Implementing The Shareholders´ Rights Directive In The UK

Introduction

Companies whose shares are traded on a regulated European Economic Area (EEA) market will have to consider making further changes to their articles of association and the way they run shareholder meetings as a result of the government's proposals on implementing the EU Shareholder Rights Directive (the Directive) next August.

The government has recently issued a consultation paper setting out its proposals and draft implementing legislation (the Regulations). Because the government is not proposing to publish a summary of responses to its consultation paper until the end of April 2009, many companies will be left in the difficult position of having to make decisions on the approach to adopt for their 2009 annual general meeting (AGM) before the Regulations are finalised.

This client guide identifies the key points likely to be relevant to companies and suggests ways to deal with the proposed changes and points where companies will want to persuade the government to adopt a different approach from that proposed. It is correct as at 1 November 2008.

Overview

The Directive sets minimum standards for companies incorporated in the EU whose voting shares are traded on a regulated market in the EEA (traded companies). It deals with notices of meeting and documents available before the meeting, shareholders' rights to add items to the agenda and table resolutions, shareholders' rights to participate, ask questions and vote at meetings, the provisions relating to proxies and provisions on voting and voting results.

For UK traded companies, many of the Directive's provisions should not cause problems as they broadly follow the approach normally adopted in the UK and some of the Directive's provisions have already been implemented by the Companies Act 2006 (the Act). There will be a bigger impact in member states where it is more difficult for shareholders to access information about meetings and to participate in general meetings and exercise their rights as shareholders, particularly if they cannot attend the meeting in person. The Directive should make it much easier to do this across the EU. However, some of the provisions in the Regulations will cause problems for companies (and are not required by the Directive) and companies should respond to the consultation to persuade the government to adopt a different approach. Companies will also want to decide what approach to adopt to amending their articles at their 2009 AGM.

As well as implementing the Directive, the Regulations correct some of the defects in the shareholders' rights provisions in the Act. In these cases the proposed changes to the Act made by the Regulations apply to all companies, whether traded or otherwise. These are discussed in Part 2 of this client guide.

The government intends that the Regulations will come into force on 3 August 2009.

The consultation paper and the Regulations are available at http://www.berr.gov.uk/files/file48662.pdf. Responses are requested by 30 January 2009. If you would like to respond to the consultation through us, or would like our advice on your own response, please let us know.

Key points - proposals for traded companies

• Company must propose a resolution at each AGM from 2009 onwards if they want to be able to call other general meetings on 14 days' notice.

• Company must include additional information in the notice of general meeting.

• Company must add an electronic address to the proxy form.

• Company must publish documents and information on its website before the general meeting – including the proxy form – and certain information must be added after the notice is sent out.

• Shareholders can requisition a resolution up to 14 days before an AGM.

• Company must pay the costs of requisitioned AGM resolutions.

• Shareholders have a new right to add items to the AGM agenda up to 14 days before the AGM and a revised notice must be sent out at least one week before the AGM.

• Electronic meetings and voting are permitted.

• Company must answer shareholders' questions at a general meeting.

• Company must publish additional information on poll results on the website.

Key proposals – proposals for all companies

• Shareholders can vote in advance – by post or in electronic form – if articles allow.

• Corporate representatives can vote in different ways from one another in respect of different blocks of shares.

• New rules apply when a shareholder's proxy casts votes for different shares in different ways.

• Proxy must act in accordance with any instructions given by the member appointing him.

• Shareholders with 5 per cent of share capital can require the directors to call a general meeting – this was 10 per cent.

Part 1 – the government 's proposals for traded companies

A Length of notice period

The Regulations do not change the existing rules that require a minimum of 21 days' notice to call an AGM. The Act allows a minimum of 14 days' notice for other general meetings – subject to the company's articles – but the Regulations will increase this to 21 days even if only ordinary resolutions are being proposed. However, 14 days' notice will be allowed if:

• the company offers the facility for members to vote by electronic means accessible to all members who hold shares that carry rights to vote at general meetings;

• members have passed a resolution approving shorter notice at the immediately preceding AGM or a general meeting held since the AGM; and

• that resolution was passed either (a) on a show of hands with no vote against, or (b) on a poll by a majority of not less than two-thirds of the total voting rights of all the members of the company who vote in person or by proxy on the resolution.

The members' resolution permitting 14 days' notice can only last until the company's next AGM. UK traded companies will need to propose a resolution at each AGM from 2009 onwards if they want to be able to call other general meetings on 14 days' notice.

