CL-2018-000297, CL-2018-000404, CL-2018-000590, - [2025] EWHC 2364 (Comm)

SKAT made claims arising out of three trading models, the Solo Model, the Maple Point Model and the Klar Model. The scale involved is indicated by the aggregate total paid out by SKAT, to which I have already referred, namely c.DKK12.1 billion (≈ c.£1.4 billion). Another indication of scale is given by the aggregate purchase price of Danish shares on the face of things contracted to be acquired, namely c.DKK1.9 trillion (≈ c.£220 billion), made up as follows:

It should not be thought, however, that those who designed the trading models had anything like that scale in mind when doing so. On 21 March 2012, when the Solo Model was being developed, Sanjay Shah forwarded to the DWF Ds at Solo a spreadsheet that had been prepared indicating the anticipated scope for the business as regards Danish shares. The email with the spreadsheet, from Edo Barac at Solo who had prepared it, expressed the view that “the returns are potentially very good”, and when forwarding it to the DWF Ds, Sanjay Shah endorsed that view: “mmmmmmm”. The spreadsheet envisaged trading 3% of the total issued volume of 13 Danish stocks and estimated a gross revenue from tax refund claims, if paid, of €19.1m (on an assumed WHT rate of 28%; at 27%, that would have been €18.4m). In the event, significantly larger volumes were traded, in aggregate, from the outset, but still nothing like the scale later seen in 2014/2015.

I aim to be precise and consistent in my terminology when describing the trading models. They were designed and implemented so that each trade would generate a payment credit referable to a Danish dividend in the account at a custodian of an entity on behalf of whom a tax reclaim agent would claim a tax refund from SKAT on the basis of inter alia a credit advice note (‘CAN’) issued by the custodian in respect of that payment credit. I shall use that term throughout; ‘dividend credit advice’ or ‘DCA’ was also frequently used, both at the time and at trial.

My aim to be precise and consistent does not mean that participants involved in dividend arbitrage (‘div-arb’) strategies, or cum-ex trading, were as precise, or were consistent, in their use of language. Nor does it mean that how I define or use terms is necessarily how such parties did so at the material time or might do so today. I should also make clear that where I use or explain a use of language that involves legal concepts or effects, they are the ordinary legal concepts and effects of securities trading, not (if different) those of Danish tax law, unless I indicate otherwise.

An immediate example of imprecision or variability of terminology concerns the two terms just mentioned, div-arb and cum-ex. It would be wrong to imagine that if a trading strategy were described as div-arb, or if a person said they had experience, knowledge or awareness of div-arb trading in the market, that would necessarily mean trading focused on the generation of a tax refund claim, or trading on a cum-ex basis. In general, arbitrage trading is the practice of taking advantage of pricing differences in two or more markets relating to the same asset. Economic theory has it that in perfectly efficient trading markets, arbitrage opportunities should not exist; but trading markets are not perfectly efficient. A simple div-arb strategy, then, might use options, acquiring shares and put options for a matching share volume on or before a dividend declaration date, and exercising the put options after the record date, having earned and collected the dividend. That would be an attempt to make an arbitrage profit out of spot market equity prices and options market prices relating to the same shares, with particular reference to pricing around a dividend declaration date.

A div-arb strategy of that kind would be unrelated to tax refund claims in respect of the dividend. It would be a classic arbitrage, looking to create a small margin out of pricing differences across markets. It is conceivable, I think, that there could be some complex relationship between the potential availability of tax refund claims to some equity investors and market prices for spot trades and/or options that in some indirect way connects tax refund claims to that simple type of arbitrage; but that is a very different point.

A structured tax trade under which a tax-advantaged buyer acquires shares so as to earn and receive payment of a dividend from the share issuer, suffering withholding tax on that income, before then selling the shares ex-div and claiming a refund, is not a simple price arbitrage strategy of that kind. However, the evidence at trial indicated that those involved in such structured tax trades might consider them and refer to them as (a species of) div-arb, although another term might be ‘tax arbitrage’.

Div-arb of that kind does not involve trading on cum-ex terms, under which a buyer contracts for a deferred settlement such that, if the trade is performed as per contract, the buyer will not acquire cum-div shares. Again, however, the evidence at trial indicated that those involved in structured trades using cum-ex, in a structure designed to facilitate and profit from a tax refund claim made by or on behalf of the cum-ex buyer, might consider and refer to them also as (a type of) ‘tax arbitrage’, or as another (sub-)species of div-arb.

