Corporate ownership interests hidden through cash‐settled equity derivatives: impact on the companies' governance under the Italian legal framework

This paper seeks to analyze the impact on companies' governance of corporate ownership interests hidden through cash‐settled equity derivatives.

The paper outlines the definition and use of cash‐settled derivatives and describes the recent proposal of the Italian financial regulator to extend disclosure obligations of significant shareholdings to positions held through cash‐settled derivatives.

Given the structure of Italian companies and the proven risk of evasion through cash‐settled derivatives, it should be advisable to extend the concept of a major shareholding for mandatory bid purposes to this kind of instrument. Moreover, recent cases have shown that the lack of a common worldwide disclosure regime for cash‐settled derivatives could result in misleading information and in turn in a lack of confidence by investors and an increase in the costs of raising capital.

The disclosure regime to be implemented should neither completely ignore cash‐settled equity derivatives nor impose excessive duties that may increase the costs of compliance. It should be empirical and concrete. Ownership disclosure is intended to improve corporate governance by enabling minority shareholders to monitor the abuse of control.

This paper provides practical guidance from an experienced Italian securities lawyer. It explains and supports the Italian regulator's proposal to identify cases in which holdings of derivatives trigger mandatory bid obligation.