Competition in the EU securities market: a case study

All participants in all markets benefit from real competition and transparent rules. In Ukraine, the rules of technology competition are gradually developing and improving. Therefore, it is extremely important for our specialists to familiarize themselves with the foreign experience of regulating competition in the corporate sector and study cases. Below is a longread from the author's research with links to all primary sources. Enjoy yourself.

One of the most important blocks of norms that most affect the implementation of competitive advantages of participants in the securities market are the norms that regulate the disclosure of information in the securities market. The relationship between information disclosure and benefits from the securities market, for example, increased liquidity, has been considered in many theoretical and empirical studies (Healy P., Krishna G. Palepu. Information Asymmetry, Corporate Disclosure, and the Capital Markets: A Review of the Empirical Disclosure Literature// Journal of Accounting & Economics. - 31, No. 1-3 (September 2001). – R. 405–440. Asymmetry of information leads to an unfavorable choice between potential buyers and sellers, and, in turn, to higher transaction costs. Extended disclosure reduces information asymmetry and, therefore, lowers transaction costs in the secondary market, leading to an increase in stock liquidity. How important the rules of information disclosure in the securities market can be clearly demonstrated by the case described below, analyzed in detail by Dirk Zetsche (The ruling of the German Federal Supreme Court in re WMF//BGHZ. - 169. - P. 98. [Electronic resource] / Zetzsche, Dirk A., Hidden Ownership and European Law? (October 29, 2008) – Vol. 10. – CBC-RPS . – No. 0039. – Access mode: http://ssrn.com/abstract=1170987 or http://dx.doi.org/10.2139/ssrn.1170987).

Gentlemen's agreement, participation in management and share swaps

Scheffler's group of companies entered into cash-settled total return equity swaps with nine investment banks, but did not acquire the official right to purchase shares of Continental AG (Foley J. Die Milliarden – Dollar Frage [Electronic resource] / J. Foley. – 24 July 2008. – Access mode: http://www.handelsblatt.com/finanzen/breaking-views/diemilliarden-dollar-frage;2015442). This group took advantage of the provisions of the German Securities Act (Article 21 (1) of the German Securities Act (the Wertpapierhandelsgesetz – “WpHG”), which implements Article 9 (1) of the Transparency Directive), which does not require disclosure of holding information equity total return swaps (hereinafter - PSPP), although, like the Transparency Directive, sets 3 percent of direct partial ownership as the disclosure threshold (the same applies to certain types of indirect ownership). PSPP is an American terminology (Henderson Schuyler K. On Derivatives / Schuyler K. Henderson. - 2003. - 423 p., C. 88 - 89], the counterpart of which in European systems are financial contracts for differences (Directive 2004 /39 of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments amending Council Directives 85/611/EEC and 93/6/EEC and Directive 2000/12/EC of the European Parliament and of the Council and repealing Council Directive 93/22/EEC // Official Journal of the European Union. – 2004. – P. 1–44.) The expression comes from the British Financial Services and Markets Act of 2000 [392] under which "contracts for differences" include rights under a contract where the parties intend to secure a profit or avoid the costs of one or more parties with the delivery of any property to which the contract may relate. "Contracts for differences" refer to financial instruments according to German and European legislation on securities (Ct. 25 (1) clause 1 and clause 2 (2) No. 1 WpHG; Art. 11 (1) of the Transparency Directive precisely defines swaps as any other derivative according to Annex I, section C of the DRFI.), which was adopted in accordance with European minimum standards, according to which swap positions are subject to disclosure only if "they lead to the emergence of the right to purchase voting shares of an issuer admitted to trading on a regulated market, on the owner's own initiative only within the framework of a formal agreement", although the requirements for disclosure of information regarding financial instruments are generally applicable in the EU. That is, under German securities law, unless the Schaeffler group was formally authorized to purchase the shares through which the nine investment banks hedged their contrarian swap positions (which is essentially a gentleman's agreement with no legal obligations), then the disclosure requirement should not apply in this situation.

