EXECUTING BLOCK TRADES ISSUES IN PRACTICE

Nicholas Holmes of Ashurst LLP and Peter Castellon of Proskauer Rose LLP consider some of the issues that can arise when executing shareholder block trades.

A block trade is a secondary sale of a large • How to document a block trade. the seller. To the extent that it is able to quantity of existing shares. Block trades are resell the shares at a higher price, the typically carried out by institutional • Disclosure issues when executing a manager keeps the difference. and are best suited to highly liquid and well- block trade. researched shares in public companies. They • A non-risk deal, also known as an can provide a rapid and effi cient solution for • Issues that may arise after the block accelerated equity offering (AEO), where holders of substantial equity stakes wishing trade is announced. the manager builds a book of demand to monetise their positions through the equity for the seller before agreeing on a price capital markets. Unlike large public offerings, • The impact of the MiFID II Directive based on that demand. Frequently, the which require months of preparation, block (2014/65/EU) (MiFID II). manager receives a commission from trades are typically launched, executed and the seller. In some cases, the manager priced very quickly, sometimes within 24 hours. STRUCTURE may earn an agreed spread. Since January 2000, offering sizes have varied between $2.3 million and $5.9 billion. A block trade can be structured as: • A back-stopped deal, falling somewhere between a and an AEO, where This article considers: • A bought deal, in which the investment the manager does not take the shares onto bank acting as manager of the block its own books before marketing (as with • The structures and timetables that can trade buys the shares from the seller a bought deal), but does guarantee the be adopted to execute block trades. before the manager starts its formal seller a minimum price. If the manager is marketing efforts. The manager unable to fi nd buyers for all of the shares • The key issues that can arise before the generally resells the shares as soon as at or above the back-stopped price, it buys launch of a block trade. possible after they are acquired from the shares itself.

practicallaw.com / September 2016 / PLC Magazine 29 TIMETABLE Indicative timetable for competitive process

There are two general approaches to a T-1 2.45-3 pm • Confidentiality letter circulated block trade timetable. In the fi rst, the seller appoints the manager in advance. This is 3 pm • Package of tender documents circulated to invited most frequently used for AEOs but can be banks that have signed the confidentiality letter followed for bought deals and back-stopped deals. The manager and the seller will fi rst 4.30 pm • Deadline for invited banks to submit bids agree on the block trade agreement, conduct due diligence, prepare announcements and 5 pm • Notification to successful manager(s) take care of any formalities. They will then • Conference call between seller and manager(s) launch the block trade when they believe • Block trade agreement executed the time is right. 5.15 pm • Announcement and launch of transaction

