In the private wealth sphere, single stock lending (where a bank provides a loan secured by a borrower's shareholding in a publicly listed company) is not uncommon. There are, however, some potential pitfalls and points to be aware of when entering into such loans, especially where the borrower is connected to the listed plc.
This article seeks to outline the potential disclosure requirements for borrowers triggered by the granting of such share security under the Disclosure Guidance and Transparency Rules (DTRs) and the UK Market Abuse Regulation (UK MAR) as well as the issues for lenders in making these secured loans.
It should be noted that following the end of the Brexit transition period, the UK Market Abuse Regulation and the EU Market Abuse Regulation (EU MAR) run in parallel. In practical terms both EU MAR and UK MAR have the same effect and contain the same dealing restrictions and disclosure requirements and therefore, as at the date of this article, the below analysis applies to both regimes. UK MAR specifically applies to financial instruments which are:
- admitted to trading on a UK or an EU regulated market or for which a request for admission to trading on a UK or an EU regulated market has been made;
- traded on a UK or an EU multilateral trading facility (MTF), admitted to trading on a UK or an EU MTF, or for which a request for admission to trading on a UK or an EU MTF has been made;
- traded on a UK or an EU organised trading facility (OTF); and
- not covered by points (a), (b) or (c), the price or value of which depends on or has an effect on the price or value of a financial instrument referred to in those points, including, but not limited to, credit default swaps and contracts for difference.
UK MARAmongst other things, UK MAR governs disclosure requirements for Persons Discharging Managerial Responsibility (PDMRs) and Persons Closely Associated (PCAs) with them when conducting transactions in the securities of listed issuers.
A “PDMR” is a natural or legal person within an issuer who is either of the following:
- a member of the administrative, management or supervisory body of that entity; or
- a senior executive who is not a member of the bodies referred to in (i), but who has regular access to "inside information" relating directly or indirectly to that entity and the power to make managerial decisions affecting the future developments and business prospects of that entity.
A “PCA” in relation to a PDMR is:
- the PDMR’s spouse, or a partner considered to be equivalent to a spouse under national law (includes civil partnership);
- a dependent child of the PDMR in accordance with national law;
- a relative of the PDMR who has shared the same household for at least one year on the date of the transaction concerned; or
- a legal person, trust or partnership, the managerial responsibilities of which are discharged by the PDMR (or by a person in (i) – (iii) above), or which is directly or indirectly controlled by such a person, or which is set up for the benefit of such a person, or whose economic interests are substantially equivalent to those of such a person.
In relation to UK MAR, "inside information" is information of a precise nature which:
- has not been made public;
- relates, directly or indirectly, to one or more issuers or to one of more financial instruments;
- and which, if it were made public, would be likely to have a significant effect on the prices of those financial instruments or on the price of related derivative financial instruments (that is, it is information that a reasonable investor would be likely to use as part of the basis of their investment decisions).
Therefore, lenders should assume that any client who retains a board position, senior executive (non-board) role or sufficiently high shareholding so as to have an impact on decision making for the listed company, together with their family members (spouses, dependent children) and trust entities, will be caught by the relevant MAR legislation in relation to transactions in the securities of the relevant listed issuer.
Having established who the legislation applies to, what effect does it have? Article 19 of UK MAR requires PDMRs and their PCAs to notify the issuer and the FCA of any transactions conducted on their own account in the issuer’s shares, debt instruments, derivatives or other financial instruments, where the total amount of such transactions exceeds €5,000 in any calendar year. Transactions are not limited to the acquisition of shares and/or changes in shareholding levels, but capture all transactions entered into in respect of their shares in the issuer. This includes the pledging or lending of financial instruments where they are used to secure a credit facility (a pledge of financial instruments relating to the deposit of financial instruments in a custody account does not require a notification).
Therefore when a share pledge is granted in respect of a credit facility, the PDMR or PCA (as relevant) must, within three business days, notify the issuer and the FCA (this is regardless of whether or not disclosure is also required to an EU competent authority under EU MAR due to, for example, the issuer being registered in an EU Member State).
The issuer must then, also within three business days, notify the market of the dealing by the PDMR of PCA in its securities by way of a regulatory announcement.
The same notification requirements apply to transactions made under a life insurance policy where the:
- policyholder is a PDMR or PCA;
- investment risk is borne by the policyholder; and
- policyholder has the power or discretion to make investment decisions regarding specific instruments in that life insurance policy or to execute transactions regarding specific instruments for that life insurance policy.
There are certain exceptions to notification where the transaction relates to financial instruments linked to shares or to debt instruments of the issuer (collective investment undertakings or a portfolio of assets (with a 20% threshold)).
