Shareholder Activism Series: A Primer on the Swiss Legal Framework
This blog series puts the spotlight on legal issues relevant to activist shareholders and event-driven institutional investors in Swiss target companies and introduces market participants from abroad to the pillars of Switzerland's legal framework.
Information on significant shareholdings is often important in the context of an activist campaign or a corporate event
During White Tale's campaign in opposition of the merger between Clariant (SIX: CLN) and Huntsman (NYSE: HUN), the increasing number of voting rights controlled by the activist shareholder was a prominent news item and an indication of its growing threat to the transaction. While the particularities of the deal made the White Tale campaign somewhat special in this regard, information on significant shareholdings is often important to target companies and the market at large, all the while activists may have an interest in controlling that information. The rules of the Swiss Financial Market Infrastructure Act (FMIA) on the disclosure of shareholdings delineate to what extent this is possible.
Overview of the FMIA disclosure regime
The disclosure regime of the FMIA broadly provides that when certain thresholds are reached or crossed upwards or downwards a disclosure notice must be made to the company and the stock exchange. The thresholds are 3, 5, 10, 15, 20, 25, 33⅓, 50 and 66⅔ percent of the voting rights and are calculated on the basis of the total share capital issued (without adjusting for, say, treasury shares). The thresholds must be calculated separately for three different positions (sometimes referred to as 'buckets'): the shares only position, the purchase position (of which the shares only position is a component) and the sales position. If a threshold is reached or crossed in any of these, the position in all three 'buckets' must be disclosed. Accordingly, the disclosure regime not only captures a person's shareholding in a literal sense, but also its other 'long' and 'short' positions.
When a disclosure obligation is triggered, the company and the stock exchange must be notified within 4 trading days. Upon receipt of the disclosure notice, the target company must publish the information via the stock exchange within 2 trading days (although it may take somewhat longer to actually appear on the website). Accordingly, the market's state of knowledge of a target company's shareholder structure has a time lag of up to 6 trading days.
The FMIA disclosure regime is comprehensive in scope, but does not lead to full information
The legislator has designed the scope of the disclosure regime to be comprehensive.
The disclosure obligation is imposed upon the beneficial owner, i.e. the person who controls the voting rights and carries the economic risk. Whether the stake is held directly or indirectly is not relevant. Generally, any operation which may ultimately convey the voting power over shares is considered an indirect acquisition of such shares and attributed to the beneficial owner. If multiple individuals act in concert (in particular regarding the exercise of voting rights), they have to fulfil the disclosure obligation as a group and, among other things, disclose their aggregate positions.
The regime is also comprehensive in terms of the financial instruments it covers. The idea that physically settled call options may have to be disclosed is perhaps unsurprising; but the regime also encompasses cash settled derivatives, contracts for difference, repo-transactions, securities lending and the like. The working assumption for shareholders should therefore be that the legal structure of the stake is not relevant as long as the economic substance is essentially the same.
That does not mean that the target company and the public at large always have a clear picture of all significant shareholdings. In addition to the time lag issue, there are considerable 'blank spaces' between the thresholds, particularly for larger shareholdings. For instance, a shareholder who has disclosed slightly over 25 percent of the voting rights may in fact hold just shy of 33⅓ percent without – all other things being equal – triggering a further disclosure obligation.
The TOB's disclosure regime is more demanding
The situation is somewhat different in a takeover context. The ordinance of the Swiss Takeover Board (TOB) on public tender offers (TOO) provides for a stricter disclosure regime which applies from the publication (or pre-announcement) of a tender offer until the end of the additional acceptance period. Pursuant to this regime, certain persons (including those who directly or indirectly hold a stake of at least 3 percent of the voting rights in the target company) must notify the TOB and the relevant stock exchange of any transaction in equity securities in the target company and in relevant equity derivatives. The disclosure must be made on a daily basis, at the latest by noon on the trading day following the relevant transaction(s), if any, after which they are published on the TOB's website. Accordingly, during a tender offer, the public at large receives much more detailed and current information on the target company's shareholders.
Disclosure of shareholdings outside of these regimes
If a listed company has issued registered shares (as opposed to bearer shares), the share register is another source of information on shareholdings, at least for the company (the share register of a Swiss company is generally not public). Registered shares must be registered with the company before they can be voted at a general meeting. The requirements and process for registering shares differ from company to company. In most cases, the company sets a date prior to the general meeting (so called 'record date') by which shares must be registered. Of course, if they wish, shareholders may register their shares significantly earlier and thereby communicate to the company the exact number of shares held.
Activist or other shareholders are, in principle, also free to communicate their stake in the target company to the public at large at any stage. However, it is advisable to word such communications carefully, particularly to ensure compliance with the market conduct rules.