In the alternative approach, the manager 10 pm – 7 am • Closing of books (potential to close earlier depending is appointed in a competitive process on how the deal is going) immediately before the block trade is launched. In this case, the timetable is T 7 am • Pricing, pricing announcement and allocations inevitably highly challenging (see box “Indicative timetable for competitive process”). T+2 • Settlement and delivery The seller invites bids for a block of shares it wishes to sell. It does so by having one of its advisers (sometimes a law fi rm) call a pre- PRE-LAUNCH In any such case, the manager is likely to agreed , as potential require a due diligence call with the issuer to managers, to alert them to the block trade. Before a block trade is announced, the parties assure itself that no material disclosures are will need to address a number of issues. imminent, that the issuer is up to date with Sometimes the investment banks will be its disclosure obligations and that trading is asked to sign a confi dentiality letter. The Due diligence in line with market expectations, although confi dentiality letter (if used) usually arrives The scope of the due diligence exercise for a care will be needed to avoid triggering the around 2:45 to 3:00 pm. It will not disclose block trade varies based on the circumstances provisions of the Market Abuse Regulation the underlying securities but will require the of the transaction, the relationship between (596/2014/EU) (MAR) and inside information interested parties to agree to be bound by the manager and the issuer, and the concerns. an obligation of confi dentiality in return for relationship between the seller and the issuer; the disclosure of the details of the intended for example, if the manager is the issuer’s The safest time to conduct a block trade is block trade transaction. corporate broker, it will already know the shortly after the publication of the issuer’s issuer well, so a shorter due diligence exercise fi nancial results: all material information Confi dentiality letters vary in scope but might be needed. In any event, the scope of concerning the issuer can then reasonably sometimes contain additional provisions the due diligence exercise for a block trade be presumed to be in the public domain. intended to prevent unsuccessful bidders is limited when compared to the scope for an Separately, if the issuer is an EEA listed in receipt of information from selling initial (IPO) or other offering company and the seller is a person the relevant shares. These restrictions can by an issuer. The shares should already be discharging management responsibilities sometimes be onerous, and it is important to listed and there will be signifi cant amounts (PDMR) within the issuer, or a body corporate ensure that a representative of the equities of publicly available information, including in which a PDMR is a director or senior trading arm of a participating investment annual reports, other fi nancial and corporate executive with power to make management bank is comfortable with them before the announcements and independent research decisions, then the trade cannot take place confi dentiality letter is signed by that bank. reports. This is unlike an IPO or rights offering, during a closed period (that is, the period of Confi dentiality letters are not strictly needed, where marketing efforts are focused on a 30 calendar days before the announcement of as banks have a duty of confi dentiality in any prospectus and other marketing materials an interim fi nancial report or year-end report) event. (For a form of confi dentiality letter, see prepared especially for the offering and (Article 19, MAR) (see feature article “Market feature article, “Strictly confi dential: new block needed to disclose new or transformative Abuse Regulation: ensuring compliance amidst trade confi dentiality letter” www.practicallaw. information. uncertainty”. www.practicallaw.com/6-629- com/3-500-2224.) 5677.) Timing The seller or its advisers will then circulate a Managers will not usually wish to undertake Sounding out the market package of documents, including an invitation a block trade in the shares of an issuer that A successful and profi table bid for a block to tender a bid, a draft timetable, a draft block will shortly report fi nancial results. Block trade requires a good knowledge of the trade agreement with schedules including an trades will usually take place at least four market dynamics of the relevant and representation letter (if applicable) weeks before the relevant announcement, the sector in which its issuer operates. It also and, sometimes, forms of supporting legal although this might be reduced by a few days requires a good sense of the likely appetite opinions (see “Documents” below). or even a week in exceptional circumstances. of investors. Getting this wrong can lead to

