An extract from The Corporate Governance Review, 11th Edition


i Shareholder rights and powers

Under the Companies Act, shareholders have the power to challenge a board in several ways. As few as 100 shareholders or shareholders holding as little as 5 per cent of the voting rights (whichever is less) can requisition a meeting and add any item to the agenda, or add any item to the agenda for the company's annual general meeting (AGM); moreover, there is no minimum holding period to qualify. In practice, however, boards are relatively responsive to shareholder concerns, and requisitions are rare because each director must submit to annual re-election, and because directors are in any event required to obtain shareholder approval for a number of matters, requiring relatively frequent engagement with the company's main shareholders.

Under the Companies Act, shareholders must approve secondary share offerings by simple majority resolution and, in any event, shareholders enjoy statutory pre-emption rights on all secondary share offerings for cash, although they can approve the disapplication of these pre-emption rights by special resolution (i.e., 75 per cent of shares voted). In practice, shareholders typically give directors general authority to issue further shares for cash and on a non-pre-emptive basis within certain guidelines published by institutional investors (e.g., no more than 5 per cent of the company's share capital in any year, and no more than 7.5 per cent on a rolling three-year basis (or an additional 5 per cent in connection with an acquisition or specified capital investment), and then subject to restrictions on the price at which the shares may be issued). Authority to issue further shares is typically renewed at each AGM or sought in relation to a specific transaction when equity funding is required.

Shareholders are also required to approve the terms of share incentive plans and Class 1 transactions such as major acquisitions or disposals (in each case by simple majority), related-party transactions (by simple majority of independent shareholders), and any changes to the company's constitution or the rights attaching to their shares (by special resolution). Any proposal to acquire control (defined as 30 per cent or more of the voting rights) of a company subject to the Takeover Code requires an offer to be made to all shareholders on the same terms. Finally, shareholder approval (by way of simple majority) is required under the Companies Act for loans and other credit transactions, and for substantial property transactions, with directors and their connected persons (although in practice the provisions of the Listing Rules cover many more related-party transactions).

When more than 20 per cent of votes have been cast against any board-recommended resolution or any such resolution has been withdrawn, the Code will require companies to announce what actions it intends to take to consult with shareholders so as to understand the reasons behind the result. There is then a requirement for the company to provide an update on the consultation and any remedial actions within six months of the vote, with a final summary included in the annual report. The Investment Association has also launched its Public Register to aggregate publicly available information regarding meetings of any FTSE all-share company following significant shareholder opposition to a proposed resolution.

A general shareholder equality principle pervades both UK company law and the Listing Rules. There is a one share, one vote norm, and distributions to shareholders (dividends, share repurchases, etc.) are required to be made anonymously on market and on tightly regulated terms unless shareholders waive these requirements. In principle, information must be made available simultaneously to all shareholders, although in practice it is possible to inform key shareholders of significant proposals so as to take soundings confidentially, although this precludes shareholders from dealing in a company's securities until the information has been made public or ceases to be price-sensitive.

ii Shareholder duties and responsibilities

English law imposes little in the way of active duties or liabilities on shareholders. A majority shareholder does not owe any fiduciary duty to the company or to the other shareholders, and is free to exercise its voting rights to advance its own interests, except when it is barred from doing so because of its interest in a proposed transaction or if, in relation to a proposed change to the company's constitution, it is not voting bona fide in the interests of the company.

Certain non-binding expectations are placed on investors by institutional guidelines, the Code and the UK Stewardship Code. The Stewardship Code recognises the importance of environmental, social and governance factors to investors and the role that asset managers have in ensuring market integrity, minimising systematic risks and being stewards of the investments in their portfolios. Signatories must report annually on their stewardship. Large asset managers such as BlackRock and State Street are vocally increasing their engagement with portfolio companies on their environmental, social and governance (ESG) criteria, recognising the growing responsibilities of asset managers to foster long-term value, and the need for companies to develop their purpose and focus on creating stakeholder value. This is in line with a wider trend of expectations of enhanced ESG reporting by companies against often overlapping legal and voluntary reporting criteria.

The Listing Rules contain the concept of a controlling shareholder, who (either alone or with others acting in concert) is able to control 30 per cent or more of the voting rights. Affected companies must enter into a relationship agreement with their controlling shareholder that contains certain mandatory terms intended to ensure that the board will remain independent of improper influence by the controlling shareholder. Companies with a controlling shareholder are also subject to additional disclosure requirements, and certain matters require the approval of shareholders independent of the controlling shareholder.

iii Shareholder activism

Although institutional investors have traditionally been reluctant to police the corporate governance regime, an increasing number have become more vocal. Where institutional investors do have criticisms, they are more likely to engage in private dialogue with the directors. In recent years, however, they have been increasingly involved in activist campaigns, alongside traditional activists, such as hedge funds. What distinguishes shareholder activists is that they are prepared to air issues publicly to achieve change. Much activism is still concerned with securing board representation, encouraging merger and acquisition activity or building stakes; however, there is also an increasing focus on executive remuneration and perceived corporate governance failings. Related-party arrangements, the independence of directors, failures to address shareholder concerns and overly generous bonus or exit remuneration packages have also been addressed by activists in recent years. ESG factors are increasingly a source of shareholder activism too.

iv Contact with shareholders

A company's relations with its shareholders are also specifically addressed in the Code. Regular engagement with major shareholders so as to understand their views on governance and performance against strategy is encouraged. The Code also requires the chairperson to ensure that the board as a whole has a clear understanding of the views of shareholders. The board should keep in touch with shareholder opinion in whatever ways are most practical and efficient, using the AGM to communicate with investors and encourage their participation alongside more informal consultation throughout the year.