This case involves trading that occurred on a major European stock exchange. The plaintiff, a liquidated private equity fund, owned zero coupon bonds convertible into common stock issued by a large entertainment firm based in Germany. The plaintiff converted its bonds and received fewer shares of common stock on conversion than it believes it was entitled to under the applicable conversion formula. The ability of the plaintiff to purchase the approximately 30 million additional shares it believes it should have received in a fairly short time frame following the conversion given the level of liquidity of common stock was called into question. Additionally, the impact that such an acquisition program would have had on the trading price of company shares was also called into question.
Question(s) For Expert Witness
- 1. Please briefly describe your familiarity with the relevant stock exchange.
- 2. Can you discuss the ability of the plaintiff to purchase the approx 30 million additional shares in a fairly short time frame following the conversion, given the level of liquidity of common stock?
- 3. What impact would such an acquisition program have on the trading price of shares?
Expert Witness Response E-130291
With my specialty in market microstructure, I can definitely discuss the ability of the plaintiff to purchase the approximately 30 million shares. I would say it is possible – however, the cost would be high. The trading volume of this company is about 12 million shares per day recently. So the total shares for sale on a regular day can only cover 40% of the acquisition, and it basically consumes all the sell orders in the limit order book. This would significantly increase the price of the stock. Since high-frequency traders (HFT) were already active at the time of this incident, this large acquisition would attract their attention, which makes the price even higher. Besides, other large traders can also observe this large acquisition and trade against this acquisition to gain profit.
Expert Witness Response E-130523
I worked for the stock exchange in question from 2004 to 2007, and thereafter I worked for two investment banks from 2007 to 2014, where I was heavily involved in dealing with this exchange regarding IPOs and M&A. I’m very familiar with the exchange’s regulations and practice. As far as I understand, the common stock might not have been very actively traded at that time and accordingly its liquidity was low. I would look into the shareholding structure of the company at that time in order to assess whether it would be possible for the plaintiff to acquire enough shares from the market. Such an acquisition program as described might lead to substantial volatility in the trading price of shares. This might draw the exchange’s attention and queries. The management of the company would need to explain whether they had any knowledge about the reasons for the significant price movements.