Austrian M&A: New Disclosure Requirements To Prevent Secret Stakebuilding In Austrian Listed Companies

Christian Herbst, Dr., LL.M. (Harvard)
Schönherr Rechtsanwälte GmbH

EXECUTIVE SUMMARY:

As of 1 January 2013 Austria will tighten disclosure requirements for significant shareholdings in listed companies.
The new rules are aimed at preventing secret stake-building in listed companies and target in particular stake-building by cash settled option arrangements and similar financial instruments.
The disclosure threshold remains unchanged at 5% and multiples of 5%, but an additional disclosure threshold at 4% will apply and listed companies may lower that threshold in their articles of association to 3%.
By 28 February 2013 those reaching or exceeding the new thresholds, including by financial instruments must notify the Financial Market Authority, the Vienna Stock Exchange and the Issuer.
Sanctions for violations, in addition to administrative fines, newly include a temporary suspension of voting rights as to the non-disclosed shares until 6 months after proper disclosure, yet no suspension of dividend rights.

2012 AMENDMENT TO STOCK EXCHANGE ACT CLOSES CURRENT LOOPHOLE INDISCLOSURE REQUIREMENTS FOR SIGNIFICANT SHAREHOLDINGS
The 2012 amendment of the Austrian Stock Exchange Act (BörseG) under BGBl I 83 /2012 will take effect as of 1 January 2013. The amendment aims at capturing financial instruments not granting an enforceable right to acquire shares, in particular cash settled equity swaps. These instruments currently fall outside the existing disclosure requirements. The new legislation is a regulatory response to the recent secret stake-building of a 20% plus stake by an investor in listed Telekom Austria. The technique applied corresponded to that used in the stake-buildings in Sulzer/Oerlikon/Switzerland and Schaeffler/Conti and Porsche/VW in Germany. The new Austrian rules stop short of the 2012 German rules with the Austrian rules inter alia providing for a limited suspension of voting rights but no loss of dividend claims.

CURRENT AUSTRIAN NOTIFICATION REQUIREMENTS
The Austrian Stock Exchange Act provides for 2 (separate) disclosure obligations: (i) an obligation to notify the acquisition or disposal of shares in a company traded on a regulated market; and (ii) an obligation to disclose financial instruments held.

Thresholds: Persons directly or indirectly acquiring or selling shares carrying voting rights of an Austrian listed issuer must inform the Austrian Financial Market Authority, the exchange operating company and the issuer of the share of voting rights held, if their proportion of voting rights reaches, exceeds or falls below 5%, 10%, 15%, 20%, 25%, 30%, 35%, 40%, 45%, 50%, 75% or 90%.

Financial Instruments: In general, the Austrian Stock Exchange Act(BörseG) extends the disclosure obligations applicable to shareholders to (direct or indirect) holders of certain financial instruments which entitle the holder to acquire existing shares to which voting rights are attached.

Exemptions: The acquisition of financial instruments does, however, only trigger disclosure obligations, if they result in an entitlement to acquire on the holder's own initiative alone under a formal agreement, (already issued) shares to which voting rights are attached. Therefore, until the 2012 amendment prevailing opinion held that cash settled options and swaps didnot qualify as financial instruments triggering disclosure obligations.

Acting in Concert: The notification obligation also applies to persons acting in concert with a person holding shares or relevant financial instruments; a shareholder agreement, a controlling interest or a common parent company may, inter alia, qualify two persons as acting in concert. Therefore, disclosure obligations cannot be circumvented/avoided by building a stake via various acquisition vehicles, if such vehicles are (ultimately) controlled by the same entity.

Financial Institutions: Exceptions inter alia apply to (i) shares acquired for the sole purpose of clearing and settling within the usual short settling cycle (maximum 3 trading days), (ii) custodians, provided such custodians can only exercise the voting rights attached to the relevant shares under instructions given in writing or by electronic means, (iii) market makers, and (iv) investment firms and credit institutions. Please note, however, that the exception applicable to investment firms and credit institutions is limited to shares acquired within the scope of the conduct of the business of securities dealing (as defined under the Austrian Banking Act), provided that, inparticular, the stake held due to securities trading does not exceed 5 %. Thus, an individual financial institution holding more than 5% of the voting rights in a listed company is obliged to disclose such shareholding.

Sanctions: Potential sanctions include (i) an administrative law fine of upto EUR 30,000 ( increased to EUR 150,000 under the 2012 legislation) ; (ii) damage claims by market participants, (iii) suspension of voting rights, if provided for in the issuer's AoA (under the 2012 legislation suspension of voting rights statutorily foreseen), and (iv) suspension of trading.

2012 AMENDMENT OF AUSTRIAN DISCLOSURE RULES BROADEN THE DEFINITIONOF FINANCIAL INSTRUMENTS

Scope of instruments qualifying for disclosure enlarged
The broadened definition of Financial Instruments under sec 91a Stock Exchange Act now includes instruments which do not grant an enforceable right to acquire voting shares but which make the acquisition of voting stock (economically) possible. Under the new rules it is irrelevant whatever an instrument provides for a cash settlement or physical delivery of the underlying shares. Thus total return swaps and cash settled options and contracts for difference will have to be disclosed. The new disclosure requirements also cover instruments relating to baskets and indices, if the shares of the issuer exceed 20% of the total value of the basket or index.
Disclosure Threshold starting at 4%
The current statutory disclosure thresholds starting with 5% being the lowest disclosure threshold stay unchanged. However, the amendment legislation introduces a new additional threshold at 4%. Moreover, companies may provide for a lower disclosure threshold of 3% in their articles of association. It is unlikely that many companies will make use of this possibility. Until date only 2 companies use a similar possibility to provide in their articles of association for lower a statutory threshold, namely to forcestake-builders to launch a mandatory offer when exceeding a threshold lower than the statutory threshold of 30% provided for under the Takeover Act.
No Grandfathering but disclosure by 28 February 2013
By 28 February 2013 those reaching or exceeding the new thresholds of 4%,or 3% if provided under the listed companies articles of association, or any other additional disclosure threshold by financial instruments newly qualifying for disclosure as of 1 January 2013, must notify the Financial Market Authority, the Vienna Stock Exchange and the Issuer.
Sanctions now include suspension of voting rights
Under the 2012 legislation, the administrative law fines for non-compliance with the disclosure requirements have been increased to EUR 150,000.

Under a new Sec 94a, the law newly provides for a temporary suspension of the voting rights of the shares affected by the non-disclosure until six months from the date of disclosure. The suspension of voting rights will not be triggered if, including by request of the issuer, the shareholder notifies within 2 trading days, provided the total shareholding, including the shares affected by the stake-building, of that shareholder or shareholders acting in concert do not reach 15% of the total voting stock of issuer and the number of shares not yet notified is below 3%. Different from Germany, the Austrian rules on non-compliance with disclosure obligations do not providefor a suspension of dividend claims.

About the author
Christian Herbst, Dr., LL.M. (Harvard)
is a partner of Schönherr Rechtsanwälte GmbH, Attorneys at Law, Vienna
Tel: +43 1 534 37 129 Fax: +43 1 534 37 6129
Email: ch.herbst@schoenherr.eu

Web: www.schoenherr.eu