As drafted, the Regulations apply immediately from 3 August 2009. This means that unless a company has passed an appropriate resolution at its 2009 AGM it will have to call any general meetings on 21 days' notice unless it calls a general meeting to pass an appropriate resolution (which is not likely to be attractive).

This may be important where the company, for example:

• needs to hold a meeting to increase its share capital and authorise the directors to allot shares to raise new money, where a shorter timetable will allow the company to reduce the underwriting costs associated with the fund raising; or

• needs shareholder approval for a large acquisition or disposal where the shorter notice period means, in the case of an acquisition, that the company will be at less of a timing disadvantage compared to rival purchasers who do not need shareholder approval or, in the case of a disposal, that the company can receive the consideration for the sale more quickly.

Companies may want to respond to the consultation to suggest that the Regulations be amended so that this provision only applies to general meetings called after the first AGM of the company where notice was first given after 3 August 2009. They may also want to express their views on whether the Regulations should define what a company must do to offer 'the facility for members to vote by electronic means accessible to all members'. It would be helpful if the Regulations at least made it clear that this condition would be satisfied if shareholders can either use a website or CREST to appoint a proxy to vote for them. The government is also asking if the resolution should be passed as a special resolution or only by twothirds of those who vote.

The Regulations will allow adjourned meetings to be held on shorter notice if the adjournment is for lack of a quorum and the company has to issue a second or subsequent notice of meeting, provided no new item is put on the agenda for the meeting and there is at least 10 days between the original meeting and the date of the adjourned meeting.

B Contents of notice of meeting

The notice of general meeting of a traded company will have to include, in addition to the information the Act and the articles already require:

• a statement giving details of the website on which the information that must be published before the meeting is available (see paragraph C);

• a statement of the 'precise procedures' with which members must comply in order to be able to attend and vote at the meeting (including the date by which they must comply);

• a statement (a) that the right to vote at the meeting is determined by reference to the register of members, and (b) of the time when that right is determined in accordance with the Act (see paragraph F);

• any forms to be used to appoint a proxy (see paragraph G for potential problems this may cause);

• where the company offers the facility for members to vote in advance (see paragraph L) or by electronic means (see paragraph H), (a) a statement of the 'precise procedures' for doing so (including the date by which it must be done), and (b) any forms to be used; and

• a statement of the right of members to ask questions (see paragraph I).

Where the meeting is an AGM the notice must also include a statement of the shareholder's rights to require the company to:

• give notice of a resolution to be moved at the meeting (see paragraph D); and

• include a matter in the business to be dealt with at the meeting (see paragraph E).

C Website publication of information before a general meeting

The Regulations will require a traded company to publish the following information on a website before a general meeting:

• the notice of the meeting;

• the total numbers (as at the latest practicable time before the notice is sent) of (a) shares in the company, and (b) shares of each class, in respect of which members are entitled to exercise voting rights at the meeting; and

• the totals (as at the latest practicable time before the notice is sent) of the voting rights that members are entitled to exercise at the meeting in respect of the shares of each class.

This information must be available on the website throughout the period beginning with the first date on which notice of the meeting is sent and ending with the conclusion of the meeting. Failure to meet this requirement will be a criminal offence, but will not affect the validity of a meeting or anything done at it. Any shareholders' statements, shareholders' resolutions or matters of business received after the notice is published must be published as soon as reasonably practicable and be available on the website for the remainder of the period.

Currently, the Act only requires website publication of the meeting notice where the company chooses to give notice of meeting by means of a website following the procedures set out in the Act – although many traded companies make the notice available on their website as a matter of good practice.

D Shareholder's right to table resolutions for AGM

The Act already allows members of public companies to require the company to give notice of a resolution for the next AGM, but the Regulations will set the deadline by which a request must be received at 14 days before the meeting where the public company is a traded company. Under current rules, the request must be received not later than (a) six weeks before the AGM, or (b) if later, the time at which notice is given. The Directive does not set the deadline, but allows each member state to set a common deadline for exercise of this right. Companies may feel the deadline period is rather short, particularly where there are large numbers of shareholders. The Regulations will require the company to meet the cost of circulating the members' resolution in all circumstances – now, the company is only required to pay if the request is received before the end of the financial year preceding the AGM. The government is asking if it is appropriate for companies to bear these costs.

