On 4 April 2020 the Financial Markets Regulator (AMF) heavily penalised a hedge fund for omitting to disclose its objectives regarding a takeover bid after it had purchased large amounts of equity swaps in shares of the company subject to the takeover.
Reporting obligations during takeover bids
In order to guarantee that the stock exchange markets remain transparent and that all material information in connection with a listed company is communicated to all investors, the AMF's General Regulation contemplates certain disclosure obligations when an investor's participation significantly increases or substantially decreases.
Investors that hold at least 5% of the share capital or voting rights of a company subject to a takeover bid, or that have increased their holding to 1% or more of the company's equity or voting rights, must report to the AMF daily on their transactions involving:
- the transfer of the targeted equity; or
- financial instruments with similar economic effects to that of owning said securities.
The General Regulation further requires investors which cross the threshold of holding 2% or 5% of a target's share capital to immediately report to the AMF the objectives that they intend to pursue with regard to the ongoing offer.
Such thresholds are determined based on transactions involving listed shares, but other transactions also fall within the scope of the AMF's rules. Specifically, the "Takeover bids" section of the General Regulation provides that for the purpose of determining shareholding percentages, direct shareholdings as well as "transaction[s] involving financial instruments or agreements that have similar effect to that of owning said securities" are taken into account.
In the case at hand, a hedge fund entered into a series of derivatives instruments, the underlying instruments of which were the shares of a company subject to a takeover bid. During the two months in which the fund made the transactions, its economic exposure became equivalent to 2% and then 5% of the target's share value. As such, it reported the transactions in compliance with the General Regulation, as well as its intentions to continue acquiring derivatives and pursue their settlement in shares, depending on market conditions.
It was only after settling the equity swaps in shares, and at the request of the AMF, that the fund reported not wanting to tender the shares to the offer.
The AMF penalised the fund for failing to report its intentions regarding the ongoing offer immediately after it had crossed the thresholds. It dismissed the fund's argument that at the time of the transactions, it had been uncertain as to its ability to settle the derivatives in shares. The AMF held that the fund's obligation to disclose its intentions regarding the ongoing public tender did not depend on its actual ability to acquire the target's shares. On the contrary, it reiterated that a securities purchaser's intentions with respect of a public tender that must be immediately reported are not deemed to be firm and final and that any change of intentions following the initial report must be subject to a new disclosure.
The fact that equity swaps may ultimately be settled in cash or in equity is irrelevant – the mere fact that these financial contracts can give the equity swap holder access to shares of a company that is the subject of a takeover bid is enough for them to fall within the scope of the takeover bid legislation. Thus, the disclosure requirements apply to any holder of financial contracts (eg, options contracts, warrants, contracts for difference and equity swaps) if the underlying instruments are the target's shares.
