Why David Jones Probably Won't Know Who Owns The Secret Stake Until The End Of June

Getty/ Graham Denholm

David Jones probably won’t know until the end of next month who owns the mystery shares snapped up in a round of heavy buying last week.

Earlier this week it was reported that DJs issued tracing notices on nearly 30 million securities.

There are conflicting reports around the tracing notices, with The Australian claiming they were never sent.

But either way, the rumour is the the 29.7 million securities — currently held by Deutsche Bank — are owned by Solomon Lew.

He hasn’t confirmed, or denied this.

But the chunk would give the owner a 5.5% stake in David Jones: enough to scuttle a takeover proposal from the South African retailer Woolworths. So it is safe to say the board would like to know who owns them.

Trouble is, they almost certainly won’t until until a 30 June shareholder meeting.

Companies can enquire as to who owns their shares, but if they’re held through a derivatives contract or economic swap ­agreement, they’re unlikely to get a useful answer.

It looks like these shares are held under such an arrangement according to Ben Rebbeck, whose firm First advisers is one of three major outfits that traces shareholders for companies.

Last week Deutsche Bank issued a notice saying it had become a substantial holder in David Jones, as it owned 35.9 million securities.

6.2 million of these are for its funds management arm. But the rest are owned, through DB, by “unknown” parties.

It is common practice for IBs to hold stock for third-party investors, and “these are all hidden from the view of ordinary shareholders,” Rebbeck said.

It works like this: “The investment bank says ‘you give me a dollar for every dollar increase in a share price’. It is an arrangement that relates to movement in price to a third-party asset, but it doesn’t require any ownership of the asset itself.

“The investment bank will write that deal, and separately it will go and buy the shares in the underlying company. Thereby, while they will lose a dollar for every dollar the share price goes up, they will gain a dollar by owning the stock.”

Even if the stake the investor owns through their investment bank reaches a theoretical 5 per cent, they do not have to disclose this under Australian law.

“The investment bank will say ‘they are our shares –- we are holding the shares for our purposes'”.

It becomes increasingly complicated if the bank loans the stock it is holding on behalf of the investor. The custodian, according to Rebbeck, can offer this option to the original client.

The shares will be put into the market, and the custodian can then charge a fee, and the owner receives a reduced cost.

“You can have an economic interest but you won’t have a clue who is sitting on the register with those shares,” he said. “That is quite a common occurrence.”

“Once you start combing all these derivative agreements together you get a situation where it can be very difficult for a company to understand who holds the ultimate economic interest.

“It is a very opaque situation where you start layering derivatives and economic swaps and on top of each other.”

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