Shareholder rights and engagements Flashcards
What are the four types of market abuse?
The four main types of market abuse are:
* engaging or attempting to engage in insider dealing;
* recommending that another person engage in insider dealing or inducing another person to do so;
* unlawfully disclosing inside information; and
* engaging in, or attempting to engage in, market manipulation.
2. Why
Why might there be more successful prosecutions for insider dealing under the market abuse regime than under
the Criminal Justice Act 1973?
The market abuse offence of insider dealing is a civil offence. Accordingly, it is only necessary to prove that a person’s
behaviour was illegal ‘on the balance of probabilities’ as opposed to the ‘beyond reasonable doubt’ test applied in
criminal prosecutions for insider dealing under the Criminal Justice Act 1993.
What is inside information and why are listed companies required to publish inside information so promptly?
Inside information is defined as:
* information of a precise nature;
* which has not been made public;
* relating, directly or indirectly, to one or more issuers or to one or more financial instruments; and
* which, if it were made public, would be likely to have a significant effect on the prices of those financial instruments
or on the price of related derivative financial instruments.
Information is not inside information unless each of the criteria in the above definition is met.
Listed companies are required to publish inside information promptly in order to minimise the opportunities for insider
dealing and the creation of a false market where the information has leaked.
Briefly describe the most common types of shareholders.
Below is a list of the most common types of ‘shareholders’.
* Member – a person (or corporation) entered into the Register of Members of the company as a holder of the
company’s shares.
* Beneficial shareowner – a person or organisation that ultimately owns a share in a company. The shareowner may
or may not be a ‘member’ of the company.
* Nominee/Custodian – a person or organisation that holds shares as a
* ‘member’ on behalf of another person or organisation who may or may not be the ultimate owner of the shares.
* Retail shareholder – individual investors who buy and sell securities for their personal account, and not for another
company or organisation. The individual usually registers the shares in the name of a nominee belonging to a stock
broking firm, e.g. Barclays Nominees Limited.
* Institutional shareholder – a person or organisation that trades securities in large quantities or monetary amounts on
behalf of multiple beneficiaries.
What are the main sources of shareholder rights?
The main sources of powers and rights for shareholders are as follows:
Legislation –- the two main areas of law that relate to shareholders are company laws and securities laws.
Regulations – listed companies are subject to the requirements of the Listing Rules, Disclosure and Transparency Rules
(DTRs) and the Takeover Code.
Case law – some protection for minority shareholders can be found in common law rules, which often operate when
legislation is silent.
Corporate governance codes and principles such as the OECD Principles of Corporate Governance.
Articles of association of the company usually contain powers and rights of members, such as those for the holding of
general meetings.
Resolutions passed at general meetings of shareholders reinforce pre-emption rights, the rights to share by way of
dividend in the profits of the company and the rights to elect the board of directors and the company’s auditors.
Shareholder agreements which may regulate:
* the purchase and sale of shares;
* the preference to acquire shares;
* the exercise of voting rights;
* the exercise of control;
* the company’s policy on investments;
* the company’s budget;
* the right of first refusal;
* the tag-along and drag-along clauses;
* the preparatory meetings among the shareholders who executed the shareholder’s agreement to decide how to
vote in the general meetings of the company.
- Give examples of shareholder rights. The following are examples of shareholder rights:
- ownership and transfer of shares;
- equal treatment;
- share in profits;
- receipt of information;
- attend and vote at shareholder meetings; and
- enfranchising indirect shareholders.
- Name four examples of shareholder abuse.
- insider trading
- dilution
- tunnelling
- related party transactions
What is a derivative claim? Who is able to bring it and when?
CA2006 introduced the possibility of a ‘derivative claim’ by shareholders on the grounds that the company itself has
a cause of action against the directors of the company. The cause of action must involve some negligence, default or
breach of duty on the part of the director and may be brought against the director involved in the breach. There is no
need to show that the company has suffered a financial loss. Minority shareholders are therefore able to bring actions
against directors who have acted in a way that is preferential to a majority shareholder and have breached their duty to
promote the interests of shares as a whole.
- In what ways does a company know who its interested shareholders are?
Shareholders who have a substantial holding in a company are required to inform the company. This disclosure makes
it clear to potential investors who owns the company or who aspires to secure control of the company. It also warns
the company and allows them, together with shareholders, to prepare for an impending takeover. In the UK, the initial disclosure is triggered at 3% of total voting rights and a further disclosure is required for each whole percentage point
change after that. There are exemptions for market makers holding less than 10% so long as they don’t influence the
management of the company or exert influence over the company. At 10% and over the entire holding is disclosable.
Listed companies are required to make these notifications public.
Public companies can, under the CA2006, give notice to any person or entity whom the company believes to have an
interest in the company’s shares or to have had an interest at any time in the three years immediately preceding the
date the notice was issued. The notice requires the shareholder to disclose whether or not they have had an interest and the nature of that interest. If the shareholder fails to provide the information the company is able to obtain a court order imposing certain restrictions on the shares it believes are held by the shareholder. If the shareholder fails to comply with a court order it is a criminal offence.
Why should institutional shareholders take an interest in good corporate governance?
Shareholder participation provides ‘checks and balances’ on the board of directors, thus helping the board monitor the
management of the company.
Institutional investors should take an interest in good corporate governance as:
* Investors expect a return on their investment. Most evidence suggests that well-governed companies deliver
reasonable returns over the long term, and shareholders in these companies are less exposed to downside risk
than shareholders in companies that are not so well governed.
* Institutional investors also have legal responsibilities (fiduciary duties) to the individuals on whose behalf they invest.
For pension funds, these individuals are the beneficiaries of the funds. In fulfilling their responsibilities, institutions
should try to ensure that they make a decent return on investment, and promoting good corporate governance is
one way of trying to do this.
