Chapter 14 - Shareholders' Rights & Engagement Flashcards
(44 cards)
1
Q
What is a member?
A
S.112 CA2006
- A subscriber to the Memorandum who is automatically entered on ROM on incorporation;
- Every other person who agrees to become a member / whose name is entered onto the ROM.
2
Q
What is a retail shareholder?
A
Individual investors who buy/sell securities for their personal account, not for another company or organisation
Will usually register shares in name of nominee belong to a stock-broking firm
3
Q
What is an institutional shareholder?
A
- One which trades securities in large quantities/monetary amounts on behalf of multiple beneficiaries.
- Assumed to be more knowledgeable and therefore better able to protect themselves.
- Have a role in economy to act as HIGHLY SPECIALISED INVESTORS on behalf of others
- Ex. pension funds
4
Q
What are the two most common company responses to short-termism and shareholder activism?
A
- Look for funding from private equity rather than listing
- Where listing - list in countries allowing dual share structure where listed shares are non-voting (founders retain more votes per share and so retain overall control)
5
Q
Whare some ways in which investor/shareholder priorities may differ?
A
- Strategic opportunities viewed differently.
- Different time horizons / investment objectives
- Risk attitudes differ
- The more powerful a shareholder, the more likely they are able to sway board/management
- Engagement leads to expectation of acceptance of ideas - if not the case this must be carefully managed
6
Q
What are the 7 sources of shareholder rights/powers?
A
- Legislation
- Regulations
- Corporate governance codes
- Resolutions passed at general meetings
- Case Law
- Articles of Association
- Shareholder agreements
7
Q
What are the 5 main types of shareholder?
A
- Member– person or entity entered into ROM of as holder of its shares. Normally have shareholder rights and powers;
- Beneficial shareholder – ultimately owns a share, but may not be member;
- Nominee/custodian – holds shares as a member on behalf of another (who may not be the ultimate owner of the share);
- Retail shareholder
- Institutional shareholder
8
Q
What are the 5 rights of shareholders?
A
- Information rights (receipt of information)
- Ownership & transfer
- Equal treatment (enfranchising)
- Share in profits (by way of distribution , dividend)
- Attend and request, meetings and to vote
9
Q
What are some ways in which CA2006 aims to enfranchise indirect shareholders?
A
CA 2006 aims to assist indirect investors become more involved in company’s affairs via:
- Exercise of rights (usually reserved for registered shareholders)
- PROXIES - enables registered shareholders to nominate another person to exercise / enjoy all / any of the rights, including voting, as long provided for by Articles (few have as such a largely immaterial provision);
- Give beneficial shareholders direct right to company information. Not automatic. Requires that the registered shareholder nominates the indirect investor. Company will usually alert indirect investor of right to be appointed as proxy for any meetings.
10
Q
What are the 4 most common abuses of shareholder rights?
A
- Tunnelling
- Dilution
- Market Abuse/Insider Dealing
- Related Party Transactions
11
Q
What are the 3 forms of market abuse?
A
- Engaging/attempting to engage in insider dealing (recommending/inducing another to);
-
Unlawfully disclosing inside information;
(Exceptions - disclosures to regulators or where requested/permitted by LRs) - Engaging or attempting to engage in market manipulation.
12
Q
What are the 3 offences relating to insider information per CJA 1993 part V?
A
- Dealing in securities on the basis of inside information
- Encouraging another to engage in such dealing
- Disclosing (otherwise than where during proper performance of employment, office or profession)
13
Q
What are the main defences re insider dealing?
A
- Dealing offence - would have dealt the same way if had not had the information
- Disclosing offence - did not expect them to deal / did not expect profit from it
14
Q
What should the contents of an insider list include?
A
- Identity of person having access;
- Reason for including that person in list;
- Date and time person obtained access to inside info;
- Date insider list was drawn up.
15
Q
What is included in ‘ICSA GUIDANCE NOTE ‘MARKET ABUSE REGULATIONS (MAR) DEALING CODE & POLICY DOC’ 2016 regarding share dealing policies?
A
- ‘specimen’ group-wide dealing policy for issue to employees as an intro to concept of market abuse
- ‘specimen’ dealing code - co’s to issue to PDMRs/others they wish to be covered
- ‘specimen’ dealing process manual- use by CoSec/ whoever responsible for clearance of dealing
16
Q
Why might there be more successful prosecutions for insider dealing under MAR than under then CJA 1993?
A
Under MAR insider dealing is a civil offence, burden of proof is that is on ‘balance of probabilities’ instead of ‘beyond reasonable doubt’ as applied to criminal prosecutions (CJA insider dealing offence is a criminal offence)
17
Q
What are the 3 ways in which ‘dilution’ can occur?
A
- Ownership percentage voting control reduced;
- Per-share earnings cut when disbursed among a greater number of shareholders;
- Share value fall depending on proceeds recieved from selling more shares to investors.
18
Q
What 3 protections has CA2006 put in place against the dilution of shares?
