- 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As a result, the previous bright line test has been replaced by such blurred concepts as the announcement of "a proposal that is likely to affect ...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.
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.
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