What are the seven principles of the stewardship code?
- Principle 1: Institutional investors should publicly disclose their policy on how they will discharge their stewardship
responsibilities. - Principle 2: Institutional investors should have a robust policy on managing conflicts of interest in relation to
stewardship, which should be publicly disclosed. - Principle 3: Institutional investors should monitor their investee companies.
- Principle 4: Institutional investors should establish clear guidelines on when and how they will escalate their
stewardship activities. - Principle 5: Institutional shareholders should be willing to act collectively with other investors where appropriate.
- Principle 6: Institutional investors should have a clear policy on voting and disclosure of voting activity.
- Principle 7: Institutional investors should report periodically on their stewardship and voting activities.
- What is the difference between responsible investing and socially responsible investment?
- Responsible or ethical investing means refusing to invest in ‘unethical’ companies and ‘sin stocks’, that is,
companies that produce or sell addictive substances (like alcohol, gambling and tobacco) because the activities of
the company are inconsistent with the investor’s ethical, moral or religious beliefs. - SRI investing goes further. It includes refusing to invest in ‘unethical’ companies, but SRI investors also encourage
companies to develop CSR policies and objectives, in addition to pursuing financial objectives. SRI investors will
seek out companies engaged in social justice, environmental sustainability and alternative energy/clean technology
efforts. SRI investors may also be involved in shareholder activism when companies have social or environmental
policies with which they disagree.
What are the ways in which an investor can pursue an SRI strategy?
There are several different ways in which
institutional investors may pursue an SRI strategy:
* engagement;
* investment preference; and
* screening.
With an engagement strategy, the institutional investor acquires shares in which it wants to invest (for financial reasons) but then engages with the board of directors and tries to persuade the company to adopt policies that are socially responsible, or to make improvements in its CSR policies. Engagement may therefore involve the investor telling what the CSR policies of the company should be and persuading it to change its policies in some areas (through regular meetings with its senior directors). If the company indicates its willingness to make changes, the investor may also offer to help with the formulation of new policies.
With an investment preference strategy, the investor develops a set of guidelines that companies should meet. The
investor will then invest only in the shares (or other securities) of companies that meet the guidelines, some of which will
be social, ethical or environmental in nature. With this strategy, its investment decisions need not be based entirely on SRI considerations. The investor can also consider the expected financial returns from an investment, and the selected investment portfolio can be a suitable balance of investments that are ethically sound and those that are not as ethical (or are ‘riskier’ in social or environmental terms) but should provide better financial returns.
With a screening strategy, investments are restricted to companies that pass a ‘screen test’ for ethical behaviour.
Screening may be positive or negative. Positive screening means that companies must meet certain criteria for ethical
and socially responsible behaviour; otherwise, the investor will not buy its shares. Negative screening means that an
investor will identify companies that fail to meet certain minimum criteria for socially responsible behaviour and will refuse to buy shares in those companies. The screening process could make use of a published CSR index, such as the Dow Jones Sustainability Indices or the FTSE 4 Good Indices.
Chapter summary
Chapter summary
* Many individual shareholders believe they are shareholders of the company and call companies expecting to be treated as such. The company has no record of them as they are not registered members of the company. These individuals hold their shares through nominee companies for a variety of reasons including ease of transfer. The CA2006 included rights for these indirect shareholders.
- Institutional shareholders, such as banks, insurance companies and pension funds hold broad portfolios of listed
company shares in an attempt to spread risk. - The powers and rights of shareholders have developed to manage issues resulting from the separation of ownership and control in companies and also to protect minority shareholder rights.
- Shareholder rights cover the following:
– ownership and transfer;
– equal treatment;
– share in the profits;
– receipt of information; and
– attend and speak at meetings and vote. - Common abuses of shareholder rights include the following:
– market abuse and insider dealing;
– dilution;
– tunneling; and
– related party transactions. - Shareholders are able to bring a cause of action on behalf of the company through a ‘derivative claim’ against a director for negligence, default or breach of duty.
- Institutional shareholders should take an interest in the companies in which they invest, however, sometimes the
expense and time required to enter into a productive dialogue with the company may not be worth it for the level of investment, often less than 1% of the company. - Evidence has shown that in the last five years engagement between shareholders and the companies has
increased with interest in the impact of technological change and ESG factors. - Shareholder activism is not always negative – it can be positive and constructive. It only becomes aggressive when
companies fail to listen or engage properly with the institutional investor. - The UK Stewardship Code aims to enhance the quality of engagement between investors and companies to help
improve the long-term risk adjusted returns to the providers of capital for companies. - The company secretary plays an important role in ensuring that the engagement between companies and their
shareholders happens effectively. - There are two main UK shareholder representative bodies who engage in issuing guidance to institutional
shareholders. These are:
– The Investment Association (incorporating guidance from the Associated British Insurers (ABI)).
– Pension and Lifetime Savings Association (PLSA) (formerly the National Association of Pension Funds
(NAPF)). - UK listed companies also communicate directly with some institutional shareholders, such as Hermes, who have
their own corporate governance units. - There are also international shareholder bodies who engage UK listed companies in discussions about ESG factors.
- There is a difference between responsible investing and socially responsible investing (SRI). The first means
refusing to invest in companies that that produce or sell products that are inconsistent with the investors’ ethical,
moral or religious beliefs. The second, SRI, is wider in scope, with investors also encouraging companies to develop
CSR policies and objectives, in addition to pursuing financial objectives. - SRI investors will seek out companies engaged in social justice, environmental sustainability and alternative energy/
clean technology efforts. SRI investors may also be involved in shareholder activism when companies have social or environmental policies with which they disagree. - institutional investors may pursue an SRI strategy in the following ways:
– engagement;
– investment preference; and
– screening
