Portugal changes stake disclosure rules

Author: | Published: 25 Apr 2003
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Credit institutions in Portugal are regulated by Decree Law 298, which was enacted in December 1992 and is more generally known as the General Regime of Credit and Financial Institutions. In September 2002 Decree Law 201 amended several important aspects of the General Regime.

Among the amendments introduced, the regime of qualifying holdings has been extended to less expressive stakes in credit institutions, with a closer control of their stockholding structure. On one hand, the communication duties of acquisition (and disposal) of holdings in credit institutions has increased. On the other hand, the concept of a qualifying holding has been adjusted, increasing the possibilities, for the Bank of Portugal, to apply the qualifying holdings regime.

New duties of communication to the Bank of Portugal

The changes to General Regime of Credit and Financial Institutions were approved in September 2002. These changes extend the communication duties concerning the acquisition (and disposal) of holdings in credit institutions in Portugal to cases where the thresholds of 2% and 5% of the share capital or voting rights of the participated entity, have been exceeded.

Until September 2002, projects involving the acquisition of qualifying holdings of 10%, 20%, 33% and 50% in the share capital or voting rights of the participated credit institution were subject to notification duties foreseen in the European Council's Second Directive. This notification duty has now been extended to acquisitions of holdings representing 5% of the share capital or the voting rights of the entity.

There is also a duty of subsequent notice whenever an acquisition of holdings exceeds the limit of 2% of the share capital or the voting rights of the entity. Notice must be given within 15 days of the acquisition.

From that point, the participant entity might be compelled by the Bank of Portugal to communicate any increase of its participation reaching or exceeding the limits of 3% or 4%.

The concept of qualifying holdings

The amendment to the General Regime means that the regime of qualifying holdings applies to situations that previously were beyond its scope.

Before the new changes the definition of qualifying holdings in the Portuguese Law was quite similar to the definition established in the European Council's Second Directive. That is that a "direct or indirect shareholding representing not less than 10% of the share capital or of the voting rights of the participated entity or, by any other means, allowing a significant influence over the management". Consequently there was a qualitative criteria (influence over the management) and a presumption of such influence from a quantitative criteria: the holding of 10% of the share capital or voting rights and there being a number of situations where the voting rights of third parties were equal to the voting rights of the participant.

Without modifying the concept, the September 2002 Law gives more emphasis to the qualitative criteria (the significant influence over the management), creates new presumptions and the concept of joint holding with an independent entity.

Significant influence over the management

The criteria for significant influence over the management of the participated entity already existed in the initial version of the General Regime. However, the quantitative criteria, based on the holding of 10%, had a very important role in the analysis and qualification of a holding as qualifying. Relying on such a threshold, the Bank of Portugal tended not to search, and prove, other situations of significant influence.

The amendment passed on September 2002 points out the intention to reverse this tendency, giving more emphasis on the significant influence criteria. This purpose, expressly referred to in the exposition of motives of the Decree approving the amendments, clarifies the elimination, in the definition of qualifying holding, of any reference to the amounts of the holding.

The concept of significant influence remains to be clarified. It has been left to the discretion of the Bank of Portugal to apply that qualitative criterion that characterize a holding as a qualifying one.

Presumption of significant influence

It is naturally much simpler to characterize a holding as a qualifying holding by the quantitative criteria (based on a holding in the share capital) than to apply the concept of significant influence.

In order to facilitate the task of the Bank of Portugal, the law presumes the existence of a "significant influence" (and consequently of the "qualifying" character of the holding) from the percentage of the holding in the share capital or in the voting rights of the credit institution. A conclusive presumption of the existence of a qualifying holding for a participation exceeding the 10% threshold is maintained. While this presumption already existed, the Law added one more for participation exceeding 5%.

The characterization of a holding as a qualifying holding may be made through three different procedures, depending on the percentage held in the share capital or voting rights regarding the credit institution:

In order to characterize as a qualifying holding a participation representing less than 5% of the share capital or voting rights of the participated entity, the Bank of Portugal has the burden of proving the significant influence over the management of the participated entity.

The reform of the Law has created an inconclusive presumption of significant influence, and consequently of the qualifying character of the holding whenever the holding exceeds 5% of the share capital or voting rights of the participated entity.

The referred presumption can be removed by the interested party, if it can be shown that it is not possible to exercise a significant influence in the participated entity. As a result there is a transfer of the burden of proof in benefit of the Bank of Portugal, allowing holdings below 10% to be more easily submitted to the qualifying holdings regime.

Once the shareholding reaches 10%, the presumption of significant influence is considered conclusive, not admitting proof in the contrary. Those holdings, by legal definition, confer to their holders the possibility of exercising a significant influence over the management of the participated entity and are automatically submitted to the qualifying holdings regime.

Joint Holding

Since its enactment in 1992, the General Regime has established that for the purposes of characterizing a qualifying holding, holdings held by related companies as well as direct or indirect holdings must be taken into account. Holdings whose voting rights are exercised by (or under the instruction of) the participant entity in similar terms to those established in Article 92 of the European Council and Parliament's 2001/34 Directive must also be taken into account.

The September 2002 reform of the General Regime extended the regime of qualifying holdings to the concept of joint holding. Joint holding means two or more entities that, as a result of community or co-ownership of rights situations, or in virtue of the existence of special relation, can exercise a common influence over the management of the participated entity.

The fundamental difference between taking into account the voting rights of related companies and the new concept of joint holding is that in the first case voting rights held by other entities (when under the influence of the holder of the qualifying holding) are assimilated into the voting rights of the participant.

In the case of joint holding, the holdings are held by independent entities. But due to a community or co-ownership of rights situation or especial relations existing between them, independent entities can exercise their voting rights in order to have a common influence over the management of the participated entity. The qualifying holding is considered as being held jointly by two or more participant entities.

Consequently there is an extension of the regime of qualifying holdings to situations that, under normal circumstances, would not be covered by these rules, even if, in practice, the involved companies could jointly exercise a significant influence over the participated entity.

How the Bank of Portugal will apply the concepts of especial relation and consequently, joint holding remains to be seen.

Conclusions

The amendment to the Portuguese General Regime of Credit Institutions has increased the communication duties on the acquisition (or disposal) of holdings in Portuguese Credit Institutions. Communication is now mandatory with the threshold of 2% of the share capital or voting rights (subsequent notification), and there must be a previous communication when the threshold of 5% has been exceeded.

The regime of qualifying holdings has also been extended to situations that, until then, had been left beyond the scope of the rules.

As a consequence, a higher control of the stockholder structure of credit institutions will occur (with the possibility of preliminary opposition from the Bank of Portugal to the acquisition or reinforcement of a qualifying position by a stockholder, as well as to the restraint of its voting rights).

A higher number of shareholders in Portuguese credit institutions will be subject to limits, existing under Portuguese law, concerning the granting of loans to holders of qualifying holdings (the loans granted to a holder of qualifying holding cannot exceed 10% of the credit institution's own funds and the total amount lent to holders of qualifying holdings cannot exceed 30% of the credit institution's own funds).

The remaining question is how the Bank of Portugal will apply the new criteria of qualification for qualifying holdings.