11 September 2007
The Takeovers Panel wants more disclosure of cash-settled equity swaps.
In a draft Guidance Note issued yesterday, the Panel also took the opportunity to clarify its position on short positions and the progressive building of swaps.
The release of the draft Guidance Note also warns existing swap holders to think seriously about disclosing or unwinding swaps that do not accord with the proposed policy.
Level of disclosure
Following the Austral Coal cases, there has been a growing market practice of disclosing cash-settled equity swaps where the "combined holding" of swaps and shares has equated to 5 percent of a company. This commonly takes the form of a note on a substantial shareholder disclosure notice, disclosing only that the person has economic interests in X per cent of the company, through cash-settled equity swaps.
The Panel apparently thinks that more disclosure is required. Although it does not want disclosure of written agreements establishing swap arrangements, it does think that the following details should be disclosed:
It does not propose to require disclosure of whether the counterparty has hedged the swaps by acquiring shares. This is for two reasons:
Who has to disclose?
Basically, it's proposed that everyone would have to disclose once they had a combined holding of 5 percent, regardless of whether they're a would-be bidder or merely taking an economic position.
The Panel's rationale is that, even where the swap holder has no takeover intentions, the fact that someone has an economic foot on 5 percent of a company will impact on the market for that company's shares.
Progressive building of swap positions
Swap positions are often built progressively, and formally binding documentation may not be executed until very late in the process. The Panel takes the view that the 5 percent disclosure threshold should be calculated on the basis of the size of share exposure that the counterparty has agreed to offer on a firm basis. Where that exposure increases, the Panel would expect those increases to be disclosed.
The Panel will not require disclosure of the total exposure sought by the swap holder but, on the other hand, will be watchful for arrangements that have been structured to avoid progressive disclosure.
Long vs short positions
The size of a combined holding would be calculated by reference to the swap holder's long positions (ie. where the counterparty has an incentive to hedge its position).
The swap holder will not be allowed to net short positions against long positions when calculating the size of its combined holding. However, once the combined holding threshold has been reached and disclosure is required, the swap holder's short positions (of 1 percent or more) should also be disclosed.
Beneficial ownership tracing
There were whispers that counterparties who received a beneficial interest tracing notice in relation to hedging shares might be required to disclose the swap holders.
In its current form, the draft Guidance Note doesn't go this far. However, in an accompanying discussion paper, the Panel asks whether it should become part of the final policy.
Physically settled equity derivatives
The Panel also comments on the amendment made to section 609(6)(b) of the Corporations Act by the Financial Services Reform Act 2001.
This replaced the word "futures contract" with "derivative" where it appeared in that section. As a result of that amendment, section 609(6)(b) currently appears to provide that a person that is party to any "derivative" (including privately negotiated derivatives) does not acquire a relevant interest in securities (which it might otherwise hold by reason of section 608(8)) except for the purposes of Chapter 6C. The Panel's view is that the amendment "may have results which were not intended by the legislature" and that it would regard it as unacceptable if this broader exception in 609(6)(b) was used to undermine the purposes of Chapter 6 or avoid its provisions.
The Panel also states that it would be likely to treat as unacceptable circumstances any attempt to avoid the intent of the Guidance note by persons entering into deliverable equity securities in a manner which, it was argued, did not give rise to an obligation to make disclosure under Chapter 6C where an equivalent cash settled equity derivative would need to be disclosed under the Guidance Note.
How does this affect current swap arrangements?
The Panel is allowing 12 weeks for comments about the draft Guidance Note, after which it will be finalised. It takes the view that that is also the effective transition period for the implementation of the policy.
In other words, it's proposed that there will be no "grandfathering" of existing swaps. On the day the Guidance Note is finalised, it will apply to all swaps, even if they were written before that date. The Panel advises current swap holders to take this opportunity, over the next 12 weeks, to disclose or unwind any swaps that would be affected by the Guidance Note.
Swap holders who have already disclosed combined holdings may need to revisit their disclosure: the amount of disclosure proposed by the draft Guidance Note is greater than much current market practice.
Mark Paganin, a Partner of Clayton Utz, is a member of the Takeovers Panel. He did not participate in the drafting of this Alert.