If it is assumed or proven that Scheffler knew that Merrill Lynch (and other investment banks) purchased shares in order of hedging, then their behavior can be considered as "acting together" according to Art. 5 (1) Directive 2004/25/EC on takeovers. Scheffler's intentions were confirmed by the fact that the EU Commission later granted Scheffler permission to obtain full control over Continental AG on the basis of Art. 6(1) (b) of Regulation (EC) No. 139/2004 (Case No COMP/M.5294 Schaeffler [Electronic resource] // ContinentalSG-Greffe (2008) D/208506.C(2008) 8916. – 19/12 /2008. - Access mode: http://ec.europa.eu/competition/mergers/cases/decisions/m5294_20081219_20310_en.pdf), although, in accordance with part 3 of Art. 5 Directives on takeovers, the share of voting rights that lead to obtaining control over the enterprise and the method of its calculation are determined in accordance with the legislation of the member states in which the company is registered, that is, if Scheffler had the right not to disclose information about indirect ownership, then there was no reason to obtaining permission for concentration. If Merrill Lynch (and other investment banks) and Scheffler acted in concert, then the shares owned by the banks should have been treated as Scheffler's. The concept of "concerted actions" includes coordinated actions with respect to the issuer. In contrast to British and Swiss law, the German definition of "concerted actions" under para. 22 (2) WpHG and p. 30 (2) WpUG does not refer to the joint acquisition of securities. At the time of concluding the agreement, Scheffler, "acting in concert", obliged the shareholders (banks) to coordinate the exercise of shareholder rights, in particular voting rights. German law limits the definition of "concerted actions" to other forms of coordination, in particular, with regard to permanent influence on the issuer, for example, joint lobbying of a certain corporate policy, so a simple coordinated acquisition of shares does not correspond to the concept of "acting in concert". As long as Merrill Lynch and Scheffler did not attempt to jointly influence the policies of the issuer Continental AG, the hedged shares should not be considered Scheffler shares under applicable law. However, according to Art. 10 g) of the Transparency Directive requires disclosure of information on indirect equity ownership under certain circumstances. For example, the notification requirements for direct share ownership (in particular, the 3 percent barrier in Germany) apply to persons who have "the right to acquire, dispose of or exercise ... (g) voting rights held by third parties from their name and interests of this person or organization" (Article 10g) of the Directive on transparency, implemented in Article 22 (1) No. 2 of the Federal Securities Act (WpHG); similarly, in accordance with Art. 30 (1) No. 2 of the Federal Law on Mergers and Acquisitions (WpUG), these shares are considered shares that provide "control" in accordance with Art. 5 (3) of the Directive on mergers and acquisitions.). Art. 10 g) of the Transparency Directive was adopted from its predecessor - Directive 88/627/EC (Article 7), which was in force for more than 20 years. These prescriptions should most effectively prevent circumvention of securities laws (Bulow Von in Hirte, Mollers (eds.) Kolner Kommentar zum Wertpapierhandelsgesetz / Bulow Von in Hirte, Mollers (eds.). – 2007, C. 22, 64). For more than 20 years, the generally accepted interpretation of Art. 7 of the First Directive on transparency and Art. 10 of the Second Transparency Directive, at least among German and Portuguese lawyers, that in the event that the scheme of contracts results in the short party owning shares on behalf of the long party, if the latter bears the economic risk in relation to said securities and is able to influence the exercise of voting rights (Bulow Von in Hirte, Mollers (eds.) Kolner Kommentar zum Wertpapierhandelsgesetz / Bulow Von in Hirte, Mollers (eds.). – 2007, C. 22, 66; 299, C. 21 - 29). In order to avoid the circumvention of German law, the actual influence on the exercise of voting rights is sufficient to meet the specified requirements [131, C. 218]. In addition, German law does not require that, in order to influence the vote, one must be the owner of the issuer's shares, or that a third party must be formally authorized to vote on the order on behalf of the beneficial owner. If there is influence, then the so-called "regarded ownership" takes place (Bulow Von in Hirte, Mollers (eds.) Kolner Kommentar zum Wertpapierhandelsgesetz / Bulow Von in Hirte, Mollers (eds.) - 2007, C. 22, 27; 360 , C. 45). Establishing the fact of "influence on the right to vote" is rather difficult. Conventional swaps do not confer the right to "own on behalf of" someone else, as such an instrument results only in the transfer of economic influence and not in the transfer of voting rights (Bulow Von in Hirte, Mollers (eds.) Kolner Kommentar zum Wertpapierhandelsgesetz / Bulow Von in Hirte, Mollers (eds.). – 2007, C. 87). In this view, English disclosure rules go beyond the minimum requirements of EU law by requiring holders to disclose all long positions arising from "contracts for difference".

Avoiding the obligation to disclose information about his actual ownership, Scheffler, using this or a similar scheme, could have a decisive influence on the activities of another enterprise, which, for example, is a counterparty or competitor of Continental AG, and therefore, in the conditions of insufficient disclosure of information, there was a real threat of violation of the rules of free competition

Conclusions

Therefore, according to the results of the study of the problems of competition in the securities market, it can be stated that Art. 27 paragraph 1 of the DRFI obliges member states to publish information on shares admitted to trading on the regulated market and for which there is a liquid market. Thus, each member state establishes the concepts of the sales market and liquidity in its legislation. The consequence of this may be that the share is recognized as liquid in one country, but does not meet the liquidity requirements in another, in particular, in the case of dual listing (quotation of securities of the same corporation on more than one stock exchange). The analysis of the Scheffler - Continental AG case makes it possible to state that the Transparency Directive cannot fully ensure the achievement of the goals for which it was adopted, therefore it needs to be modernized.

The EU policy in the field of legal regulation of securities markets is built on the principle of combining the exclusive competence of the EU in the field of direct investment and the mixed competence of the EU and member states in most other issues, while the tendency to strengthen the competence of the EU in all areas of legal regulation of the integrated securities market can be observed in the EU. The inadequacy, inequality, and limited implementation of EU norms into the national legislation of member states creates a risk of manipulation of regulatory provisions, which may hinder the development of free competition in the securities market, and also creates a threat of using financial systems to legalize income obtained illegally.