Skip to main content
SpringerLink
Log in

Against Mandatory Disclosure of Economic-only Positions Referenced to Shares of European Issuers — Twenty Arguments against the CESR Proposal

  • Articles
  • Published:
European Business Organization Law Review Aims and scope Submit manuscript

Abstract

Following recent developments in some European jurisdictions, the Committee of European Securities Regulators (CESR) proposed, on 9 February 2010, ‘to extend major shareholding notifications to instruments of similar economic effect to holding shares and entitlements to acquire shares’. This initiative pushes for mandatory Economic-only Disclosure of Major Shareholdings in Europe (EOD). By providing twenty arguments against the CESR proposal, this paper seeks to spur a lively discussion as to whether mandatory EOD is desirable. It puts forward that European institutions are well advised to refrain from implementing the CESR proposal in its current form. If at all, implementing a requirement to report to regulators (Economic-only Reporting — EOR) and limiting EOD to very large positions serves social welfare better than EOD and avoids major differences between European securities law and US securities regulation.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  1. Art. 20(2bis) of the Swiss Law on Stock Exchanges and Securities Trading (BEHG) and Arts. 11 and 13(1) of the Ordinance of the Swiss Banking Commission on Stock Exchanges and Securities Trading (BEHV-EBK), 4; U. Bertschinger, ‘Finanzinstrumente in der Aktienrechtsrevision — Derivate, Securities Lending und Repurchase Agreements’ [Financial Instruments and the Reform of Corporate Law — Derivatives, Securities Lending and Repurchase Agreements], 80 SZW (2008) p. 208; P. Nobel, ‘Neues Aktienrecht’ [The New Corporate Law], 80 SZW (2008), at pp. 175 and 188 et seq

    Google Scholar 

  2. Committee of European Securities Regulators (CESR), Consultation Paper on Proposed Extension on Major Shareholding Notifications to Instruments of Similar Economic Effect to Holding Shares and Entitlements to Acquire Shares, CESR/09-1215b, 9 February 2010, available at: <http://www.cesr-eu.org/popup2.php?id=6481>.

  3. Commissione Nazionale per le Societa e la Borsa (CONSOB), Position Paper CONSOB in tema di trasparenza proprietaria sulle posizioni in derivati cash-settled [CONSOB Position Paper on transparency regarding positions based on cash-settled derivatives], 8 October 2009, available at: <http://www.consob.it>.

  4. Inter alia, H.T.C. Hu and B.S. Black, ‘The New Vote Buying: Empty Voting and Hidden (Morphable) Ownership’, 79 Southern California Law Review (2006) pp. 811–908, and ‘Empty Voting and Hidden Ownership: Taxonomy, Implications and Reforms’, 61 Business Lawyer (2006) pp. 1011–1069, put forward a disclosure reform proposal.

    Google Scholar 

  5. Inter alia, R. Kraakman, ‘Disclosure and Corporate Governance: An Overview Essay’, in G. Ferrarini, K.J. Hopt, J. Winter and E. Wymeersch, eds., Reforming Company and Takeover Law in Europe (Oxford, Oxford University Press 2004) p. 95, and M. Schouten, ‘The Case for Mandatory Ownership Disclosure’, 15 Stanford Journal of Law, Business & Finance (2009) p. 127, argue in favour of extending disclosure rules.

    Google Scholar 

  6. See, inter alia, H. Fleischer and K.U. Schmolke, ‘Das Anschleichen an eine börsennotierte Aktiengesellschaft. Überlegungen zur Beteiligungstransparenz de lege lata und de lege ferenda’ [Sneaking up on quoted companies. Considerations on transparency of major shareholdings de lege lata and de lege ferenda], 12 Neue Zeitschrift für Gesellschaftsrecht (2009) p. 401, and the citations in the following n

    Google Scholar 

  7. On individual and collective interest suits, see E.P.M. Vermeulen and D.A. Zetzsche, ‘The Use and Abuse of Investor Suits: An Inquiry into the Dark Side of Shareholder Activism’, 7 European Company and Financial Law Review (2010) p. 1, TILEC Discussion Paper No. 2010-001, CBC-RPS Paper No. 1/2010, available at SSRN: <http://ssrn.com/abstract=1428901>.

    Article  Google Scholar 

  8. H.C. Hu and B.S. Black, ‘Hedge Funds, Insiders, and the Decoupling of Economic and Voting Ownership: Empty Voting and Hidden (Morphable) Ownership’, 13 Journal of Corporate Finance (2007) p. 343; ‘The New Vote Buying’, supra n. 8; ‘Debt, Equity, and Hybrid Decoupling: Governance and Systemic Risk Implications’, 14 European Financial Management (2008) p. 663.

