Publicly listed companies take a close interest in the performance of their equity shares and in the types of shareholders they have, the names of larger shareholders, the size of holdings, the trading activities and intentions of investors. As a prime objective the company directors will want to deliver shareholder value. Linked to this the Board will want to reduce their share price volatility and cost of equity. Clearly the underlying business characteristics, strategy and performance are crucial but if these are to influence the markets then the market needs to be well informed.
As well as publishing information to the market generally a Company will try to ensure that the information is getting through to influential shareholders and analysts.
Analysts do not themselves own shares but yet companies’ Investor Relations departments include them in their efforts at disseminating information. Likewise companies are finding that holders of CfDs are becoming a far more significant constituent, so that they are interested in knowing the identity of holders of significant CfD stakes. CfD holders do not have a vote at company meetings but they are interested in the performance of the company, one way or another, and are influential in driving share prices up or down.
An investor taking a large long position in CfDs will often trigger the CfD issuer to hedge themselves in the share market so that CfD positions do feed back into share price performance. We therefore question the conclusion you have reached in paragraph 3.16 - that pure economic CfDs ie with no voting rights do not create a significant problem of inefficient price formation.
Even without voting rights, the identity of a significant CfD holder could well have an effect on market sentiment for the share in question. Why else would the Takeover Code require disclosure of transactions in such economic interests in bid situations? The market could still find the information influential before a bid situation formally begins.
Throughout your consultation you take the view that CfDs are not a substitute for shares since generally there are no voting rights attached and since CfDs are rarely closed out into the actual shares. Even so we believe that to all intents and purposes (other than voting) a CfD holder is equivalent to a shareholder.
Your evidence shows that the markets do react to Major Shareholding Notifications so the presumption must be that the lack of disclosures around significant CfD holdings does cause a market failure with regard to inefficient price formation.
With CfDs there exists the problem that the economic interest in the shares has become separated from the voting rights which prompts the question - for whose benefit are the directors running the company? We are clear here that from the point of view of the company they must have regard to the legal registered shareholders and that there should be no obligation to look beyond those registered shareholders, but even so the company should be able to gather information of significant CfD holdings, as any other interests in shares.
