Home > Regulación, Uncategorized, Voting Rights > Hidden ownership and disclosure recommendations

Hidden ownership and disclosure recommendations

We can define Hidden Ownership as the situation of an economic agent having an economic interest over a certain share, over which he hasn`t got any control or voting right, not being the owner of the share. The derivative market is the tool with which this result is usually built, (a future contract, a call option, an equity swap are valid instruments for that).

Hidden owners may also negotiate with short traders in the transaction that they will vote the shares according to the long traders`preferences. In that case the long trader is a hidden and morphable owner. Morphable ownership also appears when the economic risk holder may assume he will be able to decide the sense of the vote of the subjacent shares, whether by agreement with the short trader or because the case is clear for him that the normal solution at the settlement date will be a share acquisition from the short trader, that would buy the shares then, or would have had the shares since the beginning, (imagine the case of an illiquid market for these shares).

The huge growth of derivative markets has led to a parallel increase in the number of decoupling (of economic and control interests) incidents, both empty voting (see our post dated October 7th 2012) and hidden ownership. In the case of a hidden owner, the bank facilitating the derivative usually becomes an empty voter, (hedging his position purchasing shares in the stock market). As the bank has no economic interest with the company, but a commercial interest in the customer, it can eventually accept to vote with the customers`preferences, this one becoming also a morphable owner. As derivatives are today mostly cash-settled, there is no limit to its amount, so that hidden ownership is now easier than it was.

The concern with decoupling is about efficiency, fairness, (decoupling is used by hedge funds, industries, but not by small investors), and regulation circumvention.

Known hidden and morphable ownership cases have been unveiled in Switzerland in 2007, when several companies saw large stakes being disclosed in a takeover hidden attempt; regulation only asked to disclose voting rights and physically settled options. Hu and Black unveil a huge number of cases, and analyse regulatory proposals, (“Equity and Debt Decoupling and Empty Voting II: Imprtance and Extensions”).

Since then a clear case is made for disclosure, pursuing the efficiency result that all shareholders know who is buying or selling, so that the price mechanism works well. For disclosure, Hu and Black propose:

–         Disclosure should involve voting and economic rights, from share od coupled assets (derivatives, share borrowing…), ownership,

–         Disclosure should involve both positive and negative economic interest,

–         Disclosure should involve share lending and borrowing,

–         Consistency of disclosure asset type obligation and types counted for thresholds,

–         Disclosure of empty voting,

As for hidden ownership, disclosure could be enough, as it will not be hidden anymore, and inefficient effects on pricing will not appear. Hu and Black also recommend that voting rights are passed on to the economic owner, as generally banks in a derivative contract are empty voters. This would prevent investors from keeping hidden ownership. Moreover, they recommend that economic owners vote directly, and not through the empty voter, (bank, broker, and so on), so as to avoid complexities and mistakes in the voting process.

  1. Joaquin B
    November 15, 2012 at 3:00 pm

    One of those cases, hedge funds (hidden owners), now unveiling that interest and trying to pile up voting rights….



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