Short-selling activism—A new challenge for companies listed in Sweden

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As the year draws to an end, it is clear that 2022 will be the year when short-selling activism and short-seller reports gained real traction in Sweden. From being virtually unheard of in the Swedish context, the use of short-seller reports has become a real headache for companies under attack. Amid this recent development, many companies want to know more about short-selling activism and how to respond to it, proactively as well as after the fact.

Short-selling activism in a nutshell

In brief, short-selling is an investment strategy through which investors strive to identify (allegedly) overvalued companies in an attempt to profit from future declines in the companies' stock prices. Once an overvalued stock has been identified, the short-seller borrows securities in the company and sells them at the current market price. The plan is to buy back these securities at a lower price in the future, once the stock price has dropped. The securities are then returned to the lender and the short-seller pockets the price difference between the purchase price and the selling price as a profit. What distinguishes activist short-sellers from traditional short-sellers is primarily that they actively try to drive down the stock price by convincing the market that the target company is overvalued. This is done by publishing a report, commonly referred to as a research report, which contains more or less underpinned arguments and circumstances in support of the short-seller's expressed view. The modus operandi usually also includes spreading the content of the report on various platforms, such as Twitter, and in mainstream media in order to give it maximum spread and effect.

Even if the concept of short-selling activism is relatively new in Sweden, it has been used successfully for many years in other markets such as the US. Famous US short-selling attacks include Luckin Coffee and DraftKings but the activist short-selling strategy has also proven successful in certain EU markets; for example, in the UK and Germany. The most notorious example is probably Wirecard, which was later proven to have serious accounting issues. Regulatory risks, accounting issues, undisclosed information, odd related-party transactions and similar problems are examples of "findings" that are usually pointed out in the research reports published by activists. These types of problems have also been used by activist short-sellers to justify short positions in Swedish listed companies during 2022, the most high-profile cases being Evolution Gaming, SBB, Sinch and Truecaller.

Recent examples of short-selling activism in Sweden

In January 2022, The Analyst published a research report stating that online gambling company Evolution Gaming was overvalued because 62 percent of the company's overall revenue was derived from unregulated markets. The activist short-seller expressed the view that Evolution Gaming's unregulated revenue should be valued at a much lower multiple than the rest of the business due to the regulatory risks associated with such revenue. The research report caused Evolution Gaming's share price drop 11 percent, temporarily wiping out more than €2 billion in value.

In February 2022, Viceroy Research published a short-seller report that stated that the Nordic real estate company SBB was "un-investible" due to inaccuracies in the company's financial statements and undisclosed information relating to relationships between SBB and board members and other related-party aspects. The publication of the research report caused large price fluctuations, resulting in SBB's share price initially dropping 10 percent, only to turn around 15 percent and then dropping again. Two days later, SBB published a response to Viceroy's research report, stating that the report was incorrect and misleading.

In July 2022, NINGI Research published a report that accused Sinch of presenting an inaccurate picture of the company's business by, for example, incorrectly classifying invoices that had not yet been billed as revenue and overstating the performance of the company's operations in Australia and India. Sinch's stock price dropped approximately 16 percent after the report was published. A week and a half later, Sinch published a written response to the allegations stating that the short-seller report was misleading.

In September 2022, Viceroy Research published a short-seller report that stated that Truecaller was overvalued in the short- and medium-term perspective due to regulatory risks, accounting issues and tax investigations. Truecaller's stock price dropped approximately 20 percent intra-day after the report was published. A week later, Truecaller published a response to Viceroy's allegations and argued that they were incorrect and false.

The above-mentioned examples indicate that activist short-sellers and the companies being targeted by them tend to take very different positions with regard to the veracity of the various themes and concerns discussed in the short-seller report. Some individuals have even accused the activist short-sellers of criminal behavior, but are there any legal merits to that type of allegation?

The regulatory framework

Market manipulation is regulated in Article 12 and 15 of the European Market Abuse Regulation ("MAR"). Article 15 states that market manipulation is prohibited while Article 12 describes various types of behaviors that constitute market manipulation. Subsection 12.1(c) establishes that disseminating information through the media, or by any other means, which gives, or is likely to give, false or misleading signals as to the price of a financial instrument constitutes market manipulation. The subsection also states that the dissemination of rumors, where the person who made the dissemination knew, or ought to have known, that the information was false or misleading, also constitutes market manipulation. The determination of whether the activist short-seller report and related behavior constitutes market manipulation pursuant to Article 12.1(c) must be made on a case-by-case basis. Furthermore, the use of short-seller reports should also be considered from an
insider information perspective and the prohibition on insider trading pursuant to Article 14 MAR. Research and estimates based on publicly available data should not as such be regarded as insider information but undisclosed information that provides views from a recognized market participant could potentially constitute insider information.

An exposition regarding the legality of activist short-seller reports should also include a discussion of whether or not short-seller reports constitute "investment recommendations" under MAR. If a short-seller report is considered to be an "investment recommendation," certain requirements regarding, among other things, disclosure of conflicts of interest and objective presentation are triggered under Article 20 MAR. In order to determine if a short-seller report constitutes an "investment recommendation," one must review and interpret the definition of "investment recommendation" in Article 3.1(35) MAR and the definition of "information recommending or suggesting an investment strategy" in Article 3.1(34) MAR—again, the determination needs to be done on a case-by-case basis.

The assessment of whether a short-seller report should be seen as an "investment recommendation" and whether the publication of an activist short-seller report constitutes market manipulation is ultimately for the Swedish authorities and courts to decide. With that said, how have the Swedish authorities interpreted the legal framework?

Current attitude from the Swedish authorities

The Swedish authorities have so far not given any clear guidance as to whether or not activist short-seller reports should be seen as investment recommendations. The same goes for whether the modus operandi of the activist short-sellers constitutes market manipulation. In connection with the publication of the short-seller report that targeted SBB, Ilija Batljan, CEO of SBB, urged the Swedish Financial Supervisory Authority ("SFSA") (Sw. Finansinspektionen) to investigate whether the activist short-sellers' modus operandi constituted market manipulation. This request has so far not resulted in any public legal proceedings. The Swedish Economic Crime Authority (Sw. Ekobrottsmyndigheten) has, however, stated that they are interested in the short-selling activism phenomenon and will monitor the development closely. Nasdaq Stockholm, the prevailing stock exchange in Sweden, has also communicated that they are continuously monitoring the development and will report any suspicious activities to the SFSA for further investigation.

In essence, the above account indicates that the legal implications associated with publishing a short-seller report are currently unclear. Amid this legal uncertainty, how can listed companies proactively protect themselves from short-seller activism and how should they act when under attack?

How to deal with short-selling activism

The first line of defense to avoid being targeted by activist short-sellers is to have in place adequate routines to pre-detect and correct any operational, financial or disclosure-related issues that short-sellers might otherwise be inclined to exploit. It is also important to have in place a clear communication strategy that respects applicable rules and regulations regarding market communications. The communication policy should include the names of the responsible spokesperson(s) within the company, routines for internal communication lines, and guidance on external messaging. Having a clear communication strategy in place makes it easier for the company swiftly to make accurate decisions on if and how to respond to a potential short-seller report.

If a company becomes the target of a short-seller report, we would recommend that the targeted company engage with external advisors. The short-seller report will most likely give rise to delicate communication considerations for the targeted company, and both the publication of a short-seller report and the publication of a response to such report could give rise to complex legal concerns related to the company's ongoing disclosure obligations. If in doubt, the prudent approach would be to seek the support and advice from experienced legal counsel, financial advisors, PR firms and specialized data analytics.

This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
© 2022 White & Case LLP

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