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Company Law Reform Bill: Enjoyment or exercise of members' rights


20th July 2006

Jonathan fights for nominee shareholder voting rights

Mr. Djanogly: We move on to part 9, "Exercise of members' rights". The list of amendments gives some indication of the interest that all parties take in the provisions. They have proved to be some of the most controversial and widely reported provisions in the Bill. The exercise of members' rights is an important issue, and the Conservative party feels strongly about it.

The position has moved on significantly since we tabled the amendments. I shall address the issues in the context of the Government's new clauses, which we welcome and which form the substantive position for debate today. In our view, there should be a link between a person who has chosen to invest in a company's shares and that company. Once a person invests his money in a company, a line of trust is created; it is a thread that runs directly between the company and the person who has chosen to risk his money by investing in it. The law should acknowledge and respect that.There are myriad ways of investing one's money in a company. While it is still possible to buy shares in one's own name, it is increasingly common, especially among small investors, to arrange instead for the shares to be held in the name of a nominee. However, where group arrangements are used, it is often the case that a nominee account holder is put down as the legal owner of the shares, whereas the beneficial or actual owner of the shares is somebody quite different-the person who has paid money to invest in the company rather than that nominee or broker.

Let me give an idea of the extent of the practice by mentioning some statistics. We are told that nearly 50 per cent. of all private shareholdings are now administered by nominees. Whereas there are 26 million certified shareholdings, there are now 24 nominee-based shareholdings. It is estimated, therefore, that £100 billion-worth of share capital is held in that way. The owners of those 24 million shareholdings held in nominee accounts should benefit from shareholder democracy. At present, they have no rights in the companies in which they have chosen to invest money. They cannot vote on matters that are normally voted upon by shareholders, nor do they have a right to receive any of the information that is normally received by shareholders.

The Government have now gone some way towards heeding our calls, but it is only fair to set out the views to those who have campaigned hard on both sides. Over the past 20 years, while shareholder groups such as The Share Centre, the United Kingdom Shareholders Association and the Association of Private Client Investment Managers and Stockbrokers have lobbied for such enfranchisement, registrars and various corporate groups have lobbied against it. Although many of the briefings that I have received relate to the old drafting of the clause, the groups' points are still pertinent. We have received a great deal of information from a wide range of companies and groups that feel strongly. The CBI and some of its members have expressed concerns about the clause in relation to indirect investors and have mentioned the costs and burdens that they feel could be imposed on listed companies should it come into effect.

We have listened carefully. Mechanisms are already in place for beneficial shareholders to choose to vote in some circumstances, and more and more publicly listed companies place their annual reports and other information on their websites. Many of the companies to which we have spoken have indicated that they would be happy to provide information to any beneficial shareholder who might contact them. However, although systems are in place, we need to do more to encourage active shareholder participation. A representative of one major public limited company told us that the clause was not necessary because few of the private investors in his company vote. We would support an update in the law because the corporate environment is not healthy; private investors do not engage enough in the running of what are, essentially, their companies. In some limited companies, only 7 per cent. of private investors vote. That should be just as unacceptable as falling national and local electoral votes.

James Brokenshire: My hon. Friend makes a powerful point about the need for greater shareholder democracy. Does he share my dismay that, at plc AGMs, the advisers often significantly outnumber the shareholders? That starts to bring the process into disrepute, so there is a need to encourage greater participation, engagement and involvement of shareholders in their companies.

1.15 pm

Mr. Djanogly: My hon. Friend makes a good point. We have all been there, and that is often the norm for small and medium-sized listed companies. However, while that situation is typical, we should not accept it; we want to move away from it. The Conservative party stands for increased shareholder democracy. In an ideal world, all private shareholders would use the avenues there are to obtain the information available, but in practical terms, unless they are given the choice to opt in, few will. In an ideal world, all issuers would take a positive interest in the beneficial owners of their shares and give them the option to receive information. Unfortunately, that does not occur. A voluntary system is in place and it does not work very well. Electronic communication and CREST are delivering significant cost-savings to companies, but the success of technology should not mean that members' rights are destroyed. The system needs to be adapted to cater for technology.

Many of the anxieties that businesses have expressed about the clause concern the cost to the issuer. We believe that it will not be as great as many fear. The vast majority of communications, for voting or information, will be electronic, which is quick, easy and far cheaper than conventional postage delivery systems. As issuers already send electronic communications to those with a full shareholding who want them, it would not be a significant cost burden to increase the volume of those communications to take into account those with a beneficial interest.