30 PLC Magazine / September 2016 / practicallaw.com FEATURE a failure to bid competitively for the block or, information within the meaning of the 1993 a transaction would prima facie constitute alternatively, to unsold stock on the bank’s Act or MAR. Therefore, it may be possible unlawful disclosure (Article 10, MAR). books and a risk of incurring a fi nancial loss. to disclose certain non-specifi c information However, disclosure of inside information is For this reason, banks sometimes sound out regarding the issuer without falling within lawful, according to Article 10 of MAR, where the market by telephoning potential investors the MAR prohibitions. However, given the it is disclosed in accordance with the “normal to assess their likely appetite before bidding limited extent of information that can be exercise of an employment, a profession for a block of shares at a particular price. A disclosed before this information may be or duties”. Taking this into account, inside number of legal and regulatory constraints considered inside information under MAR, information could potentially be disclosed should, however, be borne in mind before market participants may fi nd the benefi ts in each of scenarios A, B and C above, undertaking any market soundings. of this approach limited and, in any event, and therefore market participants need to this approach is unlikely to be available for consider whether this disclosure is lawful. Insider dealing and market abuse. Inside scenario C involving the offering of securities, information may arise at a number of different as the information given in respect of the In relation to scenario B, MAR provides points in a block trade, and it is important offering will inevitably need to be precise a new safe harbour that can be relied on to distinguish between them. These points and in scenario B it will still be a sounding when carrying out this activity in the form of include: under MAR (as set out below), even if there a market sounding regime, which may apply is no inside information. to communications under block trades in a • When a manager contacts investors similar way to other transactions (Article 11, acting on its own behalf (that is, on its Previously the FCA Handbook had two MAR) (Article 11). In particular, recital 35 of own initiative and without being under relevant safe harbours, known as the MAR confi rms that where a market sounding mandate from a seller) (scenario A). “legitimate business” and “dutiful execution procedure is used, the disclosing market of client order” safe harbours which related participant will be considered to be acting • The sounding of investors, by a manager, to the execution of the orders, rather than within the normal course of his employment, to gauge their appetite for a trade when disclosure of inside information. However, profession or duties. The requirements in acting on behalf of a seller (scenario B). under MAR, the concept of dutiful execution relation to market soundings are set out at has been removed and the legitimate business Article 11 and include, among other elements, • The actual offering of the securities safe harbor has been narrowed. Nevertheless, ensuring that the recipient of the information to investors in order to effect the MAR sets out a legitimate behaviour safe agrees that he is prohibited from using transaction (scenario C). harbour in Article 9(2)(a) that permits an that information or attempting to use that entity in possession of inside information to information to acquire or dispose for his own The fact that a particular prospective seller, trade where doing so is in the normal course account (or third party) fi nancial instruments or even an unnamed seller, is contemplating of its function as either a market marker or relating to that information. A large number a substantial sale of specifi ed securities a counterparty. of the new requirements set out in MAR relate is likely in itself to be inside information to the form and nature through which the for the purposes of the criminal insider A further safe harbour exists where an entity market sounding is conducted and recorded. dealing regime under Part V of the Criminal that is in possession of inside information In order to deal with the MAR requirements for Justice Act 1993 (1993 Act), and the market executes an order on behalf of a soundings, many market participants abuse legislation now contained in MAR party legitimately in the normal course of have a market sounding script or checklist (superseding the Market Abuse Directive the exercise of that person’s employment, that is read out to a potential investor by (2000/6/EC) (MAD) and the provisions of profession or duties (Article 9(2)(b), MAR). the disclosing market participant before the and Markets Act 2000 These safe harbours under Article 9 of MAR conducting the sounding. (FSMA) that implemented MAD). However, continue to permit a market participant this may not be the case in scenario A, where to carry out a transaction in the course of In relation to scenario C, the fi rm would not be a fi rm is simply testing investor appetite for its legitimate business. For example, the able to rely on Article 11 as it does not apply to a block trade on its own initiative but has acquisition of instruments by the manager effecting transactions; rather, it only applies to not been approached by the seller. In this who is conducting the block trade would gauging interest in the proposed transaction. respect, although MAR is a civil regime, be within the MAR safe harbour, where Instead the fi rm would have to ensure that any EEA competent authorities have signifi cant the manager is acting in accordance with disclosure made as part of the dealing was powers under MAR to fi ne, publicly censure, its legitimate business as a counterparty made in the normal exercise of its profession or withdraw or suspend the authorisation of, (Article 9(2)(a), MAR). These safe harbours or duties (Article 10(1), MAR). In addition, an investment fi rm or person where market would not, however, apply to the disclosure the of the market participant who abuse has been carried out (Articles 30 and of inside information itself and also would not has received the market sounding has to be 31, MAR). permit the ultimate buyers, who may have considered. If such a participant is in receipt been market sounded (see below), to deal. of inside information (following the market It is possible to argue that if the identity sounding) it is generally accepted that in of the issuer of particular securities is not If information disclosed by a potential seller order to be cleansed of this information an disclosed, either expressly or by implication to the investment bank is inside information announcement would need to be made before given the investment bank’s or the market’s (and it generally will be, as noted above), the participant can deal. Therefore, in relation existing knowledge, any information relating the dissemination of that information to to scenario C, an announcement will typically to a potential sale might not be inside third parties before any announcement of be made before the deal is effected.

practicallaw.com / September 2016 / PLC Magazine 31 In relation to scenario A, where an entity is gauging investor interest on its own initiative Block trade agreement representations (and therefore not within the market sounding regime) it must be careful that doing so does The following representations from the selling shareholder are typically included in not result in the unlawful disclosure of inside the block trade agreement: information. The entity would not be able to rely on Article 11 as it is not acting on behalf • Corporate power and authority. of, or on the account of, the issuer or seller. However, an entity reaching out to investors • No confl icts. on the public side should not be disclosing inside information (that is, the information • Title to the securities. being disclosed should be public in this context). • No stamp taxes.

