Identificating Beneficial Ownership
Disclosure and enforcement
Moscow, Russian Corporate Governance Roundtable, 3 October 2003
Paulo Câmara, Director CMVM
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.
Page 2
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.
Page 3
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).
Page 4
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).
Page 5
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.
Page 6
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.
Page 7
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.
Page 8
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.
Page 9
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 company’s
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.
Page 10
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.
Page 11
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.
Page 12