News
The Secretary to the Code Committee
The Takeover Panel
10 Paternoster Square
London EC4M 7DY
5 February 2007
Dear Sirs
Re: REVIEW OF THE PANEL’S DERIVATIVES AND OPTIONS REGIME
Thank you for the opportunity to share our views on the effectiveness of the above. Our response is focussed on the rules changes in regard to notification of major shareholdings in an offer period. As this is a critical subject for all our members, and where some strong views are held, we are particularly pleased to have the chance to put forward our members’ opinions.
Introduction to the Investor Relations Society
The Investor relations Society (IRS) is the UK’s professional body for investor relations practitioners. Formed in 1980, it has over 600 members drawn both from the UK and overseas, including the majority of the FTSE 100 and much of the FTSE 250. Members’ disciplines include finance, treasury, corporate affairs and company secretariat, as well as investor relations.
The Society’s primary objectives are to:
• Promote good relations between listed companies, their shareholders and potential investors.
• Provide education and training.
• Support high ethical and professional standards in the practice of investor relations.
• Increase awareness of investor relations techniques and best practice.
• Represent the views of members to regulatory bodies, the investment community and government.
• Carry out research and publish information.
• Provide a forum for members to exchange views and share experiences.
General response
The Investor Relations Society is a very strong supporter of the principles of the existing UK major shareholding disclosure regime as provided under the FSA’s listing Rules; indeed we are firmly of the belief that this regime should be extended to synthetic ownership, in instruments such as Contracts for Difference. We also believe that an absence of disclosure of stock lending situations causes problems for Investor Relations Officers in identifying beneficial owners with consequent problems of communication.
We believe therefore that the Takeover Panel is to be applauded for its initiative in introducing these disclosures during an Offer Period, and that from a corporate perspective, the regime is working very well. However, we note the failure of the Companies Act 2006 to include an explicit provision for the obligation of investors holding an economic interest in a stock through a holding via CFDs, swaps or other derivative instrument to disclose their interest in their responses to enquiries by the company under Section 793 of the Act.
In preparing for our response to this consultation, we polled the members of the Investor Relations Society, representing as they do the vast majority of those dealing with shareholder communication tasks in FTSE 350 companies.
They were overwhelmingly of the view, noted above, that the existing Takeover Panel regime was working well. They also added that they believed that a similar regime should be implemented more broadly – ie outside of the Offer Period. Members of the IRS believe that long CFDs should be treated by the FSA Listing Rules in exactly the same way as more traditional holdings to promote transparency and good communication between companies and their owners.
Although the Companies Act 2006 failed to provide an explicit reference to synthetic ownership in its definitions of interest, it did give the FSA powers to introduce a disclosure regime to cover such interests. We noted in the FSA’s Policy Statement PS 06/11, that the FSA identified 3 potential market failures. From our members’ perspective, the second of these, identified under 6.5.ii, is critical although we believe that the risk is not simply “the risk of stealth takeovers by predatory investors” – rather it is a wider risk.
Many of the IRS' corporate members experience significant difficulties in identifying ownership of their company's stock on a day-to-day basis because of the increasing use of derivatives by both traditional and hedge fund managers. Increased levels of proprietary trading by investment banks have added to these difficulties, especially where this trading is linked to third party derivative contracts which are often themselves linked to predatory activity.
We also noted that the FSA offered 3 potential policy options. Our members believe that option to “introduce a disclosure regime, similar to the major shareholder notification regime which would target holders of ‘economic interest in shares’ such as CFDs” is the option to be pursued, for the following reasons:
It follows the Takeover Panel’s lead, which has proved resilient, and would introduce consistency.
It treats all classes of people with an economic interest in the company as equals.
It uses boundaries and thresholds that everyone is used to, creating the maximum transparency for all market participants.
It uses the existing methods of transmission and publishing as currently exist. Hence the marginal extra cost to the market is, at worst, very small.
Finally, we noted that the FSA plans to analyse the effectiveness of the Takeover Panel’s regime, before deciding its next steps. The members of the Investor Relations Society believe that the Panel’s rule changes have worked extremely well, and we hope that this encourages the FSA to extend them.
Thank you for the opportunity to respond to your Consultation.
Yours sincerely
Mark Hynes
Chairman, The Investor Relations Society Policy Committee
Published: 5 February, 2007