The trading with which I am concerned always centred on a cum-ex trade by a tax-advantaged buyer with, in the Solo and Maple Point Models, price hedges, stock loans, subsequent unwinds, and settlement procedures, all coordinated so as to facilitate a tax refund claim on behalf of that buyer to a national tax authority like SKAT. As I describe below, the Klar Model had the same focus, but it was simpler, with no price hedges and not always using stock loans.

In equity trading, participants will use ‘sale / purchase’, ‘sell / buy’ and ‘sold / bought’ to refer to an equity trade that, strictly, is only a contract to buy / sell, under which no shareholding is transferred on the trade date. They will use those terms even though the question whether any shareholding is transferred to the buyer will depend on whether and if so how the trade is ‘settled’, i.e. performed.

That use of language is so ubiquitous and efficient that I adopt it, but it has the consequence, and this must be borne in mind throughout, that “V has today sold shares to B”, or similar, does not mean that any shareholding has been created in or transferred to B. It does not mean, without more, that any shares ever will be owned by or transferred to B. There are differences between different types of personal property, but at the basic level of that last proposition, a contract to buy Carlsberg A/S shares is not a shareholding in Carlsberg A/S any more than a contract to buy a pint of Carlsberg is a pint of Carlsberg.

I have laboured that slightly because it was apparent at trial that there may be those, possibly including some of the trial defendants, who would take the use of the language of ‘bought’ and ‘sold’ to the false conclusion that some kind of share ownership passes to the buyer the moment they execute a trade, i.e. enter into a contract to purchase shares. At that moment, however, all the buyer ‘owns’ is the seller’s promise to perform the bargain on the settlement date. Just as a contract to buy a shareholding in a Danish company is not a shareholding in the company, ‘owning’ such a contract is not share ownership. Whether the buyer ever becomes the owner of any shares in the Danish company will depend on whether, and if so how, the bargain is in fact settled (performed).

Messrs Jain, Godson and Fletcher made the point in their closing argument that in a modern system of recording shareholdings through custody chains (as to which, see further paragraph 61ff, below), whether or what true ownership rights can be said to exist is a complex question, because “Intermediation by the custody chain gives rise to the separation of a party who is economically or beneficially entitled to a security (the end investor or ultimate account holder) from a party who, under the statutory or contractual regime (which constitutes the security) is recognised as the holder of it, and therefore as entitled to exercise and enjoy the rights attached or flowing from it.” There is force in that point, but it does not detract from what I said in paragraphs 54 to 56 above. It goes to what may nowadays be a complex question of what precisely is ‘owned’ by a holding of shares constituted by a complete custody chain. Whatever may be the correct answer to that possibly complex question, such a holding is not created merely by entering into a trade under which a seller is obliged to cause the buyer to acquire (receive a transfer of) such a holding some days later.

So, for example, in Sample Trade Solo 1 (see paragraph 101 below for the Sample Trades), on 27 November 2012 Mill River Capital Management Pension Plan sold, at DKK187.5903 per share, 1,000,000 shares in CHR Hansen Holdings, for settlement on 3 December 2012. But that means only that on that trade date (27 November), Mill River contracted to acquire, on 3 December, a holding of 1,000,000 shares in CHR Hansen. The conclusion of that contract on that trade date did not transfer a holding of shares to Mill River, Mill River did not become in any sense a shareholder by concluding it, and whether Mill River became a shareholder as a result of it would depend on how, if at all, the contract was performed.

That will always be true for the trading considered in this judgment. By design, the sellers always held no shares, on the trade date or ever (and any direct or indirect sellers to those sellers likewise never held any shares). If the sales had settled in such a way that the buyers became shareholders, the more complex aspects of Danish tax law that in SKAT (Validity Issues) I found to exist might have been relevant to whether the buyers were liable to Danish dividend tax on a dividend declared after the trade date and prior to settlement, so as potentially to be entitled to a tax refund. Those aspects of Danish tax law do not arise, however, because, again by design, no buyer was ever going to become or ever in fact became a shareholder pursuant to any of the equity purchases, due to the way in which they were (treated as) settled.

For clarity, then, I need to distinguish between contracting to buy shares, on the one hand, and obtaining a holding of shares pursuant to such a contract, on the other hand. Since I use ‘buying’, ‘selling’, etc, for the former, for the latter, as in the preceding few paragraphs, I use ‘acquiring’ or ‘acquisition’ by a buyer, ‘transferring’ or ‘transfer’ by a seller.