efficient enforcement of shareholder transpareny rules – lessons from antitrust leniency
DESCRIPTION
Efficient enforcement of Shareholder Transpareny Rules – Lessons from Antitrust Leniency. Dr. Dirk Zetzsche, LL.M. (Toronto) Center for Business & Corporate Law Heinrich Heine University Düsseldorf. The Issue. Management. Informational Advantage. - PowerPoint PPT PresentationTRANSCRIPT
Efficient enforcement of Shareholder Transpareny Rules – Lessons from
Antitrust Leniency
Dr. Dirk Zetzsche, LL.M. (Toronto) Center for Business & Corporate LawHeinrich Heine University Düsseldorf
The IssueS
hareholders
Management
InformationalAdvantage
Bid-related information(mandatory, voluntary)
Stock Price
Bidder
Art. 9 – 16 of Transparency Directive
Shareholder ≤ 5%, 10%, etc.
notifies Issuer discloses Public
Art. 5 Takeover Directive
Shareholder & persons- acting in concert
- acting on behalf ofcontrols Issuer
All outstanding voting shares
Mandatory Bid
Defined by MS (30%, 1/3)
I will not address ...
Efficiency / Desirability of - Disclosure- Takeovers- the European Mandatory Bid Rule
Stock Price Reactions to Disclosure of Major Shareholdings
Fair Stock Price in the Context of Takeovers
(Desirable) Design of Shareholder Transparency Rules
Structure
A. Circumventive Schemes
B. Inefficiency of Traditional Enforcement
C. A Self-Enforcing Scheme
D. Real-World Issues
The Issue
‘Surprise attacks’ on issuers may - circumvent information and pricing
process of takeover bids- increase risk of shareholder
expropriation through ‘unfair pricing’
Disclosure of Major Holdings Mandatory Bid upon control
acquisition
Some investors do not play by the rules. How can we make them play righteously?
Equity Strategy (Wolf pack)
TargetHF 5
HF 3
HF 2
HF 1
HF 8
HF 7
HF 4
HF 6
Service Strategy
Continental
Schaeffler(Swap Long-Leg)
8%
RBS
N.N.
DreBa
CoBa
MLCoordinator
UniCredit LBBW
CrS
TRS (28%)
Hedging Agreements (Swap Short-Leg)
UBS28%
+ ?
Cash-Settled Total Return Equity Swap / CFD
• Fees• Interest on virtual bond at EURIBOR / LIBOR• Making good for decreasing stock price
Short Party(bank)
Target company (issuer)
• Stock price increase• Dividends
Long Party(investor)
B. Inefficiency of Traditional Enforcement
Ex ante enforcement
Market supervision (trading patterns)
Compliance & Whistle blowing by investment firms
Investigation of suspicious behaviour
Ex post enforcement
Civil sanctions (investor suits)
Administrative Penalties (fines)
Criminal Sanctions (market manipulation, insider trading)
Ex-ante Enforcement depends on Efficiency of Ex-post
Enforcement
Without hard evidence any enforcement action is futile
Participants rely on non-formal (‚oral‘) agreements
Key Issue: ‚Efficient‘ Enforcement
1) Market participants are required to disclose their shareholdings which they hold indirectly through the equity strategy or the intermediary-based strategy
2) There is no evidence other than the scheme participants’ testimony.
3) The longer the acquisition strategy remains undisclosed, the larger is the proportion of the target’s share that the members of the scheme can assemble without the market noticing.
4) Stock prices will respond to first time disclosure of major shareholdings by significant abnormal returns.
5) Once the major shareholding has been disclosed the stock price remains higher than prior to the disclosure.