UK MAR also contains a general prohibition on PDMRs conducting any transactions in the securities of an issuer on their own account or the account of a third party during a closed period (being the period of 30 calendar days before the announcement by the issuer of an interim financial report or year-end report). Note that some issuers extend the length of the closed period applicable to its PDMRs in the code adopted by the issuer governing dealings in its securities. This should be kept in mind by lenders in terms of the timing of entry into loans and, in particular, the taking of security over the shares. Indeed, lenders should obtain specific confirmation from a PDMR of a listed company at the point of taking security that:
- the listed company is not in a closed period;
- that he or she has received clearance to deal in the shares pursuant to the share dealing code of the issuer (if any); and
- that he or she has made the required notifications in respect of the dealing in the issuer's shares.
Finally, we note for completeness that UK MAR prohibits insider dealing, which arises where a person possesses inside information (see above) and uses that information by acquiring or disposing of financial instruments to which the information relates. While granting a pledge over shares arguably will not constitute an acquisition or disposal for these purposes, and that insider dealing by a borrower will not affect the validity of the security, there is at the very least the possibility of adverse publicity for the lender. We would therefore recommend that lenders obtain confirmation from the borrower at the time security is granted that he or she is not in possession of inside information relating the issuer of the relevant securities.
DTR 5The DTRs set out general disclosure requirements for significant shareholders in companies listed on a UK market. The rules are specifically designed to ensure a notification is made where changes to voting rights in public companies occur and will normally be most relevant in acquisition situations.
Where shares are being pledged or equitably mortgaged or charged (i.e. there is no transfer of title to the lender or its nominee), there is no transfer of shares at the point of granting security and therefore notification on entry into the share pledge is not required.
However, if the share security is ever enforced or a legal mortgage of the shares is taken, the position may be different. Where shares are transferred to the lender or its nominee as part of an enforcement action or before, notification may be required if certain thresholds would be triggered. The relevant thresholds and trigger points are noted below:
|UK issuer (with shares admitted to either a regulated or a prescribed market)||Non-UK issuer with shares admitted to a regulated market|
|Notification Obligations||3% and each whole percentage above 3%||
5%, 10%, 15%, 20%, 25%, 30%, 50% and 75%
Shareholder must notify within two trading days
|Shareholder must notify within four trading days|
|Notification to be made to||
Issuer and (if a regulated market issuer) the FCA
|Issuer and FCA|
|UK issuer with shares admitted to a regulated market||UK issuer with shares admitted to a prescribed market (e.g. AIM)||Non-UK issuer with shares admitted to a regulated market|
|Notifications from shareholders||
Notify market of notifications received by end of next trading day
|Notify market of notifications received by end of third trading day||Notify market of notifications received by end of third trading day|
|Total voting rights||Notify at the end of each calendar month the total number of voting rights and capital in respect of each class of shares if there was an increase or decrease during the month and as soon as possible and in any event no later than the end of the business day following the day on which there is a material increase or decrease following completion of a transaction||Notify at the end of each calendar month the total number of voting rights and capital in respect of each class of shares if there was an increase or decrease during the month and as soon as possible and in any event no later than the end of the business day following the day on which there is a material increase or decrease following completion of a transaction||
Notify at the end of each calendar month the total number of voting rights and capital in respect of each class of shares if there was an increase or decrease during the month and as soon as possible and in any event no later than the end of the business day following the day on which there is a material increase or decrease following completion of a transaction
|Transactions in own shares||Disclose within four trading days any acquisitions or disposals out of treasury of own shares that cross 5% or 10% thresholds||Disclose within four trading days any acquisitions or disposals out of treasury of own shares that cross 5% or 10% thresholds||
Disclose within four trading days any acquisitions or disposals out of treasury of own shares that cross 5% or 10% thresholds
Are there any exceptions to this? DTR 5.1.3(R)(5) does confirm that there is an exception to the notification requirements where shares have been transferred as collateral (which they would be pursuant to a legal mortgage), provided that the collateral taker does not declare his intention to exercise, and does not exercise, the voting rights attached to such shares. However, if shares were to be outright transferred (i.e. to realise the value of them), notification would be required.
Therefore, lenders should be conscious of the fact that notification will be required on enforcement at the point when the relevant shares are sold to realise the secured liabilities of the borrower, but only where the above noted thresholds would be triggered.
ConclusionWhen taking security over shares in a listed company from a PDMR or PCA, a lender needs to take into account UK MAR and/or EU MAR (as appropriate) and satisfy itself that the legislation has been complied with, including obtaining appropriate confirmations from the borrower. Having done that the lender is free to enforce its security when it chooses, i.e. it is not restricted by any closed period in relation to the relevant issuer.
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