By Karin Matussek
Oct. 31 (Bloomberg) -- Porsche SE's use of options to build a stake in Volkswagen AG took advantage of flaws in German securities laws and companies should be forced to disclose transactions sooner, lawyers and investors said.
German capital market rules don't require companies to disclose holdings until they have a legal right to acquire the stock, said Thomas Moellers, a capital markets law professor at Germany's Augsburg University. Schaeffler Group earlier this year similarly used swap rights to acquire 28 percent of Continental AG before disclosing a takeover bid.
``Porsche was able to use a loophole here, and the lack of transparency distorted the DAX and led to unfair losses by others,'' Moellers said in an interview. ``This example, like the Schaeffler-Conti case, shows that regulatory action is needed.''
Porsche said Oct. 26 that it held 42.6 percent of Volkswagen AG's shares and had secured so-called cash settled options for another 31.5 percent. Volkswagen shares soared almost fourfold the following two days and trading in Volkswagen is being probed by BaFin, Germany's financial-market regulator. Germany's benchmark DAX index rose 12 percent on Oct. 27 and 28 as Volkswagen's shares were pushed up by the Porsche bid.
The tactics have revived criticism that German rules are too lenient. Schaeffler's move to employ swaps in the Continental takeover prompted companies including E.ON AG and Daimler AG to urge the government in July to strengthen disclosure standards.
Frank Gaube, a spokesman for Stuttgart, Germany-based Porsche, declined to comment. He has said previously the company rejects allegations that it manipulated Volkswagen's share price or that it violated securities laws.
Short Sellers
Wolfsburg, Germany-based Volkswagen rose 41.67 euros ($53) to 541.67 euros in Frankfurt trading at 1:07 p.m. Porsche fell 95 cents to 64.60 euros.
Short sellers, who bet that Volkswagen's price would fall, were forced to buy from a shrinking pool of Volkswagen stock to close their positions in a so-called short squeeze. Short-selling occurs when investors borrow shares and then sell them on the hope that the price will fall.
``The short-sellers got the sharp end of this stick, but the general point is it is not just an issue for short-sellers, but also for the traditional long-term investor,'' said George Dallas, corporate governance director at F&C Asset Management Plc, which oversees the oldest U.K. investment fund. ``Majority control by Porsche was achieved without the minority shareholders being aware, and the market and share price distortions that resulted from the limited free float of shares are not the type of thing long-term investors would like to see.''
Cash-Settled Options
Porsche said that it had cash-settled options equivalent to 31.5 percent of Volkswagen, and that it aimed to control 75 percent of the carmaker in 2009. With the options, Porsche would receive the difference between the undisclosed underlying strike price and the market price for the shares on the day of settlement. ``The shares will be bought in each case at market price,'' the company said in the Oct. 26 statement.
Until Oct. 26, Porsche had said it was aiming only for a stake exceeding 50 percent, and Chief Executive Officer Wendelin Wiedeking said at the Paris Motor Show this month that a stake of as much as 75 percent would be ``not realistic'' because of market turmoil.
While current German disclosure rules meet minimum European Union rules, the U.K. and Switzerland have stricter standards on the use of derivatives.
U.K. Rules
``Porsche couldn't have done this in the U.K., and that's what people in the markets overlooked,'' said Jochen Kindermann, an attorney with Simmons & Simmons in Frankfurt. Investors ``were surprised to hear how few shares were left available all of a sudden.''
The U.K. financial regulator last week said it would adopt rules that force investors that use derivatives to build large stakes in companies to disclose their positions when they control options equivalent to a 3 percent stake in a company.
Kindermann, who advises hedge funds, said he has been contacted by numerous clients this week about the Volkswagen turbulence.
Porsche, which first bought the stock in 2005, had to make a mandatory takeover bid under German law when it boosted its stake above 30 percent in March 2007. This signal wasn't understood clearly by investors and hedge funds, according to Kindermann.
``The crucial issue here is the timing of Porsche's latest disclosure on the 75 percent,'' Kindermann said. ``They were just able to pick and choose the date and time for that one at will.''
Ruediger von Rosen, managing director of the association of German listed corporations, DAI, said any new regulations should be proposed on the European level.
``If hedge funds really fell flat on their face here, I'm not sure that's a compelling reason for new regulation,'' von Rosen said. ``There are always winners and losers in each situation. Everybody has known since 2005 about Porsche's ambitions.''
To contact the reporter on this story: Karin Matussek in Berlin at kmatussek@bloomberg.net
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