Use of Cash-Settled Derivatives in Public Takeovers: A Challenge for Legislators, Regulators and Courts

In last couple of years, the activities of certain investors on world capital markets raised controversies as to their duties to disclose shareholdings in publicly listed issuers. These activities involved the use of cash-settled security-based financial instruments, such as call options and swaps, which enabled their holders to conceal their takeover intentions and virtually acquire access to shares in target companies, while staying out of scope of the legislation in force. This was apparently possible since cash-settled financial instruments did not provide their holders with any right either to acquire the referenced shares or to direct the voting under those shares in the general meeting of the target. The non-disclosure of positions in cash-settled financial instruments referencing the target shares left other investors, shareholders and boards of directors without the relevant information on possible changes of control, which might have influenced the target’s stock prices and possible defence strategies in case of a hostile takeover. The question whether these investors violated their duties or not is still unsettled among scholars which is why some states like Germany decided to expressly include these financial instruments in the securities legislation disclosure duties.