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Corporate Governance > Shareholders' rights and engagement > Flashcards

Shareholders' rights and engagement Flashcards

1
Q

What is a member?

A

• Member = s.112 CA2006 = a person or organisation entered into the Register of Members of the company as the holder of the company’s shares.

• ‘members’ normally have ‘shareholder rights and powers’

The owners of shares are required to exercise their rights and powers through these members.

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2
Q

What is a beneficial shareholder?

A

= a person or organisation that ultimately owns a share in a company.

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3
Q

What is a nominee / custodian?

A

= 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.

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4
Q

What is a retail shareholder?

A

= individual investors who buy and sell securities for their personal account, and not for another company or organisation

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5
Q

What is an institutional shareholder?

A

= a person or organisation that trades securities in large quantities or monetary amounts on behalf of multiple beneficiaries

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6
Q

Why are many beneficial owners physically and psychologically distant from the activities of the companies they invest in? (3)

A

J. Bower and S. Pain:
1. limited liability means that shareholders have no legal duty to protect or serve the companies whose shares they own
2. can buy and sell their shares, often without restriction
3. hidden behind one or more layers of institutional shareholders = only disclose their identities in certain circumstances

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7
Q

What is the problem caused by seeing shareholders as owners of companies and therefore having a say in how a company operates?

A

= not all shareholders have the same views and objectives for the companies in which they invest e.g. Attitudes to risk are different

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8
Q

What is Shareholder activism often based on?

What is a wolf pack?

Name a case of a wolf pack.

A

= the belief by shareholders that they are the owners of the company and therefore the directors of the company should be doing what they say.

= Shareholders that have grouped together to impose their views on a particular company often with a view to short term gain

Telstra and Tabcorp = shareholders coordinated their campaigns against executive remuneration

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9
Q

Name 3 moves that are happening to reposition companies away from the shareholder primacy model to acting in the best long-term interests of the company.

Name 2 moves that companies themselves are taking in response to the pressures of short-termism and activism by shareholders

A
  1. engagement with a wider range of stakeholders and incorporate their views and interests into decision-making
  2. S.172 duty and subsequent reporting requirements
  3. introducing Stewardship Code
  4. looking for funding from private equity rather than considering listing
  5. looking to list in countries which allow dual share structures = where the shares listed are non-voting shares or give founders more votes per share enabling them to keep control of the company e.g. Google
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10
Q

Who can exercise the powers and rights of shareholders?

What are the 7 main sources of powers and rights for shareholders?

A

can only be exercised by the registered member.

  1. Legislation = company laws and securities laws
  2. Regulations = listed companies LR, DTRs and Takeover Code
  3. Case law
  4. CG codes and principles = OECD Principles of Corporate Governance
  5. Articles of association of members
  6. Resolutions passed at GMs e.g. rights to elect the board and auditor
  7. Shareholder agreements = may regulate purchase and sale of shares etc.
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11
Q

What are the 6 main rights of shareholders?

A
  1. Ownership and the transfer = G20/OECD Principles of Corporate Governance state that secure ownership and the power to transfer a shareholding are basic rights
  2. Equal treatment
  3. Share in profits = A company should have a dividend policy
  4. Receipt of information
  5. Attend meetings and vote
  6. Enfranchising indirect shareholders
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12
Q

SHAREHOLDER RIGHT - EQUAL TREATMENT
What do the Listing Rules say on this?

What does the G20/OECD Principles of Corporate Governance state?

A

Listing Rules Principle 5 = all shareholders of the same class of shares should be treated equally

G20/OECD Principles of Corporate Governance state: ‘Minority shareholders should be protected from abusive actions by controlling shareholders and should have effective means of redress.

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13
Q

SHAREHOLDER RIGHT - RECEIPT OF INFORMATION
What does the G20/OECD Principles of Corporate Governance state? (2)

What do the Listing Rules say on this?

A

• The G20/OECD Principles of Corporate Governance state it is a basic right of shareholders to:
1. within reasonable limits, be able to demand information from the company and

  1. receive timely and regular disclosure of important information about the company

Listing Rules Principle 6 = listed company must communicate information to shareholders and potential investors ‘to avoid the creation of a false market’ in the company’s shares.

