Home > Board Performance, Disclosure, Investor Participation, Regulación, Voting Rights > Blockholder Disclosure: a case for transparency or for monitoring benefits?

Blockholder Disclosure: a case for transparency or for monitoring benefits?

We refer in this post to the norm that in the USA and most other countries forces significant beneficial owners report their shareholdings. In particular, in the USA, any holder tresspassing a 5% threshold has a 10 day term to report that fact. Beneficial ownership is said to exist over securities over wich voting or investment power is held, including the power to dispose of it. As for ownership through derivatives, it is only counted when they confer the right to acquire beneficial ownership within 60 days.

The purpose of the ruling is to alert investors about potential changes in corporate control and provide them with the opportunity to evaluate their effect and to react accordingly. In what follows, we explain the controversy that has arisen in the las year about this, between academics –Bebchuk and others- and practitioners, -the law firm Wachtell, Lipton, Rosen and Katz-.

As for the concept, Wachtell, Lipton, Rosen and Katz made the point, in a 2011 letter addressed to the SEC, that cash-settled derivatives, share-parking and other “voting right and economic risk decoupling practices”, are not included. Thus, they propose economic risk holdings should also be included in the concept, because they allow the holder to exercise market control, even short positions, and at the end, they may eventually be settled in kind.

As for the 10 day delay, once the threshold is passed, WLRK suggest that it is used by many hedge funds, or other aggresive investors, to increase their holdings, so that valuable information is hidden from the public.They propose to shorten the period, as investors accumulating significant stakes are sophisticated ones, that do not need so much time, and they even suggest to introduce a “cooling-off period” equivalent to the disclosure lag, so that investors are prevented from increasing their holding in that period. Hedge funds often argue they need that lag to amass large enough holdings to force companies to take efficient actions, to the profit of all shareholders.

Bebchuk and Jackson first argue that the ten day lag was an explicit equilibrium tool between blockholders` interests and the need for disclosure. They afterwards argue about the costs of tightening the rules: given the free riding problem that affects the blockholder that tries to monitor a certain company, (which makes incumbent accountable and reduces agency costs and managerial slack), tightening the rules would diminish their incentives to do so. They provide references to empirical evidence regarding that latter effect of large blockholdings, and also argue that without large stakes the case of a proxy fight is reduced, as the benefits coming from their eventual existence. The ability to buy a large stake at prices before monitoring and engagement expectations are included, is critical for them to have incentives to incur in those costs. As for the benefits of tightening the rules: WLRK argue that the appropiation of part of the control premium by blockholders would be avoided. Bebchuk and Jackson counterargue that blockholders do not really control the company as a result of the ten day lag, but they still need to convince other shareholders to drive the company`s actions. Bebchuk and Jackson also argue against regulating isolated aspects of the balance between blockholders and management, without considering the broad picture, (for instance poison pills are commonly approved by state law in the USA).

On their response to the previous, WLRK argue that what they intend is to assure that there is no loophole to what the law tries to enforce, “transparency and disclosure”. If a large 25% stake can be accumulated before anything is broadcasted, what is the law for? Besides, they say, the law was not a balance between insiders and outsiders, the ten day lag was the recognition of some costs and administrative burden, not anymore existent, and the law aim was transparency, having failed in that purpose. Besides, they argue there is no evidence for the blockholders` monitoring benefits, (wealth creation in the long term), but only for short term price increases derived from the M&A option appearing, for instance. Moreover, institutional investors, rather than opportunistic hedge funds are to be credited for monitoring activities.

A fascinating debate, usual between Bebchuk and Lipton in the last decade, over this and other topics, that will for sure continue!

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  1. August 4, 2013 at 5:07 pm

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