322 8 Exit: Introduction
shareholders and a strict rule on the equivalent treatment of shareholders can sig-
nal lower risk to minority shareholders in a company which has a controlling
shareholder.
Effect of exit on perceived quality of financial instruments. In addition, the per-
ceived quality of financial instruments issued by the firm can be influenced by
whether and how existing investors transfer their claims. The sale of debt claims at
a large discount can signal that they are of poor quality. The impact is bigger when
the sellers are investors who are perceived as a reliable source of information.
Sales by insiders signal their opinion of the outlook of the firm.^3 The firm might
therefore prefer to control the transfer of those claims (for transferability, see Vol-
ume II).
Where shares are traded on a regulated market, investors will want to know
what insiders do with their shares. EU securities markets law requires disclosure
of share transactions in some cases. (a) The Market Abuse Directive provides that
“[p]ersons discharging managerial responsibilities within an issuer of financial in-
struments and, where applicable, persons closely associated with them, shall, at
least, notify to the competent authority the existence of transactions conducted on
their own account relating to shares of the said issuer, or to derivatives or other fi-
nancial instruments linked to them”. In addition, “Member States shall ensure that
public access to information concerning such transactions, on at least an individual
basis, is readily available as soon as possible”.^4 (b) The Transparency Directive
lays down an obligation to disclose information about major holdings.
Mitigation of risk. The firm can mitigate this risk in many ways. One of the
ways to mitigate it is by ensuring that the firm’s key shareholders are long-term
investors who are not looking for short-term or private benefits contrary to the in-
terests of the firm.
The firm can generally signal the quality of its shares by using information in-
termediaries. For example, if the shares are sold by the firm’s existing owners, the
choice between a trade sale and an IPO can be important. In a trade sale to one
buyer, the buyer can assess the quality of the shares. In an IPO to the public, most
investors lack the expertise; investors might therefore assume that it is the right
time for the firm’s owners to sell at that price (and that it is not time to buy those
shares at that price).
This can be illustrated by the case of Iittala Group Oyj, a Finnish homeware design com-
pany. In 2007, Iittala shares were owned by ABN AMRO Capital (a private-equity firm),
the company’s management, and other private shareholders. A planned IPO by means of
selling existing shares to the public failed to convince investors. After the failed IPO, 98%
of Iittala shares were sold to Fiskars Corporation, another Finnish homeware design com-
pany. Fiskars was in a better position to assess the quality of the shares.
(^3) For example, when Blackstone, a large private-equity group, and its owners sold Black-
stone’s shares to the public in 2007, the sale was interpreted as a signal of the private-
equity market already having reached its peak. See Dramatic entrance, The Economist,
June 2007; Saving Steve Schwarzman, The Economist, September 2007; Lifting the lid,
The Economist, January 2007.
(^4) Article 6(4) of Directive 2003/6/EC (Directive on market abuse).