Investment Management Alert
June 2008
Authors:
Danny Asher Brower
+44.20.7360.8120
danny.brower@klgates.com
Philip J. Morgan
+44.20.7360.8123
philip.morgan@klgates.com
Manjinder Cacacie
+44.20.7360.8345
manjinder.cacacie@klgates.com
K&L Gates comprises approximately 1,500
lawyers in 25 offices located in North
America, Europe and Asia, and represents
capital markets participants, entrepreneurs,
growth and middle market companies,
leading FORTUNE 100 and FTSE 100
global corporations and public sector
entities. For more information, visit www.
klgates.com.
www.klgates.com
Short Selling Disclosure - New FSA Rules
The Financial Services Authority (FSA) announced on Friday 13 June 2008 new
disclosure rules relating to short positions taken in companies during a rights
issue period. The FSA will be introducing the new rules into the Market Conduct
Sourcebook of the FSA Handbook. The new rules will come into effect from Friday
20 June 2008. The FSA took this step in response to the recent market volatility in
the shares of companies undertaking rights issues.
The following is a summary of the FSA’s new rules for the disclosure of short selling
during rights issues:
1. The holder of the short position must disclose a significant short position which
represents 0.25% or more of the issued shares obtained as a result of short selling
or by trading any instruments giving rise to an equivalent economic interest.
Persons with an existing short position of 0.25% or more on 20 June 2008 and
those who take a short position of 0.25% or more thereafter will have a disclosure
obligation.
2. The disclosure obligation applies only to the person who exercises discretion
over holdings of economic interests in the company in the rights issue period.
In the case of short positions held by a fund manager exercising discretionary
investment management on behalf of a client, the fund manager itself should
make the disclosure and the clients need not be named. Where a fund manager
conducts discretionary investment management for more than one client, the
fund manager should aggregate the positions of all clients for the purposes of
determining whether it has a disclosable short position.
3. For the purposes of determining whether a person has a disclosable short position
on any given day, their position at midnight on that day is the relevant figure.
Hence if a person assumed a short position of 0.25% or above on a day, but had
unwound that position by 23:59 on the same day, they would not be required to
make a disclosure.
4. For the purposes of the rules, a holder of economic interests in a company in
a rights issue period may net its long and short positions in that company. The
disclosable position will be any net short position of 0.25% or above. A person
cannot however net off a short position in the company’s existing (undiluted)
shares with a long position in rights under the rights issue. Nor can a person net
off a short position against any shares in the company that it has borrowed.
Investment Management Alert
5. The obligation to make a disclosure is
applicable in respect of shares admitted to
trading on a UK prescribed market such as the
London Stock Exchange’s main market, AIM
and Plus.
6. The obligation to disclose commences from
the date a company announces a rights issue
and ends on the date that the shares issued
under the rights issue are admitted to trading
on a prescribed market.
7. T
he disclosure must be made by means of
a Regulatory Information Service (RIS) by
3.30pm on the business day following the
date on which the disclosable short position is
reached or exceeded.
8. T
he disclosure may be made using the TR3 form
available on the FSA website. Alternatively, a
different method of disclosure can be used as
long as all disclosures include the information
required by the TR3 form.
The FSA states in its press release that it views
short selling as a legitimate investment technique
which assists liquidity and is not in itself abusive.
However, the FSA also states that, in current
market conditions, there is increased potential for
market abuse through short selling during rights
issues. The FSA’s new disclosure requirements
will be kept under review and may be subject
to change.
The FSA further provides that, in addition to the
new disclosure regime, it is considering whether
to restrict the lending of shares during rights
offerings to short sellers and/or to restrict short
sellers from covering their positions by acquiring
the rights to the shares to be issued in the
rights issue.
In addition to the press release of 13 June 2008,
the FSA has also published frequently asked
questions and answers on 17 June 2008 which
gives some prescribed guidance. Please click on
the link to access the FAQs- http://www.fsa.gov.
uk/pubs/other/Short_selling_faqs.pdf
This list of questions will be reviewed over time
by the FSA and may be updated to address any
other frequently asked questions that arise. K&L Gates comprises multiple affiliated partnerships: a limited liability partnership with the full name Kirkpatrick & Lockhart Preston Gates Ellis LLP
qualified in Delaware and maintaining offices throughout the U.S., in Berlin, in Beijing (Kirkpatrick & Lockhart Preston Gates Ellis LLP Beijing
Representative Office), and in Shanghai (Kirkpatrick & Lockhart Preston Gates Ellis LLP Shanghai Representative Office); a limited liability partnership
(also named Kirkpatrick & Lockhart Preston Gates Ellis LLP) incorporated in England and maintaining our London and Paris offices; a Taiwan general
partnership (Kirkpatrick & Lockhart Preston Gates Ellis) which practices from our Taipei office; and a Hong Kong general partnership (Kirkpatrick &
Lockhart Preston Gates Ellis, Solicitors) which practices from our Hong Kong office. K&L Gates maintains appropriate registrations in the jurisdictions
in which its offices are located. A list of the partners in each entity is available for inspection at any K&L Gates office.
This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein should not be used or
relied upon in regard to any particular facts or circumstances without first consulting a lawyer.
Data Protection Act 1998—We may contact you from time to time with information on Kirkpatrick & Lockhart Preston Gates Ellis LLP seminars and
with our regular newsletters, which may be of interest to you. We will not provide your details to any third parties. Please e-mail london@klgates.
com if you would prefer not to receive this information.
©1996-2008 Kirkpatrick & Lockhart Preston Gates Ellis LLP. All Rights Reserved.
June 2008 | 2