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14
Q

SHAREHOLDER RIGHT - ATTEND MEETINGS AND VOTE
In UK law, what do shareholders have the right to? (2)

What does the CA2006 say shareholders and proxy voting?

A
  1. require the directors to call a general meeting if together they hold at least 5% of the voting share capital; and
  2. propose a resolution to be voted on at the AGM of the company provided they hold at least 5% of the voting share capital.

Under CA2006 shareholders may appoint more than 1 proxy per shareholding

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15
Q

SHAREHOLDER RIGHT - ENFRANCHISING INDIRECT SHAREHOLDERS
What is an indirect shareholder?

How does the CA2006 aim to assist indirect investors becoming more involved in the company’s affairs? (2)

A

= shareowners who hold shares through one or more financial intermediary

By:
1. enabling registered shareholders to nominate another person to exercise or enjoy all the shareholder rights as long as Articles permit
2. giving beneficial shareholders direct rights to company information so long as registered shareholder nominates the indirect investors

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16
Q

What are the 4 common abusers of shareholder rights?

A
  1. Market abuse and insider dealing
  2. Dilution
  3. Tunnelling
  4. Related party transactions
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17
Q

What is market abuse?

What are the 4 types of market abuse?

What powers do the FCA have?

A

= a civil offence that encompasses a wide range of unacceptable market practices and behaviours, including insider dealing

  1. Engaging or attempting to engage in insider dealing
  2. Recommending that another person engage in insider dealing, or inducing another person to engage in insider dealing
  3. Unlawfully disclosing inside information
  4. Engaging in or attempting to engage in market manipulation

S.123 FSMA2000 = FCA may impose an unlimited penalty on, or censure, any person who has engaged in market abuse

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18
Q

What are the 3 criminal offences of insider dealing under Criminal Justice Act 1993?

What is inside information? (4 elements)

What is the disclosure requirement of insider information for listed companies?

A
  1. dealing in securities on the basis of inside information
  2. encouraging another to engage in such dealing; and
  3. disclosing inside information otherwise than for proper purposes

Information which:
1. relates to particular securities or issuer(s) of securities;
2. is specific or precise;
3. has not been made public; and
4. if it were made public would be likely to have a significant effect on the price of any securities

• Listed companies are required to inform the public as soon as possible of inside information which directly concerns them as an issuer

19
Q

What 2 conditions must be met for a person to be guilty of insider dealing?

What powers do the FCA have?

A

• To be found guilty of the offence:
1. the defendant must have insider information as an insider and must know that such information is inside information.

  1. The information must have been obtained by the defendant as a director, employee or shareholder of the company concerned or directly or indirectly from such a person.

• S.402 FSMA2000 = empowers FCA to institute criminal prosecutions

20
Q

What are the 3 defences for dealing in securities on the basis of inside information and encouraging another to engage in such dealing?

A
  1. They did not at the time expect the dealing to result in a profit attributable to the price-sensitive information;
  2. They reasonably believed the information was disclosed widely; or
  3. They would have done what they did even if they didn’t have the information
21
Q

What are the 2 defences for disclosing inside information otherwise than in the proper performance of one’s employment, office or profession?

A
  1. They did not at the time expect any person to deal in securities; or
  2. They did not expect the dealing to result in a profit attributable to the price-sensitive information
22
Q

Who must keep an insider list and what is its purpose?

What must the insider list include? (4)

A

• Listed companies should maintain a list of people who have access to any inside information and make that list available to FCA
Purpose = enable FCA to conduct investigation regarding the source of any possible leaks

  1. the identity of any person having access to inside information;
  2. the reason for including that person in the insider list;
  3. the date and time at which that person obtained access to inside information; and
  4. the date on which the insider list was drawn up.
23
Q

What does the ICSA Guidance Note MAR Dealing code contain?

