A breakdown of Twitter shareholding lawsuit
Elon Musk is being sued due to his delayed shareholding disclosure of a large stake in Twitter from March 2022. Under US law, anyone who acquires more than 5% of a class of voting equity securities must disclose their holdings to the SEC within ten calendar days, Musk failed to do this and only disclosed 21 days after acquiring the disclosable amount, taking more than double the length of time required by law.
Twitter share price jump
Once Musk announced his 9.2% stake, the share price jumped 27% from US$39.31 to $49.97. This indicated two things about the 11 days preceding Musk’s eventual disclosure:
- Musk was able to continue to buy shares at a lower share price, amassing his stake for a cheaper price. It has been estimated that he saved approximately $200 million as a result of this
- Anyone selling shares during this time would have sold them for below their true value.
Earlier this week Musk asked a US judge to throw out the lawsuit, denying that this was a deliberate attempt to defraud. The case is still ongoing.
What the Elon Musk case tells us about shareholding disclosures
We can see from this example why disclosing on time is important, however shareholding disclosures are important for many other reasons. They provide transparency to the market, the issuer, and the relevant regulator, about positions and voting rights that are being accumulated.
These regulations have a common purpose but differ greatly across the world. In the US, shareholders are to calculate exposure through shares and some physically settled derivatives of the same class (excluding put options and anything that isn’t exercisable within the next 60 days) and report anything above 5% within ten calendar days. This is a longer time frame than many other countries such as Hong Kong, Japan, China and most European, where the reporting deadline is normally between two-five business days. These countries also include cash-settled derivatives in their holding calculations, something that was brought about after the Volkswagen short squeeze in 2008. The SEC has made some proposals to bring the US requirements in line with those of its international peers including shortening the disclosure deadline to five days and the inclusion of cash-settled derivatives. These proposals are currently under consideration following the public comment period.
Better monitoring for Musk
Musk has made it known that he has fulfilled these obligations in the past for other issuers, including Tesla Inc, on multiple occasions, and is claiming this late filing was ‘inadvertent’. If this is the case, we can only suggest that Musk puts better monitoring in place to prevent this from happening again in the future.
At Kaizen our fully automated, customisable solution will calculate your holdings under each jurisdiction, allowing for increased efficiency and accuracy. Our service processes your position and trade data and alerts you to your disclosure obligations. We also provide the option to export your disclosable holding on to the relevant regulators forms. Using our solution means that you save time and remove the risk of human error and late reporting.
Did you know there are over 100 countries globally that have a form of Substantial Shareholding Disclosure requirements? We cover those too.
- For a demo of our Shareholding Disclosure Service, or for a conversation with Sam or one of our regulatory specialists, please contact us.