Identificating Beneficial Ownership Disclosure and enforcement

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Identificating Beneficial OwnershipDisclosure
and enforcement
Moscow, Russian Corporate Governance Roundtable,
3 October 2003
Paulo Câmara, Director CMVM
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Diversification of proprietary structures in
companies

• Control over a company does not involve
  necessarily direct acquisition of shares.
• Corporate proprietary landscape has changed
  dramatically over the recent years due to
• trust arrangements
• shareholders agreements
• complex structure of some groups of companies or
  other forms of legal persons (inter alia
  foundations and partnerships)
• All these schemes are commonly used in Russia.

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A need for further transparency

• This situation has claimed for increased
  transparency over ownership structure of
  companies.
• This is a universal question - and has been
  significantly pointed out as one of the Russian
  corporate governance weaknesses.
• White Paper (2002) it is essential that
  ownership and control structure remains fully
  transparent to all shareholders under all
  circumstances.

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Why transparency of ownership structures matters

• Ownership structure affects management of
  companies - and therefore affects pricing of
  securities.
• Hence, transparency is this respect
• Increases investors confidence
• Promotes market efficiency
• Helps market integration

Such is the justification for the first EC
intervention in this field (1988).
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Why transparency of ownership structures matters

• Prophylactic effect
• Disclosure of ownership structure helps to detect
  and prevent
• illicit use of corporate vehicles (e.g. tax
  evasion, money laundering, financing terrorism,
  infringement of competition law) or
• irregular corporate practices (related-party
  transactions).

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Why transparency of ownership structures matters
takeover law

• Special concerns under takeover law
• Transparency of ownership structures is important
  for a correct functioning of market for corporate
  control.
• All concert parties have to be described in the
  offer documents.
• Some authors (e.g. Guido Ferrarini) argue that
  there are implications in the degree of
  contestability of control of listed companies.

In countries with mandatory bids, this point is
crucial.
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Why transparency of ownership structures matters
takeover law

• Special concerns under takeover law
• Here the problem also lies on the prospective
  ownership structure.
• Offeror has to disclose real name of person under
  which instructions takeover bid is being
  presented (i.e. beneficial owner of shares to be
  acquired through the bid process).
• Some jurisdictions impose disclosure of sources
  of financing.

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How to detect beneficial ownership attribution
of voting rights

• What matters is holding of voting rights, and not
  of shares.
• Important to elaborate a list of situations where
  holding of voting rights is deemed to exist
  (fictio juris).
• New Proposed Transparency EC Directive presents
  us the following comprehensive approach

EC regime is currently under revision.
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Attribution of voting rights Proposed EC
Directive

• (a) voting rights held by a third party with whom
  that person or entity has concluded an effective
  agreement, which obliges them to adopt, by
  concerted exercise of the voting rights they
  hold, a lasting common policy towards the
  management of the issuer in question
• (b) voting rights held by a third party under an
  effective agreement concluded with that person or
  entity providing for the temporary transfer for
  consideration of the voting rights in question
• (c) voting rights attaching to shares which are
  lodged as collateral with that person or entity,
  provided the latter controls the voting rights
  and declares its intention of exercising them
• (d) voting rights attaching to shares in which
  that person or entity has the life interest
• (e) voting rights which are held, or which may be
  exercised within the meaning of points (a) to
  (d), by an undertaking controlled by that person
  or entity
• (f) voting rights attaching to shares deposited
  with that person or entity which the latter can
  exercise at its discretion in the absence of
  specific instructions from the security holders
• (g) voting rights which that person or entity or
  one of the parties mentioned in points (a) to (e)
  is required to sell, on the sole initiative of a
  third person, or is entitled to acquire, on his
  own initiative, under a formal agreement
• (h) voting rights which that person or entity may
  exercise as a proxy according to common
  instructions from securities holders.

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How to enforce rules on transparent ownership
structure

• The Portuguese solution
• Duty to disclose shareholder agreements whose
  percentage of votes involved is higher than 2 of
  publicly-held companies.
• Such duty is binding to all parties in the
  agreement.
• Besides administrative fines for non-compliance,
  a companys decision can be declared as void if
  majority is obtained due to votes of shareholders
  that entered into a non-disclosed agreement.

Enforcement is also decisive in terms of
transparency of ownership structures.
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How to enforce rules on transparent ownership
structure

• The Portuguese solution
• In Portugal, a 2001 reform has brought up
  interesting changes in this respect.
• If beneficial ownership is not disclosed, the
  market authority can issue a public declaration
  qualifying some shareholding as not transparent.
• Consequently, voting rights therein attached
  become suspended.
• This solution has proved to be very effective.

Enforcement is also decisive in terms of
transparency of ownership structures.
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Conclusion

• Disclosure system should
• Be coherent and easily understandable by
  shareholders
• Encompass adequate articulation with takeover
  law
• Imply a catalogue of situations where beneficial
  ownership is deemed to exist
• Involve the Internet as a means of disseminating
  accessible and timely information
• Provide the necessary powers to market
  authorities
• Be enforced effectively (i) through
  administrative fines and (ii) through rules that
  affect shareholders rights if disclosure duties
  are not complied.