Shareholders' Rights and Engagement (+ stewardship Code) Flashcards
What is a member?
What is a beneficial shareholder?
What is a nominee/custodian
What is a retail shareholder?
What is an institutional shareholder?
Member – a person or organisation entered into the Register of Members of the company as the holder of the company’s shares = have shareholder rights and powers
Beneficial shareowner – a person or organisation that ultimately owns a share in a company.
Nominee/custodian – a person or organisation that holds shares as a ‘member’ on behalf of another person or organisation
Retail shareholder – individual investors who buy and sell securities for their personal account
Institutional shareholder – a person or organisation that trades securities in large quantities on behalf of multiple beneficiaries e.g. banks
Who can exercise the powers and rights of shareholders?
What are the 7 main sources of powers and rights for shareholders?
an only be exercised by the registered member.
- Legislation = company laws and securities laws
- Regulations = listed companies LR, DTRs and Takeover Code
- Case law
- CG codes and principles = OECD Principles of Corporate Governance
- Articles of association of members
- Resolutions passed at GMs e.g. rights to elect the board and auditor
- Shareholder agreements = may regulate purchase and sale of shares etc.
What are the 6 main rights of shareholders?
- Ownership and the transfer of shareholding
- Equal treatment
- Share in profits = A company should have a dividend policy
- Receipt of information = receive timely and regular disclosure of important information about the company
- Attend meetings and vote
a. require the directors to call a general meeting if together they hold at least 5% of the voting share capital
b. propose a resolution to be voted on at the AGM of the company provided they hold at least 5% of the voting share capital. - Enfranchising indirect shareholders = enabling registered shareholders to nominate another person to exercise or enjoy all the shareholder rights as long as Articles permit
What are the 4 common abusers of shareholder rights?
What is dilution and 3 safeguards under CA2006?
What is tunnelling and a safeguard under the LR?
What are the safeguards under s.190 CA2006 and DTR 7.3 for the last one?
- Market abuse and insider dealing
- Dilution = Ownership percentage of voting control is reduced. Shareholders have pre-emption rights, directors must be authorised to allot shares, shareholders approve any LTIS (CA2006)
- Tunnelling = when the value of the shares held by a shareholder is reduced e.g. majority shareholder directs company assets to themselves for personal gain = e.g. company’s assets are sold to 3rd parties at non-market prices.
Transactions over 25% of company’s value require shareholder vote (LR) - Related party transactions
S.190 CA2006 = substantial property transactions (over £100,000) 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
What is market abuse?
What are the 3 types of market abuse?
What powers do the FCA have?
= a civil offence that encompasses a wide range of unacceptable market practices and behaviours, including insider dealing
- Engaging or attempting to engage in insider dealing (Recommending that another person engage in insider dealing, or inducing another person to engage in insider dealing)
- Unlawfully disclosing inside information
- 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
What are the 3 criminal offences of insider dealing under Criminal Justice Act 1993?
What is inside information? (4 elements)
- dealing in securities on the basis of inside information
- encouraging another to engage in such dealing; and
- 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
What are the 4 defences for insider dealing?
- They did not at the time expect the dealing to result in a profit attributable to the price-sensitive information;
- They reasonably believed the information was disclosed widely; or
- They would have done what they did even if they didn’t have the information.
- They did not at the time expect any person to deal in securities.
Who must keep an insider list and what is its purpose?
What must the insider list include? (4)
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
- the identity of any person having access to inside information;
- the reason for including that person in the insider list;
- the date and time at which that person obtained access to inside information; and
- the date on which the insider list was drawn up.
What is the disclosure requirement of insider information for listed companies?
How must inside information be disseminated?
Can issuers delay the disclosure of insider information?
= Listed companies are required to inform the public as soon as possible of inside information which directly concerns them as an issuer
The inside information must be disseminated though a Regulatory Information Service (RIS) (or 2 national newspapers and UK newswire services)
Yes where immediate disclosure is likely to prejudice their legitimate interests = e.g. where conducting negotiations
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)
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?
- Assert their rights.
- Communicate with companies
- Monitor CG best practice and hold management accountable.
- Join with fellow shareholders to overcome legal hurdles in the run-up to GMs
- React with management in a timely manner to hostile takeovers.
= 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. 10% = entire holding disclosable.
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
What are the 4 opportunities institutional investors have to call the board to account?
- Voice their concerns direct to the company.
- Escalate = escalate concerns to a wider group of shareholders possibly through a representative body.
- Vote = withhold vote or vote against a particular resolution or the re-election of directors
- Exit = shareholder can sell their shares.
What is shareholder activism?
What happens when a board of directors fails to respond in an acceptable and appropriate way to shareholder concerns?
How does shareholder activism work?
What is a wolf pack?
What is a ‘red top’ notice?
What is a case example?
= 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
works through attracting publicity = shareholder opposition creates negative publicity which puts pressure on companies
Wolf pack = shareholders that have grouped together to impose their views on a particular company
red top notice = advices members to vote against a resolution, which may persuade shareholders how to vote
- 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
What is the UK Stewardship Code?
Is it a mandatory code?
What should the cosec do regarding the Stewardship Report?
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 (whether they are signatories or not)
Cosec = monitor the websites of asset owners, managers (and their service providers) to assess whether there is anything in the content of their Stewardship Reports that can assist in the company’s dialogue with them = shared with the board
What is the difference between Responsible (or Ethical) Investment and Socially Responsible Investment?
Which companies with SRI investors seek out and what may they be involved in?
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 (goes further) = 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.
SRI investors may be involved in shareholder activism
What are the 3 ways institutional investors can pursue a Socially Responsible Investment?
- 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
- Investment preference = investor develops a set of guidelines that companies should meet and will only invest in companies that do
- 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 = Dow Jones Sustainability Indices or the FTSE 4 Good indices)