E Shareholder's right to add items for AGM agenda

The Regulations will give members of a traded company a new right to require the company to include a matter in the business to be dealt with at an AGM. This is distinct from the right to propose a resolution – see paragraph D. A company must include the matter if it has received requests from:

• members representing at least 5 per cent of the total voting rights of all the members who have a right to vote at the meeting to which the requests relate; or

• at least 100 members who have a right to vote on the resolution at the AGM to which the requests relate and hold shares in the company on which there has been paid up an average sum, per member, of at least £100.

The request (in hard copy or electronic form) must identify the matter to be included in the business, must be authenticated by the person or persons making it and must be received at least 14 days before the AGM. The company must send a revised AGM notice to everyone who received the original notice at least one week before the AGM and by the same means. It must also publish it on the same website as that on which the company publishes the other information required by the Regulations – see paragraph C.

The Directive does not set the deadline by which this right must be exercised, but requires each member state to set a common deadline for all companies. Companies may feel the 14-day deadline is rather short, particularly in view of the proposed obligation to send a revised AGM notice at least one week before the AGM. The Directive does not set the one-week requirement but requires the revised notice to be made available either before the record date set for voting at the meeting or, if there is no such date, sufficiently before the meeting to enable shareholders to appoint a proxy or vote by correspondence (see paragraph L).

F Record dates and abolishing share-blocking

Share-blocking is a procedure where, on a specific date before a company meeting, shareholders must notify the company of their identity and intention to vote. The shares involved cannot be traded after this date. Share-blocking does not occur in the UK, but it is not unlawful, so the law is being amended to prevent it.

The Directive requires a record date system – as already used in the UK – under which shareholders or their proxies are validated for voting at the meeting on a fixed date before the meeting, but allowing shares to be traded after this date. In general, UK companies set a record date of 48 hours before the meeting. If a company cannot determine the right to vote by reference to its register of members on the day of the meeting, it must use a record date 48 hours before the time for holding the meeting. If it can do so, it can set a record date at any time up to 48 hours before the meeting.

The Regulations provide that non-working days must be ignored in calculating the relevant periods. This will allow companies who can use their register on the meeting day to determine the right to vote to use a record time 48 hours before the meeting, as permitted by the Uncertificated Securities Regulations. It would be helpful if those regulations were amended to allow non working days to be ignored. The Regulations do not require a record date for receiving notice of the meeting to be set, as opposed to attending and voting at the meeting.

G Proxy appointments and terminating the proxy's authority

The Regulations will mean that a company will only be able to require a member appointing a proxy to provide reasonable evidence of (a) the identity of the member and of the proxy, and (b) the member's instructions (if any) as to how the proxy is to vote. This is unlikely to change UK practice but will be helpful to shareholders in other member states where formal requirements such as notarisation or an apostille are sometimes required.

A traded company will have to give an electronic address in (a) every instrument of proxy sent out by the company for the purposes of a general meeting of the company, and (b) every invitation to appoint a proxy issued by the company for the purposes of such a meeting. This will trigger the Act's existing provision that the company is deemed, by providing an electronic address, to have agreed that any document or information relating to proxies for that meeting may be sent by electronic means to that address (subject to any conditions or limitations specified in the notice). The requirement goes further than the Directive, which only requires that member states must allow shareholders to appoint proxies by electronic means and companies to accept electronic notifications of proxy appointments and require companies to offer at least one effective method of notifying proxy appointments by electronic means. The same requirements apply to revocations.

The Regulations require a company to include any forms to be used for the appointment of a proxy in the notice of the meeting. This means they will also be available on the company's website. This seems undesirable, as companies usually want proxy forms to be personalised so the registrars can identify the shareholder appointing the proxy. It goes further than the Directive requires, which allows forms not to be included where they are sent directly to each shareholder.

H Electronics meetings and voting permitted

It will become possible for shareholders' meetings of all types of companies to be conducted by electronic means if those who participate can speak and vote. A traded company can impose only requirements and restrictions that are necessary to ensure the identification of those taking part and the security of the electronic communication – so long as they are proportionate to the achievement of those objectives.

I Shareholders' questions

The orderly conduct of the meeting will continue to be the chairman's responsibility, within the bounds of the company's articles and the common law. This will be subject to a new obligation on the company to answer any question relating to the business being dealt with at the meeting put by a member attending the meeting. The Regulations do not make it clear whether a proxy or corporate representative attending the meeting for a member can also require an answer to their question – although this is probably the intention.

The company does not need to answer a question if:

• to do so would (a) interfere unduly with the preparation for the meeting, or (b) involve the disclosure of confidential information;

• the answer has already been given on a website in the form of an answer to a question; or

• it appears to the chairman of the meeting that it is undesirable in the interests of good order of the meeting that the question be answered.

