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

Illustrative Shareholding Diagram

The section of the revised diagram that features B, V, C4 and C5 illustrates the effect of vendor V, who holds no shares, selling X% of DanCo to buyer B, where B and V are both custody clients of custodian C4, and C4 is in turn a custody client of custodian C5. C4 holds no shares, since C5 holds no shares for it. C5 therefore also holds no shares so far as might be material to B or V, i.e. as sub-custodian of C4 indirectly through whom any shareholding of B or V would be held. I note for completeness that C5 need not be a different custodian to C1 or C2. For example, if C5 was C2, then it would have shares (a 30% shareholding), but not shares held for C4, and therefore not shares held via C4 as sub-custodian for B or V. That is illustrated by the shaded ‘barrier’ between C2 and C5 in the revised diagram.

The sale, assuming it is priced on the trade date, gives B and V immediate exposure, long and short respectively, to movement in DanCo’s share price, but it gives neither of them any shares. If account entries at C4 recording the sale from V to B purport to show X% of DanCo in a securities account of B’s at C4, prior to any completion of that sale, that does not make B a shareholder in DanCo. Any such record is not connected to DanCo via VPS, whether directly or via a sub-custodian or chain of sub-custodians. B may not realise that, if C4 produces an account statement purportedly recording that it holds X% of DanCo in custody for B, depending on what B knows or understands, if anything, of any wider set of transactions of which its equity purchase may form a part, and on whether it appreciates that concluding a purchase does not make it a shareholder. B’s possible ignorance that it is not immediately a shareholder in DanCo upon entering into its purchase with V does not affect the reality that it is not.

The other party in the new section of the diagram, L, is a stock lender, also a client of C4, that contracts to borrow X% of DanCo from B and to lend X% of DanCo to V, for settlement on the same settlement date as the sale by V to B. If the two stock loans and the sale are settled internally at C4, even though none of V, B or L has any shares to deliver, settlement date account entries at C4 might show X% of DanCo being:

In that way, the equity trade (V selling to B) and the stock loans (B lending to L; L lending to V) might be treated as having settled although none of B, V or L at any time has, acquires or transfers any shareholding in DanCo. It is easy to see that as a self-fulfilling settlement loop: B lends to L, so that L can lend to V, so that V can complete the sale to B. Mr Wade, the market expert instructed by SKAT, illustrated that with this diagram of the settlement transfers prima facie required to settle Sample Trade Indigo 1 (in which DWM Pension Plan bought from Maven Asset Management, Potala was the stock lender, and Indigo was the custodian):