A
- Directors must be authorised to allot shares in the company by shareholders (s.250)
- Pre-emption rights on issue of new shares (can be waived @ GM / some listed companies waive to certain level @ AGM each year)
- Shareholder right to approve LTIPS (CoSec often involved in preparing plan rules / resolutions placed for AGM regarding these)
19
Q
What is the Company Secretary’s role in protecting shareholder rights/preparation of share issues/allotments?
A
- Ensure resolutions re allotment of shares/waivers etc. included in AGM agenda
- Ensure waivers / authorities are in line with shareholders’ expectations
20
Q
What is tunneling?
A
Illegal business practice where majority shareholders direct company assets/future business to themselves for personal gain
21
Q
What are some examples of tunneling?
A
- Assets sold/transferred at non market prices to 3rd parties
- Value-destroying acquisitions or investments are made to help related companies
- Off-balance sheet loan guarantees made
- Corporate opportunities are exploited by related companies - rather than by the company itself
- Articles / capital structure amended to give priority to one set of shareholders over another
- Changes (inc merg/ac/disp) made affecting fundamental legal/de facto bases of company
22
Q
What is a related party transaction?
A
IAS 24 Related Party Disclosures = ‘ transfer of resources, services or obligations between a reporting entity and a related party, regardless of whether a price is paid’.
23
Q
What should a company disclose in respect of RPTs?
A
If company had any RPTs in the period covered by the financial statements, it must disclose:-
- Nature of related party
- Name of related party
- Date/value of transaction or arrangement
- Any other info re - fair/reasonable for the company and uninterested/unrelated shareholders
Rules / definitions are set out in LRs and DTR 7.3
24
Q
Under CA2006 what transactions require shareholder approval prior to being entered into?
A
Company may not transfer to director/director to company-
- Non cash >10% net assets and >£5,000
- > £100,000
CoSec will aid if shareholder approval required- coordinating GM & dealing with applicable documentation.
25
What does the identity of shareholders being known enable the shareholder(s) to do?
* Assert their **rights**;
* **Communicate** with companies;
* **Monitor** CG best practice and **hold** management **accountable**;
* **Join** with fellow shareholders to **overcome legal hurdles** leading up to GMs;
* **React** with management in a **timely** manner to **hostile takeovers**.
26
In what ways does a (listed) company know who its interested shareholders are?
* **Shareholders** who have a *substantial holding* in a company are required to **inform the company**.
* 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**.
* UK - initial disclosure is triggered at **3% of total voting rights** and further disclosures for **each full percentage point over** 3%.
* Exemption for **market makers**, if under **10%** and **not exerting significant influence/control**. After 10%, must disclose.
* Under **s.793 of CA2006**, public companies can give **notice** to individual/entity it believes to have interest in shares (or at any time in 3 years before the date of the notice being issued)
* They should disclose whether or not they **have** an interest, and if so the **nature** of the interest
* If an individual does not comply - company can get a **court order** placing **certain restrictions on the shares**
* It is a **criminal offence** not to comply with such a court order.
27
What are the benefits of good governance for any type of investor?
Shareholders **delegate management** of the company and the board/mgmt should be **accountable** to the shareholders for how it uses the company's resources, good corp gov:
* Provides ‘**checks and balances**’ on the board
* Helps boards **monitor management** of the company.
Institutional shareholders should take an interest in good governance as:
* Investors **expect a return** on their investment.
* Evidence suggests **well-governed companies deliver reasonable returns over the long term**
* Arguably, shareholders in well-governed companies are **less exposed to downside risk**
* Institutional investors have **legal responsibility** (*fiduciary duties*) to the individuals on whose behalf they invest.
(ex. pension funds - such individuals are the beneficiaries of the funds)
28
What are some ways in which institutional shareholders can call the board to account?
* **Voicing** concerns **directly**;
* **Escalate** – can escalate to a wider pool of shareholders;
* **Vote** – withhold vote / vote against a particular resolution or re-election of directors;
* **Exit** – shareholder can sell their shares.
29
What were the key findings of ICSA's "Shareholder Engagement: The State of Play" 2018?
- Evidence of **increase** since 2013 (60%) including **quality** of the engagement (70%)
- **Issues similar** , but increased focus on ESG and technology
- **Equally initiated** by companies and investors
- Still predominantly **event-driven** but some evidence of it being on an ongoing basis
30
What actions might institutional shareholders take re shareholder activism?
* Use of **voting rights** as shareholders
* Engaging in **active dialogue** with the board to influence decisions.
In **most cases** activism is **constructive** - conducted via **dialogue & discussion**
Where **board fails to respond acceptably/appropriately** - more aggressive act may be considered for example
* **Withholding** vote at AGM or
* **Voting against** resolution in GM but this can be *difficult to organise a voting majority of dissident* shareholders
Sometimes **votes will be guided** institutional investor organisations / voting advisory firms
31
What are wolf packs?
Where **hedge funds** join with **other activists** to **push through agendas** in companies for **short-term gain**- these actions will not usually be in the company’s best interests in the long-run.
32
What is a 'red-top' notice?
A ‘red top’ warning is a notice **sent out by institutional investor organisations** to its **members**, advising the members who are shareholders to **vote against a particular resolution** at an approaching AGM of a company.
33
What are the main features of the UK Stewardship Code?
