CHAPTER 01 10 Regulatory and Judicial Developments That GCs and Boards Need to Know 1 | The Long and the Short of It: Activist Short Selling
In December 2020, the Canadian Securities Administrators (CSA) published CSA Consultation Paper 25-403 – Activist Short Selling to facilitate discussion of concerns related to activist short selling and its potential market impact, a move that proved prescient given the GameStop saga that unfolded in the United States in January and February 2021. At its simplest, short selling involves selling securities that one does not own. Typically, a short seller borrows securities and then sells them on the open market with the expectation they will decline in value. The short seller then purchases securities at a lower price and returns them to the lender, thereby realizing a profit. Activist short selling refers to instances in which a short seller publicly shares information or analysis that is likely to have a negative effect on the price of the securities being “shorted.” Short selling is a legitimate investment strategy that provides several benefits to the capital markets. Activist short selling can be positive or negative depending on the accuracy of the information that a short seller disseminates. At one end of the spectrum are short sellers that conduct extensive research and analysis, and provide accurate information to the market explaining why an issuer’s securities may be overvalued. At the other end, however, are so-called short-and-distort campaigns in which unscrupulous short sellers deliberately disseminate false or misleading information in order to drive down the price of an issuer’s securities to the detriment of the issuer, its securityholders and the capital markets as a whole. Many campaigns fall somewhere in the middle, which has prompted the CSA to explore whether additional regulation is required. For further details regarding activist short selling and the related issues currently under review by the CSA, see our comment letter.
KEY TAKEAWAYS
– Regulators are taking abusive short selling seriously. Issuers that find themselves subject to short-and-distort campaigns may find CSA staff receptive to their concerns, as regulators may be increasingly inclined to take enforcement action either in anticipation of new rules or as a means of demonstrating that the current rules are adequate and effective. – Victims of abusive campaigns may receive self-help tools. Market participants should prepare for the possibility that the CSA will give issuers and securityholders a private right of action, which could curb victims’ reliance on regulators and deter short sellers from deliberately disseminating misleading information.
– Short sellers may be required to provide enhanced disclosure. The
CSA is considering whether to require short sellers to provide disclosure with respect to their short positions. In this regard, regulators may revisit whether disclosure of derivatives in early warning and alternative monthly reporting remains adequate or should be expanded.
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Davies | dwpv.com
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