Thomas Schirmer Florian Khol October 16 2013 Enhanced disclosure for stake building in public M&A transactions Binder Grösswang Rechtsanwälte GmbH | Corporate Finance/M&A - Austria Thomas Schirmer, Florian Khol Corporate Finance/M&A IntroductionDisclosure of voting rights and financial instrumentsConcretisation of covered financial instrumentsRelevant disclosure thresholdsCommentIntroductionAs a result of implementing the EU Transparency Directive, the Austrian legislature introduced enhanced disclosure rules for significant shareholdings in stock exchange-listed companies, with effect as of January 2013. One main purpose of the enhanced disclosure rules is to reduce the possibilities for hidden stake building in public M&A transactions. However, the new rules leave significant room for interpretation and lead to uncertainty when determining the relevant disclosure obligations.On June 19 2013 the Financial Market Authority (FMA) issued a circular letter regarding notification and disclosure duties for issuers, detailing the FMA's detailed view on certain notification and disclosure duties in connection with, among other things, stake building. Although the circular letter is unbinding, its most relevant practical application is in determining whether a disclosure duty is invoked.Disclosure of voting rights and financial instrumentsThe transparency rules in Austria relate to control over or access to voting rights attached to issued shares. It is a broad regime covering not only direct shareholdings and indirect interests (ie, access to voting rights), but also certain financial instruments entitling its holders to acquire shares if voting rights would be attached thereto.However, as of 2013, the transparency rules also apply to financial instruments procuring access to voting rights of a stock exchange-listed company via either cash-settled or physically settled instruments, irrespective whether the shares are in issue.Generally speaking, the new disclosure regime with respect to financial instruments covers financial instruments that:grant the right to acquire shares already issued;give an entitlement to conclude such an agreement (eg, the writing of physically settled options);enable the holder in any way to participate in share price changes relating to the issuer's shares (eg, cash-settled instruments);grant the right to acquire shares of an entity whose principal purpose is to hold voting rights associated with shares of the issuer; orgive the holder the right to convert the securities, providing for entitlements to acquire shares of an issuer in addition to or instead of cash settlement (eg, convertible preference shares and convertible debt securities, regardless of whether such instruments are referenced to unissued shares).Concretisation of covered financial instrumentsThe rules leave significant room for interpretation in relation to which particular financial instruments are covered by the new disclosure regime. Based on the legislative explanatory materials and the circular letter, it appears that the legislature intended to cover as many financial instruments or similar agreements as possible (ie, also including put options or stock lending).The circular letter contains the following indicative non-exhaustive list of financial instruments to be disclosed:options and forward transactions with physical settlement;options and forward transactions with cash settlement;each and every contractual agreement, irrespective of its precise classification and form, that stipulates the acquisition of shares in any way. The mere labelling of a (unilateral) declaration or agreement is irrelevant – depending on the concrete content, letters of intent or memoranda of understanding may already be disclosable in individual cases (eg, where a letter of intent contains an enforceable call option);the entry into agreements regarding the acquisition of shares (eg, a share purchase agreement), in case the transfer in rem of the share does not occur within the two-day notification period;share baskets and instruments based on indices to the extent that they fulfil certain conditions specified in the Stock Exchange Act;swap contracts and contracts for differences;conditional financial instruments;instruments stipulating the acquisition of shares in a holding that holds shares in issuer, in case dominant influence may be exercised upon the holding; andconvertibles.In general, the FMA has stated that when deciding whether a financial instrument is covered by the disclosure regime, it will be irrelevant whether the financial instrument is based on a formal agreement and entitles its holder to acquire shares on the holder's sole initiative. In general, it is further irrelevant whether the respective shares are already in issue.Relevant disclosure thresholdsAmong other things, the new disclosure rules set out additional disclosure thresholds. As a result, under Article 91(1) of the act every person must disclose the holding of voting rights or financial instruments if he or she holds more than or falls below 3%,(1) 4%,(2) 5%, 10%, 15%, 20%, 25%, 30%, 35%, 40%, 45%, 50%, 75% or 90% of the total voting rights attached to the shares of the issuer. The new rules set out an obligation to aggregate voting rights and financial instruments (including cash-settled instruments) when calculating these thresholds (previously shares and financial instruments were not aggregated when calculating the disclosure thresholds).Should Austrian companies listed on the Vienna Stock Exchange introduce the new voluntary disclosure threshold of 3%, they must set out this requirement in the articles of association, disclose their articles of association on their website and forward the articles of association to the FMA.CommentThe introduction of the enhanced disclosure regime has closed a gap in the statutory disclosure regime and aims to reduce hidden stake building in public listed companies in Austria. However, although the new disclosure rules are a further step in the right direction towards providing a level playing field for all participants in the public M&A market, as well investors in public listed companies in Austria, they still leave room for interpretation.For further information on this topic please contact Thomas Schirmer or Florian Khol at Binder Grösswang Rechtsanwälte by telephone (+43 1 534 800), fax (+43 1 534 808) or email ([email protected] or [email protected]). The Binder Grösswang Rechtsanwälte GmbH website can be accessed at www.bindergroesswang.at.Endnotes(1) Disclosure at this threshold is voluntary.(2) This threshold has been newly introduced.