Disclosure Regulation of Cash-Settled Equity Derivatives - An Intentions-Based Approach
Lloyd's Maritime and Commercial Law Quarterly, Forthcoming
52 Pages Posted: 23 May 2011 Last revised: 19 Oct 2011
Date Written: May 17, 2011
In capital markets around the world, calls for greater transparency regarding holdings of cash-settled equity derivatives (in particular Contracts for Difference or CfDs) have arisen due to the increased use of CfDs to gain control or to influence the management of prominent companies on all major European stock exchanges. They have been used in this manner due to an emerging practice that permits a CfD holder to capture the shares to which the CfD arrangement relates (without entering into any further express or implied agreements to do so), thereby acquiring a de facto control position in the target company.
This paper evaluates disclosure regulation of CfD instruments and assesses the effectiveness and suitability of the disclosure regulation under chapter 5 of the Disclosure and Transparency Rules (DTR) in the UK with comparison to the relevant US rules and case law. We argue that the UK made the wrong choice of disclosure regime for CfDs. It fundamentally misunderstood the nature of the underlying problem relating to CfDs. As this article explains, the key problem related to CfDs is not the economic interest which CfDs convey per se, but rather the hedging structures that market participants have developed to facilitate the use of CfDs to acquire control of companies by stealth. This particular mischief would have been better targeted by an intentions-based disclosure regulation requiring disclosure of CfD positions only in cases where the CfD holder intends to launch a takeover or to otherwise influence the target company’s strategy and operations.
Instead, the UK market is saddled with a general disclosure obligation with only very limited exceptions. This disclosure obligation is too wide in scope, places an undue burden on market participants and ultimately acts as a deterrent to beneficial CfD transactions. This article argues that the UK should move away from the current general disclosure obligation towards intentions-based disclosure to remove the current fetter on the CfD market, while still tackling the underlying mischief. The implications may also be relevant for the ongoing revision of the EU Transparency Directive.
Keywords: cash-settled derivatives, contract for difference, disclosure, takeovers, Transparency Directive
JEL Classification: G30, G34, K22
Suggested Citation: Suggested Citation