What does the dealing code and policy document include? (3)

A

= documentation for a dealing code and policy compatible with the requirements of the market abuse regulations

• The dealing code and policy document includes:
1. a ‘specimen’ group-wide dealing policy
2. a ‘specimen’ dealing code to issue to PDMRs
3. a ‘specimen’ dealing procedures manual for the cosec

24
Q

What are the 3 ways dilution can occur?

What protection does the CA2006 provide against this? (3)

A
  1. Ownership percentage of voting control is reduced
  2. Per-share earnings may be cut when disbursed among a greater number of shareholders.
  3. Share values may fall depending upon proceeds received from selling more shares to investors

CA2006:
1. Requires directors to be authorised to allot shares in the company by the shareholders

  1. Shareholders have the right of ‘pre-emption’ in relation to the issue of new shares
  2. Shareholders have the right to approve long-term incentive schemes
25
Q

What is tunnelling and an example?

When can it happen? (4)

What safeguards does the Listing Rules impose? (2)

A

= occurs when the value of the shares held by a shareholder is reduced e.g. majority shareholder directs company assets or future business to themselves for personal gain

• Tunnelling can happen when:
1. the company’s assets are sold or transferred to third parties at non-market prices;

  1. value-destroying acquisitions and investments are made to help related companies
  2. off-balance sheet loan guarantees are made
  3. corporate opportunities are exploited by related companies and not the company itself

• Chapter 10 Listing Rules:
1. where a transaction is more than 5% of company’s value, company has to notify shareholders.
2. More than 25% = shareholder vote is required.

26
Q

What is a related party transaction according to the International Accounting Standards?

If an entity has had related party transactions during the periods covered by the financial statements, what must it disclose?

A

• IAS 24 = ‘a transfer of resources, services or obligations between a reporting entity and a related party, regardless of whether a price is charged’

Disclose = the nature of the related party relationship, the transactions, and outstanding balances, necessary for users to understand the potential effect of the relationship on the financial statements.

27
Q

What does the CA2006 say on related party transactions?

What does the DTRs require?

What do the LR set out?

A

• S.190 CA2006 = substantial property transactions between a company and its director or a connected person must be authorised by shareholders

• DTR 7.3 = disclosure must be made if a listed company enters into a material related party transaction

• LR Related Party Transactions = sets out safeguards intended to prevent a related party from taking advantage of its position

28
Q

In recent years several reasons have made it important for the identity of shareholders to be known.

What does this enable shareholders to do? (5)

A
  1. Assert their rights.
  2. Communicate with companies
  3. Monitor CG best practice and hold management accountable.
  4. Join with fellow shareholders to overcome legal hurdles in the run-up to GMs
  5. React with management in a timely manner to hostile takeovers.
29
Q

Why are shareholders who have a substantial holding in a company required to inform the company?

What is the trigger point for this disclosure who does the notifications go to?

How can public companies find out if a person or entity has/had an interest in their shares?

A

= this disclosure makes it clear to potential investors who owns the company or who aspires to secure control of the company

• disclosure required at 3% of total voting rights and a further disclosure is required for each whole % point change after that
Listed companies are required to make these notifications public

• s.793 CA2006 = public companies can give notice to any person or entity who the company believes has an interest in the company’s shares or had in the last 3 years
• notice requires the shareholder to disclose whether or not they have had an interest and the nature of that interest

30
Q

Why do many institutional investors not see CG as their responsibility?

Why should institutional investors take an interest in good CG? (2)

A

= have holdings in 1000s of companies accounting for 1% of a company = the expense and time spent entering into active engagement with a company is often not seen as beneficial

  1. Investors expect a return on their investment = Evidence suggests well-governed companies have less downside risk
  2. Institutional investors have legal responsibilities (fiduciary duties) to the individuals on whose behalf they invest.
31
Q

What are the 4 opportunities institutional investors have to call the board to account?

A
  1. Voice their concerns direct to the company.
  2. Escalate = escalate concerns to a wider group of shareholders possibly through a representative body.
  3. Vote = withhold vote or vote against a particular resolution or the re-election of directors
  4. Exit = shareholder can sell their shares.
32
Q

What did the 2018 ICSA ‘Shareholder Engagement: The state of play’ research into?

What are 2 things it concluded?

