On 1 January 2016, revised regulations regarding the disclosure of significant shareholdings in listed Swiss companies or non-Swiss companies with their primary listing in Switzerland entered into effect. In most respects, the new law restated the former regulations. However, the legislation also introduced some significant changes and imposes important new disclosure obligations, in particular upon asset managers who discretionarily exercise the voting rights of the shares held or managed on behalf of their clients.
By Hans-Jakob Diem (Reference: CapLaw-2016-19)
1) Introduction
On 19 June 2015, the Swiss Parliament adopted the new Federal Act on Financial Market Infrastructures and Market Conduct in Securities and Derivatives Trading (FMIA). The new statute establishes the regulatory regime applicable to key market infrastructures, such as securities exchanges, trading platforms, central depositaries and payment systems. Trading in derivatives is also regulated. The FMIA further incorporates the rules on public takeovers and disclosure of significant interests in listed companies which were hitherto embodied in the Stock Exchange Act.
On 9 December 2015, the Financial Market Supervisory Authority (FINMA) published its new Ordinance on Financial Market Infrastructure (FMIO-FINMA) which implements, among other things, the new rules on disclosure of significant interests in listed companies. The revised law entered into effect on 1 January 2016.
2) New disclosure obligation of persons having discretionary voting power
One of the key purposes of the revision was to require asset managers to disclose the positions that they hold for the account of their clients. In a decision of 2013, the Swiss Supreme Court considered that the former FINMA regulations on this topic lacked a statutory basis and were consequently not enforceable. The Swiss Parliament saw the adoption of the FMIA as an opportunity to remedy this situation.
The new rules, in effect since 1 January 2016, provide two distinct disclosure obligations:
(i) As in the past, the disclosure obligation of the person who beneficially owns a disclosable interest in a listed company; and
(ii) A new disclosure obligation of the person who has the power to exercise the voting rights in its discretion.
The disclosure obligations of the beneficial owners and of the persons with discretionary voting power are separate and independent from one another. Certain shareholdings may consequently have to be reported twice: once by its beneficial owner, and once by the person who has the discretionary voting power. To avoid the confusion that could otherwise result from this “double counting”, the new rules require that the reporting person specifies whether the positions disclosed are held in a capacity as a beneficial owner or as a person with discretionary voting power.
The new disclosure obligation of persons having discretionary voting power affects, in particular, asset managers who are authorised to direct the voting of the shares managed on behalf of their clients. Besides asset managers, also proxy advisors who are authorised to vote the relevant shares or to complete the voting instructions to the independent proxy may be subject to the new disclosure duty.
In this context, the FMIO-FINMA contains a significant change compared to the draft on which FINMA had consulted. While the draft ordinance provided that the disclosure obligation of a discretionary proxy holder rests with the person who has the power to exercise the voting rights (i.e., in case of asset managers, on the asset manager itself), the final rules impose this obligation on the person or the persons who ultimately control the proxy holder. This rule, introduced “in the last minute”, is of significant importance for financial groups that have a controlling shareholder or a group of controlling shareholders. Such controlled groups are in principle required to consolidate the positions beneficially owned by the controlling shareholder(s), including the nostro positions held by the financial group itself, with the positions which they hold or manage on the account of their clients and for which they have the power to discretionarily direct the voting, in order to determine whether a disclosure duty exists or arises.
3) New definition of the beneficial owner
The imposition of a distinct disclosure obligation upon the person who has discretionary voting power comes together with a new definition of beneficial owner. In the past, the recognition as a beneficial owner of a disclosable interest depended exclusively on the ability to control the exercise of voting rights. Under the new rules, the beneficial owner is defined as a person who controls the exercise of voting rights and, in addition, bears the economic risk of the relevant shareholding. The new definition of beneficial ownership may trigger an obligation to make new filings, in particular for structures that dissociate voting power from economic interests such as trusts. However, the significance of the change is reduced by the fact that the important instances of dismemberment of ownership – securities lending and collective investment schemes – are governed by specific rules.
