UK: Challenge To Re-Registration – Position Of Indirect Investors

Last Updated: 28 March 2013
Article by Victoria Brett

Facts:

Dnick Holding Plc was a public company incorporated in England but managed and operated from Germany and its shares were listed for trading on German exchanges (regulated by Deutsche Borse). Under the rules of the German exchanges, shares have to be held in dematerialised form. There were only two registered shareholders in the company's books; an individual and a bank. The bank held all the remaining issued shares in Dnick as the depository agent. The shares were held on trust for the holders of Clearstream accounts, Clearstream being the clearing and settlement division of Deutsche Borse, through which trades on the relevant exchange between Clearstream account-holders are transacted electronically. Clearstream account-holders have to be banks or financial institutions not individuals. It is Clearstream Interests (CIs), not shares, that are ultimately traded on Deutsche Borse and CIs represent the underlying ownership rights in the company's shares.

In May 2012, Dnick's board announced its intention to cancel the listing of Dnick's shares on all German exchanges and at its AGM a resolution was passed to re-register the company as a private limited company. The de-listing proposal had a negative impact on the marketability of Dnick's shares.

Under section 98 of the Companies Act 2006, "holders" of not less than 5% in nominal value of the company's issued share capital (or not less than 50 of the company's members) can apply to the court for the cancellation of a special resolution by a public company to be re-registered as a private limited company.

Three individuals began proceedings alleging that their aggregate holding of 6% of Dnick's shares gave them standing to apply under s.98 for the cancellation of the reregistration resolution. The three individuals were customers of the Clearstream accountholders and, as such, were "end investors" in Dnick, but their names did not appear in the share register.

The defendants (who included Dnick and its majority investor) argued that, for the purposes of s.98, the individuals did not qualify as "holders" of Dnick's shares and therefore did not have standing to make the application.

Held:

The three individuals did lack standing to make the application.

The architecture of company law employs the concept of "member" or "shareholder" as a key element. A "shareholder" or "the holder of a share" is only the person whose name is registered in the company's register of members. This is confirmed, amongst other things, by the definition of member in the Companies Act 2006 (found at section 112). When section 98 refers to "the holders of not less in the aggregate than 5% in nominal value of the company's issued share capital", the "holders" it is referring to are those who are registered as the members holding those shares, not the persons who own the ultimate economic interest in shares registered in somebody else's name.

The structure of the Act is such that where a right is directly enforceable by a nonmember, then specific provision is made. For example, section 260 provides that a derivative claim may be brought by a "member of a company" and then section 260(5) provides that references to "a member" include a person who is not a member but to whom the shares in the company have been transferred or transmitted by operation of law.

Whilst provisions (such as the nomination rights set out in section 145) were introduced by the Companies Act 2006 in recognition of the fact that investors increasingly hold their shares through intermediaries, these did not avail the applicants either. Dnick's articles did not confer any rights on the customers of the Clearstream account-holders.

In the circumstances, the applicants' claim had no real prospect of success.

Comment:

Whilst the Companies Act 2006 does not use the term "shareholder", the terms "shareholder", "member" and "holder" of shares are used interchangeably and all ultimately mean the same, that is the registered holder of the shares whose name appears in the company's share register.

Persons with a beneficial interest only in the shares will not appear in the share register. Usually, they will have voting and information rights and an entitlement to dividend payments through their contract with the registered member or written into the articles of association. This case demonstrates that the rights they have are limited and they are not afforded all the minority shareholder protections provided by the 2006 Act.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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