Interest in the disclosure of equity derivative positions in New Zealand reached its zenith in late 2003. At that time, the Court of Appeal in Ithaca (Custodians) Limited v Perry Corporation ruled that a cash-settled equity derivative did not give rise to a disclosable “relevant interest” in Rubicon shares merely because “market reality” meant that the equity amount payer would be likely to hold those shares as a hedge and sell them to its counterparty on termination. The Court said something more, such as an actual arrangement or understanding between the parties, would be required in order to trigger a disclosure obligation.
In March 2004, the Privy Council denied Ithaca’s petition to appeal the Court of Appeal decision. The immediate reaction from the Government was to propose amending legislation that would, arguably, have reversed the outcome of that case. But the Government’s proposal met with a luke-warm response and was never implemented.
Since 2004, equity derivatives have largely flown under the regulatory radar. The shift in various other jurisdictions towards the disclosure of purely synthetic equity positions has not been proposed in New Zealand. Until now.
Takeovers Panel Consultation Paper
On 24 August 2012, the Takeovers Panel issued a Consultation Paper entitled Disclosure of Equity Derivative Positions. While the Panel’s focus is, not surprisingly, on disclosure in the context of a takeover, the paper also considers disclosure more generally.
The Paper begins with a background section, which outlines the position in Australia and the UK, refers to the Perry case, then considers the two principal disclosure regimes in New Zealand: the general disclosure regime in the Securities Markets Act 1988 (which applies to substantial security holders) and the takeovers disclosure regime in the Takeovers Code (which applies to offerors and target companies). In general, neither of those regimes currently requires the disclosure of cash-settled equity derivative positions.
Is there a problem in New Zealand?
The Panel admits it is not aware of evidence that equity derivatives are necessarily having a negative impact on the takeovers market in New Zealand. Nonetheless, given the Panel’s preferred option (see below), it is clear that the Panel is not approaching the issue from an impartial perspective. Rightly or wrongly, the Panel believes it is inevitable that the problems encountered in offshore markets will eventually hit New Zealand. This is despite the modest size of the New Zealand equity derivatives market and the low level of takeover activity.
Options for reform
Given that predisposition, it is not surprising that, of the three options the Panel considers, maintaining the status quo is the least preferred.
The second option - to amend the Takeovers Code to require long equity derivative positions to be disclosed in a takeover - is seen as better. However, according to the Panel, its shortcomings are that the disclosure obligations only apply in the context of a takeover and, even then, they only catch certain parties.
These shortcomings would be addressed by the third, and preferred, option. This builds on the second option by also requiring long equity derivative positions to be included in calculations under the substantial security holder regime. In other words, under the preferred option, a physical 4% interest coupled with a synthetic 2% interest would need to be disclosed under the Securities Markets Act (as it exceeds the 5% threshold). That would be the case whether or not a takeover offer had been made. By contrast, such an interest does not currently need to be disclosed.
Such extended disclosure would, the Panel suggests, “promote efficient allocation of resources” and “ultimately promote confidence in, and the international competitiveness of, the New Zealand capital markets.” A worthy cause indeed. But this is a mantra that has been rolled out with such predictable regularity, as a justification for almost all of the financial market reforms of the last 20 years, that it has become hackneyed to say the least.
- there is no evidence of a problem in New Zealand;
- if there is a problem, there is no evidence that it is having any significant effect on confidence in, and the competiveness of, New Zealand capital markets; and
- there is nothing to suggest that problems offshore will spring up in New Zealand any time soon,
perhaps this is a solution to a problem that doesn’t exist.
Submissions on the Paper close on 5 October.