In post No. 58, I wrote on disclosure obligations of investors, and mentioned that members of the Dutch parliament have requested expansion of the scope of disclosure obligations to include cash settled equity derivatives. Last week, Wouter Bos, the Dutch Minister of Finance, published his response. Some preliminary thoughts:
1. Bos announces that a consultation document will be published shortly, addressing the question how broad the scope of disclosure obligations of investors should be in order to prevent creeping acquisitions through the use of equity derivatives. The focus on preventing creeping acquisitions is understandable, as these have generated most publicity (e.g., the case of Schaeffler/Continental). But as I’ve argued elsewhere, there are several other reasons why full disclosure of long positions may be useful – one of which is to prevent derivative holders from secretly influencing the outcome of the voting process at shareholder meetings (think TCI/CSX).
2. Bos indicates that the consultation document will also address the question whether cash settled equity derivates should be taken into account in determining whether a mandatory bid is triggered. Currently, Dutch law provides that a mandatory bid is triggered upon directly or indirectly acquiring the ability to exercise, jointly or in concert, at least 30% of the voting rights in the target. But it’s not entirely clear – at least not to me – what counts as ‘indirect’ acquisition (in Dutch: middellijke verkrijging). Alexander Doorman has suggested that acquisition through an interposed company counts as indirect acquisition if the acquirer controls, as a matter of fact, the way in which the interposed company exercises the voting rights in the target. But it’s doubtful whether we can also apply this factual test to equity derivatives. After all, the legislature has explicitly stated that potential voting rights in the form of call options do not trigger a mandatory bid unless the options have been physically settled. To prevent major shareholders from avoiding a mandatory bid by holding part of their stake in the form equity derivatives – the case of Fiat provides an intriguing example –, Bos may indeed want to consider expanding the scope of the mandatory bid rule (for interesting discussions, see here and here).
3. In response to the question whether he is prepared to expand the scope of the ownership disclosure regime to short positions, Bos refers to the Dutch financial regulator (the AFM)’s authority to issue temporary rules (the AFM has made use of this authority to require that at least until January 1, 2010, short positions exceeding 0.25% be reported to the AFM, see here). At first sight, this response does not suggest that Bos is considering expanding the scope of the general ownership disclosure regime to short positions. But the AFM has stated on its website that it is striving to increase transparency of short positions for the longer term. So it wouldn’t come as a surprise if this issue, too, is addressed in the forthcoming consultation document.
4. Finally, Bos touches upon the issue of empty voting. Members of parliament had expressed concern that parties with a negative net short position have perverse incentives when exercising shareholder rights, given that they profit from a decrease in the share price. This is a complex issue. Many agree that empty voting can be problematic, but few have a clear idea how to address the issue (for Hu & Black’s proposals, see here). Bos, too, has acknowledged that empty voting can be problematic, but he has so far refrained from making proposals. In his view, a solution will need to be found at European level, given the “international character of the equity markets.” But the international character of the equity markets could be cited as a reason for virtually any problem needing to be solved at European level rather than at national level. Some skepticism is warranted here, especially given that Bos’ repeated efforts to bring the issue under attention at European level do not appear to have sorted much effect – I’m not aware of any current initiatives at EU level. In any case, the international character of the equity markets hasn’t stopped the French from addressing the issue and coming up with some interesting ideas (see here).
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