All questions

Engagement with shareholders

i Shareholder rights and powersEquality of treatment

Equality among shareholders is a dominant feature within the UK corporate governance framework for listed companies.

Premium listed companies must ensure that they treat all holders of the same class of shares equally in respect of the rights attaching to those shares.56 Further, a listed company must not selectively disclose information to third parties, including to shareholders. Instead, information must be made available to all shareholders at the same time. In certain circumstances, companies may look to inform major shareholders of significant proposals so as to seek their views ahead of proceeding with the proposal; however, disclosing any non-public inside information to selected shareholders will generally preclude the relevant shareholders from dealing in the company's securities until such time when the disclosed information is no longer treated as price-sensitive, inside information.

Separately, in the event of a proposal to acquire 30 per cent or more of voting rights of a company subject to the City Code on Takeovers and Mergers (the Takeover Code), an offer is required to be made to all shareholders on the same terms.

Reservation of certain matters for shareholders

Although the board is responsible for the management of the company and the company's powers are generally exercised by the board acting collectively, certain matters are reserved for shareholders of a UK company under the Companies Act and must be approved by ordinary resolution (passed by a simple majority) or special resolution (passed by a 75 per cent majority). An ordinary resolution is the more common and is used, inter alia, to authorise directors to allot shares, approve the directors' remuneration policy, remove directors from office, ratify board decisions and, for premium listed companies, approve significant transactions or transactions with related parties. Special resolutions, on the other hand, are required to disapply pre-emption rights, reduce a company's share capital (which is commonly used to create distributable reserves) or amend the company's articles of association. Generally, voting is based on the principle of 'one share, one vote'.

Ability to make a shareholder proposal

In addition, if a shareholder (or shareholders) of a UK company wishes to make a proposal, it can require the company to call a general meeting under the Companies Act, provided that it holds at least 5 per cent of the paid-up share capital that carries voting rights (excluding treasury shares). If a valid requisition request is made, the board must call a general meeting within 21 days and the meeting itself must be held not more than 28 days after the date of the notice of the meeting. Where the board fails to do so, the shareholder who requisitioned the meeting (or, where more than one shareholder, any of them representing more than half of the total voting rights of the requisitionists) may himself or herself call the meeting.57

Additional rights are available to a shareholder (or shareholders) holding at least 5 per cent of the total voting rights (excluding voting rights attached to treasury shares) and to any group of 100 shareholders with the right to vote on the resolution (provided that each holds, on average, £100 of paid-up share capital). The latter may be satisfied by an activist shareholder holding less than 5 per cent voting rights by splitting its shares between nominee accounts. A shareholder satisfying these criteria is permitted to require resolutions to be put before an annual general meeting of a public company or to require the company to circulate a statement to shareholders.58

Consultation if adverse shareholder vote

Finally, the Governance Code emphasises that when 20 per cent or more of votes have been cast against the board recommendation for a resolution, the company should explain, when announcing voting results, what actions it intends to take to consult shareholders in order to understand the reasons behind the result. The board is then required to provide an update on the views received from shareholders and actions taken by no later than six months after the shareholder meeting, in addition to providing a summary in its annual report.59

Information relating to shareholder dissent can be viewed in the public register60 published by the Investment Association, which details companies in the UK FTSE All Share that have received significant opposition by shareholders to a resolution or a written statement, or any resolution withdrawn before a shareholder vote. This helps to identify which companies are acknowledging shareholder dissent and how they are addressing their shareholders' concerns.

ii Shareholders' duties and responsibilitiesLimited duties and responsibilities

Shareholders of English companies are subject to very few restrictions by way of duties and responsibilities with regard to their shareholding. Generally, except in limited circumstances (such as with regard to amending articles of association or voting on a proposed transaction in which a controlling shareholder is interested), there is no restriction on shareholders exercising their voting rights to promote their own interest and, unlike directors, shareholders do not owe any fiduciary duties to the company or other shareholders.

Notification of interests

Under the DTRs, shareholders are required to give notice of an acquisition of shares within two trading days where they acquire (directly or indirectly through other group entities), in aggregate, 3 per cent or more of the voting rights in a UK company to which DTR 5 applies. A further notice has to be given each time a percentage holding above 3 per cent increases or decreases through 1 per cent thresholds (rounding down to the nearest whole percentage point).61

Controlling shareholders

For premium listed companies with a 'controlling shareholder', there is a mandatory requirement under the Listing Rules to have a relationship agreement in place to ensure that the controlling shareholder complies with certain legally binding undertakings set out in the Listing Rules.62

Market guidance

Shareholders are expected by custom and market practice to follow and respect institutional investor guidelines, the Governance Code and the UK Stewardship Code, last published by the FRC in 2020, which sets out good practice for institutional investors seeking to engage with boards of listed companies and also applies on a comply or explain basis.63

iii Shareholder activism

Shareholder activism has grown in prevalence in both the UK and, more generally, Europe in recent years. While shareholder activism in the US has tended to be viewed as more adversarial, hostile or opportunistic in nature, in the UK there is growing support for activist investors, particularly as many have taken a more collaborative approach to activism and engaged with companies privately instead of taking public action at the outset. Activists in the UK are not restricted to any particular industries. Natural targets are characterised by poor share price performance compared with industry peers, high cash reserves, businesses that can be sold or spun off, corporate governance concerns or a receptive shareholder base.

Companies that regularly engage with their major shareholders are less vulnerable to challenge from an activist shareholder. US hedge funds and alternative investors with event-driven strategies are often considered to be the principal shareholder activists in the UK. However, in recent years, long-term institutional investors have become increasingly involved in activist campaigns (outside takeover or merger arbitrage situations) and, on occasion, have formed alliances with hedge funds or alternative investors for this purpose. The apparent behavioural shift of institutional shareholders is due to a number of factors, including the publication of best practice guidance aimed at promoting effective engagement between institutional shareholders and listed companies and the introduction of 'say-on-pay' legislation.

iv Takeover defences

Notwithstanding a rise in shareholder activism in the UK generally, structural or 'poison pill' defences are not prevalent in the UK, and their adoption would likely constitute a breach of fiduciary duty by the directors of a UK company. Further, in the context of a possible takeover offer for a UK listed company, the Takeover Code prohibits a target company's board from denying its shareholders the opportunity to decide on the merits of a bid, and prohibits the board from taking certain actions without shareholder approval during the course of an offer or if it believes that an offer might be imminent, which would include issuing shares, selling material assets or entering into non-ordinary course contractual arrangements.

In any event, shareholder consent would be required to implement any poison pill involving an amendment to the company's capital structure or rights attaching to its share capital, which is unlikely to be granted by UK institutional investors, and for companies with or seeking a premium listing, it is unlikely to be consistent with the requirements of the Listing Rules.

v Engagement with shareholders

The Governance Code recommends that companies ensure satisfactory dialogue with shareholders as one of its main principles.64 This is supported by guidance published by shareholder representative groups, including the Investment Association and Pension and Lifetime Savings Association, which recommend that dialogue takes place at regular intervals throughout the year.

Best practice guidance also recommends that directors be involved in shareholder engagement efforts; they should be accessible to shareholders and should make themselves available to engage on any issues (whether or not related to a vote at a company's general meeting). While, in practice, most shareholder contact is with the chief executive officer and finance director, the Governance Code emphasises the role of the chair and senior independent director for maintaining shareholder relations. In particular, the chair must ensure that the board as a whole has a clear understanding of the views of shareholders.65