Australia: Cash-Settled Equity Swaps: Spot The Difference

Last Updated: 23 June 2008
Article by Geoff Hoffman

Key Point

  • The Takeovers Panel's final line on disclosure of cash-settled equity swaps has arguably made life more complicated for acquirers of swaps.

Last year, the Panel wanted disclosure of all long swap holdings (or a combination of swaps and physical shares) equating to 5 percent of the company, regardless of whether the swap-holder was involved in a takeover play. In the final version of its Guidance Note, released recently, it took a step back. It will now only require disclosure of 5 percent holdings (regardless of whether or not they're hedged) "where there is a control transaction".

At first sight, limiting disclosure to situations of a "control transaction" appears to be a considerable narrowing of the disclosure requirement. On closer inspection, however, the Panel's new position is still very problematic, for two reasons.

The first issue is that the Panel takes a very broad view of what constitutes a "control transaction":

"A control transaction will be considered by the Panel to have commenced when (as applicable):
a) a proposal that is likely to affect control or potential control of a company is announced
b) an acquisition of a substantial interest occurs or
c) a proposed acquisition of a substantial interest is announced."

As a result, the previous bright line test has been replaced by such blurred concepts as the announcement of "a proposal that is likely to affect ... potential control of a company". In effect, the Panel appears to be saying that holders of swaps over a company's shares must monitor all announcements about that company. If the swap holder decides that a particular announcement could potentially affect control of the company, the Panel expects the swap to be disclosed. Some announcements, such as a proposed takeover bid) will obviously trigger a need to disclose. However, other, less obvious announcements - a share buyback or underwritten rights issue, for example - could also require disclosure of swaps (as, arguably, could a proposal to requisition a meeting for a board spill).

Just to complicate things, the Panel reserves the right to examine swap holdings "even though there is no control transaction".

Substantial interest, bidder's statements

Even where the Panel appears to be setting a clear test, the reality is quite different.

For example, it expects disclosure of swaps where there has been an announcement of a proposed acquisition of a "substantial interest".

On its face, the acquisition of a "substantial interest" looks like a straightforward concept, but it's not. The Corporations Act was amended last year, to ensure that a "substantial interest" is, in effect, whatever the Panel says it is. In the case of equity swaps, the Panel says that it is a parcel of securities, of whatever size, that "forms a step in the direction of takeover or change in corporate control".

Finally, the Panel "may consider" that a bidder's statement should disclose consideration given for all the long and short swaps taken by the bidder in the four months preceding the bid.

What's exempt?

Holders of long positions over 5 percent (or a combination of long positions and shares over 5 percent) have to disclose their holding in the circumstances described above.

Generally speaking, the Panel will not require disclosure:

  • by writers of swaps;
  • by holders of index derivatives or derivatives over a broadly-based basket of securities.

By themselves, short positions do not have to be disclosed. However, if a swap-holder is disclosing long positions or lodging a substantial holder notice, the Panel will require it to disclose relevant short positions in the same stock. It's important, also, to note that short positions can't be netted against long positions when determining whether the 5 percent threshold has been reached.

The mechanics of disclosure

The good news in the Panel's final policy position is that its disclosure requirements have been scaled back a little.

In its draft Guidance Note, the Panel indicated that it wanted disclosure of considerably more details than the one or two sentence disclosures that had become market practice in the aftermath of the Austral Coal affair. The final policy still requires more than a couple of sentences, but fewer details than originally proposed:

"a) identity of the taker (but not the writer)
b) relevant security
c) price (including reference price, strike price, option price etc as appropriate)
d) entry date
e) number of securities to which the derivative relates
f) type of derivative (e.g. contract for difference, cash settled put or call option)
g) any material changes to information previously disclosed to the market
h) long equity derivative positions held by the taker and its associates, its relevant interests and its associates' relevant interests (and the identity of all associates referred to)
i) short equity derivative positions that offset physical positions
Example 1: a taker might "rent" voting power by acquiring physical securities and simultaneously taking offsetting short equity derivative positions to avoid market exposure.
Example 2: A substantial holding of, say, 10 percent that is disclosed but subsequently a short equity derivative contract is entered for, say, 5 percent.
j) short positions of more than 1 percent that have been acquired after a long position is disclosed, whether by notice or substantial holding notice (ie, the taker should update its disclosure with reference to the short position)."

The timeframes for disclosure are the same as for substantial holder notices: within two business days of becoming aware of the need to disclose or, in a bid period, by 9:30am on the next trading day.

Disclosure can be made as a note to a substantial holding notice or by a written notice to the company (if a substantial holding notice isn't otherwise required).


The new Guidance Note took effect on 11 April. The Panel is prepared to be flexible for the next six months. For example, it will bear in mind that systems necessary to ensure adequate identification and disclosure of equity derivatives may need to be changed, particularly in large organisations that undertake a lot of derivative business. However, it cautions that it is "unlikely ... that the taker of a derivative would be unaware of its position".


In summary, swap holders are probably little better off under the final policy than they would have been under the original proposal. On the one hand, they've been relieved of the need to disclose every time they have a combined share/swap holding of 5 percent. On the other hand, they now have to monitor the companies covered by swaps and make a judgement call about when the disclosure requirement has been triggered: an incorrect call could see their being hit with divestiture orders by the Panel.

It will be interesting to see if the end result is that many swap holders simply take the line of least resistance and disclose regardless of whether a control transaction is in the air.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.