On 6 April 2010, the FSA published Draft Guidance setting out its views on when persons might be "acting in concert" or hold deemed voting power for the purposes of its controller regime (the "Draft Guidance").
The Draft Guidance, once finalised, will become part of the FSA's Supervision Manual, and follows changes made to the controller regime as a result of the implementation in March 2009 of the Acquisitions Directive. Prior to that, the regime required aggregation of shares or voting power where persons were "associated". This included circumstances where they had an agreement or arrangement under which they undertook to act together in exercising their voting power.
Now, the FSA's controller regime requires the aggregation of shareholdings or voting power where persons are "acting in concert". It also requires the aggregation of voting power in circumstances where there is an agreement between two or more persons which obliges them to adopt, by concerted exercise of the voting rights they hold, "a lasting common policy towards the management of the institution in question".
The aggregation and disclosure of voting power under concert arrangements will be familiar to many, in light of the FSA's Rules requiring the public disclosure of significant shareholdings in publicly-quoted companies. Similarly, the Takeover Code, in establishing whether its mandatory offer provisions are triggered, requires the aggregation of holdings of concert parties. However, the FSA's views on concert arrangements for the purposes of its controller regime are of particular significance, given that the acquisition of "control" of a FSA authorised firm requires the FSA's prior approval, and failure to obtain that approval is an offence.
In July last year, Sir David Walker published, for consultation, his review of corporate governance in UK banks and other financial institutions. This included recommendations designed to strengthen shareholder engagement with the boards of investee companies, with the aim of promoting good corporate governance. In August, the FSA wrote to the Institutional Shareholders' Committee of the Association of British Insurers to share its thinking on the extent to which its disclosure and controller regimes might affect active shareholder engagement, and in particular where co-operative action by shareholders might constitute concert party arrangements. The FSA's view at the time was that there was no fundamental inconsistency between the requirements of those regimes and its support for shareholder engagement.
However, and as the FSA stated, its intention was to keep the position under review, and the Draft Guidance expands on the thinking contained in that letter. Some of the issues the Draft Guidance raises, in particular in relation to shareholder engagement, are discussed below.
Background: "control" over an authorised firm
The FSA's controller regime, as set out in the Financial Services and Markets Act 2000 (the "FSMA"), obliges potential controllers of authorised financial institutions to seek pre-approval from the FSA for acquisitions of controlling levels of shareholdings and voting power. This obligation is intended to prevent unfit persons gaining control of such institutions and, as set out above, failure to obtain the necessary approval is an offence.
Broadly speaking, under the FSA's regime, a person is deemed to have "control" over a FSA authorised firm where that person:
- holds 10 per cent. or more of the shares or voting power in the authorised firm or a parent undertaking of the authorised firm; or
- is able to exercise significant influence over the management of the authorised firm by virtue of its holding of shares or voting power in the authorised firm or a parent undertaking of the authorised firm.
Acting in concert
When determining a person's percentage level of control, that person's holdings of shares or entitlement to exercise voting power must be aggregated with the holdings or entitlements of any person with whom he is "acting in concert".
The phrase is not defined in the Acquisitions Directive, and the Treasury did not provide one to be included in the FSMA on implementation. The three Level 3 European Committees produced Guidelines which included the following definition:
"[…] persons are "acting in concert" when each of them decides to exercise his rights linked to the shares he acquires in accordance with an explicit or implicit agreement made between them."
This interpretation is potentially very broad in scope and the Draft Guidance stresses that the concept of "rights linked to shares" is not limited to voting rights.
Aggregation of voting power
The FSMA provides that in certain situations, when calculating a person's percentage level of voting power, it is necessary to aggregate that person's holdings with another's. These circumstances include, for example, where those persons have concluded an agreement which obliges them to adopt "by concerted exercise of the voting power they hold, a lasting common policy towards the management of the undertaking in question”.
"Control" through the holding of shares or voting power
A key point to note in relation to the Draft Guidance is its scope. It places significant stress on the extent to which existing shareholders in a FSA authorised institution may become "controllers" of that firm by virtue of a common approach to the holding of shares, as well as to the exercise of voting power.
