On March 26, 2012, new disclosure obligations regarding net-short positions in shares admitted to trading on a regulated market in Germany come into effect. The new general disclosure obligation replaces the existing regime, the scope of which was limited to a number of German financial institutions. A directive published by the German Financial Services Supervisory Authority (“BaFin”) on March 13, 2012, provides some guidance on important technical details. As a follow-up to our alert from July 28, 2010 (“German Act on Avoidance of Abusive Securities and Derivative Transactions”), this alert summarizes the scope of the new disclosure obligations and provides an overview of the technical details of the recent BaFin directive.
1. General Scope of Disclosure
The new regime is structured as a two-tier disclosure obligation regarding net-short positions in shares of (all) issuers admitted to trading on a regulated market in Germany. It includes:
the obligation to notify BaFin of any net-short position which reaches, exceeds or falls below 0.2 percent (or any 0.1 percent above that) of a company’s outstanding shares admitted to trading on a regulated market of a German exchange; and
the obligation to publish such net-short position in the German Electronic Federal Gazette (elektronischer Bundesanzeiger) if such position reaches, exceeds or falls below 0.5 percent (or any 0.1 percent above that).
The notification and publication obligations apply to each individual or legal entity, irrespective of its nationality or registered domicile.
2. Determination of Net-short Positions
According to the new provision, a net-short position is deemed to exist if the netting of all financial instruments held by the relevant holder results in a total economic exposure regarding a relevant company’s shares, which equals a short-selling position in such shares. In order to determine the short-selling position, the holder of the financial instruments has to (i) determine the long position and the short position in the relevant share, (ii) deduct the long position from the short position, and, if the deduction results in a net-short position, (iii) determine the ratio of the net-short position as a percentage of the outstanding shares.
The holder of financial instruments generally has not to take a consolidated view when calculating the net-short position, i.e. a separate calculation for each entity of a group and/or for each mutual fund or non-regulated fund is required. In the case of master-feeder structures, the master fund will be deemed to be the holder of the financial instruments; in the case of umbrella structures, each sub-fund will be considered as a separate entity. In practice, this approach may allow investors to avoid a disclosure of their net-short positions in many instances.
In order to determine the net-short position in a relevant share, the holder has to take into consideration any financial instrument within the meaning of the German Securities Trading Act, which creates a positive or negative economic interest in respect of such specific share. The calculation may, therefore, not include exposures other than those relating to such specific share even if there is an economic correlation between such exposure — e.g. a debt instrument issued by a company — and the short position in that company’s share. Accordingly, combinations of long and short positions in different names (such as in certain equity long/short strategies) may not be offset.
Financial instruments within the meaning of the German Securities Trading Act include, inter alia, shares, call and put options, futures, contracts for differences, and swaps (irrespective of whether the derivative is traded on a multilateral trading facility (“MTF”) or over-the-counter (“OTC”) and irrespective of whether the derivative provides for physical delivery or cash settlement). Index and basket products as well as Exchange Traded Funds (“ETFs”) have to be included to the extent that those products include a long or short position in the relevant share. However, repo transactions as well as interests in mutual fund units are not to be included, even if the mutual fund holds a long or short position in the relevant share.
In general, the calculation has to include all financial instruments held at the end of a trading day at the same value as at the end of such trading day. In respect of derivatives, the respective delta value has to be taken into account. Therefore, a disclosure obligation may arise even if the investor has not changed its holdings, but the delta value of an instrument held by the investor has changed over time.
In order to express the short position as a percentage of the share capital of the relevant company, the total issued share capital of such company as of the end of the respective trading day has to be taken into account, including both voting and non-voting shares.
3. Exempt Positions
Investment services firms and equivalent foreign firms are exempt from the disclosure obligation, provided that:
they act as lead broker, market maker or liquidity provider; and
in each case, the relevant long and/or short position is necessary for the performance of such activity.
According to the new regime, investment services firms are obliged to notify BaFin about the intention to commence any of the exempt activities. However, such notification is not a condition for the applicability of the exemption.
4. Notification and Publication
Notifications to BaFin have to be submitted via a specific online interface on BaFin’s website. The notification has to include, inter alia, the company name and ISIN of the concerned company/share; the relevant threshold; whether and when the threshold has been reached, exceeded or fallen below the notification threshold; the precise net-short position in percentage (rounded by two positions after the decimal point); and the number of issued shares of the company used as calculation basis. It has to be noted that each notifying entity has to set up a new user account, and BaFin will request certain corporate documents similar to a KYC check.
Publications with the German Electronic Federal Gazette have to be submitted online via the Federal Gazette’s website and include, in addition to the abovementioned items, the company name, registered seat and country of the disclosing holder of the net-short position.
Both the notification as well as the publication have to be made by the end of the trading day following any notification threshold being crossed. Existing net-short positions exceeding the relevant thresholds on March 26, 2012, have to be notified and (if applicable) published by the end of March 27, 2012.
5. Administrative Fines
In cases where a notification to BaFin or a publication in the German Electronic Federal Gazette has not been made, is incorrect, incomplete or has not been made in the right time or manner, BaFin may impose an administrative fine in an amount of up to EUR 200,000.