Obligation to launch a mandatory bid and disclose holdings may also arise based on a derivatives contract 

In autumn 2008, the FIN-FSA requested market participants’ opinion on whether an obligation to launch a mandatory bid, in accordance with chapter 6, section 10 of the Securities Markets Act, may arise based on a derivatives contract (FIN-FSA’s consultation paper No. 5/2008, J. No. 4/121/2008). Of the interested parties, 17 submitted an opinion. In addition, 3 respondents informed that they will not issue an opinion on the matter. The opinions received and the feedback on the opinions has been published on the FIN-FSA’s website.

Respondents supported more explicit regulation on the obligation to launch a mandatory bid in connection with a derivatives contract

Some respondents issued only a general opinion and did not take a stand on specific questions presented in the consultation paper. Several respondents considered that the obligation to launch a mandatory bid in connection with a derivatives contract, as such, is a matter that may require clearer and more explicit regulation. The majority of respondents were however of the opinion that a categorical interpretation that an obligation to launch a mandatory bid would arise, already based on a derivatives contract, would be contrary to the wording of the provisions of the Securities Markets Act. These respondents proposed that the FIN-FSA raise the issue of the obligation to launch a mandatory bid based on a derivatives contract in connection with the reform of the Securities Markets Act being prepared by the Ministry of Finance. Some respondents shared the view of the FIN-FSA presented in the consultation paper and supported the view that Standard 5.2c should discuss the obligation to launch a mandatory bid in connection with a derivatives contract.

Some respondents also noted that derivatives contracts should be treated as consistently as possible in terms of the obligation to launch a mandatory bid and the obligation to disclose holdings, by virtue of chapter 2, section 9, of the Securities Markets Act. Additionally, some respondents also commented that in addition to derivatives contracts there are various types of other instruments, eg hybrid loans, through which it is possible to actually influence a company or its decision making process.

De facto control over shares creates an obligation to launch a mandatory bid

The FIN-FSA takes the view that through a derivatives contract it is possible to exercise de facto control over shares that are subject to the derivatives contract. The FIN-FSA holds that the method of settling a derivatives contract (either cash or equity settlement) is irrelevant, as such, in cases where the holder of the derivatives contract actually has the opportunity to exercise control related to the shares that are subject to the derivatives contract.

Under chapter 6, section 10 of the Securities Markets Act and the related preparatory work, the obligation to launch a mandatory bid is based on the portion of voting rights. The total votes of the target company are calculated on the basis of the shares issued. Hence, financial instruments that entitle the holder to acquire shares to be issued at a later date (eg option rights and other special rights as referred to in the Companies Act) are not taken into account in calculating the voting rights of the shareholder before the shares have been entered in the trade register. Instead, derivatives contracts that relate to shares already issued can be taken into consideration in calculating the voting rights of the shareholder if the holder of the derivatives contract de facto has an opportunity to exercise control related to the shares subject to the derivatives contract.

The FIN-FSA assesses the parties’ actual activities based on the provisions of chapter 6, section 10 of the Securities Markets Act and the criteria for assessing acting in concert presented in Standard 5.2c. When assessing parties' acting in concert the FIN-FSA takes into account derivatives contracts settled in cash and equities. To avoid conflicts of interpretation, the FIN-FSA urges the parties to contact the FIN-FSA in advance if they are planning a derivatives contract or other arrangement in which the parties’ total interest (so-called long position) relates to shares that represent over three-tenths of the voting rights of shares of a company whose shares are admitted to public trading.

Obligation to disclose holdings also arises based on de facto control over shares

The FIN-FSA draws the parties’ attention to the fact that according to chapter 2, section 9, subsection 2 of the Securities Markets Act, the portion of holdings or voting rights establishing a disclosure obligation also includes the portion of holdings the use of which the shareholder, alone or together with a third party, may decide on under a contract or otherwise. Consequently, the holder of a derivatives contract settled in cash will also be obligated to disclose holdings if the holder de facto has an opportunity to exercise control related to shares subject to the derivatives contract. In addition, even though a derivatives contract settled in equities were, as such, disclosed as a contract which, when effected, results in the threshold being reached or crossed, a separate disclosure obligation arises in these cases on the actual portion of voting rights.

The FIN-FSA will pay special attention to the use of derivatives contracts both in terms of obligation to launch a mandatory bid and disclose holdings. In addition, the FIN-FSA has proposed to the Ministry of Finance that regulation concerning the increased use of derivatives contracts be assessed in more detail in connection with the reform of the Securities Markets Act, currently being prepared, particularly in terms of obligation to launch a mandatory bid and to disclose holdings.

17 June 2009