    Article  Google Scholar 

  9. Cf. para. 2, cited supra section 2, stating that ‘CESR intends to widen the scope’ of the Transparency Directive.

  10. For an initial theoretical study, see D.A. Zetzsche, Challenging Wolf Packs: Thoughts on Efficient Enforcement of Shareholder Transparency Rules, February 2010, available at SSRN: <http://ssrn.com/abstract=1428899>.

  11. See US District Court for the Southern District of New York, 11 June 2008, Case 1:08-cv-02764-LAK — CSX v. The Children’s Investment Fund (TCI) — confirmed by summary order No. 08-2899-cv (2nd Cir. Sept. 15, 2008). See also J. Coffee, ‘Regulators Need to Shine a Light on Derivatives’, Financial Times, 30 June 2008, p. 13. The question of civil damages for ‘short-swing’ profits under s. 16(b) of the SEA was settled for $11 million, while CSX identified potential recoverable damages of approx. $138 million, see T. Mirvis, ‘Hedge Funds Settle “Short Swing” Profits Litigation’, Harvard Law School Corporate Governance Blog, 28 December 2008.

  12. In light of tumbling stock prices under the influence of the financial crisis, a tender offer made at an offer price that was calculated prior to Lehmann Brothers’ insolvency and thus assumed better economic conditions than were justified in light of the dawning depression was preferable to having no tender offer at all. See D.A. Zetzsche, ‘Hidden Ownership in Europe: BAFin’s Decision in Schaeffler v. Continental’, 10 European Business Organization Law Review (2009) p. 115, available as online working paper at: <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1170987>.

    Article  Google Scholar 

  13. The criminal sanctions imposed on Ifil’s directors for market manipulation are subject to an appeal before the Corte D’Appello di Torino (Torino Court of Appeal). For the facts of the case and relevant literature, see Zetzsche, supra n. 18, at p. 129.

  14. CESR/09-1215b), para 16. For details, see the author’s argument supra n. 18.

  15. As mentioned before, additional considerations are likely to have influenced BaFin’s decision to declare Schaeffler’s conduct legal, see supra n. 18. However, BaFin’s decision did not bind any of the parties involved. The issuer, and/or Continental’s shareholders, could have sued Schaeffler for breach of VRD rules. None did. This indicates, with hindsight, Schaeffler’s offer price did not seem to be inadequate.

  16. S. Grossman and J. Stiglitz, ‘On the Impossibility of Informationally Efficient Markets’, 70 American Economic Review (1980) p. 393, at p. 405.

    Google Scholar 

  17. Other arguments against broadly phrased disclosure rules include potential law suits and discouragement of overall monitoring: European Commission Report on More Stringent National Measures Concerning Directive 2004/109/EC on the Harmonisation of Transparency Requirements in Relation to Information About Issuers Whose Securities Are Admitted to Trading on a Regulated Market, SEC(2008) 3033 final, at p. 10; H. Fleischer and K. Schmolke, ‘Kapitalmarktrechtliche Beteiligungstransparenz nach 21 ff. WpHG und “Hidden Ownership”’ [Securities Law-Based Transparency of Shareholdings under ss. 21 et seq. WpHG and ‘Hidden Ownership’], 29 Zeitschrift für Wirtschaftsrecht (ZIP) (2008) p. 1501; J.R. Macey and J.M. Netter, ‘Regulation 13D and the Regulatory Process’, 65 Washington University Law Quarterly (1987) p. 131, at p. 144; B. Black, ‘Next Steps in Corporate Governance Reform: 13D Rules and Control Person Liability’, in K. Lehn and R. Kamphuis, eds., Modernizing U.S. Securities Regulation: Economic and Legal Perspectives (Burr Ridge, Irwin Professional Publishing 1992), at p. 201 (raising concerns that institutional investors may be discouraged from monitoring).

  18. See, for instance, on the ‘Dutch Discount’, J. McCahery and E.P.M. Vermeulen, Conflict Resolution and the Role of Corporate Law Courts: An Empirical Study, available at: <http://ssrn.com/abstract=1448192>, at p. 19 et seq.