This approach to the concept of "acting in concert" may seem counterintuitive, given that the Acquisitions Directive which the Draft Guidance supports refers to the regulation of situations in which a person has taken "a decision to acquire or increase a qualifying holding" in a regulated financial institution. This would not, on first principles, appear to include situations in which existing shareholders come together in the absence of an agreement to acquire or increase shareholdings in an authorised firm. The breath of the FSA's proposed approach could also catch arrangements relating solely to the mechanics of acquisition, even where there is no intention to exercise common control post acquisition, such as where there are multiple signatories to a single share purchase agreement, and as set out below.
However, the FSA's letter to the ABI stated that it did not believe that its regulatory requirements prevented "collective engagement by institutional shareholders designed to raise legitimate concerns on particular corporate issues, events or matters of governance with the management of investee companies". Furthermore, "ad hoc discussions or understandings of this nature" would not, in the FSA's view, trigger the obligation to aggregate shareholdings or voting power for the purposes of the controller regime.
Clearly, this approach provides some comfort, and the Draft Guidance is broadly consistent with these statements. Specifically, it sets out how the following situations will be treated by the FSA:
Agreements to vote on particular issues
The Draft Guidance indicates that the FSA "would not expect" the aggregation provisions (that is, either the "acting in concert" or aggregated voting power definition) to be triggered, simply because shareholders have agreed how to vote on a particular issue.
The Draft Guidance suggests that these will instead be triggered where shareholders have agreed a "wider – and usually more permanent – objective". However, it does not give any example of what such an objective could be.
Agreement to put future issues to vote
The Draft Guidance indicates that agreements to require particular management actions to be put to a vote of shareholders would not trigger the requirement to aggregate.
Agreements on how to exercise voting power "on future issues generally"
The Draft Guidance indicates that this would require aggregation, as the parties would be "acting in concert".
Passive shareholder agreements and investment/hedging strategies
The Draft Guidance indicates that agreements not to exercise voting rights are capable of resulting in the shareholders being viewed as acting in concert with each other.
However, a policy of non-voting adopted as part of an investment or hedging programme, where the acquirer has adopted a policy of consistently not voting those shares would not, in the FSA's view, trigger aggregation provisions, on the basis that it is not an agreement with other shareholders.
Multiple parties to a single share purchase agreement
The Draft Guidance proposes a rebuttable presumption that parties acquiring shares under a single share purchase agreement are "acting in concert", unless it is possible to demonstrate that there is "insufficient commonality of interests" between them.
The Draft Guidance provides examples of factors which the FSA will consider in deciding whether or not this presumption is rebutted, which include, for example, whether or not each of the signatories has been separately advised, and whether they are making the acquisition independently of each other. However, it is also clear that this list is not intended to be exhaustive, and the FSA proposes to take a "holistic" approach to any consideration of a joint share acquisition.
Interaction with Takeover Code provisions
The FSA stresses in the Draft Guidance that it will not be swayed by the interpretation of "acting in concert" for the purposes of the Takeover Code when considering the controller regime.
There are potential difficulties in some areas of the Draft Guidance. The Draft Guidance is helpful in that it states that "not all common actions taken by shareholders in relation to shares or voting power will amount to acting in concert". However, it may be difficult for shareholders to judge, on the basis of the Draft Guidance, where an agreement to vote on a "specific issue" becomes an agreement in relation to a "wider" or "more permanent" objective. It is not difficult to think of situations, where, for example, separate agreements to vote specific issues could be construed by the FSA as relating to a "more permanent" objective.
A particular difficulty with the Draft Guidance is that it provides that the aggregation provisions operate in tandem – e.g. that a shareholder (A) acting in concert with shareholder (B) would need to include the voting power held by a third shareholder (C), which is attributed to B by virtue of his "lasting common policy towards the management of the undertaking in question" with B. Since there are no provisions in the FSMA which would require a shareholder to disclose his shareholding or voting power to another shareholder, there will be no immediate way for a shareholder to establish the aggregate level of "control" he would be deemed to hold under these provisions.
The Draft Guidance addresses an area where the FSA faces conflicting tensions. It is clear that the FSA is supportive of moves to strengthen shareholder engagement with the boards of investee companies, with the aim of promoting good corporate governance. However, it is also clear that the FSA is subject to its own obligations to prevent control of financial institutions which it authorises falling into unsuitable hands. The risk is likely to be that, in drawing the net too widely, the FSA may chill what might otherwise have been legitimate co-operation and collaboration between investors. In particular, the risk of commission of an offence may encourage firms to submit arrangements to individual "vetting" by the FSA, or avoid entering into such arrangements entirely. It remains to be seen how the final form of the Draft Guidance will balance these competing tensions.