Netherlands: Economic Interests In Listed Companies: Scope Of Disclosure Obligation Extended

With effect from 1 January 2012 the statutory obligation to disclose substantial shareholdings in listed companies also includes certain cash-settled instruments, such as cash-settled equity swaps and stock options. Although such economic interests do not confer a legally enforceable right on the investor to acquire the underlying shares, they can still in practice result in the acquisition of those shares by the investor. The Dutch Authority for the Financial Markets (AFM) has introduced a policy rule regulating certain technical and operational aspects of the extension of the disclosure obligation. Nonetheless, uncertainty about the scope of this obligation will continue to exist in practice.

Background

Under chapter 5.3 of the Dutch Financial Supervision Act (Wet op het financieel toezicht; DFSA) investors are required to disclose substantial holdings of shares and/or voting rights in listed companies to the AFM. Any person who knows or should know that as a result of acquiring or disposing of shares or voting rights, his stake will reach, exceed or fall below a statutory threshold (currently 5, 10, 15, 20, 25, 30, 40, 50, 60, 75 and 95 percent) must immediately notify the AFM. The notifications are entered in a public register on the AFM website. These rules, which have been in force for many years, were amended on 1 January 2012 to extend the disclosure obligation to include certain cash-settled instruments. The new rules were introduced through amendments to the DFSA and the Disclosure of Major Holdings and Capital Interests in Issuing Institutions Decree. Based on those amendments, the AFM has published a 'Guideline for Shareholders', which replaces its previous 'Information Brochure for Shareholders'.

Under the new rules, long positions resulting from cash-settled instruments are deemed to contribute to shareholdings (but not to voting rights, at least not in the technical sense) for the purpose of the disclosure obligation. Unlike physically-settled contracts, cash-settled instruments do not confer a legally enforceable right to acquire the underlying shares. In many cases, the cash-settled instrument is a contract (an OTC derivative) between a bank and a counterparty/client which provides for payment of a cash sum that depends on the value of the underlying shares. The new rules deliberately do not provide an exhaustive list or definition of such cash-settled instruments, but instead include a catch-all provision (see below under 'Extension of scope of disclosure obligation for shareholdings').

The reason for extending the disclosure obligation is that in practice certain cash-settled instruments can, despite the absence of a legal right to acquire the underlying shares, nonetheless result in their acquisition by the party who, pursuant to that instrument, holds a long position in those shares. In many cases the counterparty (often a bank) will hedge its short position by acquiring the underlying shares. In that event, it is by no means unlikely that the counterparty/bank, in the absence of any direct interest of its own, will be prepared to exercise the voting rights attached to the shares in accordance with the wishes of the party/client holding the long position. Moreover, in such a case the bank may often be willing to transfer the underlying shares to that party/client on maturity of the instrument (even though it has no obligation to do so). There have been some examples in Europe and America of parties that have covertly built up substantial economic positions in listed companies in this way using OTC derivative contracts with a number of banks. This lack of transparency is considered to be undesirable. It enables a listed company to be 'raided' by a party with an indirect (full or partial) controlling interest, and a potential bidder to build up an interest in a listed company without this being reflected in the price of the relevant shares. Transparency in respect of cash-settled instruments should contribute to realistic price formation.

Scope of disclosure obligation extended

As noted above, since well before 1 January 2012 investors have been required to notify their holdings of shares and/or voting rights in listed companies to the AFM when those holdings reach, exceed or fall below a statutory threshold. The listed company can be a Dutch public limited liability company (naamloze vennootschap) whose shares are admitted to trading on a regulated market within the EU/EEA or a foreign legal entity whose shares are admitted to trading on a Dutch regulated market (such as NYSE Euronext in Amsterdam).

Under section 5:45 of the DFSA, a notification obligation can also arise other than through the holding of shares (or voting rights). For example, depositary receipts for shares and rights to acquire shares or voting rights (such as convertible bonds and call options where the investor has the right to acquire the underlying shares upon settlement) are equated with shares for the purpose of the disclosure obligation.

As of 1 January 2012 the scope of section 5:45 of the DFSA has been widened to include three more subcategories. First of all, a new subsection 10(a) has been inserted, which provides that a person is also deemed to hold shares if he has a financial instrument (i) whose rise in value depends in part on the rise in value of the underlying shares or on dividend or other payments on those shares (in other words, a long position must be held in those shares), and (ii) which does not entitle him to acquire shares in a listed company (i.e. it is a cash-settled financial instrument). The use of the statutory term 'financial instrument' (which is broadly defined in section 1:1 of the DFSA) is in itself sufficient to bring numerous contracts within the extended scope of the disclosure obligation. Moreover, the words 'depends in part' (in subsection 5:45(10)(a)) are intended, among other things, to clarify the fact that an increase in the value of an instrument may sometimes also depend on factors other than an increase in the value of the underlying shares, as occurs in the case of indexes and baskets of shares. Also, the increase in the value of an instrument need not exactly reflect the increase in the value of the underlying share (see also below under 'AFM policy rule').

