The Executive Newsletter of TheOfficialBoard

By Antoine Juaristi, Lovells

The recent financial crisis has brought to light the complexity of certain financial products, as well as a profound lack of transparency within the financial system. Despite strong criticism denouncing this lack of transparency, investors have, nevertheless, increasingly had recourse to hidden trading platforms on the equity market, better known as dark pools.

By way of clarification,  let us dive into the world of dark pools! The EU Markets in Financial Instruments Directive, MIFID, came into force two years ago. It allowed for the opening up of new trading systems, in particular in the equities market.

In order to ensure market transparency and integrity, this Directive set up pre-trade and post-trade transparency requirements. For example, the directive’s pre-trade transparency requirements include the obligation to make public on a continuous basis during trading hours current bid and offer prices and the depth of trading interests at these prices.

This EU directive also allows for the waiving of these obligations for transactions that are large in scale compared to normal market size. The aim is to prevent the acquisition or transfer of a large number of shares from triggering a large increase or decrease in share prices if this order were made public. This has spurred the development of dark pools for block trades.

Dark Pools thus refers to Trading Systems operating without pre-trade transparency using the waivers provided for in the MIFID. It currently represents less than 10% of trade volume on the European equity shares market.

The most well-known dark pools include: Smart Pool founded by NYSE Euronext, Baïkal founded by the London stock exchange (which recently merged with the alternative European platform Turquoise, founded by BNP Paribas, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, Merrill Lynch, Morgan Stanley, Société Générale and UBS) or Neuro Dark founded by Nasdaq OMX.

Although the post-trade transparency requirements apply to dark pools (in particular the obligation to make public the price, volume and time of transactions), they are criticized for their lack of pre-trade transparency. Some investors could sell large quantities of shares within a regulated market after purchasing these same shares at a much lower price from a dark pool.

Beyond the risk of price manipulation, the rise of dark pools might also distort competition and create a disadvantage for private investors who do not trade in large quantities of shares and who cannot have recourse to dark pools. This highlights the risk of liquidity fragmentation and, as a consequence, a possible deterioration of the price formation process on the equities market.

Due to the multiplication of shares trading systems, equity issuers complain when the price of their shares is altered. Since they don’t know the exact stock exchange price of their shares, they can’t determine the actual price of their financial capitalisation.

In the US, dark pools emerged in the 1990s. In October 2009, because of the growing number of those hidden platforms, the Stock Exchange Commission proposed measures intended to increase transparency of dark pools in the United States, so investors get a clearer view of stock prices and liquidity.

Did MIFID really achieve its aim of protecting investors through setting up a more integrated, transparent, effective and competitive capital market? The European Commission has scheduled a revision of MIFID for 2010, which we hope will provide an opportunity for the pre-negotiation transparency waivers to be rethought in order to prevent the development of this dark side of the financial markets.

Antoine Juaristi is Partner at Lovells, in the Dispute Resolution Group. Lovells is one of the largest international law firms with offices in Europe, Asia and the United States.

By Igor Quézel-Perron

A lot of managers, after long careers in big corporations, used to approach head-hunters for positions in companies under LBOs. This has changed in these difficult times for Private Equity: fewer operations, less leverage, smaller dreams…

Are there real opportunities today to join an LBO company as CEO or CFO?  Many managers (and it begins generally in their early 40’s) are looking for more independence and entrepreneurship, but do not want to create their own companies, because it is either too risky, or because they do not have The Idea.

Then, they think they can take over a company, or find a position in a company under LBO. It is true it can be a good deal: nice compensation, and potential leverage. Generally Private Equity firms propose that they invest 1 year salary, and the goal is to have a multiple of this investment once company is resold.

If the drivers of this kind of opportunities have not changed, the economic situation has, and candidates know that. In 2009, they showed less enthusiasm for this kind of job, because they know that there is less leverage.

There are also fewer opportunities all over the world. For example, In France in 2008, out of 194 LBO operations there were only 24 Management Buy In (MBI) or Buy In Management Buy Out (BIMBO) of which 80% were valued below 15 Mi€. On the first semester 2009 out of 62 LBO, there were 13 MBI or BIMBO of which 100% were valued below 15 Mi€. In a nutshell, for CEO, we are talking about only 24 new positions in France in 2008.

What profiles do those jobs require? Quite surprisingly, Price Equity firms are always open to meet good candidates. For them, this means experienced managers, with a good knowledge of the sectors those firms have invested in (which is often public) or of the sectors they are considering investing (information they need), ideally with a mix of experience in large groups and smaller companies.

Why are Private Equity firms opened to meet candidates while not recruiting? Because they want to know the market, the good potential candidates for their investments, identify potential board members, discover a new market through a specialist… They love seasoned managers presenting them investment opportunities. They can help you to externalize one of your less strategic activities or to prepare for your next career step. So if you have a chance to meet them, do not miss it.

Igor Quézel-Perron is Partner at Eric Salmon and Partners and conducts global search. Eric Salmon and Partners is a leading European executive search firm with 6 offices in Europe.

Richard Jadot & Louis-Jérôme Laisney, Lovells

France has recently introduced a new trust and security mechanism transferring the management and the ownership of an asset to the trustee. Those new security tools should help the finance industry to leverage new pools of assets, to contribute to lower borrowing costs and to provide lenders greater diversification. In a cash crunch environment, unleashing a wave of financial innovation is an opportunity for many corporations to free up cash.

How this happened? The law about the trustee or fiducie was first introduced in 2007. It was not judged sufficiently clear and protective by the stakeholders and thus became largely ignored. In January 2009, the regulator introduced rules to organize the management and the security of the assets. For instance, it is now possible for a borrower to provide trade receivables, movable or fixed assets as securities for his loans.

How it works? Pursuant to the fiducie agreement, the asset is transferred to a trustee (which can either be the lender or a third party) as a separate asset. This protects the lenders in case of bankruptcy proceedings against the grantor or the trustee.

When the fiducie agreement guarantees the financing of the transferred asset, a secondary agreement might be introduced, leaving the transferred asset under the control of the grantor. The grantor can then use and manage the financed asset which is now owned by the lenders. Some uncertainties remain regarding this secondary agreement in the context of insolvency proceedings.

The Fiducie concept exists under various forms in several other European countries: in the United Kingdom it is called Trust, in Germany Treuhand and in the Netherlands Bewind.

Despite these uncertainties, Fiducie has been qualified by some commentators as the future “Queen of security rights”. It is in our view premature to make such a strong statement. It is undeniably an interesting concept which will hopefully “find its way” and generate innovative security package schemes in the market.

Richard Jadot and Louis-Jérôme Laisney are respectively Partner and Lawyer at Lovells, in Finance and Banking. Lovells is one of the largest international legal practices with offices in Europe, Asia and the United States.