On 13 June 2008, at the same time as signalling the initiation of a wider review on how capital raising by listed companies can be made more orderly and efficient, the FSA announced the introduction of a new disclosure regime for significant short positions in companies undertaking rights issues.

The new regime has been implemented through changes to Chapter 1 of The Code of Market Conduct (MAR), which forms part of the FSA Handbook. Chapter 1 of MAR provides assistance in determining whether or not behaviour amounts to market abuse.

Broadly, the new regime provides that market abuse will be committed:

• where a person has reached or exceeded a significant short position,
• in securities which are the subject of a rights issue,
• during the period that commences on the date a company announces a rights issue and ends on the date that the shares issued under the rights issue are admitted to trading,

if that person fails to make a disclosure of the significant short position via a RIS by no later than 3:30pm on the business day following the day on which the significant short position was reached or exceeded. A significant short position is a short position that represents an economic interest of 0.25% of the issued capital of a company. The new regime applies to all shares (but not depository receipts) admitted to trading on a prescribed market (which includes both AIM and the main market of the London Stock Exchange as well as PLUS markets).

Interestingly, once the 0.25% threshold is crossed and an appropriate notification has been made, no further notification is required for any increase in the short position or if the short position falls below the 0.25% threshold.

The FSA has indicated that the new regime and, in particular, the threshold of 0.25% which triggers the requirement to make a disclosure, will remain under review and may be subject to change in light of experience. The FSA also indicated that, in addition to the introduction of this new regime, they are examining a number of other options in this area including:

• restricting the lending of securities which are the subject of rights issues for the purposes of enabling short selling; and 
• restricting short sellers from covering their positions by acquiring the rights to the newly issued shares.

The full text of the changes, which were implemented on 20 June 2008, can be found here.

The FSA has also published a number of FAQs on the new regime which can be found here.

30 June 2008

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