It is open to a regulated fi rm to disclose to a • No manipulation. seller, as a customer or a potential customer, that the fi rm may contact selected investors • No inside information. to gauge their appetite for a particular transaction, or kind of transaction, and to • Directed selling efforts. This should be included if the block trade is structured obtain the seller’s consent to that course of pursuant to Regulation S under the Securities Act (Regulation S). No further action where appropriate. The then-Financial representation may be required if the transaction is structured solely pursuant to Services Authority suggested in its 5 April Regulation S. 2004 decision notice concerning Morgan Grenfell & Co Limited that informing the If the block trade is structured pursuant to Section 4(a)(1) of the US Securities Act of customer of intended action is essential in 1933 (Securities Act), no US law-specifi c representations are needed. circumstances where the customer’s interests might be disadvantaged by that action. This The following additional representations are required if the block trade is structured disclosure might be made, in theory, at any pursuant to Rule 144A under the Securities Act (Rule 144A) or Section 4(1½): time between the initial meeting with the seller or its advisers and the time at which the • General solicitation. While there is an argument that the general solicitation fi rm is mandated to act on its behalf. Until representation is not required in the case of a block trade structured pursuant mandated or requested to by a seller, banks to Rule 144A, it is, nevertheless, always provided in Rule 144A block trade are not restricted from unilaterally seeking agreements. The representation is required in the case of a Section 4(1½) block bayside feedback without falling into the trade. market sounding regime. • Investment company. FCA regulation. Managers will need to additionally take into account the FCA’s • Passive foreign investment company (PFIC). Handbook provisions, where relevant. In particular, the fi rst tier of the FCA’s Handbook The following additional representations should be included if the block trade is consists of the Principles for Businesses structured pursuant to Rule 144A. (Principles), which include that a fi rm must: • Fungibility. • Conduct its business with integrity (Principle 1). • Ongoing information.

• Conduct its business with due skill, care There is no need for a representation that covers integration. The concept of integration and diligence (Principle 2). is not applicable in the case of a sale by a shareholder, whether or not the shareholder is an affi liate of the issuer. • Pay due regard to the interests of its customers and treat them fairly (Principle Representations that cover foreign private issuer (FPI) status and substantial US market 6). interest (SUSMI) are sometimes included. In circumstances where the FPI status and SUSMI status of the issuer are obvious, no representations are required. However, • Manage confl icts of interest fairly, both in block trades involving a competitive process, due to the limited time available to between itself and its customers and review the issuer’s status, the representations are typically included. between a customer and another client (Principle 8). including in cases where market abuse or which damages a customer’s interests may The Principles are frequently the basis on insider dealing legislation has not been not constitute market abuse but may breach which the FCA takes enforcement action, infringed. A disclosure of trading information Principles 6 and 8.