Second, the legislator has deliberately left open the definition of cash-settled instruments by including a catch-all provision in the new subsection 10 of section 5:45 of the DFSA, under which a person who has entered into a contract (other than a cash-settled financial instrument) that gives him an economic position comparable to that of a shareholder in a listed company is also deemed to hold shares for the purposes of the disclosure obligation. This catch-all definition was included on the grounds that an exhaustive list would take insufficient account of future financial innovations and that the disclosure obligation could thus be circumvented by means of contracts that fall outside the definition of 'financial instrument'. The AFM has not adopted the suggestion made by a number of market participants to issue a non-exhaustive list specifying which financial instruments and other contracts must in any event be notified.

Third, under the new subsection 10 of section 5:45 of the DFSA a person who may, by virtue of an option, be obliged to buy shares in a listed company is also equated with a shareholder. The legislator has justified the inclusion of such options (which are not cash-settled but physically-settled) on the grounds that this can prevent the circumvention of other provisions.

No netting of long and short positions

As already noted, the extension of the disclosure obligation relates only to long positions (where the value of the instrument increases in the event of an increase in the value of the underlying shares). Netting long and any short positions is not permitted because this would, according to the legislator, not be conducive to transparency.

Some market participants had suggested to the AFM that parties who disclose economic interests should be given the opportunity to arrange for an explanatory note to be entered in the notification register if they have also assumed obligations in exchange for the economic interest. It is, after all, quite conceivable that all or part of the interest that is disclosed serves as a hedge for, or is otherwise related to, such obligations. Without an explanatory note the party's net position would not be apparent. However, the AFM has not adopted this suggestion, at least for the time being.

AFM policy rule

The legislator left it to the AFM to provide guidance on the technical and operational aspects of the disclosure obligation. For this purpose the AFM published its 'Policy rule for the method of calculating shares to which financial instruments relate and the notification requirement for indices and baskets' on 30 December 2011 (the 'policy rule').

Delta-adjusted calculation

In its policy rule the AFM explains how the number of shares in the issuing institution to which the relevant cash-settled financial instruments or contracts relate should be calculated. In principle, the delta-adjusted calculation method should be used. This involves calculating the number of shares to be notified by multiplying the (nominal) number of underlying shares by the delta of the instrument in question. In response to reactions to the consultation version of the policy rule, the AFM has also agreed that the number of shares may be calculated on a nominal basis until 1 October 2012. However, when cash-settled instruments are notified on the basis of this nominal method, a document should be included as an explanation with the notification for publication in the register. The document should in any event include the exercise price and the number of shares on a nominal basis so that market participants can calculate the delta-adjusted position themselves, using other publicly available information. The party subject to the disclosure obligation may include additional information that can enhance the transparency of the position. From 1 October 2012, however, notification may be made only on the basis of the delta-adjusted calculation method.

Indices and baskets

As explained above, indices and baskets of shares (of which at least one share is in a listed company) will, in principle, now fall within the scope of the disclosure obligations for shareholders. However, the AFM has indicated that instruments relating to sufficiently diversified indices or baskets need not be included when determining the interest in a listed company. The policy rule is more specific: shares in an index or basket need be included in the calculation only if (i) they represent 1% or more of the class in issue of the listed company concerned, and/or (ii) they represent 20% or more of the value of the securities in the index or basket.

Manner of disclosure

When a position in cash-settled instruments is notified to the AFM, certain extra information must now be disclosed (in addition to the information that already had to be supplied under the rules in force before 1 January 2012). The extra information is as follows:

  • the type of financial instruments or contracts;
  • the expiry date of the financial instruments or contracts;
  • the number of shares in the listed company to which the financial instruments or contracts relate; and
  • insofar as the position to be notified may result in an obligation to buy shares in a listed company, the date on which or the period within which this obligation may arise.

For the time being the AFM considers that the present notification form, which is available on its website (www.afm.nl), is sufficient for notifications of cash-settled instruments. However, it is not yet clear how the AFM will classify these notifications in the public register on its website.

Transitional provisions

The transitional provisions introduce an initial disclosure obligation for persons who, on account of the new disclosure requirements, reached or exceeded the first disclosure threshold of 5% on 1 January 2012 and have not previously made a notification under the old disclosure obligations. Such persons must notify the AFM within four weeks of the entry into force of the new rules (i.e. no later than on 29 January 2012, according to the AFM).

Persons who made a notification before 1 January 2012 under the old disclosure rules will be subject to an initial disclosure obligation only if the number and type of the shares already notified have changed as a result of the new rules since the last notification (under the old rules). The altered composition of the portfolio must also be notified to the AFM within four weeks of the entry into force of the new rules.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions