Disclosure of “Beneficial Ownership” of Synthetic Positions in Takeover Campaigns

Thursday, January 1st, 2009 at 12:00 am by Elina Khasina
Elina Khasina, Disclosure of “Beneficial Ownership” of Synthetic Positions in Takeover Campaigns, 2009 Colum. Bus. L. Rev. 904

The past few years have seen a substantial rise in financial innovation of complex securities. One such ingenuity is the rise in total return equity swaps, which have the effect of decoupling the economic stake in a company from the voting rights in its stock. Ownership by activist investors of such derivative positions has critical consequences in takeover campaigns because it allows the holder of a synthetic instrument to acquire a large secret stake in a corporation. Such an undisclosed position can be transformed into ownership of the underlying stock in a matter of hours. Consequently, activist investors have controlling power over how these shares are voted without having to disclose their stake under the federal rules, depriving directors as well as other shareholders in the corporation of important information.

This Note looks into new proposals for corporations to adopt advance notice bylaws that force disclosure of synthetic positions as a requirement for eligibility to nominate directors at shareholder meetings. It analyzes this takeover defense under Delaware law, specifically using the Blasius compelling justification standard of review. Most likely, when faced with this provision, the Delaware Chancery Court will find that a board of directors has a compelling justification for implementing the disclosure requirements and will therefore uphold the legality of the advance notice bylaw.

Author Information

Columbia University Law School, J.D. Candidate 2010.