Article 120 of the Federal Act on Financial Market Infrastructures and Market Conduct in Securities and Derivatives Trading (FMIA) mandates that directly or indirectly crossing specific voting rights thresholds in companies listed in Switzerland must be disclosed to ensure market transparency. This includes indirect acquisitions or disposals of shares by way of financial instruments. In the context of contingent convertible bonds (CoCos, regulatory instruments that convert into shares upon certain events, ensuring the maintenance of sufficient capital) issued by Swiss issuers and underwritten by banking syndicates, the purchase rights and sale positions calculated in accordance with the terms of the CoCo may also trigger such disclosure obligation. Exemptions to these disclosure obligations can be requested from the Disclosure Office of SIX Exchange Regulation AG under certain conditions, allowing underwriters to disclose their positions in the final prospectus. This solution balances market transparency with practical underwriting considerations – but could be better formalized in a statutory general exemption.
1) General Overview of the Disclosure Obligation
Article 120 of the Federal Act on Financial Market Infrastructures and Market Conduct in Securities and Derivatives Trading (FMIA) stipulates that any person or entity that directly or indirectly, or acting in concert with third parties, acquires or disposes of shares, acquisition rights or sale rights relating to shares of a company whose equity securities are listed in whole or in part in Switzerland must notify the company and the stock exchanges on which the equity securities are listed if they reach, fall below, or exceed certain thresholds of voting rights. These thresholds are set at 3%, 5%, 10%, 15%, 20%, 25%, 33⅓%, 50%, or 66⅔% of the voting rights, whether exercisable or not. The disclosure requirements apply to both domestic companies whose equity securities are listed in whole or in part in Switzerland and foreign companies whose equity securities are primarily/mainly listed in whole or in part in Switzerland.
The purpose of this disclosure obligation is to ensure transparency in the market by providing sufficient knowledge regarding the identity of significant shareholders to both the market participants and the companies. The FMIA aims to protect the proper functioning of the financial markets and the interests of investors by ensuring that significant changes in shareholdings are disclosed promptly. This transparency also helps to maintain investor confidence in the financial markets.
The notification must be made to the company and the stock exchanges within four trading days of the transaction (i.e., entering into the contractual obligation to sell/purchase). The company itself is then required to publish the notification within two trading days of receipt via the electronic publishing platform of the competent disclosure office. Failure to comply with these disclosure obligations can result in sanctions, including fines and other penalties.
2) CoCos Being Subject to the Notification Duty
In the context of an issuance of contingent convertible bonds (CoCos) and underwriting by a banking syndicate, as well as a purchase of CoCos by investors, the notification duties pursuant to article 120 FMIA also apply if the issuing entity has equity securities that are listed in whole or in part in Switzerland. As per article 120(5) FMIA, all transactions that may result in voting rights over the equity securities are also considered indirect acquisitions. The CoCos are only contingently convertible into shares upon the occurrence (and sometimes continuation) of certain defined events. However, such contingency alone is not relevant from a Swiss disclosure perspective (under the FMIA or the banking regulations — see below), despite the fact that the conversion cannot be influenced by the issuer or the investors (see ruling V-01-11: https://www.ser-ag.com/dam/downloads/publication/obligations/disclosure/annual-reports/annual_report_2011.pdf).
In the regulatory context, the notification duty is also relevant (and additional notification and de facto approval requirements may be triggered under banking regulations if the acquisition would lead to an indirect qualified participation in a Swiss bank) because CoCos are treated as purchase positions with respect to equity securities that directly or, in the case of an issuance of CoCos by a Swiss bank holding company, indirectly lead to an ownership in a Swiss bank. The Swiss Financial Market Supervisory Authority (FINMA) needs to know in advance who becomes a significant shareholder in a crisis and the conversion of the CoCos – and does not want to be surprised by former CoCo holders on the list of significant shareholders ex post.
3) Basis for Calculating Purchase Rights and Sale Position
A noteworthy aspect is the calculation of the purchase and sale position with respect to the CoCos: As per article 14 of the Ordinance of the Swiss Financial Market Supervisory Authority on Financial Market Infrastructures and Market Conduct in Securities and Derivatives Trading (FMIO-FINMA), for companies domiciled in Switzerland, the positions to be reported are to be calculated on the basis of the total number of voting rights according to the entry in the commercial register (denominator). The terms and conditions of the respective CoCo then determine the calculation of the purchase rights of the syndicate banks and investors and the sale position of the issuer. If the price at which the CoCos are converted in the case of a relevant trigger event set forth in the terms and conditions is based on the market price (typically volume-weighted over a certain number of days), the floor price typically determined in the terms and conditions at pricing (typically subject to adjustment in the case of certain dilutive events) forms the basis for the calculation as per the practice of the disclosure offices and FINMA (see ruling V-01-11). If there is no floor price above the nominal value of the shares, this is the relevant basis for the calculation of the hypothetical number of shares and voting rights. If there is a fixed price (typically also subject to adjustment in the case of certain events), this is the relevant basis used to calculate the indirectly acquired/sold shares and related voting rights.
Accordingly, crossing the relevant thresholds is a function of the size of the CoCo placement (in the aggregate for the banking syndicate, and actually purchased for the individual investors), the determination of the conversion price at such time, and – for Swiss issuers – the shares registered in the commercial register at such time.
4) Possibility of Requesting an Exemption
Article 123 FMIA and article 26 FMIO-FINMA allow for exemptions or easing provisions regarding the duty of notification and disclosure, provided there is good cause for these. This is particularly applicable if the transactions are short-term in nature, do not entail any intention to exercise the voting right, or come with conditions.