32 PLC Magazine / September 2016 / practicallaw.com FEATURE

US issues in block trades

There are a number of issues that need to be considered if shares trade to be structured pursuant to Rule 144A under the Securities are expected to be sold into the US. Act (Rule 144A) or Section 4(1½) of the Securities Act (Section 4(1½)). In the case of both exemptions, there cannot be general Exemptions solicitation in the US, and the issuer cannot be an investment The registration requirements of the US Securities Act of 1933 company, as defi ned in the US Investment Company Act of 1940, (Securities Act) apply worldwide, so any securities offering must as amended (investment company). Specifi c representations will be registered with the US Securities and Exchange Commission be needed in the purchase agreement for a Rule 144A offering (see or structured pursuant to an exemption from the registration box “Block trade agreement representations”). If the seller is unable requirements. Possible exemptions include the following: to give representations on fungibility or ongoing information, the offering can be structured under Section 4(1½). If the block trade Section 4(a)(1). If the seller is not an affi liate of the issuer, it is structured pursuant to Section 4(1½), it is customary to ask QIBs may be possible to structure the block trade under section 4(a) to provide an investor representation letter. (1) of the Securities Act (Section 4(a)(1)), which allows the trade to be extended to both qualifi ed institutional buyers (QIBs) and Investment company and PFIC non-QIB investors in the US. Section 4(a)(1) is an exemption for If the issuer is an investment company, it will be diffi cult to structure secondary trades. The US securities lawyers involved should the block trade under Rule 144A or Section 4(1½) (see above). advise whether the seller is an affi liate of the issuer. There is a The US lawyers involved should advise whether the issuer is an presumption of affi liation if the seller holds 10% or more of the investment company. If the issuer is a PFIC, there may be adverse issuer’s voting securities or if it has representation on the issuer’s tax consequences for US investors that buy its shares. The US board of directors; however, other factors may be taken into lawyers involved should advise whether the issuer is a PFIC. account. If the seller is not an affi liate of the issuer, this exemption is the easiest to use. Volcker rule The Volcker rule places restrictions in certain circumstances on Regulation S. Regulation S under the Securities Act (Regulation investment banks engaging in in “covered S) is an exemption for securities sold outside the US. There are funds” (section 619, Dodd-Frank Wall Street Reform and Consumer three categories of restriction based on the volume of US trading Protection Act of 2010). In general terms, a European or Asian in the shares. For shares of most European or Asian issuers, it will company that is not an investment company will not be a covered be suffi cient to comply with this exemption if the shares are sold fund. Accordingly, the investment company representation should outside the US and there are no direct selling efforts in the US. be suffi cient to confi rm that the restrictions would not apply, It is usually possible to sell to a US institution as as the buy and in most cases there is no need for any specifi c reference to order originates outside of the US. Only on rare occasions will it the Volcker rule in the block trade agreement. If the issuer is an be necessary to exclude sales to US persons outside the US. In investment company, then the Volcker rule restrictions will need any event, Regulation S permits sales to US-based advisers acting to be considered. for non-US accounts whether or not the adviser is acting with discretion. In addition, a non-US adviser acting with discretion Section 4(a)(7) for a US account is not a US person. Section 4(a)(7) of the Securities Act is an exemption from the registration requirements of the Securities Act for certain Rule 144A and Section 4(1½). If a block trade is extended into the transactions extended to accredited investors in the US. This US, it is likely that the US securities lawyers involved will recommend exemption is not practical for block trades in shares of non-US that sales in the US be limited to QIBs. This will permit the block issuers.

Principles 6 and 8, and most of the FCA Principles and COB Rules will be relevant to agreement, the manager is bound by Conduct of Business (COB) Rules relating the relationship. general principles of the law of confi dence to designated investment business, concern not to misuse or disclose any confi dential business carried out with or for customers. It follows that the Principles may be breached information given to it in circumstances of For this purpose a customer includes pre- by actions carried out by the manager’s confi dence. If a potential seller provides existing and potential customers of the bank employees before the manager has been information to the manager in relation but does not include a market counterparty. mandated (as the Principles include potential to a proposed block trade (for example, Market counterparties include governments, customers) by a seller for a block trade, and its intention to enter into the trade, the government agencies, central banks and irrespective of whether the seller is an existing nature of the trade it is contemplating or monetary authorities, supranational customer of the manager. The Principles the identity of the securities to be traded), organisations, state investment bodies, and COB Rules will clearly also apply after this information is likely to be held to be other regulated fi rms and certain other a mandate has been given. confi dential information. On the other hand, market professionals. In many cases, the information obtained by the manager from manager is unlikely to classify the seller in Misuse of confidential information. its own research or from will not a block trade as a professional client, so the Whether or not it signs a confi dentiality be confi dential information.

practicallaw.com / September 2016 / PLC Magazine 33 Each case will depend on its particular circumstances. For example, a seller that Basic provisions of an investor representation letter is known to have only one signifi cant holding is more likely to be able to establish that We understand that no offering document or prospectus has been prepared. the information it has given to the manager about its intention to undertake a block We acknowledge that (a) we may not rely on any investigation that [US broker- trade is confi dential (even without having dealer], any of its affi liates or any person acting on its on their behalf may have identifi ed the to be traded) than conducted, and none of such persons has made any representation to us, express or a seller that has many holdings and that implied, with respect to the Securities or the Company, (b) we have conducted our has not revealed which security it intended own investigation with respect to the Securities and the Company, and (c) we have to sell. received all information that we believe is necessary or appropriate.

