Fostering an appropriate regime for shareholders' rights
Comments from ACCA
December 2004
ACCA is pleased to comment on the Commission's consultation document on the above. ACCA is a recognised professional body of accountants, with over 100,000 members based in the UK and throughout the EU and the wider world. Our members work in both business and public practice, and in both large listed companies and SMEs. Through its members, therefore, ACCA has a wide understanding of the needs of businesses of different kinds and sizes.
We support the broad aim of the proposed Directive, which is as we see it to agree on a standard range of legal rights for shareholders in EU companies. We agree that the harmonising of shareholder rights is a desirable development in the context of efforts to promote cross-border investment in the EU single market, although any new measures which the proposed Directive brings in should be careful to avoid imposing costs on companies which cannot be justified in terms of improving the ownership position of beneficial shareholders. We would also point out that the encouragement of cross-border ownership needs also to be promoted by corresponding measures to standardise the vital legal rights of contracting parties and creditors.
We would add at this stage the general point that the law can and should only be concerned with giving shareholders rights. Whether shareholders actually exercise those rights, and the way they choose to use them, should remain a matter for them. If all a shareholder wants is to invest in a company for simple financial motives, there should be no compulsion on them to participate more actively in the investee company affairs. The Introduction to the document states that the current proposal is not intended to address issues of shareholder democracy, and suggests that further legal initiatives in this area are being considered by the Commission. We would argue that the attribution of necessary legal rights to shareholders is indeed an issue of democracy, but those with rights to participate should not be forced to use them.
Our comments on the specific issues raised for consultation are set out below.
Scope of the proposed Directive
Do interested parties agree that the scope of the forthcoming proposal on shareholders' rights should be restricted to companies whose shares are admitted to trading and that member states should be invited to extend those facilities to non-listed companies?
We accept that shareholder participation issues exist on a greater scale in the listed company sector simply because listed companies have far more shareholders than do non-listed companies and also because shareholders in such companies are much less likely to have management rights in their companies. We also see that there may be particular governance-related issues facing non-resident shareholders. We accept, therefore, that the Commission would be justified in giving priority to measures which address the particular problems faced by members of listed companies in the EU.
We believe, however, that certain of the proposals contained in the Document � notably those concerning the right to table questions and resolutions and the provisions regarding notice of meetings - affect what we would regard as being �core' company law issues. As such, it would be difficult to legislate for them by differentiating between the legal rights of shareholders in different types of company. Some of the measures, e.g. electronic voting, can be justified on grounds of scale, but with regard to the more fundamental, participation-related issues, we do not think it would be healthy to have a situation where members of listed companies had legal rights to information and participation which were not available to members of non-listed companies, many of which will be large in terms of their membership and financial standing. To avoid this problem, we suggest that the Commission's project considers whether some of the proposed measures could be implemented via listing rules rather than legislation.
Entitlement to control the voting right
Do interested parties consider that the forthcoming proposal should set up a framework to control the voting right as the last natural or legal person holding a securities account in the chain of intermediaries?
We are not aware that there is any huge pressure among institutional investors for the attribution of legal rights to control voting rights. The figures quoted in the consultation document suggest that a substantial increase in cross-border ownership is occurring regardless of any widespread concerns held on this matter. We accept, though, that the question of which party should be entitled to exercise �control' rights over shares is a relevant legal issue. Increasing proportions of EU markets are being taken up by shares which are owned by intermediaries on behalf of �beneficial' shareholders. If no ownership controls are being exercised in respect of those shares, then this could, conceivably, be preventing company boards from being given a full picture of the views of their shareholders, with possible implications for the integrity of corporate governance.
Any new measures to be introduced on this matter should be capable of establishing beneficial ownership rights with certainty and with as little administrative cost to issuers as possible. We suspect however that the proposal to establish a legal framework for establishing voting rights is too complex to be practicable. It would be extremely costly and time-consuming for companies to operate, particularly where there is no easily identifiable chain of information leading down to the identity of the ultimate investor, as is the case with pooled funds. In many cases, too, beneficial shareholders will delegate authority to their fund managers or other intermediaries to exercise their control rights either as they see fit or within defined parameters.
Do interested parties agree with provisions to allow the ultimate investor to exercise the entitlement to control the voting rights?
We agree that the ultimate legal right to exercise control rights should rest with the beneficial investor. It should be a matter for that investor to decide whether and if so how those rights are to be exercised, if at all, and to issue appropriate instructions to the intermediary.
Do interested parties agree that securities intermediaries should be required to certify to the issuing company who the ultimate investor entitled to control the voting rights is and for how many shares?
Yes.
Communication of information relevant to GMs
Do interested parties consider that the forthcoming proposal should contain provisions regarding the disclosure of GM notice and materials and some standards for the dissemination of such information? What should be these standards?
