It was still easy for Freddy Heineken. The later beer magnate managed to get the Heineken brewery back into family hands with a cunning trick in the 1950s. His father had lost the controlling interest through financial tinkering in the previous years. The young Freddy – who died in 2002 – transferred the remaining family shares to a new, unknown company in 1950, and began quietly buying up new shares on the stock exchange. In four years, he managed to raise the stake in this company to above 50 percent without being noticed, after which he triumphantly walked into the office of the then chairman of the board: “Since yesterday I have had the majority of the shares in this company.” The current board was completely taken by surprise, and Heineken had its brewery back.
The fact that things are no longer that easy these days was underlined last week by an action by the Netherlands Authority for the Financial Markets (AFM). The stock exchange regulator forced investment bank Goldman Sachs to resign to report a short position of 12 percent in Philips. Goldman Sachs, hired by Exor as a guiding bank, built up that position in the run-up to the friendly entrance of Exor Holding as a shareholder at Philips. The investment company of the Italian billionaire family Agnelli – known for Fiat and Ferrari and listed on the Amsterdam stock exchange – announced on Monday morning, August 14, that it had a 15 percent interest in the medical technology group. A complete surprise for the outside world, because until that moment Exor had not reported any interest in Philips.
Notification thresholds
And that was strange, because unlike in the 1950s, there are now rules for building up an interest in a listed company. Since 1997, investors have been legally obliged to report large accumulated interests to the regulator within one day. Initially, that threshold was 5 percent of the shares, but under the current Financial Supervision Act (Wft) it has even been lowered to 3 percent. Investors must also report to the regulator if the thresholds are exceeded at 5 percent, 10 percent and so on. The AFM takes its supervisory task seriously, as evidenced by the fines of 500,000 and 1.7 million euros that the authority imposed on two investors this spring alone for failing to make such reports.
Also readAFM put pressure on Goldman Sachs after Philips share transaction
The purpose of the reporting thresholds is primarily to ensure that the public knows who is in charge within a company. In addition, large investors who enter or exit can say something about a company’s future expectations – relevant information for other players in the financial market. The way in which Exor came on board with Philips with the help of investment bank Goldman Sachs therefore raises the question: do the current transparency rules work, if investors can apparently find creative ways to circumvent this reporting obligation?
No one doubts that there are ways to legally build up a larger interest without having to report this in advance. Major investors also have an interest in this: suppose that Exor had immediately announced that it would eventually continue to buy up shares up to a 15 percent stake when it crossed the 3 percent threshold, then the stock price would have immediately shot up. That would have made the whole operation a lot more expensive for Exor. According to Leiden professor of financial law Rogier Raas, also a partner at law firm Stibbe, there is a tension in this: “Both the legislator and the supervisory authority recognize that an intention to carry out a transaction does not have to be reported.”
Financial cleverness
Investors are shooting themselves in the foot with too much transparency. And that’s where the investment banks and lawyers come in, specialized in setting up financially smart constructions that are legally acceptable. In the case of avoiding the reporting obligation, this can be done quite simply, experts say. For example, an investor can engage one or more banks at the same time to ask existing shareholders if they want to sell their interest and agree that those shares will be delivered at a specific time. The total interest can therefore exceed the threshold value in one go. The reporting obligation only arises when the transaction has been completed.
But there are more ways to avoid the reporting obligation. Last week it became clear that Goldman Sachs had not only bought shares on behalf of Exor (a long position) but had also made arrangements to sell shares it did not yet own (a short position). Netting these two positions together creates the so-called net short position, which, although also subject to a reporting obligation, conceals much larger numbers of shares than the net position shows.
AFM in discussions with market parties
The question also arises: which party exactly is subject to the reporting obligation? Goldman Sachs built up enormous interests in Philips until mid-August, but according to experts it did so (partly) as a so-called market maker – so they bought the shares on behalf of someone else. In that situation, the reporting obligation does not apply. Thanks to these types of somewhat shady, yet legal constructions, the Exor-Philips case ultimately did not involve a violation of the reporting obligation, say sources with knowledge of the matter. The fact that Goldman Sachs decided to report the short position in Philips after all was therefore more a form of goodwill towards the AFM than there was a legal obligation – or a fine in the air.
However, the AFM does not seem to be entirely happy with the issue either. The regulator has announced that it will soon enter into discussions with a group of market parties to see whether there should be more clear regulations or rules for “transaction structures in which large holdings in listed companies can be acquired in a very short time.” The AFM cites the possible information asymmetry of these types of deals as the main reason. By this, the regulator is referring to the power difference between large players such as Goldman Sachs and Exor who employ experts to shape one deal, and small investors who lack the knowledge and resources to do the same.
Investor organizations critical
Investor organizations therefore responded critically to Exor’s action at Philips. They wonder whether they have not been disadvantaged because a large investor was able to build up a large interest in silence and at a historically low stock price. Partly for this reason, the AFM is working on a detailed reconstruction of what exactly happened recently at Exor and Philips. Because in this case there was a friendly shareholder and a company that was looking for a reliable long-term investor. But what if the same methods are applied in a hostile takeover? The constructions used are still legal, but are they also desirable? The regulator will publish the results of that analysis in November.
Ultimately, this issue could lead to further tightening of the standards, says a spokesperson for the AFM. For example, the threshold values for the reporting obligation have also been further tightened over the years based on practice. And then we have to wait until new financial cleverness is invented to build up a large stake in a company without being seen.
A version of this article also appeared in the September 16, 2023 newspaper.