to review their contracts to determine whether amendments are necessary to address Euro conversion issues.
4. Risk Associated with Inaccurate Conversions
Affected Enterprises with a non-Euro-compliant FIS will be exposed to the various risks associated with inaccurate pricing and financial information due to the complex conversion process and rounding requirements. One Euro will equal an amount of national currency represented by six figures, which will not be rounded or truncated when making conversions. Because there will be situations where the initial and reconverted Euro amounts differ, even if the conversion tables are used properly, significant financial exposure exists. Further, the sum of a series of converted amounts may differ from the result that one obtains by converting the total of the original amounts. Unfortunately, the European Commission.s sole recommendation to Affected Enterprises regarding this issue is that, "citizens and enterprises should leave conversions to the banking sector."
5. Competitive Impact
As a result of the Euro conversion, it may be more difficult for businesses to charge different prices for the same products on a country-by-country basis. Product lines may become more international and less local due to revised marketing strategies. Affected Entities may need to adjust product and service prices to remain competitive. Generally, Affected Enterprises may expect to be affected as follows: (i) certain customers may expect to conduct transactions in the Euro sooner than other businesses; (ii) the need to conduct business in more than one currency may increase the cost of doing business; and (iii) certain Affected Enterprises, including customers and/or suppliers, may consolidate operations to pursue economies of scale.
6. General SEC Disclosure Requirements
The Securities and Exchange Commission (SEC) requires certain issuers of U.S. securities and other entities to disclose the impact of the Euro conversion, if that impact is expected to be material to the issuer.s business or financial condition. The Euro conversion will be most significant for any issuer that is domiciled in a European country. According to the SEC Disclosure requirements, if an issuer suspects that its operations may be materially affected by the Euro conversion, but is uncertain, the issuer should disclose this uncertainty. In either case, the issuer should indicate whether it has initiated an internal analysis to plan for the conversion, and describe that analysis and/or plan. Affected Enterprises should consult their securities counsel regarding the specific SEC disclosure requirements regarding Euro compliance. For additional disclosure requirements regarding the Euro in Registration Statements under the Securities Act of 1933 and the Securities Exchange Act of 1934, please see the Staff Legal Bulletin No. 6 (CF/MR/IM) available through http://www.sec.gov/rules/othern/cfcr998.htm.
7. Bank Fee Exposure
It is unclear whether and to what extent financial institutions will charge for certain conversions between national currencies and the Euro. A major distinction lies in the conversion of actual bank notes versus funds deposited in bank accounts. An informal survey conducted by the European Commission of some large banking institutions reveals that banks intend to charge for conversion and exchange of Euro and national bank notes during the Transition Period. It is unclear whether banks will charge for the exchange of national bank notes into Euro bank notes and coins after the Transition Period. Affected Enterprises should discuss the potential for bank fees imposed on conversions to and from the Euro with their financial institutions as soon as possible.
8. Historical Data
Affected Enterprises may be required to store and report historical financial information in both currencies for internal purposes, due to customer requirements, the needs of a business partner, or due to the changeover schedule of the national or local government authorities. In addition, as the Affected Enterprise generates data in both currencies, and particularly "historical data," it is faced with the additional cost of storing, reporting and maintaining the Euro, as well as parallel national currency-based systems.