There have been various criticisms from the Institute of Chartered Secretaries and Administrators, the Royal Institution of Chartered Surveyors, the Law Society and the Institute of Directors. The ICSA expressed reservations, including concerns about the practical implementation of the new system and the lack of obligations imposed upon the member, but its primary concern is about cost. The Law Society expressed anxiety about the legal workings of clause 138. It is important to hear from the larger brokers themselves, and I mention one in particular. We received an e-mail from the Halifax, on behalf of Halifax Share Dealing Ltd which states:

"We are delighted with the new clause 138. It has proposed a Government amendment to the Company Law Reform Bill... covering shareholders' right. HSDL is one of the UK's largest execution-only stockholders with regulatory responsibility for a number of nominee companies in which we hold shareholdings on behalf of 2.3 million retail investors. Whenever and where possible we try to obtain for our customers the same rights as they would have if they were registered in their own right. However, to do so we have to depend on the whim of registrars and regrettably all too frequently they are not willing to help us provide these rights which we strongly believe that our customers, who are investors in these companies, are entitled to. We have campaigned long for these rights and as you are aware we are part of the Shareholders' Rights Alliance."The e-mail ends by saying:

"On behalf of our customers and those of other nominee operators it is our fervent hope that the amendment will remain in place and that the moral right of investors will prevail over the profit motives of a small number of interested parties."

The depth of feeling on the issue runs deep; only a couple of weeks ago my hon. Friends on the Committee, the shadow Secretary of State and I joined a rally just outside Parliament supporting the people campaigning for these rights. We are glad, and many shareholders are relieved, that the Government have seen the right way forward on the issue and tabled a new set of amendments to the Bill. Having said that, they were tabled very late in the day, which allowed little time for a contribution on the clauses.

I shall explain briefly why we do not support the voluntary extension of shareholders' rights. Our view is that when possible the industry should lead without the need for the Government to legislate. However, in this case, if the extension of shareholders' rights was allowed to be voluntary for companies, the status quo would simply remain. The shareholder groups we have spoken to have been lobbying for nominee shareholder enfranchisement for nearly 20 years. In that time, relatively few companies have chosen to extend normal shareholder rights to nominee shareholders. If little has changed in the last 20 years there seems little reason to believe that it will change much in the next 20 years before this House considers company reform again.

We are glad that the Government are coming round to our point of view, but I want to note some of the problems that have arisen as a result of the measure, because ultimately it has become reactive law, made somewhat on the hoof. Although we support and welcome the reversal, it should have come sooner so that all interested parties could have been given a proper amount of time to consider this important issue.

We were provided with draft clauses on 11 July and the Minister set out the significant consultation that there has been on the proposals. Although it is probably going too far to say that every party has everything it wanted, we are much closer to consensus than we might otherwise have been. We recognise the Minister's efforts in that regard.

The Minister will recognise that we will need to hear what interested parties have to say. Although we reserve our right to return to this matter on Report, the measure is only possible in relation to detail, rather than form, which is broadly acceptable. However, I should like to mention some specific points.

Yesterday afternoon, we received comments from the Law Society, which moved very fast, dealing with various issues that the Government will need to consider over the summer. Perhaps the Minister has not received those comments yet; although I am sure that she will, I shall mention some of them so she can hear what the Law Society is saying. I have not had time to consider those comments in detail myself, so that is another thing to do in the summer.

The Law Society, in respect of clause 2(3), says:

"The definition of ‘information rights' refers to a right to receive ‘a copy of all communications that the company sends to its members generally'. It is not linked to the information rights that the shareholder, as a matter of fact, possesses. For example, articles may include a provision stating that overseas shareholders are not entitled to notices of meetings unless they provide an address for communications in the UK."

In respect of clause 2(5), it says:

"In Clause 2(5)(a), replace ‘(2)(a)' with ‘(3)(a)'. In Clause 2(5)(b), replace ‘(2)(b)' with ‘(3)(b)'."

I do not expect the Minister to respond immediately to these technical points; I am putting them on the record.

The Law Society says that clause 3

"should provide that a nomination ceases to have effect if the nominated person ceases to own the shares beneficially. Equally, it seems that the member or nominated person should be required to notify the company of this situation."

On clause 3(2) it says:

"It is not clear whether in the case of shares held by more than one member, all those members need to request the nomination to be terminated. Clause 3(2) should provide that the member or nominated person must notify the company of the termination of a nomination."

The Law Society says that the provisions in clause 4

"do not encompass the concepts in the articles of association for how notices are served and communications made to shareholders which would also need to apply to the information rights of nominated persons."

It wants to

"Delete the last reference to ‘appointed'."

in clause 5(2)(a).

On clause 6, the Law Society states:

"The rights introduced by this clause are highly likely to give rise to unforeseen practical difficulties and issues in relation to corporate actions. Clause 6 is also unclear. Does a member to whom the section applies ‘exercise his rights' within the meaning of the section...only when he exercises all the rights directly himself...only in respect of those of the rights which he elects to exercise directly himself; or...also in respect of rights which are exercised directly by persons whom he has nominated?

