The Transparency Directive Implementation Act (“Transparenzrichtlinie-Umsetzungsgesetz”), which took effect on 5 January 2007, extended the notification duties to cover the holding of financial instruments entitling the holder to acquire shares to which voting rights are attached (“Financial Instruments”). The German Transparency Directive Implementation Act does not cover cash-settled options In press articles it was speculated that a group of investment banks potentially would hold the actual VW shares at 2.999% each, thus preventing notification requirements on their own, in order to hedge the call options and potentially be able to deliver them to Porsche on exercise. However, options defined as cash-settled might still be physically settled on exercise if the parties agree. Examples of cash-settled contracts include most US-listed exchange-traded index options. Instead, the corresponding cash value of the underlying is netted against the strike amount and the difference is paid to the owner of the option. The Volkswagen shares will be bought in each case at market price.”Ĭash settled options do not require the actual delivery of the underlying security. In its 26 October press release, Porsche stated that, at the end of the preceding week, it had held 42.6% of the VW ordinary shares and in addition 31.5% in so called cash-settled options relating to VW ordinary shares: “Upon settlement of these options Porsche will receive in cash the difference between the then actual Volkswagen share price and the underlying strike price in cash. On 29 October, the Federal Financial Supervisory Authority (“BaFin”), the German financial regulator, revealed that it would look into the issue to decide whether it would open a formal investigation of the trading in VW stock to determine whether there was market manipulation or insider trading.Ĭash settled call options and swaps explained
The UK press has been dominated in recent weeks with events in Germany relating to the announced takeover of VW by Porsche and the hedge funds who have been caught short when it became obvious that, with only 5.9% of shares remaining in the free float (since the State of Lower Saxony controls 20%) and about 13% of shares sold short, a significant short squeeze was building up.