4) Reporting in case of indirect share ownership, in particular by groups of companies
The revised regulations change the way in which indirectly held positions are to be disclosed. Under the former rules, the entire chain of entities between the beneficial owner and the direct holder of the relevant positions had to be disclosed. The new rules only require the identification of the beneficial owner and of the direct holder. A description of the full chain of ownership between the beneficial owner and the direct holder is no longer required. On the flipside, the intermediate entities in the chain can no longer be regarded as a group for disclosure purposes and the “black box” principle can no longer be applied. As a result, if a reportable share position is transferred by the direct holder upstream to an intermediate holding company that has not held any of the relevant shares prior to such transfer, a new disclosure duty will arise.
5) Collective investment schemes
The revised law includes special rules for collective investment schemes (funds). In respect of collective investment schemes that are authorized for public distribution in Switzerland, FINMA has confirmed the current regime. These funds are deemed to beneficially own the positions that they hold. Their disclosable interests must be aggregated at the level of the fund management company (but not at the level of the financial group that controls the fund management company), for each single fund and for each segment of each relevant fund.
For funds that are not authorised for public distribution in Switzerland, FINMA has introduced new provisions. The new rules are of significant practical relevance as they apply to most funds worldwide (to the extent that they hold disclosable interests in companies listed in Switzerland) and in particular to hedge funds. The new rules distinguish funds that are sponsored by a financial group and “independent” funds. Disclosable interests held by sponsored funds must be aggregated with the positions held by their “sponsor” financial group. Disclosable interests held by independent funds must be treated pursuant to the same principles as they apply to funds authorized for distribution in Switzerland. However, the independence criteria imposed by the rules are strict and only few funds are likely to fall into this category.
6) Other changes
The revised law brought about certain other changes to the disclosure regime, in particular:
- In the event of the death of a holder of a reportable position, the heirs now have 20 trading days to report their holding, and no longer only four trading days as it was the case under the former rules.
- The postponement of the duty to notify changes in significant shareholdings during a takeover period – which formerly only benefited the bidder and the persons acting in concert with him – has been extended to the other persons required to report their trades during the offer period, i.e. the target and the persons holding 3% or more of the voting rights in that company.
- The circumstances under which a notice of significant shareholding must be updated are now specified. The general rule pursuant to which “any change” in the disclosed information had to be notified within four trading days has been abandoned. This change is a welcome clarification of the legal situation.
- Under the revised regulations, a listed company that repurchases its own shares under a repurchase program is no longer exempted from the disclosure duty. Accordingly, in addition to the reporting pursuant to the regulations governing the buy-back, if the issuer reaches or exceeds a reportable threshold, it will have to make a disclosure under the FMIA within four trading days.
- As in the past, reportable positions held by banks or security dealers for settlement purposes remain exempted from the disclosure duty. However, the exemption only applies if the positions are held by no more than two (instead of three) trading days.
7) Transitional rules and new reporting forms
FMIO-FINMA stipulates that notices of significant interests made prior to the entry into effect of the new rules remain valid until a new disclosure threshold has been reached or crossed. Notices that include information that is no longer required (e.g. information regarding the chain of ownership between the direct holder of the positions and their beneficial owner) consequently do not need to be amended until a new disclosure threshold has been reached or crossed.
Notices that have to be filed as a result of the entry into force of the new rules (e.g. the disclosure of the disclosable interests held by discretionary voting proxies) had to be made by 31 March 2016. Until the same date, notices relating to circumstances having occurred as from 1 January 2016 could be filed pursuant to the old regime. As from 1 April 2016, all notices have to be made pursuant to the new rules. To that effect, the Disclosure Office of the SIX Swiss Exchange has made available amended notification forms, the use of which is, however, not mandatory. The new forms are accessible under <www.six-exchange-regulation.com/en/home/investor/obligations/disclosure-of-shareholdings/board.html>.
Hans-Jakob Diem (hans-jakob.diem@lenzstaehelin.com)