On 5 April 2011, the German Parliament passed a law designed to "strengthen investor protection and improve the functionality of the capital market". The law includes new rules regarding disclosure requirements for dealings related to the shares of German-domiciled issuers. These rules, which amend the German Securities Trading Act, came into force on 1 February 2012. To provide guidance with respect to the new rules, the German financial regulator ("BaFin") issued a list of frequently asked questions ("BaFin FAQs") on 9 January 2012.
The new rules expand the scope of the notification requirements to include financial instruments or other instruments whose performance is linked to voting shares (regardless of whether such instruments grant a right to acquire voting shares).
Before the amendments, purchasers of financial instruments were required to disclose certain interests in the voting shares of German-domiciled issuers listed on a regulated stock exchange within the European Economic Area. In particular, purchasers were required to notify both BaFin and the issuer when the purchaser's holdings reached, exceeded or fell below designated thresholds. The former rules covered (and threshold calculation was based upon) both the voting shares of such issuers as well as any financial instruments granting a unilateral and legally binding right to acquire such voting shares.
The new rules expand the scope of the notification requirements to include financial instruments or other instruments whose performance is linked to voting shares (regardless of whether such instruments grant a right to acquire voting shares).The new rules may have been prompted by the actions of some market participants who (i) used such instruments to cause other market participants, acting as counterparties, to acquire a large number of voting shares in order to hedge their exposure to such financial instruments, and (ii) subsequently acquired the respective positions from these counterparties en block without being obliged to disclose the crossing of any relevant threshold (and consequently of any major holding of voting rights on the way to reaching a targeted overall holding). This was possible because, under the former rules, the disclosure requirement applied only to the crossing of thresholds in relation to shares conferring voting rights, which were already held by a party. Holding through options and certain other derivatives on shares was subject to disclosure if delivery of the underlying shares was required, but not where such transactions were cash settled.
It remains to be seen whether the new rules provide the intended transparency or rather lead market participants to make erroneous assumptions about hedging transactions of other market participants.
The new rules introduce an additional notification obligation with respect to: (i) derivative contracts with cash settlement; (ii) claims for the return of securities that are part of a securities lending transaction; and (iii) the repurchase obligation in connection with a repo transaction. According to the BaFin FAQs, such instruments include, but are not limited to:
- physically settled options and other derivatives that were not covered by the former rules;
- contracts for difference;
- cash settled swaps and options;
- certain baskets of securities and instruments linked to indices (provided that the weighting of the respective voting shares exceeds 20 %); and
- rights of first refusal.
The mere offer to buy a financial instrument is not taken into account when determining when the notice obligation applies. Convertible bonds and option bonds are not covered by the new rules if they are linked to new voting shares to be issued. In contrast, market participants must take into account instruments held by subsidiaries or trustees, as well as instruments that grant an indirect right to purchase voting shares (e.g., an instrument that grants the right to purchase a call option on voting shares).
The holder of such instruments (or a third person benefiting from such instruments) must disclose its economic position each time it reaches, exceeds or falls below 5%, 10%, 15%, 20%, 25%, 30%, 50% or 75% of an issuer's voting rights. The holder of the instrument must notify the BaFin and the issuer regarding the total number of all voting shares and related instruments held, as well as the number of the holder's: (i) voting shares; (ii) instruments that were already covered by the former rules; and (iii) financial instruments covered by the new rules. The holder of such positions must make the notification promptly after purchasing the position, and no later than four business days after such purchase. This may lead to multiple notifications being required because the holder of the position must also make a separate notification regarding its holdings of any voting shares and financial instruments that were covered by the former rules.
It remains to be seen whether the new rules provide the intended transparency or rather lead market participants to make erroneous assumptions about hedging transactions of other market participants. In any event, investors in such financial instruments now need to assess carefully whether any disclosure requirements may arise.
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