UK: FSA Clarifies How Its Rules Apply To Activist Shareholders

Last Updated: 27 August 2009
Article by Helen Johnson and Gary Green

The Financial Services Authority has moved to deny that there is any inherent contradiction between its role as a regulator and its support for increased shareholder engagement.

In an open letter to the Institutional Shareholders' Committee (which comprises a number of investor bodies) the FSA's Managing Director for Wholesale Markets explains how shareholders who wish to work together to promote effective corporate governance in investee companies can do so without falling foul of the market abuse regime.

Any alliances between investors must, however, be based on specific ad hoc corporate issues rather than a long-term agreement to vote together, and the investors must not deal on the basis of unpublished information they obtain while working together.

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The Financial Services Authority has moved to deny that there is any inherent contradiction between its role as a regulator and its support for increased shareholder engagement.

In an open letter to the Institutional Shareholders' Committee – which comprises the Association of British Insurers, the Association of Investment Companies, the Investment Management Association and the National Association of Pension Funds - the FSA's Managing Director for Wholesale Markets explains how shareholders who wish to work together to promote effective corporate governance in investee companies can do so without falling foul of the market abuse regime.

The FSA's letter follows Sir David Walker's review of corporate governance in UK banks and other financial institutions, which was published for consultation on 16 July 2009. Sir David supports strengthening shareholder engagement with boards of investee companies, with the aim of promoting good corporate governance. He recommends that institutional shareholders engage more with their investee companies to support long-term improvement in performance, and that boards should be receptive to this. Greater shareholder involvement in corporate governance has also been promoted by City minister, Lord Myners.

The FSA has stated that it strongly supports this approach.

Investor concern

The FSA acknowledges concerns over the extent to which concerted shareholder engagement can be reconciled with the rules on:

  • market abuse,
  • disclosure of major proportions of voting rights, and
  • (where the investee is an authorised financial institution) changes in control.

Investor unease partly stems from guidance issued by the FSA in 2007 in its publication, Market Watch Number 20, which warned that, if an investor dealt for its own account (or for the account of others) on the basis of its knowledge of another market participant's intentions and strategy, however obtained, it could be committing market abuse. There could also be grounds for finding market manipulation – one of the heads of market abuse - if several shareholders, knowing of such a strategy, acted together to build stakes with the intention of avoiding market disclosure that would have been triggered had the aggregated stakes been acquired by a single entity.


In the letter, the FSA states that it is satisfied that its regulatory requirements do not prevent collective engagement by institutional shareholders designed to raise legitimate concerns on particular corporate issues, events or matters of governance with the management of investee companies. In its view, ad hoc discussions or understandings of this kind would not trigger the restrictions or disclosures imposed by its rules. In particular:

  • Market abuse: the FSA has consulted with a number of investment management firms and has found that none of the firms considers the market abuse regime to be an impediment to its activist strategies, and that investment managers are able to maintain effective engagement with investees without contravening these restrictions.
  • Disclosure: the FSA does not see this type of engagement by shareholders as requiring a disclosure of a major proportion (3% or more) of direct or indirect voting rights under chapter 5 of the Disclosure and Transparency Rules unless other conditions are met. Chapter 5 does require disparate holders' voting rights in listed and AIM company shares to be aggregated for disclosure purposes, but only where there is an agreement between the holders which obliges them to adopt a lasting common policy towards the management of the issuer through the exercise of their voting rights. This, says the FSA, is unlikely to include the kind of ad hoc discussions and understandings that might be reached between institutional shareholders in relation to particular issues or corporate events.
  • Control of financial institutions: under the Financial Services and Markets Act 2000 potential controllers of financial institutions must seek pre-approval from the FSA. In assessing the level of control aggregation of shares and voting rights is required either (i) where there is an agreement between two or more persons which obliges them to adopt, by concerted exercise of the voting rights they hold, a lasting common policy towards the management of the institution; or (ii) where people are acting in concert. The FSA says that aggregation is unlikely to be triggered by this sort of engagement; nor is it what is meant by acting in concert (which is not defined in the relevant legislation).

The FSA has said that it intends to keep its approach under review, and will discuss the issues with the industry if the need arises. The ABI has welcomed the clarification as a positive move by the FSA that will make it easier for investors to take a collective approach to boards when individual approaches have failed.


The financial crisis has spurred the growth of more vocal shareholder involvement. The key to effective intervention is often to join forces with other shareholders. In relation to listed companies, recent legislative changes encourage the raising of questions at shareholder meetings and promote communication between shareholders by making the company act as a forum for shareholder concerns (see the LawNow dated 15 July 2009 on the Shareholder Rights Directive - new general meeting requirements for traded companies).

The FSA clearly has no wish to impede the trend. Reassurance as to its attitude towards collective shareholder action is particularly helpful in the context of market abuse, which is very widely defined.

Although there was no perceived risk that acting with knowledge of one's own strategy and intentions could of itself be market abuse, it is understandable that investors were concerned about acting with knowledge of another investor's strategy, especially where this might impact on the price of the company's securities. The clarification is, however, restricted to specific hoc corporate governance concerns, and it remains the case that – in order to avoid market abuse or the triggering of obligations under market rules - investors must avoid long-term agreements to vote together, and they must not deal in the investee securities on the basis of the unpublished information they obtain while working together.

It is also worth remembering that in certain circumstances investors collaborating with a view to influencing management may be at risk of being regarded as acting in concert for the purposes of the City Code on Takeovers and Mergers. The resulting aggregation of their interests may ultimately lead to their being forced to make a cash offer for the company with minimal conditions. Note 2 to Rule 9 of the Code provides that the Takeover Panel does not normally regard the action of shareholders voting together on a particular resolution as action which of itself indicates that such parties are acting in concert, but if shareholders requisition the consideration of a board control-seeking proposal the Panel will deem them to be acting in concert with each other and any proposed directors supported by them.

The FSA's letter is available here.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 26/08/2009.

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