Efficient enforcement of Shareholder Transpareny Rules – Lessons from Antitrust Leniency

1. 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

2. The Issue Management InformationalAdvantage Bid-related information(mandatory, voluntary) Shareholders Bidder Stock Price

3. Art. 9 – 16 of Transparency Directive Public Shareholder ≤ 5%, 10%, etc. Issuer notifies discloses

4. Art. 5 Takeover Directive Defined by MS (30%, 1/3) Shareholder & persons- acting in concert - acting on behalf of Issuer controls Mandatory Bid All outstanding voting shares

5. 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

6. Structure • Circumventive Schemes • Inefficiency of Traditional Enforcement • A Self-Enforcing Scheme • Real-World Issues

7. 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?

8. Equity Strategy (Wolf pack) HF 1 HF 2 HF 3 HF 4 Target HF 5 HF 6 HF 7 HF 8

9. Service Strategy Schaeffler (Swap Long-Leg) TRS (28%) ML Coordinator Hedging Agreements (Swap Short-Leg) 28% 8% CoBa + ? DreBa Continental N.N. CrS RBS UBS UniCredit LBBW

10. Fees • Interest on virtual bond at EURIBOR / LIBOR • Making good for decreasing stock price Short Party (bank) Long Party (investor) • Stock price increase • Dividends Target company (issuer) Cash-Settled Total Return Equity Swap / CFD

11. B. Inefficiency of Traditional Enforcement Participantsrely on non-formal (‚oral‘) agreements 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-anteEnforcementdependson Efficiency of Ex-post Enforcement Withouthardevidenceanyenforcementactionisfutile

12. Key Issue: ‚Efficient‘ Enforcement Assumptions • Market participants are required to disclose their shareholdings which they hold indirectly through the equity strategy or the intermediary-based strategy • There is no evidence other than the scheme participants’ testimony. • 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. • Stock prices will respond to first time disclosure of major shareholdings by significant abnormal returns. • Once the major shareholding has been disclosed the stock price remains higher than prior to the disclosure.

13. Incentives (present) • Announcement Effect • Reduced Price for Target‘s Shares Profit  Share in Issuer‘s Equity  Duration of Secrecy • Financing follow-up acquisitions • Reputation • Hostage to one-sided termination right in derivative contracts

14. 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

15. Redistribution 17 € / Sh, or +20%

16. 3 ExplanationsfortheAnnouncementEffect Lesser Managerial Agency Costs due tobetter Shareholder Monitoring due to a greaterlevelofConcentrated Ownership AcquisitionsignalsUnder-Evaluation oftheissuer‘s Shares which was DectectedbytheAcquirerInvesting in these Shares; other Investors Internalizethe Signal byPurchasingthese Shares Acquisition May Result in MandatoryBidatFavourable Terms / a CompetingBid

17. 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) PC1 – TC1 – ∑(P2-n) > 0 • Issue 1: Finite vs. Infinite Games • Funds are finite players (7 bis 12 yrs) • Fund Managers are finite players • Issue 2: Perverse Incentives?

18. 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

19. 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

20. 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?

21. C. A Self-Enforcing Strategy: Service Model • ! Information by non-involvedparties („rumours“)! • PC mayincentivize „Market Detectives“ • „honest“ whistle-blowers • Disciplin: Market Abuse / Securities Fraud Rules • Originator not incentivized • Banks: „Perennial Players“ • Profit from individual transaction low • Investment in client-oriented reputation (ML, DB) • But • Kicking out a competitor (?)

22. Service Strategy: Premium Claim desirable? • Banks should be stable and financially sound • Large wealth transfer may hurt bank stakeholders (deposit holders etc.) • Systemic Issues

23. D. Real-World Issues: Consider TC PC1 – TC1 – ∑(P2-n) > 0 Litigation Regulator notifies HF 1 lien on share value HF 2 HF 3 HF 4 Target HF 5 HF 6 HF 7 HF 8

24. Equity Strategy (Wolf pack) Regulator notifies HF 1 lien on premium Derivative Litigation HF 2 HF 4 HF 3 HF 8 HF 5 HF 7 HF 6

25. 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 ... • Lessonsfrom • Antitrust Leniency • False Claims Act • ProtectedDisclosure (‚Whistleblowing‘)

26. Conclusion • Equity Strategy • Corporate Incentive • Corporate and Individual: - Leniency • - Protectionfrom SL • Service Strategy • Individual Incentive • Applicationof Market Abuse / Securities Fraud Rules Equilibrium likely ! Equilibrium unlikely, but betterthanthecurrentstate !

27. Thanks!  Dirk.Zetzsche@uni-duesseldorf.de PleasevisitCBC‘sworkingpaperseriesat SSRN