If a member, without having made any nomination, exercises his rights in two different ways, does he automatically fall within this clause? If so, this should be made clear.

If the clause also applies to a member (A) who has nominated another person (B) in respect of certain of his shares, (a) does the member only ‘exercise his rights' if he exercises them in respect of the remainder of his shares, or (b) does the member also ‘exercise his rights' in respect of rights exercised by B?"In clause 6(1), it would like to

"Replace ‘person' with ‘member'."

On clause 7, the Law Society states:

"At clause 7(2)(e) we question whether the computation of the total amount of the sums paid up will be mathematically correct. The members' request must already have the support of ‘100 persons'...It is hard to understand, therefore, why the calculation requires the division of the relevant aggregate nominal value by the number of persons named in the request which will in any event ‘name' the registered holder.

We also envisage uncertainties arising under Clause 7(2)(c)(ii) as to when the nominee holds shares "in the course of a business'".

I have put those points on the record. We are where we are in terms of timing, but the Minister will have my party's full co-operation in making clause 138 work, if the changes that are required arise.

Under the new clauses as they are currently drafted, there will be no compulsion on a broker to provide the relevant services. The relationship between the broker and the company, rather than the company and the customer, which is envisaged in the clauses, means that there is no compulsion on the broker to provide the services to shareholders. In reality, however, we appreciate that it will be for the shareholder to choose a broker who supplies such services. That needs to be put on the record.

It is also worth noting that the default position for the delivery of information under the new clauses is electronic delivery. From the cost perspective, that is the right approach, but we must consider the remaining issue of the cost to the company if a beneficial shareholder chooses to opt in for hard copies of information, rather than electronic copies. I would appreciate it if the Minister confirmed that her Department will keep that aspect under review.

The Government originally used the issue of cost against the approach that they are now taking; the implementation of the system may well involve increased costs to companies, especially if many shareholders choose to opt for hard copies of the information. However, I put it on record that we believe that those marginally increased costs will be greatly outweighed by the savings that companies have borne from the use of nominee shareholders and the CREST share trading system. Again, we agree that the issue should be reviewed in due course.

The electronic CREST system is used in the vast majority of those share owning situations, whether the shares are bought by means of an individual savings account, personal equity plan or other similar arrangement. That saves a lot of time and money, as all the information is held electronically. The enfranchisement of beneficial shareholders is a natural progression in the modernisation of our company law. Nominee accounts have brought a great deal of efficiency to the UK stock market and enabled more electronic trading and settlement.

If we put the estimated £6 million per annum that this new system will cost all UK companies against the savings brought about by CREST, it seems clear that we are evolving the UK shareholding system for very little real cost. That is an essential development if we are to have a participative public financial market.

The Government have not introduced any criminal sanctions into this part of the Bill. We accept that that is right in the circumstances; indeed, it is a pity that the Government have not taken that less heavy-handed approach to other parts of the Bill. We also recognise the fact that stockbrokers have the right and ability to split votes of shares that they hold as a block. That is the right approach. Previously, the Government had argued that the increasingly complex investment claims in place precluded a one-size-fits-all approach to the enfranchisement of indirect shareholders. At thetime, they missed the point that the vast majority of individual shareholders who are currently disfranchised hold their shares through nominee operators. The names of those operators appear on the register of members; it is not a complex investment chain.

I should also point out that under the Bill the company will need a list of people who require information. We should like to receive confirmation from the Minister that the law provides for that list to be kept confidential and that the list will not be used by the company for other or inappropriate reasons. The company will send out a letter explaining that people's rights will need to be actioned through their nominees.

Will that letter be in the standard Financial Services Authority format? Has the Minister devised the law in conjunction with the FSA? If she has not, will she confirm whether that will be done?

We also note that the provisions apply only to companies operating in regulated markets. They will not apply to unregulated markets such as the alternative investment market or the off-exchange market. Will the Minister justify why she took that decision? Will the Government inform us about when they intend to review the position in due course?

Overall, I should like to commend the Government for finally seeing sense on the issue and coming round to our point of view. I also recognise the swift work that the Minister and her officials, having made the decision to change the Government's approach, did to produce the clause and consult relatively widely on it in the short time available.

The rights of shareholders are important, and not just within the narrow definition of allowing them to receive information and votes. Shareholder rights and responsible shareholder activism are the central drivers of increasing corporate social responsibility and ethical behaviour. An important step in furthering those goals has been taken today. There is still work to be done to fine-tune the clauses. As I said, I shall be happy to discuss that with the Minister over the summer. For now, I shall recommend that my hon. Friends support the Government's amendments.



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