14 - Shareholders' rights and engagement Flashcards
6 main sources of powers and rights for shareholders
- Legislation - company laws and securities laws
- Regulations - Listing Rules, DTRs, Takeover Code
- Case Law
- CG codes
- Constitution of company (articles and resolutions)
- Shareholders agreements (regulating certain items)
5 rights held by shareholders
- Ownership and transfer (of shares)
- Equal treatment (as other shareholders)
- Share in the profits
- Receipt of information
- Attend meetings and vote
What % of shareholders can require directors to call a GM?
5% voting share capital
What % of shareholders can propose a resolution to be voted on at the AGM?
5% voting share capital
Example an indirect shareholder/investor?
A shareowner who holds share through one or more financial intermediaries
What is meant by enfranchising indirect shareholders?
Assisting indirect shareholders/investors to become more involved in company affairs and exercise the rights usually reserved for registered shareholders
4 common abuses of shareholder rights
- Market abuse and insider dealing
- Dilution
- Tunnelling
- Related party transactions
3 types of market abuse
- Engaging or attempting to engage in insider dealing
- Unlawfully disclosing inside information
- Engaging in or attempting to engage in market manipulation
3 protections for shareholders against dilution
- Requirement for authority to allot
- Right of ‘pre-emption’ on issue of new shares
- Right to approve long-term incentive schemes
What is meant by ‘tunnelling’ as an abuse of shareholders rights
When the value of shares held by a shareholder is reduced
5 instances which may cause shares to ‘tunnel’
- Assets are sold or transferred to third parties at non-market prices
- Value-destroying acquisitions and investments are made to help related companies
- Corporate opportunities are exploited by related companies
- Articles amended to give priority to another set of shareholders
- Capital structure is amended to give priority to another set of shareholders
Define related party transactions
Transfer of resources, services or obligations between a reporting entity and a related party, regardless of whether a price is charged
2 reasons why institutional investors should take an interest in CG
- Investors expect a return on their investment (and well governed companies are less risky)
- Institutional investors have legal responsibilities to the individuals who they invest on behalf of
4 courses of action institutional investors can take if they are concerned about decisions taken by the board
- Voice concerns direct to the company
- Escalate (to wider group of shareholders, perhaps through a representative body)
- Vote (by abstaining or voting against - or proposing their own resolution)
- Exit (sell shares)
Due to the difficulty in organising dissident shareholders to form voting majorities, how does shareholder activism usually take place?
Attracting publicity - brings pressure to bear on companies
What is a ‘wolf pack’?
Shareholders with a common interest (typically institutional) group together to impose their views on a particular company with a view to a short term gain
What is the purpose of shareholder representative bodies?
Provide guidance for their members on CG issues of listed companies
Institutional Investors - what is the difference between responsible investing and socially responsible investing
Responsible Investing
Refusing to invest in companies that produce or sell products that are inconsistent with the investors’ ethical, moral or religious beliefs
Social Responsible Investing
Also encourages companies to develop CSR policies and objectives
3 ways SRI investors can pursue SRI strategy
- Engagement
- Investment preference
- Screening
What is engagement as an SRI strategy?
Engaging in companies for financial reasons, then engaging with board to persuade adoption of CSR and other ethical policies
What is investment preference as an SRI strategy?
Guidelines with which investments are made include social, ethical and environmental considerations.
Investments might be made in unethical companies if perceived returns are so great
What is screening as an SRI strategy?
Companies will only be invested in if they pass ‘screen test’ for ethical behaviour
Define institutional shareholder
A person or org that trades securities in large quantities or monetary amounts on behalf of multiple beneficiaries
3 examples of institutional investors
- Banks
- Insurance companies
- Pension funds
Define retail shareholder
Individual investor who buys and sells securities for personal accounts
The shares are usually registered in the name of a stock broking firm, but the retail shareholder is the beneficial owner
Define nominee/custodian
Person or organisation that holds shares as a ‘member’ on behalf of another person or organisation
What are the important areas of the Stewardship Code for exam?
C & D
Which provision of Code is re. shareholder engagement?
3
Through which means should companies disclose inside information, and when should they do it?
Through a regulatory information service (RIS) announcement, as soon as possible
In what instance can inside information be shared with certain people before an RIS announcement?
On a need to know basis
In which circumstance is delaying making an announcement about inside information permitted?
Negotiations are yet to be concluded, and public disclosure may jeopardise outcome
Under Listing and Disclosure Rules, shareholdings above which level must be disclosed to the company and announced to the market?
Above 3%
Which right do companies have under S793 of the CA2006?
Right to seek information about any interest in its shares, whatever the size.
Right to seek information on shares under S793 (4)
Give notice to any person or entity that the company believes to have an interest in the shares at any time in the 3 years prior to the service of the notice.
The notice can require the person to disclose whether they have an interest and the nature of that interest.
Can be used to ask nominee holder for information about the beneficial owner of the shares.
Enforceable by court order.
Define shareholder activism
Activities by shareholders to influence governance and strategy decisions in companies in which they invest.
When do shareholders resort to shareholder activism?
Usually, only when private dialogue and discussion with Board does not result in satisfactory discussion
4 actions (shareholder rights) that can be taken by activist shareholders
- Exercising voting rights
- Submitting a shareholder resolution to be proposed at the next AGM
- Asking questions at the AGM (to challenge strategy)
- Calling a shareholders meeting
Exercising voting rights as a form of shareholder activism (2)
Vote against or abstain from voting on one or more resolutions.
Protest vote demonstrates disapproval of strategy.
What action should shareholders take prior to exercising rights such as proposing resolutions, meetings, etc.?
Approach the chair, and arrange to engage in dialogue and discussion with the company’s Board.
This allows major shareholders to express views on governance and strategy to Board.
Purpose of the stewardship report
Enhance stewardship role that asset owners and service providers play in relation to UK traded companies, and by requiring signatories to the Code to issue an annual Stewardship Report the Code encourages better stewardship behaviour
On what basis does Stewardship Code operate?
Apply and Explain
Signatories must explain how they have applied the Principles in the Code over the last 12 months
What is a PDMR?
Person discharging managerial responsibilities
What is a PCA?
Persons closely associated (with PDMRs)
What is required of PDMRs and PCAs?
Notify issuer and FCA of any dealings in its traded securities no later than 3 working days after date, if the total amount has reached EUR5,000 in the calendar year
What must issuer do following notification from PDMR?
Make an announcement to the market within 2 working days after they have been informed
When is a PDMR prohibited from conducting transactions in company’s securities?
What else might restrict them?
Within 30 calendar days of announcement of year end results or any interim financial report
A company’s share dealing code which will normally require them to obtain clearance
Purpose of Stewardship Code
Enhance the stewardship role that asset owners and service providers play in relation to UK traded companies, to encourage better stewardship behaviour
What does stewardship code require of signatories in terms of reporting?
Issue an annual Stewardship Report, explaining how they have applies principles over last 12 months
On what basis does the Stewardship Code operate?
Apply and Explain