A

researched into the participation of institutional shareholders in listed companies

• Research concluded:
1. Clear evidence the quality of and time devoted to the engagement had increased since 2013

  1. Companies and investors initiate equally the engagements due to the demand for discussions from the companies and the increased focus on ESG issues from investors.
33
Q

What is shareholder activism?

What happens when a board of directors fails to respond in an acceptable and appropriate way to shareholder concerns?

What is a ‘red top’ notice?

A

= refers to activities by institutional investors to influence governance and strategy decisions in companies in which they invest

• Activism is usually constructive (involving dialogue and discussion) but more aggressive action may be considered
= often involve withholding a vote at an AGM or voting against the re-election of certain directors

red top notice = advices members to vote against a resolution, which may persuade shareholders how to vote

34
Q

How does shareholder activism work?

What is a case example?

A

• Shareholder activism works through attracting publicity = shareholder opposition creates negative publicity which puts pressure on companies

• Sports Direct AGM in 2018 = circa 10% of investors voted against Mike Ashley’s re-election following the shareholder advisory groups’ recommendation to do so

35
Q

What is the UK Stewardship Code?

Is it a mandatory code?

How many principles are there for asset owners and asset managers?

How many principles are there for service providers?

A

• UK Stewardship Code sets high stewardship standards for asset owners, asset managers, and service providers that support them

• is voluntary but FCA authorised asset managers must disclose whether, and if so how, they comply with it

12

6

36
Q

What are the 7 main features of the UK Stewardship Code?

A
  1. Definition of stewardship = the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society
  2. Consistent with holistic definition of stewardship = applies across asset classes beyond listed equity
  3. Signatories are expected to take ESG factors into account
  4. Signatories are expected to explain how they have exercised stewardship and report annually on outcomes
  5. Signatories are expected to explain how purpose, strategy, culture enable them to practice stewardship
  6. follows an ‘apply and explain’ model
  7. All Principles are supported by reporting expectations = indicate the information that organisations should include in their Stewardship Report
37
Q

What are the 2 main shareholder representative board in the UK that provide guidance for their members on corporate governance of listed companies?

A

The Investment Association and The Pension and Lifetime Savings Association (PLSA)

38
Q

What does the PLSA ‘Stewardship and Voting Guidelines’ offer? (2)

A

= offers practical guidance for pension schemes in acting as good stewards of their assets

= support members in engaging with investee companies

39
Q

What has the investment association published?

What are the 6 topics the guidelines cover?

A

= a series of guidelines which set out member expectations on issues such as CG

  1. executive remuneration;
  2. long-term reporting;
  3. stakeholder engagement;
  4. audit tendering;
  5. virtual-only AGMs; and
  6. share capital management
40
Q

What is Responsible (or ethical) Investment?

A

= an approach to investment that acknowledges the investor’s views on ESG factors, and the long-term health and stability of the market as a whole.

41
Q

What is Socially Responsible Investment?

A

= combines investment returns with ethical investing (investing in line with a set of moral or ethical principles)

42
Q

What is the difference between Responsible ( or Ethical) Investment and Socially Responsible Investment?

A

R(E)I = means refusing to invest in ‘unethical’ companies and ‘sin stocks’ e.g. tobacco companies, because their activities are inconsistent with the investor’s ethical, moral or religious beliefs

SRI = 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 environmental sustainability, alternative energy etc

43
Q

What are the 3 ways institutional investors can pursue a Socially Responsible Investment?

A
  1. Engagement = investor acquires shares in which it wants to invest (for financial reasons) but engages with the board and tries to persuade the company to adopt policies that are socially responsible
  2. Investment preference = investor develops a set of guidelines that companies should meet and will only invest in companies that do
  3. Screening = investments are restricted to companies that pass a ‘screen test’ for ethical behaviour
    a. Positive screening = companies must meet certain ethical and socially responsible behaviour = if not, the investor will not buy its shares
    b. Negative screening = an investor will identify companies that fail to meet certain minimum criteria for socially responsible behaviour and will refuse to buy shares in these 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

Corporate Governance (16 decks)

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