Arbitrage: successive orders are interdependent when they form part of one global operation

Facts

As a former employee of listed company X, Mr H was able to take part in a capital increase reserved for employees and former employees, through his employee savings scheme.

On 11 June 2024, he sent a letter by post to his employee savings scheme account keeper, in order to carry out an arbitrage: he requested the sale of his available units in fund A, as he had held these for more than five years in his employee savings scheme, in order to subscribe, for an equivalent amount, to new shares issued as part of the reserved capital increase.

However, the sell order was subject to a price condition, with Mr H setting a minimum price of €24.

As the price remained below €24 until the end of the subscription period on 17 June 2024, Mr H was unable to take part in the reserved capital increase. However, as the price of €24 was subsequently exceeded, the sell order was executed on 25 July 2024.

Mr H disputed this sale with his account keeper. He argued that his instruction was part of an indivisible arbitrage operation, necessarily involving the execution of the sale and the subscription of new shares. In his view, in the absence of his participation in the capital increase before the end of the subscription period, the sell order should have been cancelled automatically.

In response to his complaint, the account keeper argued that the sell order transmitted on 12 June 2024 was irrevocable and therefore refused to cancel it.

Unhappy with the situation, Mr H asked me to intervene in order to have the sale that was recognised on 25 July 2024 cancelled.

Investigation

I questioned the account keeper, who confirmed that Mr H had indeed requested an arbitrage operation and namely:

• the sale of his available fund A units, at a minimum price of €24;
• as well as a subscription to new shares in the reserved capital increase.

Mr H's objective was to finance his subscription using the proceeds from the sale of his available units.

On 12 June 2024, the account keeper entered the sell order at the limit price.

It told me that the order was valid for three months, since Mr H had not formally specified the expiry date of his order in his letter and the rules of the fund in question stated that: "Requests are valid for three months from the date they are entered”. The institution also reminded me that Mr H could have cancelled or changed his order at any time, provided it had not yet been executed.

Finally, as the price of €24 was reached on 23 July 2024, the redemption of the units was recognised on 25 July 2024 in Mr H's employee savings scheme account.

Given that the deadline for taking part in the reserved capital increase had passed on 17 June 2024, the account keeper explained to me that it was no longer possible for Mr H to take part in it.

Chronology of events:

The account keeper told me that, in its view, the two transactions were quite distinct and that Mr H was responsible for having set a limit price for the sell order without specifying its validity date, at the risk of seeing his arbitrage operation not executed in its entirety.

Finally, the account keeper emphasised that it was not its responsibility to interpret Mr H's instructions or to advise him on his investments

Recommendation

After carefully examining the information on the file, I shared my analysis with the professional.

First of all, I reminded it that, in accordance with Article 1186 of the Civil Code, when the performance of several contracts is necessary for the execution of one and the same operation and one of these contracts disappears, the contracts whose performance is rendered impossible by said disappearance become null and void. The same applies to contracts where the execution of the disappeared contract was an essential condition of a party's consent. However, the contract will only become null and void if the contractor against whom it is invoked was aware of the existence of the overall operation.

I considered that these principles were applicable in this specific case because the instruction given by Mr H in his letter had two parts, but was very clearly aimed at one global operation: he requested the sale of the units held in fund A, with a minimum price set at €24, for the sole purpose of financing his participation in the capital increase reserved for employees and retired employees which was open at the same time.

The wording of this instruction, which included the word "arbitrage", left no room for it to be interpreted differently:

• “(...) I would like to take part in the capital increase of company X reserved for employees and retired employees, by carrying out an arbitrage of available units.”
• “In other words, if the available units cannot be sold at a price equal to or greater than €24, the arbitrage operation will not take place.”

Therefore, the professional could not have been unaware that the two orders constituted an indivisible whole.

Consequently, in my view, once the subscription period had ended, the sell order should have been deemed null and void automatically.

I therefore asked the professional to reconsider its position.

In response, the institution confirmed that it had agreed to cancel the sale recognised, at its own expense, and to reinvest in the sold fund A units.

Lesson to be learned

While it is not a professional’s responsibility to interpret their client's instructions, they cannot ignore the inseparable nature of two concurrent orders, provided that this has been clearly expressed by the client. In such a case, it is up to them to draw the necessary conclusions. When several orders have a single purpose and one of them is an essential condition for the other, if it is impossible to execute this order, the entire operation becomes null and void.