What constitutes misuse of confi dential We confi rm that we are a “qualifi ed institutional buyer”, as defi ned in Rule 144A information will depend on the reason the under the Securities Act of 1933, as amended (the “Securities Act”), that is able to manager received the information in each bear the economic risk of an investment in the Securities. case. However, any use or disclosure of confi dential information by the manager for We understand that (a) the Securities are not being, and will not be, registered under its own or a third party’s benefi t without the the Securities Act, (b) the Securities are being offered and sold to us in a transaction seller’s consent could constitute misuse of that is exempt from the registration requirements of the Securities Act, and (c) the that information. Securities are “restricted securities” within the meaning of Rule 144(a)(3) under the Securities Act. Once a confi dentiality letter is signed the manager becomes bound by its terms. A We agree (a) not to offer or sell the Securities, except [pursuant to an exemption breach of those terms is a breach of contract from the registration requirements of the Securities Act] [outside the United States (for background, see feature article “Drafting pursuant to Regulation S under the Securities Act] and (b) not to deposit the confi dentiality agreements: the DNA of an Securities in an unrestricted depositary receipt facility for so long as the Securities NDA”. www.practicallaw.com/9-536-5387.) are “restricted securities” within the meaning of Rule 144(a)(3) under the Securities Act. Breach of agency duties. If the block trade is to be executed by the manager in an agency (The fi rst alternative in the paragraph above is appropriate for most Section 4(1½) capacity, the manager will, following the offerings. For certain Section 4(1½) offerings of securities listed on an exchange in mandate to act, owe the seller contractual the US, the lawyers providing the no registration opinion might require the use of the and common law duties of agency; mainly, second alternative.) to act in the seller’s best interests.

Even before it receives a mandate for the agreement will frequently also include an Opinions block trade, the manager may owe agency indemnity from the seller to the manager and Law fi rms involved in a block trade will duties to the potential seller independent of a lock-up of the seller’s remaining holdings sometimes be asked to provide an opinion the block trade, for example, as a result of a in the issuer. to the manager. This will generally cover the corporate advisory or corporate broking role. seller’s corporate and other authority to sell Some block trade agreements are structured the shares, its valid title to the shares and DOCUMENTS so that the manager buys the shares from the the validity and enforceability of the block seller and resells the shares to investors as trade agreement. In addition, if shares The main documents required for a block principal, rather than as the seller’s agent. In are expected to be sold into the US, US trade include the block trade agreement, such a case, the manager and seller usually securities lawyers will more often than not law fi rm opinions and investor representation sign the block trade agreement only after the be asked to provide a no registration opinion letters. manager has found investors for the shares confi rming that the transaction does not need (that is, the book of demand is covered). For to be registered with the US Securities and Block trade agreement shares of a company incorporated in the Exchange Commission (see box “US issues The block trade agreement will be short when UK, the manager will need to qualify for the in block trades”). A no registration opinion compared to an agreement for intermediaries’ exemption, which allows the from the seller’s lawyers is especially helpful an IPO or other offering by an issuer, even if manager to buy and resell the shares without to banks bidding in a competitive process. the block trade is worth billions of pounds. incurring a stamp duty or stamp duty reserve The block trade agreement will contain tax liability (sections 80A and 88A, Finance Investment banks have varying requirements, representations from the seller, including Act 1986). Only the ultimate investors pay and opinions are requested for some block as to valid title, no encumbrances, no inside this duty or tax. trades, but not others. If an opinion is information and compliance with securities requested, consideration should be given laws (see box “Block trade agreement Other block trade agreements are structured to the timing of the opinion. In some cases, representations”). It will also contain pricing so that the manager will act as the seller’s it could be preferable for the opinion to be and settlement provisions. A block trade agent. delivered at pricing rather than closing.