Assumptions
Incentives (present)
• Financing follow-up acquisitions• Reputation• Hostage to one-sided termination right in derivative contracts
• Announcement Effect• Reduced Price for Target‘s Shares
Profit
S
hare in
Issu
er‘s E
quity
Dura
tion of S
ecrecy
C. A Self-enforcing Scheme: Equity Strategy
Returns can only be obtained if strategy succeeds no member may disclose its
holding or the plan too early
Generate prisoner’s dilemma => risk of cheating
Incentive: Re-direct wealth inside the group as premium for first disclosing member
Redistribution
Stock Price Conti June – September 08
01020304050607080
pre-disclosu
re (t0)
pre-disclosu
re (t1)
Disclosu
re (t2)
post disc
losure (t
3)
post disc
losure (t
4)
Conti'sShare Price
17 € / Sh, or +20%
3 Explanations for the Announcement Effect
Lesser Managerial Agency Costs due to better Shareholder Monitoring due to a greater level of
Concentrated Ownership
Acquisition signals Under-Evaluation of the issuer‘s Shares which was Dectected by the Acquirer Investing in these Shares; other Investors Internalize the Signal
by Purchasing these Shares
Acquisition May Result in Mandatory Bid at Favourable Terms / a Competing Bid
Equity Strategy: Redistributing the Announcement Premium
• Redistribution of Announcement Premium („Information Value“) on the shares held by the pack to the member disclosing the scheme (referred to as Premium Claim [PC])
• If there is not stock price response then there was no value to the information
• Trust / Reputation (Long-term) Profit (Short-term)
Issue 1: Finite vs. Infinite Games
Funds are finite players (7 bis 12 yrs)
Fund Managers are finite players
Issue 2: Perverse Incentives?
PC1 – TC1 – ∑(P2-n) > 0
Who has the best incentives to disclose?
Proactive Factors include size of prey, knowledge, time of membership, last game situations Player with the smallest share of
the pack Player with the best knowledge of
the members (‘spider in the web’) Player with the shortest
membership (no reputation to loose, no risk investment in trustworthiness of others)
In the last game you can only win. Being excluded from future wolf packs does not harm
Who has the best incentives to disclose?
Counter-Factors include Risk of exclusion from future
wolf packs (‘the lonely wolf’) Being the second (‘winner
takes all’) => undisclosed regulatory action
Lack of hard evidence (‘in writing’) => hampers enforcement
What is the likely response of Wolf Pack Members?
Require immediate disclosure (legally bullet proof)? No premium, no wolf packing
Restrict membership?- to (apparently) trustworthy members- by size (probability of cheating increases with size)
Reduces effectiveness of the pack
Require deposit of new members ( Increases costs of participation, renders wolf packing less profitable
Combinations of the above?
C. A Self-Enforcing Strategy: Service Model
Originator not incentivized
Banks: „Perennial Players“- Profit from individual transaction low- Investment in client-oriented reputation (ML, DB)
But- Kicking out a competitor (?)
! Information by non-involved parties („rumours“)!
PC may incentivize „Market Detectives“
„honest“ whistle-blowers
Disciplin: Market Abuse / Securities Fraud Rules
Service Strategy: Premium Claim desirable?
Banks should be stable and financially sound
Large wealth transfer may hurt bank stakeholders (deposit holders etc.)
Systemic Issues
D. Real-World Issues: Consider TC
TargetHF 5
HF 3
HF 2
HF 1
HF 8
HF 7
HF 4
HF 6
Regulator notifies
lien on share value
LitigationPC1 – TC1 – ∑(P2-n) > 0
Equity Strategy (Wolf pack)
HF 5HF 3
HF 2
HF 1
HF 8
HF 7
HF 4
HF 6
Regulator notifies
lien on premium
Der
ivat
ive
Litig
atio
n
D. Real-World Issues: Evidence False Rumours
(Lesser) premium (10-20%) for second, if supported by further evidence ( lower premium for first)
Standard of Evidence / Preliminary Proceedings
Evidence Filtered by Regulators
Exclude Instigator / Originator / Organizer ...
Lessons from • Antitrust Leniency• False Claims Act
• Protected Disclosure (‚Whistleblowing‘)
Conclusion
Equity Strategy• Corporate Incentive
• Corporate and Individual: - Leniency
- Protection from SL
Service Strategy• Individual Incentive
• Application of Market Abuse / Securities Fraud Rules
Equilibrium likely !Equilibrium unlikely, but better
than the current state !