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corporate issues rather than a long-term agreement to vote together, and the investors must not deal on the basis of unpublished information they obtain while working together.

To view the article in full, please see below:




Full Article

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.

Clarification

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.

Comment

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 www.law-now.com/law-now/mondaq

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.