34 PLC Magazine / September 2016 / practicallaw.com FEATURE

Investor representation letters that it is a member fi rm) must submit a or a company incorporated in the UK or whose US investors are sometimes asked to sign trade report of the dealing within prescribed principal place of business is in the UK. investor representation letters in order to deadlines. Where a transaction is effected participate in the block trade. If the transaction outside of the trade reporting period (that There are limited exceptions for issuers is structured pursuant to Section 4(1½) of the is, between 7:15 am and 5:15 pm), the trade incorporated in certain other jurisdictions that US Securities Act of 1933 (Securities Act), report must be submitted before 7:45 am on are deemed to have substantially equivalent there are specifi c representations that the the next trading day. shareholding disclosure requirements. investor is asked to make. (For an example Currently, the FCA deems the US, Japan, of some of the basic provisions to be included The trade report will contain details of the Israel and Switzerland to be equivalent. The in an investor representation letter in order to transaction, including size and price. This manager will also have a notifi able interest perfect an exemption from registration under would involve disclosing the price (where the in a bought deal of this size. However, if the the Securities Act, see box “Basic provisions of manager was buying as principal) at a time manager is acting as a , the an investor representation letter”). when the manager may not yet have been relevant percentage threshold for disclosure able to offl oad its risk in full. It will have had is 10% and, similarly, where the shares are DISCLOSURE some time on the evening of launch of the held in the trading book, the percentage transaction to market to qualifi ed institutional threshold is 5%. In assessing whether a A manager bidding for a block of shares will buyers in the US, but would only have had notifi cation is required, the net position at need to know exactly what information about between one and two hours to access midnight on the day concerned should be the trade or its purchase and subsequent European demand on the morning of the considered, taking account of acquisitions resale will require public disclosure and pricing announcement. This might pose a and disposals executed during the day. when that information must be disclosed. commercial problem by revealing the price This varies considerably depending on the that the manager was committed to paying The notifi cation to the issuer must be made statutory requirements in the jurisdiction while the offering was still ongoing. as soon as possible and in any event within in which the issuer is incorporated and the four trading days in the case of a non-UK regulatory requirements in the jurisdiction There are exemptions under the LSE Rules issuer and two trading days in all other in which its shares are listed. This must permitting the delayed publication of trade cases (DTR 5.8.3R). The issuer must publish always be checked carefully in advance. The reports where a member fi rm elects to use the notifi cation as soon as possible and in applicable rules for an issuer incorporated block trading facilities (these will be further any event by the end of the trading day in England and Wales whose shares are amended in relation to the MiFID II Directive following receipt of the information, unless admitted to trading on the London Stock (see “MiFID II” below)). Under a block trade it is a non-UK issuer in which case it has three Exchange are set out below. facility, for example, publication would occur trading days to publish the notifi cation (DTR at the earlier of when it has been 90% offset 5.8.12R(1)). This disclosure is not usually Announcement and three business days after the relevant problematic, however, as by the time it is It would be usual for the seller to announce trade. The defi nition of a block trade for these published to the market, the manager is the launch of a block trade when books open purposes is made by reference to its size as likely to have exited its position. Notifi cations (see box “Indicative timetable for a competitive a multiple of normal trading in the stock: for must be made on form TR1 (www.fca.org.uk/ process”). In the case of a bought deal the example, in the case of a SETSmm (the LSE’s your-fca/documents/notifi cations-of-major- announcement would refer to a disposal. In premier electronic trading service) security, interests-in-shares-tr1-). the case of an AEO or back-stopped deal, the trade must be at least 75 times the normal the announcement would refer instead to market size. POST-ANNOUNCEMENT an intention to dispose. In each case, the announcement would indicate the change in DTR 5 One selling issue that often arises is the the seller’s percentage holding in the issuer. If the block trade is of a block of shares in an manager’s ability to disclose to potential It would not usually refer to the price at which issuer whose shares are admitted to trading buyers the status of its book of demand the shares had been bought or back-stopped. on a regulated market and that issuer’s home during the offering. This is a question it will member state is the UK, the seller may need frequently be asked and the answer has An announcement before the commencement to notify the issuer under chapter 5 of the potential legal implications. of marketing is sometimes thought to be Disclosure Guidance and Transparency Rules necessary to avoid any risk of committing (DTR 5) if it holds over a certain percentage of The simplest approach is to offer no market abuse through the making of “selective the issuer’s voting rights and the block trade comment. If that is not practicable, it is disclosure” to potential buyers of the shares. reduces its holding through a percentage crucial to ensure that any statement made Under MAR, the new market sounding regime threshold. The percentage thresholds that is not misleading, false or deceptive. If it will generally be relied on in order to carry out trigger this disclosure obligation are 3% and is misleading and is made to induce the marketing, pre-announcement (see “Insider each one percent threshold above 3%, unless potential investor to participate in the dealing and market abuse” above). the issuer is a non-UK issuer in which case the offering, this could constitute a breach of the percentage thresholds are 5%, 10%, 15%, 20%, prohibition in section Trade reporting 25%, 30%, 50 % and 75 %. A non-UK issuer is 397 of FSMA, to which criminal liability Under the Rules of the London Stock an issuer whose home member state is the UK could apply. Even if it is not intentionally Exchange (LSE), the manager (assuming other than a UK incorporated public company misleading, the statement could constitute a

