On June 1, the UK Financial Services Authority’s new regime for disclosure of long positions in listed companies became effective. In addition to shares and physically settled equity derivatives, disclosure obligations can now also be triggered by the purchase or sale of cash settled equity derivatives (the rules can be found here). With this move, the UK has taken the global lead in terms of disclosure obligations of investors. The new regime primarily seeks to address concerns over the use of cash settled equity derivatives (particularly contracts for differences) for purposes of exercising influence on the issuer or covert stakebuilding.
The European continent, too, has had its fair share of incidents involving equity derivatives (think Schaeffler/Continental). But not all regulators have been as swift in their response as the FSA. The Netherlands is a good example. As I’ve argued elsewhere, cash settled equity derivatives, in principle, do not trigger a disclosure obligation under Dutch law. Last year, a member of parliament expressed concern that Schaeffler’s tactics could therefore also be deployed in the Netherlands. In response, Wouter Bos, the Minister of Finance, stated that he intended to consider the issue in the context of the implementation of the European Transparency Directive.
The decree implementing the directive, however, failed to expand the scope of the disclosure obligations to include cash settled equity derivatives. Bos merely repeated his intention to consider the issue. Interestingly, though, he also stated that in cases where, although the parties to the derivative contract have “formally” agreed to settle in cash, it is “evident” that they have “actually intended” physical settlement, the contract could qualify as an option and thus trigger a disclosure obligation under the existing rules:
In geval van een overeengekomen afwikkeling in contanten, zoals bij een zogenaamd «contract for difference» (Cfd), cash settled optiecontract of cash settled equity swap wordt een optie in beginsel niet aanwezig geacht. Dit neemt echter niet weg dat, in een situatie waarin enerzijds formeel weliswaar een afwikkeling in contanten is overeengekomen maar waarin anderzijds evident is dat de betrokken contractspartijen materieel een afwikkeling in aandelen van een onderliggende uitgevende instelling hebben beoogd, een optie zoals hiervoor omschreven wel aanwezig kan worden geacht.
The Dutch regulator Autoriteit Financiële Markten (AFM) recently included this statement in its brochure on disclosure obligations of investors. To me, the statement raises more questions than answers, but I’d be interested to hear other people’s take on this. In any case, it suggests that those daring enough to use Schaeffler’s tactics in the Netherlands should be prepared to defend their interpretation in the courtroom.
Meanwhile, recent remarks by Hans Hoogervorst, chairman of the AFM, suggest that he is in favor of expanding the scope of the disclosure obligations, and members of parliament have explicitly requested such expansion (see here). Eumedion, the organization that represents a number of high profile institutional investors, is also pushing for reform (see here). Against this background, it will be interesting to see what legislative initiatives will be launched, if any. To be continued.
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