Practical problems arising from the present notification duty for voting rights delegated on a discretionary basis caused FINMA to consult on a revision of this rule. If implemented, those persons who actually decide on how delegated voting rights are exercised will be subject to the notification duty and no longer the persons controlling either directly or indirectly a relevant legal entity to which voting rights were so delegated on a discretionary basis.
By Benjamin Leisinger (Reference: CapLaw-2016-45)
1) The Present Rule
Following a Swiss Supreme Court decision in 2013 that the notification duty for qualified participations in listed companies with respect to nominees under the former article 9(2) of the Stock Exchange Ordinance of the Financial Market Supervisory Authority FINMA (FINMA) had no sufficient legal basis in the (former) Stock Exchange Act, the legislator in 2016 explicitly introduced this notification duty in the Financial Market Infrastructure Act (FMIA) itself. The FMIA replaced the Stock Exchange Act in this subject matter of disclosure of shareholdings with respect to companies with registered office in Switzerland whose equity securities are listed in whole or in part in Switzerland, or companies with registered office abroad whose equity securities are mainly listed in whole or in part in Switzerland.
According to article 120(3) FMIA, anyone who has the discretionary power to exercise the voting rights associated with equity securities in accordance with article 120(1) FMIA is also subject to the notification duty to the listed company and the SIX Swiss Exchange, if the relevant thresholds are reached, fallen short of or exceeded. The implementing rule in article 10(2) of the Financial Market Infrastructure Ordinance of FINMA (FMIO-FINMA) in its current version states that if the voting rights are not exercised directly or indirectly by the beneficial owner, then article 120(3) FMIA applies and whoever has discretionary powers to exercise voting rights is also subject to the notification duty. In the case of legal entities, the person directly or indirectly controlling these legal entities is deemed to have the discretionary powers to exercise the voting rights delegated to the legal entity.
This present rule had been introduced because, in the consultation process, it was said to be easier to practically implement.
However, since the present rule actually entered into effect on 1 January 2016, practice has shown some difficulties in the implementation. Most importantly, where certain individuals control a financial group but do not actually engage in its operations, there is a substantial burden on these individuals. This is contrary to the initial legislative intention underlying the implementing rule in the FMIO-FINMA to facilitate compliance with article 120(3) FMIA in practice.
Acknowledging this unintended effect, FINMA now proposed a revised rule: According to the proposal to revise article 10(2) FMIO-FINMA, the party (individual or legal entity) actually entrusted with the exercise of the voting rights would be subject to an independent notification duty if the thresholds are met. Here, the factual circumstances are relevant rather than the mere formal delegation of the voting rights to a specific person or entity. For example, according to the explanatory note of FINMA to the proposal, where a certain individual instructs the various asset managers in the financial group or in the asset management firm to whom the voting rights are formally delegated on how the discretionary voting are to be exercised, this person would be subject the revised notification duty. This may well be a senior manager. At least FINMA clarified that, as a general rule and if the factual circumstances are not different, the legal entity to which the voting rights are delegated on a discretionary basis would have to notify and not, e.g., the individual who actually votes on a shareholders’ meeting in its capacity as an employee or business organ of the asset managing company.
As to the question of when discretionary voting exists, the explanatory text of FINMA states that where instructions are given by the shareholders (or beneficial owners) and there is no free discretion of the, e.g., asset manager with respect to the exercise of the voting rights, no independent notification duty exists for the qualified participation.
The consultation period for this revision ended on 3 October 2016 and the revised rule is expected to enter into effect in the beginning of 2017 (1 February 2017 was the proposed date). It is, however, also proposed that there will be a transitory period of three months until when the market participants (in particular asset managers) can notify in accordance with the new system. This transitory period is intended to provide for enough time so that the internal systems and control mechanisms can be adjusted. At the latest on the last date of the transitory period (30 April 2017 as proposed), the notifications must be made in line with the new rule. This notably applies irrespective of any new transactions.
In light of this development and the (administrative criminal law) consequences a breach of the notification duties can have, market participants to whom shareholders delegate voting rights on a discretionary basis are well-advised to keep an eye on the final rule and its entry into effect, to adjust their internal systems and reporting accordingly, and to notify the listed company and the SIX Swiss Exchange on the last day of the transitory period at the very latest, if the relevant thresholds of article 120(1) FMIA are met.
Benjamin Leisinger (benjamin.leisinger@homburger.ch)