Hidden Ownership19 May 2021 03:20
Perhaps the FCA should focus on these practices in future .......
Hidden Ownership through Cash-Settled Equity Swaps.
Derivatives are an important class of financial instruments that has taken centre 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.
For example, an investor that intends to avoid disclosing to the market an ownership position in a public company may do so by acquiring from a derivatives dealer a long cash-settled swap covering the equity position.
Depending on what the investor’s ultimate intentions are, should it decide to exercise the voting rights resulting from the equity position, it may terminate the swap arrangement and purchase the underlying shares from the dealer.
As just described, this hidden ownership scheme allows the undisclosed retention of de facto voting rights exercisable at the investor’s discretion.
GLA