The FSA has published a consultation paper which proposes greater disclosure of significant "economic interests" (including contracts for difference) in a company's shares. The FSA has indicated that any new regime would not be effective until September 2008.
CfDs currently fall outside the scope of the disclosure requirements in the Transparency Rules (DTR 5) unless they give access to voting rights attached to shares held as a hedge by a CfD holder or give a legal right to acquire the shares on expiration of the contract. 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).
Although market failure is expressed by the FSA to be only occasional, the FSA has ruled out leaving the regime as it currently stands and has 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 disclosure of substantial economic interests in shares.
The draft Transparency Rules text for these two alternatives is set out in the consultation paper and would require amendments being made to DTR 5. The consultation closes on 12 February 2008.
The Consultation Paper (CP 07/20) is available on the FSA website at http://www.fsa.gov.uk/pubs/cp/cp07_20.pdf.
The two alternative options (which the FSA says are mutually exclusive - so it is one or the other) are described in further detail below:
Strengthening the current regime
This option would deem CfDs to have access to voting rights and would, therefore, require disclosure unless stringent safe harbour requirements are met, namely:
- the agreement with the CfD writer explicitly precludes the holder from exercising or seeking to exercise voting rights;
- the terms of the agreement exclude further arrangements or understandings in relation to the potential sale of the underlying shares; and
- there is an explicit statement by the holder that they do not intend to use their CfDs to seek access to voting rights.
The majority of CfDs are expected to fall within this safe harbour. Any interests which do not meet this safe harbour would be aggregated with shares and other instruments which provide access to voting rights, and the combined total would be disclosable above a threshold of 3%, as is the case now for instruments with access to voting rights.
In addition, the FSA says that it would introduce a new power to allow issuers (in a similar way to section 793 of the Companies Act 2006) with "reasonable cause" (as defined) to "flush out" holders of pure economic interests above 5% by way of a notice asking for disclosure. This threshold would operate separately to that for interests with voting rights.
General disclosure regime
This option would introduce a disclosure regime requiring 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.