Some minimum standards for the GM notice could be helpful. The information in the notice should include the full, definitive list of items for discussion at the meeting as well as the key data on date, time and venue.
Should it also require issuers to maintain a specific section on their website where they would have to publish all General Meeting-related information? Should issuers' websites or such GM dedicated sections of their websites contain also a description of shareholders' and investors' rights in relation to voting (voting by proxy or in absentia) and with regard to the GM (right to ask questions or table resolutions)?
We support the idea of listed companies maintaining sections on their web sites which contain information relevant to a forthcoming GM. We agree that information on shareholders' participation rights would be useful to include in this section. We query, however, whether it is right for such a requirement to be laid down in law. It could more reasonably be set down either in listing rules or in a Code of Practice. Further, the Commission should bear in mind that web-based information may not be accessible to many shareholders, so it should not be regarded as being the sole means or default means of informing shareholders.
Do interested parties consider that the forthcoming proposal for a Directive should deal with the way information is �pushed' by the issuer to the ultimate investor? If so, which of the two approaches (chain or direct) is preferable? Should the possibility be given to the ultimate investor to opt out of such identification system?
We believe that beneficial shareholders should not be compelled to play any part in the governance process. If control rights are extended to them and they wish to exercise them, then they should be entitled to do so. But many will not wish to have a direct relationship with the investee company either for reasons of privacy or because they are content to delegate �control' authority to their intermediary. Of the two approaches discussed, therefore, we would prefer information to be passed to the intermediary as the registered shareholder. The intermediary will then be responsible for passing on and receiving information in accordance with the contract with the beneficial owner. On the supplementary point, the law should give issuers the power to discover the identity of the ultimate investor.
Do interested parties consider that share blocking requirements represent a barrier to the exercise of voting rights, especially for cross-border investors?
We believe share blocking practices are undesirable; it would be
preferable to replace them with a harmonised record date approach. The proposed Directive could set a maximum date for share recognition purposes but it should be for member states to set their own limits within this range.
Do interested parties consider that Member States should be prevented from imposing requirements on companies regarding the venue of the GM that would act as a barrier to the development of electronic means of participation? Should additional criteria be defined at EU level to enable shareholders participation to the GM by electronic means?
We support the development of �alternative' means of facilitating participation in GMs, such as via video-conferencing. Such means, however, are costly and pose significant technological and procedural problems. The law should allow companies to hold GMs by such methods but there should be no compulsion. Companies should be allowed to explore and exploit the opportunities provided by alternative means at their own pace.
Do interested parties consider that the forthcoming proposal for directive should define minimum standards on the way shareholders' questions may be filed and dealt with at the GM? If so what should such minimum standards be?
We support the recognition of the right of shareholders to question their boards. But with regard to any new right to ask questions at GMs, care should be taken to avoid raising expectations on the part of shareholders and imposing onerous responsibilities on boards themselves. How the balance is to struck will be difficult to deal with in legislation: the matter might be better dealt with in a form of Code of Practice, perhaps one which addressed other, additional ways in which companies should deal with queries from their members over and above the periodical GM, for example by means of occasional members forums or web-based question and answer sessions. But if there is to be a legal provision on this specific matter, for practical reasons shareholders at a GM should not expect that every single question will be able to be aired, and companies should be allowed to impose reasonable time limits on individual questions and on the time allotted to questions and answers. Shareholders should not be entitled to raise questions which are clearly vexatious and boards should be allowed to place restrictions on the number of �single issue' questions aired.
Do interested parties consider that the forthcoming proposal for a directive should define certain criteria concerning the maximum shareholding threshold for the tabling of resolutions and placing items on the GM agenda and the timing to file these ahead of the GM?
We agree with this proposal. With respect to the minimum standards to be applied, we would argue that, in the listed company context, the right to table resolutions and proposals at a GM should be subject to a substantial ownership threshold.
Do interested parties consider that the forthcoming proposal should oblige Member States to introduce in their national company law the possibility for all companies to offer shareholders the option of voting in absentia (by post, electronic or other means)?
Yes.
Do interested parties consider that the forthcoming proposal should contain provisions to further facilitate the use of proxy voting across Member States and to lift obstructive local requirements?
Yes. It should be possible to register proxies by electronic means, including by fax.
Post-GM information
Do interested parties consider that companies should be obliged to disseminate the results of votes and minutes of the GM to all shareholders and/or to post these on their website within a certain period following the meeting?
Companies should be required to publish the results of votes and the minutes of their GMs. We would not object to this information being posted on the company's web site only, but shareholders should be given prior notice in hard copy form that this is to be done.
Do interested parties consider that the non-confirmation of vote execution hinders significantly the exercise of their voting rights?
We do not see a case for including a provision on this matter in the forthcoming Directive. Confirmation of the execution of voting instructions should be matter for the investor and the intermediary concerned.