practicallaw.com / September 2016 / PLC Magazine 35 negligent misstatement, a misrepresentation and a breach of contract. Related information

This article is at practicallaw.com/9-631-7908 If the status of the book of demand is to be Other links from practicallaw.com/ disclosed, this should not be done selectively (that is, it should be sent by a Bloomberg Topics to the newswires so that it is visible to the Rights issues and other secondary issues topic0-103-2095 whole market) and the disclosure must be US securities law: issues for non-US companies topic9-201-5199 accurate, fair, clear and not misleading. Typical statements regarding the status of Practice notes the book of demand include the following: DTR know-how: DTR 5 6-384-0063 Hot topics: MiFID II 6-503-3276 • “At the bottom end of the price range, MAR: market soundings 0-628-0853 the book is approximately half covered, Market Abuse Regulation (MAR): overview 3-583-3047 based on indicated demand as of this Notifi cation of major shareholdings under DTR 5 5-384-7258 morning.” US securities laws: introduction to US registered and unregistered offerings for non-US companies 4-506-5032 • “The book is covered.” Standard documents • “The offering is oversubscribed/multiple Block trade purchase agreement (principal basis) 7-518-2505 times oversubscribed.” Previous articles MIFID II Market Abuse Regulation: ensuring compliance amidst uncertainty (2016) 6-629-5677 MiFID II, which is due to apply from 3 January US private placements: when Rule 144A is unavailable (2015) 7-615-3385 2018, will introduce greater obligations for Strictly confi dential: new block trade confi dentiality letter (2009) 3-500-2224 investment banks carrying out block trades, Block trades: an introduction (2006) 8-202-2671 while also raising the following uncertainties: For subscription enquiries to Practical Law web materials please call +44 207 202 1200 • MiFID II will reintroduce a form of the old “concentration” rule whereby equities will have to be traded on a regulated once MiFID II applies given that the or discretionary mandate. There are market or other trading venue. This will trading volume through these waivers extended rules on confl icts of interest, modify Article 1(c) of the Association will be restricted by volume caps. but they will still be dealt with using for Financial Markets in Europe (AFME) similar procedures. Model Block Trade Agreement, which • The application of the best execution permits the sale of a security outside a rule will depend on the structure of the • A number of investment banks that trading venue. block trade. In relation to bought or provide agency deals may register as back-stopped deals it is likely that best a trading venue, such as an organised • The large-in-scale exemption for pre- execution requirements will be less trading facility, as they may be trade transparency will still apply, relevant than in relation to an agency considered as providing “multilateral” although the thresholds for reaching deal. services under MiFID II (Article 1(7)). the required size will increase. Similarly, However, there is currently uncertainty the deferral period for post-trade • Additional duties will be owed to over this point pending European transparency will still exist, but the time professional clients and eligible Securities and Markets Authority (ESMA) periods will generally be decreased (see counterparties in terms of investor Level 3 guidance. “Trade Reporting” above). The reference protection rules, such as cost and price waiver or negotiated trade waiver, charges, but the nature of a block trade Nicholas Holmes is a partner at Ashurst LLP or both, to the extent that these were should mean that these duties are more and Peter Castellon is a partner at Proskauer relied on, will be more problematic limited than, for example, an advisory Rose LLP.

36 PLC Magazine / September 2016 / practicallaw.com