It is not clear why the Regulations do not include an exemption for the protection of the company's business interests or make it clear that one overall answer may be given to questions with the same content – which the Directive permits.

J Chairman's casting vote

As a result of the Act, provisions in articles giving the chairman a casting vote at shareholders' meetings became ineffective from 1 October 2007, but companies with a casting vote provision in their articles on that date were, broadly, allowed to keep it. Because the Directive requires that all shareholders be treated equally, the Regulations will remove this saving for traded companies.

K Publishing poll results on a website

Where a poll is taken at a traded company's general meeting, the company must ensure that the following information is available on a website:

• the date of the meeting (no change to the Act's existing rules);

• the text of the resolution or, as the case may be, a description of the subject matter of the poll (no change);

• the number of votes validly cast;

• the proportion of the company's issued share capital at close of business on the day before the meeting represented by those votes;

• the number of votes cast in favour (no change);

• the number of votes cast against (no change); and

• the number of abstentions, if counted. (The Directive requires information on abstentions if applicable, rather than if counted.)

These requirements also apply to a meeting of holders of a class of shares in connection with the variation of the rights attached to the shares. The company must publish this information not later than the end of the 15th day after the date of the meeting, or, if later, the end of the first working day following the day on which the result of the poll is declared. By contrast, the Act requires the information it requires to be on the website as soon as reasonably practicable, and be available for two years. The Combined Code's good practice standards will presumably continue to require the company to publish certain information about the results of a resolution taken on a show of hands on its website as soon as reasonably practicable.

Part 2 – the government's proposals for all companies

L Advance voting on a poll

The Regulations will allow shareholders to vote by correspondence – electronic or by post – if the company's articles allow. Members can already appoint proxies electronically and by post, but the Directive requires member states to allow companies to give shareholders the option to vote directly in advance without appointing a proxy. Under current rules, a vote can only be cast by proxy if the proxy holder is present at the meeting to cast it.

The Regulations will permit a company's articles to contain a provision to the effect that on a vote on a resolution on a poll taken at a meeting, the votes may include votes cast in advance. The government has asked for views on whether the right to demand a poll should also be exercisable in advance. Arguably the Regulations should also allow votes to be cast in advance where they are taken on a show of hands. A traded company is subject to the extra requirement that it can only add conditions to exercising this right where these are necessary to ensure the person voting is identified – and the conditions must be proportionate to achieving that objective.

If a company includes this type of provision in its articles, it will not be able to require the advance vote to be registered, broadly, more than 48 hours before the time for holding the meeting (ignoring working days).

M Corporate representatives

Where multiple representatives are appointed by corporate nominees to represent different beneficial owners wanting to vote in different ways, the Act has been interpreted as preventing the representatives from voting in different ways unless they are appointed as proxies (for which notice must be given to the company in advance). The Act will be amended to permit corporate representatives to vote in different ways from one another in respect of different blocks of shares.

N Proxies' rights

The Regulations propose changes to the Act to clarify the rules that apply when a shareholder's proxy casts votes for different shares in different ways. On a show of hands, a proxy appointed by one member will have one vote and a proxy appointed by more than one member will have one vote if instructed to vote in the same way by all those members. If instructed to vote in different ways, the proxy will have one vote for and one vote against. Where a shareholder has appointed more than one proxy, all the proxies taken together will have one vote or one vote for and one against. This means companies will still face practical difficulties where a nominee holding for different beneficial owners has appointed two or more proxies. Companies will also need to consider whether to make any changes to their articles if they reflect the current law and, if so, the best way to do this given the timing issues.

O Proxy's obligations

The Regulations create a new statutory obligation on a proxy to act in accordance with any instructions given by the member appointing him or her. It is arguable whether this is needed, because the general law probably already requires the proxy to vote in accordance with instructions. However, the Regulations do not make it clear that the result of a vote is not affected if a proxy votes other than in accordance with their instructions. As companies have no way of knowing whether a proxy is following instructions, it would be helpful to make this clear and to clarify what a shareholder's remedy is if the proxy does not follow instructions.

P Shareholders' power to require directors to call a general meeting

In broad terms, the Regulations will reduce the minimum share capital that members must hold to require the directors to call a general meeting from 10 per cent to 5 per cent.

More information

If you would like any further information on the Directive or the Regulations or would like to discuss any implementation issues or how to respond to the consultation, please contact Vanessa Knapp, who is a member of the expert advisory group to the European Commission on company law and corporate governance.

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.