In a recent paper, Know Your Shareholders: The Use of Cash-Settled Equity Derivatives to Hide Corporate Ownership Interests, The Conference Board offers guidance for directors of public companies to address or prevent situations where shareholders accumulate undisclosed equity stakes by means of cash-settled derivatives.

Derivatives are an important class of financial instruments that has taken center stage in today’s capital markets. The reason for their increasing popularity is that they offer risk protection while also allowing innovative investment strategies. In particular, in a regulatory environment where disclosure requirements are triggered by voting rights rather than economic interest, derivatives can be used to conceal equity ownership of a public company—a practice generally known as “hidden ownership.”

The new report by The Conference Board cites anecdotal evidence—including the most notable recent cases regarding Continental, Fiat, and Volkswagen-Porsche—that cash-settled derivatives are increasingly being used by investors and strategic bidders to discretely expand their ownership positions in business corporations listed on European stock exchanges.

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