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Shareholders in the United Kingdom

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The London Stock Exchange at Paternoster Square.

Shareholders in the United Kingdom are people and organisations who buy shares in UK companies. In large companies, such as those on the FTSE100, shareholders are overwhelmingly large institutional investors, such as pension funds, insurance companies, mutual funds or similar foreign organisations. UK shareholders have the most favourable set of rights in the world in their ability to control directors of corporations. UK company law gives shareholders the ability to,

  • remove the board of directors with a simple majority of votes
  • change the company constitution with a three quarter vote (unless a higher figure is in the constitution)
  • wind up (i.e. liquidate) the company with a three quarter vote
  • veto any sale of a significant percentage of company assets
  • veto by a majority any restriction on ability to freely trade their shares, such as a poison pill

Shareholders also owe one another duties, and owe duties under the Stewardship Code to exercise their voting power.

Types of shareholder

See also: Institutional investor and Shareholder

Individuals

See also: American Association of Individual Investors

Pension funds

Main articles: Association of Member Nominated Trustees, National Association of Pension Funds, Pension fund, and UK pensions
Largest private UK pension funds
Largest public service UK pension funds

Insurance funds

Main articles: Association of British Insurers, Insurance, Insurance law, and UK insurance

Mutual investment funds

Main articles: Mutual fund, Open-ended investment company, Collective investment scheme, and Hedge fund
See also: Association of Investment Trust Companies, Investment Management Association, and British Merchant Banking and Securities Houses Association

Foreign investors

Main articles: Foreign Direct Investment and Sovereign Wealth Fund

Shareholder rights

Shareholders provide an essential source of capital investment to corporations, and because of the bargaining position this confers, shareholders typically gain a comprehensive set of governance rights under a constitution. While not technically required, shareholders invariably possess exclusive voting rights, in contrast to many other European jurisdictions which require that employees codetermine (i.e. have the right to elect some of) the members of the board.[1] In this way, and also because of the additional mandatory rights shareholders enjoy under the Companies Act 2006, the UK is a "shareholder friendly" jurisdiction relative to its European and American counterparts.

Elections

Since the Report of the Committee on Company Law Amendment, chaired in 1945 by Lord Cohen, led to the Companies Act 1947, as voters in the general meeting of public companies,[2] shareholders have the mandatory right to remove directors by a simple majority, now under CA 2006 section 168.[3]

By comparison, in Germany,[4] and in most American companies (predominantly incorporated in Delaware) directors can only be removed for a "good reason".[5]

Constitution

Shareholders will habitually have the right to change the company's constitution with a three quarter majority vote, unless they have chosen to entrench the constitution with a higher threshold.[6]

Meetings and resolutions

Shareholders with support of 5 per cent of the total vote can call meetings,[7] and can circulate suggestions for resolutions with support of 5 per cent of the total vote, or any one hundred other shareholders holding over £100 in shares each.[8]

Executive pay

Main article: Say on pay

Shareholder have say on pay of directors under CA 2006 section 439. For the time being, this is non-binding.

Significant transactions

Categories of important decisions, such as large asset sales,[9] approval of mergers, takeovers, winding up of the company, any expenditure on political donations,[10] and share buybacks. Other transactions where directors have a conflict of interest that require binding approval of shareholders are ratification of corporate opportunities, large self dealing transactions and service contracts lasting over two years.

Companies cannot make political donations without approval of the general meeting.

Classes of shares

It is possible for companies to create different classes of shares to provide different groups of shareholders with different shareholder rights. For example different shareholder rights could be given to different groups of shareholders such as founders, investors and employees. The shareholders rights capable of variation include: dividend rights, voting tights and capital rights. Capital rights are the right to receive capital following a sale of the company, liquidation or upon an asset sale.  It is common to see different rights for different shareholders and preferences.

Shareholder duties

Activism

Main articles: Stewardship Code and Shareholder activism

Despite habitually occupying the most privileged position in UK corporate governance, shareholders in large public companies listed on the London Stock Exchange infrequently exercise their governance rights. Institutional investors, including pension funds, mutual funds and insurance funds, own most shares. Thousands or perhaps millions of persons, particularly through pensions, are beneficiaries from the returns on shares. Historically institutions have often not voted or participated in general meetings on their beneficiaries' behalf, and often display an uncritical pattern of supporting management. However, institutional investors also often work "behind the scenes" to secure better corporate governance for their members, through informal but direct communication with management.[12] Individual shareholders form an increasingly small part of total investments, while foreign investment and institutional investor ownership have grown their share steadily over the last forty years. Institutional investors, who deal with other peoples' money, are bound by fiduciary obligations, deriving from the law of trusts and obligations to exercise care deriving from the common law. Now the Stewardship Code 2010, drafted by the Financial Reporting Council (the corporate governance watchdog), reinforces the duty on institutions to actively engage in governance affairs by disclosing their voting policy, voting record and voting. The aim is to make directors more accountable, at least, to investors of capital.

See also

Notes

  1. ^ e.g. in Germany, the Mitbestimmungsgesetz 1976 (Codetermination Act 1976)
  2. ^ In closely held, private companies, the mandatory removal right in CA 2006 s 168 is qualified by the majority House of Lords decision in Bushell v Faith [1970] AC 1099, holding that a company's articles could allow a shareholder's votes to triple if facing removal as a director. This followed the Cohen Report's recommendations.
  3. ^ Previously Companies Act 1985, section 303, implemented in the Companies Act 1947, following recommendations of the Cohen Committee, Report of the Committee on Company Law Amendment (1945) Cmd 6659. See EM Dodd, 'The Cohen Report' (1945) 58 Harvard Law Review 1258
  4. ^ See Aktiengesetz 1965 §76. This is the Vorstand, or the "executive" of the company that carries out all functions of management, rather than the Aufsichtsrat or supervisory council, which appoints it and is in turn elected by shareholders and employees.
  5. ^ See Delaware General Corporation Law s 141(k) and Campbell v. Loews, Inc 134 A.2d 852 (1957); for a comprehensive critique, see AA Berle and GC Means, The Modern Corporation and Private Property (1932)
  6. ^ CA 2006 s 283 (special resolution definition), ss 21–22 (amending the constitution)
  7. ^ CA 2006 s 303, as amended by Companies (Shareholders' Rights) Regulations 2009/1632 Pt 2, reg 4
  8. ^ CA 2006 ss 304–305
  9. ^ UKLA Listing Rule 10.
  10. ^ CA 2006 ss 366–368 and 378 require a resolution, itemising the money to be donated, be passed by shareholders for any political contributions over £5000 in 12 months, lasting a maximum of four years.
  11. ^ cf Gambotto v WCP Ltd (1995) 127 ALR 417
  12. ^ See BS Black and JC Coffee, 'Hail Britannia?: Institutional Investor Behavior Under Limited Regulation' (1994) 92 Michigan Law Review 1997–2087

References

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