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Prior to their AGMs last year, Royal Dutch Petroleum (Shell) and Unilever both circulated their shareholders with letters from shareholder representatives commenting on the company’s financial position, directors’ remuneration and corporate governance. They did so not because the law required them to, but because they have both signed up to the Shareholder Communication Channel (SCC). Companies signing up – which also include ABN AMRO, ING, Philips and Reed Elsevier – agree to allow shareholders with 1% of the issued share capital (or, if less, shares worth at least 250,000 euros) to circulate information about any item on the agenda for a forthcoming meeting. If the company unreasonably refuses to circulate any information, shareholders can appeal to an independent Supervisory Committee whose decision is binding.
Although the arrangement is presently only available to shareholders in the Netherlands, it may offer a glimpse of the future for UK listed companies and their shareholders. Whilst UK shareholders do have similar rights to put resolutions, and to require a company to circulate statements about business to be dealt with at a general meeting, the proposing shareholders need to hold at least 5% of the voting rights or to number at least 100. Any resolution must be proposed at least six weeks before the meeting, and companies are entitled to insist on the shareholders meeting the costs of circulating any documents. In practice, the rights are usually regarded by investors as a ‘nuclear option’ and are seldom used.
Difficulties in finding out who the beneficial owners of shares are, and in exercising voting rights, especially where shares are held through intermediaries, also discourage collective shareholder action. When a particularly controversial resolution is proposed, shareholder bodies like the NAPF sometimes help disapproving institutional shareholders form an ad hoc committee to consider how best to exert concerted pressure on management, but such occasions are very rare.
The Company Law Reform Bill
Although publicly committed to encouraging voluntary engagement by institutional shareholders, the Government has sent rather mixed messages in the Bill put before Parliament this month. On the one hand, it has threatened to force institutions to publicly disclose their voting records if voluntary shareholder engagement does not appear to be working in practice. But on the other, it has dropped from the previous draft of the Bill proposals that would have given shareholders in quoted companies the right, at the company’s expense, for 15 days after the accounts have been published, to propose a resolution and/or get the company to circulate a statement of not more than 1,000 words about any item on the agenda or arising from the accounts.
Quoted company shareholders with at least 5% of the voting rights, or numbering at least 100 will, however, have the right to publish on the company’s website free of charge a statement of any concerns about the audit, or the circumstances in which the auditors have resigned, that they intend to raise at the AGM. But contrary to the Government’s original plans, the auditors will not be legally obliged to answer shareholder questions.
Other promised enhancements to shareholder rights include:
- Giving the same proportion of shareholders in quoted companies the right to force the directors to obtain an independent report on any poll taken at a general meeting.
- Allowing registered holders to nominate someone else (such as the beneficial owner) to exercise some or all of their rights as a member, including the right to receive notices of meetings and to appoint proxies. To accommodate this, either companies will need to change their articles or specific Regulations will need to be passed.
- Giving proxies the same rights as registered holders to ask questions, demand a poll and vote on a show of hands at general meetings.
Although the Bill has been introduced in the current session of Parliament, it is doubtful whether most of the changes will come into force until at least April 2007. In the meantime, institutional shareholders may press the Government to reinstate its previous proposals.
First published in Directors' digest November 2005, a CMS Cameron McKenna publication.