The process for requesting an exemption involves submitting an application to the competent disclosure office, detailing the reasons for the request, and providing supporting documentation. The application must include information on the nature of the transaction, the parties involved, and the specific circumstances that justify the exemption. The disclosure office will review the application and issue a recommendation within ten trading days.
Exemptions are typically granted for transactions that are of short duration, such as underwriting agreements where the securities are quickly placed with investors. In such cases, the underwriters do not intend to hold the securities for an extended period or exercise any voting rights. The disclosure office may also consider the potential impact on market transparency and the interests of market participants when evaluating exemption requests.
5) Exemption and Reasoning
If requested in advance, in the case of the issuance of CoCos by banks or bank holding companies with equity listed in Switzerland, the Disclosure Office of SIX Exchange Regulation AG may grant an exemption from the notification duty to underwriters. This, in principle, is done in line with the Disclosure Office Notice I/09 in its version of 1 February 2022 and the leaflet regarding applications for exemptions and easing provisions concerning disclosure in the prospectus for lock-up groups and (sub-)underwriters of SIX Exchange Regulation AG dated 1 February 2022 (see CapLaw-2023-02 for the Position Paper on Disclosure Obligations of the Banking Syndicate in Swiss ECM Transactions dated 8 March 2023). The key points of the exemption and the reasoning for CoCos can be summarized as follows:
The exemption is normally to request that the underwriters be permitted to fulfill their notification obligations solely by way of disclosure in the final prospectus. Additionally, in order not to undermine the exemption, if granted, the issuer must request that it be relieved from its duty to publish the information on the managers‘ purchase position via the publication platform.
There are several key reasons for the exemption. Firstly, the underwriters‘ definitive indirect purchase positions in the shares (via the subscription of the CoCos as a member of the syndicate) will not be known before pricing (before that, the essentialia negotii, i.e., the price and number of shares indirectly purchased/sold, are missing for a disclosure), and the disclosure obligation will not be triggered before the entry into the bond purchase agreement (BPA). Secondly, because of how bonds, including CoCos, are placed in the market and the price established, the CoCos will have been effectively sold to investors prior to the signing of the BPA. After pricing, the CoCos are even traded by the investors in the so-called gray market on an „if-and-when-issued“ basis, making it highly unlikely that a member of the syndicate would be unable to place and sell the underwritten CoCos to investors and, therefore, have to keep the CoCos itself. Thirdly, a disclosure of any interim purchase positions of the underwriters to the market at any time prior to the publication of the final prospectus would not be meaningful and could be deemed misleading by market participants, as only the final and approved bond prospectus will be published in accordance with the Financial Services Act (FinSA). Article 120(2) FMIA clearly shows the spirit of the disclosure obligations and the irrelevance of a „technical interim position“ as a means of ensuring the placement of the CoCos, a proper process, and a settlement of the transaction: Financial intermediaries that acquire or dispose of shares, acquisition rights or disposal rights for the account of third parties are not subject to the disclosure obligation. Additionally, the underwriters have no intention of receiving any new shares upon conversion of the CoCos or influencing the management of the company by exercising any voting rights, as the CoCos do not confer any conversion rights to the holder, and it is highly unlikely that a syndicate member would still possess the CoCos at the time of their mandatory contingent conversion into shares of the issuer. Lastly, the underwriters‘ interest in the exemption and easing provision in the final prospectus regarding the relevant CoCos outweighs any potential interest the market participants could have in a „regular“ disclosure, as disclosure in the final prospectus using the intended wording of the prospectus ensures that no relevant information is withheld from market participants.
The Disclosure Office usually considers the specific circumstances of the transaction, including the nature of the CoCos and the specific underwriting process. In the case of the CoCos, the „bond placement“ process described before and the fact that the CoCos are designed to only be converted into shares under certain extreme conditions, such as financial distress or regulatory intervention, play an important role. This significantly reduces the likelihood that the underwriters will hold the CoCos for an extended period or exercise any voting rights.
The conditions for the exemption can be determined by the Disclosure Office on a case-by-case basis and may include several requirements. Such conditions or requirements may include that the completed intended wording of the final approved prospectus must be published no later than a certain time in the future, and that the issuer or any other person on its behalf informs the Disclosure Office of the final underwriting and discloses the names of the underwriters and the type and number of the CoCos to be underwritten by any of them within one trading day following the conclusion of the BPA. Additionally, if any underwriter were required to effectively acquire and keep the respective CoCos for its own account following the closing of a relevant offering and issuance of the CoCos, they must regularly disclose relevant positions within four trading days by means of a notification to the Disclosure Office and to the company in accordance with the provisions of the FMIO-FINMA.
The Disclosure Office‘s decision regularly reflects a balanced approach, taking into consideration the need for market transparency and the practicalities of the underwriting process. By allowing the underwriters (and the issuer in respect of the underwriters‘ positions) to fulfill their notification obligations through the final prospectus, the Disclosure Office ensures that relevant information is disclosed in a timely and accurate manner, without imposing undue burdens on the underwriters.
6) Outlook
Because of the switch to CoCo structures by some (but not all) Swiss banks, the topic of the disclosure obligations for the syndicate may need to be considered more regularly. It certainly is worth considering the introduction of a general exemption with respect to underwriters of equity securities and equity-linked instruments, including CoCos, in the FMIO-FINMA. This would take the technical role of underwriters into account in the placement of securities of issuers, while not taking away the deal certainty issuers get from a (firm, in contrast to mere best-efforts) underwriting of their securities generally subject to a disclosure obligation under the FMIA.
Benjamin Leisinger (benjamin.leisinger@homburger.ch)