UK's Takeover Panel To Examine Hedge Fund Loophole

by Robin Pilgrim, LawAndTax-News.com, London

17 November 2004

According to the Financial Times, the City's Takeover Panel is examining practices employed by hedge funds in the United Kingdom which allow them to sidestep stamp duty payments and disclosure obligations.

The UK business daily revealed that hedge funds are increasingly purchasing contracts for difference (CFDs) from banks and brokers, which then hedge their exposure by purchasing shares. Because they have no real economic interest in the fate of the firms in question, the banks will often use their position as shareholders to vote in accordance with the wishes of the hedge funds.

According to observers, such an arrangement, if established formally, would usually attract stamp duty at 0.5%, and would often trigger disclosure requirements regarding the hedge fund's position. However, it is difficult to ascertain when such an agreement has been reached informally, and it is this vulnerability that the Takeover Panel is seeking to address.

The Panel is expected to publish a consultation on the matter early next year recommending increased disclosure of CFD positions held by hedge funds.

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