1 - **Definition** of Stewardship
2 - **Consistent with holistic definition** of stewardship, **applies more broadly**
3- Signatories expected to take **ESG, including climate change, into account** and ensure their **investment decisions aligned** with needs of their clients.
4- Signatories expected to explain **how have exercised** stewardship with a **requirement** to **report annually** on stewardship **activities & outcomes**
5- (As with **some parts of 2018 UKCGC**) - explain organisation's **purpose**, **investment** **beliefs**, **strategy** **and** culture and **how these enable them to practice** stewardship.
6- Follows an **'apply and explain'** model : must **implement all** and **explain how** they have done so.
7- All principles are **supported by reporting expectations**.
34
What are the Code's requirements for the production of a Stewardship Report?
* **Succinct, engaging, plain English**
* **Single document**, structure providing a **clear picture** how applied code (**indexing** to more complex parts if required)
* **Fair, balanced, understandable**
* **Info** given should **clearly indicate** how **stewardship differs across funds/classes/geographies** p**roportionate to operations** - despite not needing to disclose on a fund by fund basis
* Should be **reviewed/approved by applicant governing body** - **signed** by **chair, CEO or CIO**
* When **accepted as signatory/report approved** by FRC - must be **publicly available document** - publish document on website or elsewhere if they do not have a one
35
What should the statement published by signatories of the Stewardship Code on their websites state?
* **How** the principles have been **applied**;
* **Specific information** required
* **Explanation** of any **non-compliance**.
36
What can the Company Secretary do re the stewardship of their company's institutional investors?
CoSec should **monitor websites** of asset owners and managers (including their service advisers) who have or manage investments in the company to:
* See if anything in **content** of their Stewardship Reports can **assist** the **company’s dialogue** with them
* Can do the same with **any disclosures req** by Conduct of Business Rules **if not signatories** of Code
* **Outcome** of this assessment should be **shared with the board**
* Many asset managers will also **publish voting policies** in addition to S-Ship Report (detail **factors taken into account** when deciding **how to vote** on resolutions)
37
What is a derivative claim? Who is able to bring it and when
**Introduced by CA2006.**
* Claim that can be **brought by shareholders** on grounds that the **company itself** has a c**ause of action against the directors** of the company.
* 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.
**Minority** shareholders are therefore able to bring such 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 company as a whole.**
38
What is the purpose of a shareholder representative body?
To provide guidance for their members on corporate governance issues of listed companies.
39
What are the two main shareholder represenative bodies in the UK?
* **PLSA** - examples of good stewardship practices & recommendations for voting at an investee AGM. Guide aloso includes recommendations for reporting of corporate culture with an emphasis on importance of boardroom diversity - Gender and Ethnic targets as identified in Davies and Parker reports.
* **Investment Association** - guidelines for members in issues such as CG, share capital management, other issues relating to capital markets.
40
What are international shareholder **advisory** bodies and why should UK companies be aware of/monitor them?
* Organisations such as **Glass Lewis** & **Institutional Shareholder Services (ISS)** exist due to **global nature of shareholdings** to **express views on UK companies**
* CoSecs/Gov Professionals should be **aware** views of these companies as far **as they affect their organisation**.
* When **board discuss issues** these bodies have an opinion on, this fact should be **brought to the board’s attention**, if they are unaware.
41
What is the difference between responsible investment and socially responsible investment?
* **Responsible** or **ethical investing** - 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.
* **Socially responsible investment (SRI)** - 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.
42
What is ESG?
Describes a **group of risks** that are **explicitly acknowledged/integrated** into **investment research** and **decision-making processes.**
43
What are the ways in which an investor can pursue an SRI strategy?
- **Engagement** : acquire **shares** where wants (**financial** reasons) & **engages** to try and **persude** them to **adopt policies** that are socially responsible **or make improvements** to CSR policies.
**May involve** investor **telling** what CSR policies should be & **persauding it to change** is policies in some areas (via **reg meetings with directors**) if company indicates willing - investor *may then help form* new policies.
- **Investment Preference**: only invest **where meet guidelines (some soc/envi/ethic in nature)**- not entirely based on CSR considerations. Investor **can consider the expected financial returns** and the selected investment portfolio can be a **suitable balance of investments** which are **ethically sound** and those that are not so ethical (or '**riskier**' re social, environ terms) but should provide **better financial return**.
- **Screening** - investments are **restricted** to companies that pass a '**screen tes**t' for ethical behaviour - can be positive or negative. **Positive** = companies **must meet certain criteria** for ethical/socially responsible behaviour - or investor will not buy shares. **Negative** = investor will** identify companies that fail to meet** certain min. criteria for socially responsible behavior and **refuse to buy shares** in those companies. Could **make use of a CSR index** such as Down Jones Sust Index / FTSE4Good Indices.
44
What is an institutional shareholder?
* One which **trades** **securities** in **large** quantities/monetary **amounts** **on behalf of multiple beneficiaries**.
* **Assumed** to be **more knowledgeable** and therefore **better** able to **protect** themselves.
* Have a **role in economy** to act as **HIGHLY SPECIALISED INVESTORS** on behalf of others
Ex. pension funds