  19. Previous research has shown significant abnormal (short-term) returns upon first-time disclosure of major shareholdings. Although the premium for potentially passive investors is smaller, this is true for all types of investors that disclose major shareholdings. As regards potential industrial buyers, see W.H. Mikkelson and R.S. Ruback, ‘An Empirical Analysis of the Interfirm Equity Investment Process’, 14 Journal of Financial Economics (1985) p. 523; C.G. Holderness and D.P. Sheehan, ‘Raiders or Saviors? The Evidence on Six Controversial Investors’, 14 Journal of Financial Economics (1985) p. 555; S.R. Bishop, ‘Pre-Bid Acquisitions and Substantial Shareholder Notices’, 16 Australian Journal of Management (1991) p. 1; regarding activist investors/hedge funds, see A. Brav, W. Jiang, F. Partnoy and R. Thomas, ‘Hedge Fund Activism, Corporate Governance, and Firm Performance’, 63 Journal of Finance (2008) pp. 1729–75: abnormal returns of 5%–7% within 20 days; A. Klein and E. Zur, Hedge Fund Activism, NYU Working Paper No. CLB-06-017 (2007), available at SSRN: <http://ssrn.com/abstract=1291605>: abnormal returns of 10% within 30 days; M. Mietzner and D. Schweizer, Hedge Funds versus Private Equity Funds As Shareholder Activists — Differences in Value Creation, Working Paper (2007), available at SSRN: <http://ssrn.com/abstract=1015714>: abnormal returns within 2 times 20 days; R.M. Greenwood and M. Schor, Investor Activism and Takeovers (2008), at p. 29, available at SSRN: <http://ssrn.com/abstract=1003792> Regarding passive investors: C. Clifford, Value Creation or Destruction? Hedge Funds as Shareholder Activists (2007), available at SSRN: <http://ssrn.com/abstract=971018>, at p. 42 (comparing ss. 13D and 13G filings, showing a premium of 1.74% for passive and 3.44% for active investors). These studies are confirmed by the Financial Services Agency, Disclosure of Contracts for Difference (CP 07/20), supra n. 2, annex 3, at p. 14. For informed traders who are unlikely to pursue activist strategies (such as mutual funds), see A. Bozcuk and M.A. Lasfer, ‘The Information Content of Institutional Trades on the London Stock Exchange’, 40 Journal of Financial and Quantitative Analysis (2005) p. 621, at p. 631; Bishop, ibid., at p. 19.

    Article  Google Scholar 

  20. See Zetzsche, supra nn. 16 and 18.

  21. The Continental/Schaeffler case provided evidence for this statement, see Zetzsche, supra nn. 16 and 18.

  22. See, for example, G. Bachmann, ‘Rechtsfragen der Wertpapierleihe’ [Legal Questions Relating to Securities Lending], 5 Zeitschrift für das gesamte Handels- und Wirtschaftsrecht (2009) p. 173; U. Noack and D.A. Zetzsche, in U. Noack and W. Zöllner, eds., Kölner Kommentar zum Aktiengesetz [Cologne Commentary to the Stock Corporation Act], 3rd edn. (Cologne, Wolters Kluwer 2010), re s. 123 AktG ¶ 265.

    Google Scholar 

  23. For forfeiture of rights as penalty for violation of disclosure rules, see Zetzsche, supra n. 18. Under current German law, forfeiture of rights does not extend to call options, see s. 28 WpHG (Securities Trading Law).

  24. For a description and analysis of secret acquisition schemes, see Zetzsche, supra n. 16.

  25. Cf. Zetzsche, supra n. 16.

  26. For a proposal, see Zetzsche, supra n. 16.

  27. Stamp Duty Reserve Tax (SDRT) applies only to transfers of stock and marketable securities and to certain transfers of interest in partnerships. Moreover, investors purchasing units from a fund manager are not charged SDRT. But when units are surrendered, the fund manager is charged SDRT. See: <http://www.hmrc.gov.uk/sdrt/intro/basics.htm>.

  28. The US Treasury’s ‘proposed framework’ was outlined in a letter dated 13 May 2009 from United States Secretary of the Treasury Timothy F. Geithner to a number of Congressional leaders (<http://www.financialstability.gov/docs/OTCletter.pdf>). See also Mr Geithner’s written Testimony before the House Financial Services and Agriculture Committees on 10 July 2009, available at: <http://www.house.gov/apps/list/hearing/financialsvcs_dem/otc_derivatives_07-09-09_final.pdf>.

  29. See Fleischer and Schmolke, supra n. 10, at p. 404 et seq.

  30. For a theoretical exercise, see supra n. 16.

Download references

Author information

Authors and Affiliations

  1. Faculty of Law, Heinrich Heine University, Düsseldorf, Germany

    Dirk A. Zetzsche LL.M. (Assistant Professor)

Authors
  1. Dirk A. Zetzsche LL.M.
    View author publications

    You can also search for this author in PubMed Google Scholar

Additional information

I am indebted to Daniel Awrey, Brian Cheffins, Alexander Helgardt, Sebastiaan Hooghiemstra, Matteo Gargantini and K. Ulrich Schmolke for their criticism and encouragement. All errors and omissions remain my own responsibility.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Zetzsche, D.A. Against Mandatory Disclosure of Economic-only Positions Referenced to Shares of European Issuers — Twenty Arguments against the CESR Proposal. Eur Bus Org Law Rev 11, 231–252 (2010). https://doi.org/10.1017/S1566752910200034

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1017/S1566752910200034

Keywords

Search

Navigation