Continental AG vs. Schaeffler, Hidden Ownership and European Law - Matter of Law or Enforcement?

Abstract

This note presents my position regarding the hidden ownership schemes currently employed by the Schaeffler group to build up stakes in Continental AG in preparation for an unsolicited surprise cash-bid for Continental's shares. It summarizes the information publicly available on the Schaeffler / Continental case as of 19 August 2008, providing a useful source on hidden ownership schemes in general. Furthermore, it puts the Continental vs. Schaeffler pattern in context of Judge Kaplan's recent ruling in CSX / The Children's Investment Fund (TCI) as well as the FSA's forthcoming rule with respect to the disclosure of CFD long positions. Prompted by the Schaeffler group's current takeover bid for Continental, I hint at some of the results in two forthcoming articles of mine, titled 'Empty voting and Hidden Ownership - The European Perspective' and 'Challenging Wolf Packs - Thoughts on Efficient Enforcement of Shareholder Transparency Rules'.

I conclude that: 1) European law mandates disclosure of hidden ownership; 2) Hidden ownership issues are, in fact, those of enforcement in multi-party schemes (i.e. wolf packs or contractual acquisition networks organized by investment banks) where adverse incentives prevent all participants from disclosure; 3) Enforcement must shift from ex-post measures that insufficiently re-arrange the benefits of secrecy to an ex-ante self-regulatory approach that considers the incentive structure in multi-party schemes. A look at the leniency programs of antitrust law provides a starting point for a self-regulatory disclosure regime with respect to shareholder transparency rules.

Keywords: Hidden Ownership, Empty Voting, Morphable Ownership, Contracts for Differences, long position, disclosure, shareholder rights, enforcement, securities laws, self-regulation, ex-ante regulation, ex-post regulation, shareholder transparency rules, transparency, takeover, cash-bid, mandatory bid, early

JEL Classification: G10, G30, G34, G38, K20, K22