Short-selling Banned. Golden Shares Introduced. Increased Transparency Required. Governments are acting to protect companies - but will it work?
European governments and regulatory bodies are acting quickly to protect companies from the vulnerable position they now find themselves in amid a colossal drop in stock prices in recent weeks. The pan-European Stoxx 600 index plunged more than 34% in the last month, France’s CAC 40 is down by almost 40%, and both Italy’s blue-chip FTSE MIB and Spain’s IBEX have fallen by around 40% over the past month. Short-selling is banned in several countries, golden shares have been re-introduced, and laws around increased transparency have been passed. Furthermore, Spain has banned non-EU investors from buying more than 10% of key companies, a measure we expect other countries to replicate.
Here we take a look at the actions governments are taking, and what companies can do to protect themselves.
Short-selling banned
Regulators in Spain, France, Italy and Belgium have banned short selling in some stocks, for varying periods of time, aiming to curtail the plunge in equity markets that we are currently seeing. The fear is that short sellers, who do not have the companies’ long-term best interests at heart, will be able to destabilise companies by publicly criticising accounting or management – which will only increase loss of investor faith and economic turmoil. And they may be right. We have seen shorts have had some clear successes in recent times. NMC Health Plc shares plunged after Muddy Waters Capital LLC made accusations of financial wrongdoing. Trading in the shares was suspended, and the company said an internal investigation turned up evidence of suspected fraud in its accounts.
Golden shares introduced
A few days ago, the government of Spain brought back the ‘golden share’ to shield strategic assets listed on country's stock market from hostile takeovers in the wake of falling share prices. The Spanish Prime Minister said that in order to protect the companies on the Spanish bourse, his government has reinstated investment regulations that impede businesses from outside the European Union obtaining control of entities in strategic sectors. Spain isn’t alone. Italy is also planning on introducing golden share powers to protect Italy’s interest with regards to 5G technology. More on that here >>
This concept of a golden share allows a nominal shareholder to outvote all other shares in certain specified circumstances. But as history has shown us, golden shares get challenged, and they won’t necessarily work at helping companies maintain control or defend against activists. For example, the British government's golden share in BAA, the UK airports authority, was ruled illegal by European courts in 2003, when it was deemed contradictory to the principle of free circulation of capital within the European Union. The European Court of Justice also held that Portugal's holding of golden shares in Energias de Portugal was contrary to European Union law since it presented an unjustified restriction on free movement of capital. Other golden shares ruled illegal include the Spanish government's golden shares in Telefonica, Repsol YPF, Endesa, Argentaria and Tabacalera.
Increased transparency required
In addition to the introduction of golden shares and banning of short-selling, the European Union’s market regulator on Monday ordered hedge funds and other traders to disclose more information. Traders now must inform regulators when their net-short positions account for at least 0.1% of a company’s share capital, compared with 0.2% previously.
What companies can do
Even with these increased protectionist measures, companies are still vulnerable. Shareholders deemed as non-threatening may become disillusioned with management over the course of this global crisis. We would also expect to see an increased number of corporate leaks during times like this, and other de-stabilising behaviour that can’t be defended through government action. Plus there are dozens of companies whose governments are not taking the same action as the larger European nations, and will be left vulnerable given their devalued stock.
There are solutions to mitigate the risk however. One being regular Forensic Shareholder Identification Reports that will clearly show changes in ownership, new buyers and red flag entrants that might be risky. Another is an Activist Alert Report, which would tip off companies to the first signs of trouble as indicated from who is currently invested and recently investing in their stock. And of course there is an opportunity now for friendly investors—the type you would like to hold your stock—to invest. A Global Investor Targeting & Screening service would ensure you were inviting the right type of investor to the table, giving you a better chance of weathering this global economic storm.
Conclusion
Ultimately, the current unpredictable nature of the world economy is underpinned by one very predictable variable – human nature – both in defending what is dear to us, and capitalising on the opportunities that present themselves.
We expect to see further measures put in place in markets across the world to defend against short-selling and potential shareholder activism as new holders buy stock at cheap prices. But when things calm down, and markets become less tumultuous, will the measures be seen as legal? And are these measures enough?
It is fair to say that only time will tell.
In the meantime, stay smart and protect against market uncertainty: track your shareholders, communicate actively and use forensic capital markets intelligence to stay in control.
Written by Audra Walton
About CMi2i
CMi2i is a leader in capital markets intelligence, specialising in the world’s most accurate Equity & Debtholder identification service. CMi2i supports issuers and their advisors with investor relations, M&A, shareholder activism, capital restructuring and reputation management goals. The company has supported more than 1000 corporate transactions, 1200 AGMs and has over 500 clients worldwide.