At a 1% Stake, You're a Public Book

At a 1% Stake, You're a Public Book

The most revealing document in a British takeover is the one with the worst name. It is the "PUBLIC OPENING POSITION DISCLOSURE/DEALING DISCLOSURE BY A PERSON WITH INTERESTS IN RELEVANT SECURITIES REPRESENTING 1% OR MORE," which is a lot of capital letters doing the work of one simple sentence: during a bid for a UK-listed company, if you own one percent of what is being bought, you have to show your whole position—including the parts you are short—to the general public, on a schedule.

The basic point is that the UK Takeover Code does not trust takeovers to police themselves. Bids are when people cheat: bidders and their friends quietly accumulate target stock before the life-changing announcement, merger arbitrageurs load up to lean on the outcome, and the shareholders being bought are usually the last to see any of it. So once an offer period starts, the Code turns everyone significant into an open book, and the tool is a document called Form 8.3. Anyone interested in 1% or more of a class of the relevant securities must file an opening position disclosure by 3:30 p.m. London time on the tenth business day after the offer period begins, and then a dealing disclosure by 3:30 p.m. on the business day after every trade. Positions are measured as of midnight in London, which is less about vampires and more about making sure the deadline attaches to what you actually owned at a fixed moment rather than whatever you happened to touch that afternoon. A side effect is that merger arbitrage in the UK is barely a private business: the arbs' books are right there in the forms.

The interesting part is what counts as "interested." The 1% test is measured on your gross long positions, and the reason it is gross is a lovely little history of derivative loopholes. Until the rules were amended in 2005, you could hold a contract for difference referenced to 8% of a company and disclose nothing, as long as your actual physical shares were under 1%. A cash-settled derivative gave you the economics of owning the stock, and the counterparty hedging the contract typically bought the real shares and got to vote them, so you had the upside and the influence of an 8% owner while being, disclosure-wise, a nobody. The Panel closed that: a long economic exposure to a security now counts as an interest in it. There is even a rule for the uncertain: if more than one definition of "interest" applies, you use the one that produces the biggest number. Short positions don't count toward the 1% trigger, but once you're in, you have to show them anyway; and you may net longs against shorts only under four conditions—same class, same product, identical terms, same counterparty—that amount, in practice, to: no.

The everyday consequence is that the people filing these forms are often not the ones who chose to own the stock. A discretionary fund manager is treated as the controller of its clients' shares and must aggregate across every account it manages, so a firm whose clients collectively sit on 1% of a target is inside the machine even if no single client is. Anyone acting with others on a shared understanding to deal together is merged into the group as a single person, because otherwise five friends at 0.2% each would be five people at 0.2% each. Market makers are exempt, since their trades are liquidity rather than thesis; investment banks' proprietary desks are not, and the Panel has been known to take the exemption away from desks that look like they are trading a view. Translate that into the life of a big asset manager and you get the recurring ritual of an offer period: some compliance person, most mornings, filling in a form about positions the firm holds because clients gave it the money, with the form public by late afternoon.

When the bidder is two companies

Now watch the form do real work. In early January, Glencore confirmed preliminary discussions with Rio Tinto plc and Rio Tinto Limited about an all-share merger—Rio Tinto to acquire Glencore—that would create the world's largest mining company. Rule 8's first question in any offer is what the "relevant securities" are. For a cash offer the answer is easy: only the target's shares are relevant securities, and the cash offeror's own shares don't count. For a share exchange, the bidder's shares become relevant too, because the bid is partly a market in those shares. And Rio Tinto is not one company but two: a public company incorporated in England and listed in London, and a public company incorporated in Australia and listed in Sydney.

So the Takeover Panel's executive effectively wrote a bespoke disclosure basis for the tie-up. Relevant securities would include the shares of Glencore, Rio Tinto plc and Rio Tinto Limited; anyone with 1% or more of any one of them would have to disclose positions in all three; and opening position disclosures were due by 3:30 p.m. on January 22. This is the classification question in the Code's purest form: to know who has to show their cards, the Panel first had to decide what the cards even were, and in a merger of two mining giants it decided the deck contained three companies.

Fidelity—filing as FMR LLC and FIL Limited—shows what that produced. On February 3 it reported a long position of 15,977,233 Rio Tinto plc shares, about 1.27% of the company, plus a 90,000-share short position tucked into stock-settled derivatives, plus 5,247,687 Rio Tinto Limited shares, about 1.41%. The next day's form lists the dealing ledger, which includes runs of one-share and two-share ADR purchases that the machine insisted be disclosed. Position measured February 3, disclosed February 4: the one-business-day clock, working as designed, on a merger whose disclosure architecture had to be built to order.

The machine did not get much more use this time, because the deal died. On February 5, Rio Tinto announced it did not intend to make an offer. Glencore's version of the talks was that the terms carried no proper control premium and undervalued its copper business, and that Rio Tinto would have kept both the chairman and the chief executive. Six months of standstill followed.

The paperwork is the tell

The standstill is over. In early August, Rio Tinto's chief executive said there was no reason to revisit the talks, while Glencore was making friends in Australia—the first attempt had partly foundered on Australian hostility to Glencore's coal and its governance history, even as large UK holders wanted to see consolidation. Analysts thought any revived approach would have to be "vastly different," and the arithmetic has shifted: Glencore's London-listed shares are up about a third this year, while Rio Tinto's New York-listed line—the paper that would be the currency of any all-share deal—trades around $100, up roughly a quarter on the year, in market data. A target whose stock has run ahead of the buyer's is a target that costs the buyer more of its own paper, which is another reason the takeover that triggered all this disclosure may never happen. If it does, the bespoke disclosure basis comes back with it, and the forms return. The paperwork is the tell.

And anyway, the machine is always running. The Panel's disclosure table lists more than thirty companies in live offer periods: easyJet with Apollo circling, SEGRO with Prologis, Intertek with an EQT-and-Mubadala vehicle, JTC in an offer period that began about a year ago, and Spire Healthcare, whose "put up or shut up" deadline lands tomorrow at 5 p.m. In each of them, some index manager or fund mechanically above the 1% line is watching the same 3:30 p.m. clock. That is what a bid for a British company is: a private negotiation among consenting institutions that the Code refuses to keep private. If you are 1% of the company, you are part of the public record now, long and short, ADR by ADR. Form 8.3 is the admissions desk of that public square, and its terrible name is a feature, not a bug.