Corporate Governance - Shareholders' Rights and Engagement

Question 1

From which seven Sources, do Shareholder Powers and Rights derive?

Answer 1

1. Legislation.
2. Regulations.
3. Case law.
4. Corporate governance codes.
5. Articles of association.
6. Resolutions passed at GM.
7. Shareholder agreements.

Question 2

What six Principal Rights do Shareholder have?

Answer 2

1. Share ownership and transfer.
2. Equal treatment (amongst same class of shareholders).
3. Share in profits.
4. Receipt of information.
5. Meeting attendance and voting.
6. Enfranchisement of indirect shareholders.

Question 3

What are the three Market Abuse Offences?

Answer 3

1. Engaging or attempt to engage in insider dealing.
2. Unlawful disclosure of inside information.
3. Engaging in or attempting to engage in market manipulation.

Question 4

What are the Three Effects of Dilution?

Answer 4

1. Reduction of ownership percentage of voting control.
2. Diminution of per-share earnings (due to disbursement amongst greater number of shareholders).
3. Falling share value due to sale of more shares.

Question 5

What are two CA ‘06-derived Protections against Dilution?

Answer 5

1. Requirement for directors to be authorised by shareholders prior to alloting shares.
2. Shareholder right of pre-emption to new share issues.

Question 6

What is Tunnelling?

Answer 6

Reduction in value of shareholder’s shares, arising from:
1. Sale or transfer of company assets at non-market value.
2. Value-destroying acquisitions and investments to help related companies.
3. Off-balance sheet loan guarantees.
4. Exploitation of corporate opportunities by related companies.
5. AoA, capital or corporate structure amendments to favour one set of shareholders.

Chapter 10, Listing Rules: Significant transactions of >5% company value must be notified to shareholders. If >25%, shareholder vote required.

Question 7

What is a Related Party Transaction?

Answer 7

1. Either:
   - Non-ordinary business course transaction made between a listed company and related party.
   - Non-ordinary business course arrangement where listed company and related party invest in or finance another asset/undertaking.
   - Non-ordinary business course between listed company and other person, the effect of which is to benefit related party.
2. Related party means:
   - Person (or close family member) who is related to reporting entity, if have control, joint control or significant influence over entity or key management stakeholder.
   - Parent, subsidiary, fellow subsidiary, associate or joint venture of reporting entity.
   - Person who is, or was in past 12 months, a substantial shareholder.
   - Person who is, or was in past 12 months, a director or shadow director of listed company or its subsidiaries.

Question 8

What Safeguards exist to Protect against Related Party Transactions?

Answer 8

1. Under CA ‘06, non-cash assets exceeding 10% of the company’s assets (>£5k de minimis) or £100k cannot be transferred to a director without general meeting approval.
2. Related party transactions should (DTR 7.3):
   - Have board approval (excluding interested directors).
   - At the time of transaction terms are agreed, disclose: nature of the related party, name of related party, date/value of the transaction, and other fair and reasonable information.

Question 9

What is Inside Information?

Answer 9

Information that:
1. Relates to particular issue(s) or issuer(s) of securities.
2. Is specific or precise.
3. Is likely, if made public, to have a significant effect on the price of any securities.

Question 10

What are the (i) three insider dealing offences and (ii) three insider dealing defences?

Answer 10

1. Offences comprise:
   - Dealing in securities on the basis of inside information;
   - Encouraging another to engage in such dealing; and
   - Disclosing inside information otherwise than in the proper performance of a person’s employment, office or profession.
2. Defences comprise:
   - Defendant did not, at the point of disclosure, expect any person to deal because of the disclosure;
   - Defendant did not expect any profit, resulting from dealing, to be attributable to price sensitivity of the information; or
   - Defendant would have dealt the same way regardless of the information.

Question 11

What four things should be done in terms of Insider Lists?

Answer 11

1. Listed companies must maintain a list of persons with access to inside information (and make this available to the FCA, on request).
2. The insider list must include identities of insiders, date they had access, reason for their inclusion and date the list was drawn-up.
3. Insiders should give written acknowledgement of their legal and regulatory obligations re. inside information.
4. Effective arrangements must be established to deny access to inside information by those who do not require it.

Question 12

Who are a PDMR and a PCA?

Answer 12

1. A Person Discharging Management Responsibility (PDMR) is a person within an issuer who is either (i) a member of a administrative, management of supervisor board, or (ii) senior non-director executive who has regular access to inside information.
2. A Person Closely Associated (PCA) with a PDMR is a (i) spouse, (ii) dependent child, (iii) relative who shared same household for >1 year prior to dealing or (iv) person owning or benefitting from a corporate body that has its managerial responsibility discharged by the PDMR.

Question 13

Which three Fiduciaries Providers does the UK Stewardship Code apply to?

Answer 13

1. Asset owners (e.g pension schemes, insurers, investment funds).
2. Asset managers.
3. Investment service providers.

Question 14

What Five Themes are covered by the UK Stewardship Code?

Answer 14

A. Purpose and governance (purpose enables stewardship and creates long-term client value and sustainable benefits; response to market-wide/systemic risks to promote well-functioning financial system; governance/workforce/resources promote effective stewardship; conflicts management/promotion of client interests; support of client integration of stewardship/investment; policy assurance).
B. Investment approach (client/beneficiary needs accounted; outcomes of stewardship communicated; systemic integration of stewardship to fulfil responsibilities; account managers and service providers held to account).
C. Engagement (issuers engagement to maintain/enhance asset valuation; collaborative engagement used, where necessary).
D. Active exercise of rights and responsibilities.
E. Principles for Service Providers (purpose, strategy and culture enable effective promotion of stewardship).

Question 15

What are RI, ESG and SRI?

Answer 15

1. Responsible investment - Acknowledges relevance of investor to ESG factors hence driven by financial, rather than ethical or moral implications.
2. Socially responsible investment - Combines ethical investing with return-based approach to investment via:
   - Engagement strategy;
   - Investment preference strategy; or
   - Screening strategy.
3. ESG - Recognises that environmental, social and governance risks should be expressly recognised and integrated into investment research and decision-making.