Know Your Shareholders: The Use of Cash-Settled Equity Derivatives to Hide Corporate Ownership Interests

Conference Board Director Notes No. DN-009

12 Pages Posted: 26 Jul 2010

Date Written: July 2010

Abstract

Derivatives are an important class of financial instruments that has taken center stage in today’s capital markets. The reason for their increasing popularity is two-fold: they offer risk protection, and they allow innovative investment strategies. In particular, in a regulatory environment where disclosure requirements are triggered by voting rights rather than economic interest, derivatives can be used to conceal equity. This practice - generally known as “hidden ownership” - is being used by investors and strategic bidders for the purpose of discretely accumulating equity stakes in business corporations listed on European stock exchanges. The most notable examples are the cases regarding Continental, Fiat, and Volkswagen-Porsche.

This paper provides an overview of the implications on corporate governance of certain uses of equity derivatives. It outlines actions that, in the performance of their fiduciary duties, directors of corporations listed in Europe should consider in order to address or prevent situations of undisclosed stake building by means of such derivatives. It also discusses the recent regulatory initiatives undertaken to restrain abuses of these financial instruments in Belgium, France, Germany, Italy, the Netherlands, and the United Kingdom.

Keywords: governance, derivatives, financial markets

Suggested Citation

de Nardis, Eugenio Simone and Tonello, Matteo, Know Your Shareholders: The Use of Cash-Settled Equity Derivatives to Hide Corporate Ownership Interests (July 2010). Conference Board Director Notes No. DN-009, Available at SSRN: https://ssrn.com/abstract=1648526 or http://dx.doi.org/10.2139/ssrn.1648526

Eugenio Simone De Nardis

University of Siena ( email )

Via Banchi di Sotto, 55
Siena, 53100
Italy

Matteo Tonello (Contact Author)

The Conference Board, Inc. ( email )

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