On Thursday 3rd July, the FSA published a policy update on its November 2007 consultation paper (CP 07/20) on the disclosure of contracts for difference (CfDs) in a company's shares. In its update the FSA announced that it has decided to implement a general disclosure regime for long CfD positions.
Currently CfDs fall outside the scope of the disclosure requirements in the Transparency Rules (DTR 5) unless they give rights to exercise voting rights or to acquire the underlying shares. However, during an offer period, the Takeover Code requires any person who has an interest (which includes holding a CfD) in 1% or more of the bidder or target's shares to publicly disclose all dealings in the bidder or target's shares (including in CfDs). Following its consultation, the FSA believes that having a general disclosure regime for long CfD positions is the most effective way of addressing concerns caused by the non-disclosure of CfDs including: the asymmetry of information between what the market knows about a company's shareholders versus the absence of information about who holds its CfDs; CfD holders seeking to exercise influence on the management of an issuer company, but the company being unable to verify the level of economic interest (if any) held through the CfD; and, CfD holders building up large (greater than 3% but often much more) undisclosed economic positions in a company before the CfD holder wishes to engage in shareholder activism or a possible takeover bid, and then converting these into actual stock and surprising the market by avoiding the disclosure regime which would have applied had the stakebuilding been done with shares. Of course having a general disclosure regime means that those who hold CfDs for purely economic reasons (and not, for example, in order to influence management or to seek to stakebuild by stealth) will also be subject to the disclosure rules and the associated extra compliance costs
The FSA's proposals set out yesterday go somewhat further than either of the original options set out in the consultation paper. In the consultation paper the FSA ruled out leaving the regime as it currently stands and outlined the following two alternatives for consultation:
- strengthening the current regime by requiring the disclosure of substantial economic interests unless the holder has taken specific steps to preclude himself from exercising influence over the underlying shares; or
- introducing a comprehensive regime, similar to the major shareholder notification regime, which would require the disclosure of all economic interests above a 5% threshold held through CfDs and other derivatives. This would operate separately from the threshold for shares and qualifying financial instruments, as currently set out in the DTRs, and there would be no aggregation across the two sets of interests.
For further details on the proposals put forward in the original consultation please see corporate e-bulletin 2007/25.
During the consultation period, concerns were raised about the first of the above alternatives including whether the proposed rules would in fact be enforceable. The FSA's proposals yesterday adopt the second of the above alternatives but with some modifications. Under the new position all existing share and CfD holdings, in the same company, will need to be aggregated for DTR 5 disclosure purposes and the disclosure threshold on this aggregated basis will be 3% in line with the current DTR 5 threshold for UK companies. To reduce unnecessary disclosures the FSA has said that it will develop an exemption for CfD writers, who act as intermediaries, similar to the Takeover Panel’s Recognised Intermediary exemption. In the original consultation paper the FSA said that the new disclosure rules for CfDs would only apply to CfDs referenced to UK shares admitted to trading on a regulated market or on AIM. The FSA has not announced any change in respect of this in its update.
The FSA intends to publish a Policy Statement on its position in September together with a Feedback Statement on the consultation responses; the Policy Statement will include draft rules. Although the position has now been finalised, the FSA will accept technical comments on the draft rules to ensure that they are workable. The final rules will be issued in February 2009. Stakeholders should then have six months in which to implement the necessary compliance changes with the rules coming into force no later than September 2009. The FSA will however seek views on whether the new rules should come into force before then but says that it will allow enough time after the final rules are issued in February for those affected to have time to implement any necessary changes.
The update is available on the FSA website at http://www.fsa.gov.uk/pubs/cp/cp07_20_update.pdf.
The November 2007 Consultation Paper (CP 07/20) is also available on the FSA website at http://www.fsa.gov.uk/pubs/cp/cp07_20.pdf.