On 19 August 2009 the FSA wrote to a number of trade associations (including the Association of British Insurers) to set out how activist shareholders should engage with the boards of investee companies in order to promote good governance.

Stronger shareholder engagement in boards was among the recommendations of Sir David Walker in his July Consultation ‘A review of corporate governance in UK banks and other financial industry entities’. The letter responded to concerns expressed by some trade bodies representing institutional investors over the extent to which more active shareholder engagement was consistent with elements of the existing regulatory regime.

The main areas which had raised concerns were: market abuse; disclosure of substantial shareholdings; and change in control. The FSA letter sets out the regulators approach to these issues

  • Market abuse - The FSA state that the market abuse rules do not prevent investors from engaging collectively with the management of an investee company. However, the FSA consider that trading on the basis of knowing another investor’s intentions or working jointly to avoid disclosure of shareholdings could constitute market abuse.
  • Disclosure of substantial shareholdings - The FSA rules on disclosure of major shareholders require that investors who have agreed to follow the same long-term voting strategy should aggregate their shareholdings when considering whether their shareholdings reach the threshold level required for disclosure. This is unlikely to include the kind of ad hoc discussions and understandings which might be reached between institutional shareholders in relation to particular issues or corporate events.
  • Change in control - Under the EU Acquisitions Directive, implemented into the UK earlier this year, when investors are acting “in concert” FSA approval is required where a controlling shareholding is reached in a regulated firm (10% or more). Although “acting in concert” is not defined in the directive the FSA consider that it is not intended that the phrase "acting in concert" should capture ad hoc discussions and understandings in good faith solely aimed at exerting influence intended to promote generally accepted principles of good corporate governance.

The FSA letter states that the regulator is “satisfied that there is no fundamental inconsistency” between an increase in collective engagement by institutional shareholders designed to raise concerns on corporate issues or matters of governance and existing regulatory requirements.

For further information: FSA provides clarity for activist shareholders