- The Company Law Review Steering Group, Modern Company Law for a Competitive Economy—Final Report (URN 01/942 (vol 1) and 01/943 (vol 2), DTI, 2002, hereafter the “CLR Final Report”), ch 7.
- The question of altering the very model of the company was squarely posed for the Review: Modern Company Law for a Competitive Economy (London, DTI, 1998), § 3.7. The Review gave an equally clear answer to the question: see The Strategic Framework (URN 99/654, DTI, 1999), ch 5.1; Developing the Framework (URN 00/656, DTI, 2000), ch 3; Completing the Structure (URN 00/1335, DTI, 2000), ch 3.5. The position is rather different in the case of a Societas Europea (or “SE”)—a public limited company established pursuant to European law (Council Regulation (EC) No 2157/2001). In that case, the law will provide for the involvement of employees in the company (Council Directive 2001/86/EC, to be implemented by EU Member States no later than 8 October 2004). This European law may come to influence English domestic law, but not in the foreseeable future: the Directive on Employee Participation in a Societas Europea has been very carefully (and deliberately) drafted so as not to affect companies established under the domestic legal system of a Member State. Similarly, the consultation paper published by the EU High Level Group of Company Law Experts, “A Modern Regulatory Framework for Company Law in Europe”, does not envisage harmonisation of the law on directors’ duties: “In all Member States there are rules on directors’ liability. These rules are core company law. They differ very much from one Member State to another. In some Member States, for example in the UK, there is extensive reform activity in this area. An attempt to harmonise all this appears to be futile at this stage.” (<http://europa.eu.int/comm/internal_market/en/company/company/modern/consult/consult_en.pdf> ch 3.1, para 12). No such proposals for harmonisation are contained in the Final Report of the High Level Group, published in November 2002 and available at: <http://europa.eu.int/comm/internal_market/en/company/company/modern/consult/report_en.pdf>.
- Modernising Company Law, Cm 5553-I (2002), 9, 26. This White Paper set out the Government's response to the Review and was published in July 2002, after the original presentation of the paper which became this article.
- CLR Final Report, § 3.51. See more generally the very useful review of institutional shareholding in the UK, and its implications for corporate governance, by GP Stapledon and JJ Bates, “Unpacking the ‘Interest-Holders’ in a Share: Reducing the Cost of Voting” [2000] Company Financial & Insolvency Law Review 293, and also GP Stapledon, “Analysis and Data of Share Ownership and Control in the UK”, a paper prepared for the Company Law Review available at <http://www.dti.gov.uk/cld/staple.pdf>.
- CLR Final Report, vol 1, §§ 1.52 and 1.56–1.57, chs 3 and 7.
- Companies Act 1985, ss 14, 22. Note also that a company's articles of association will confer governance rights on members, such as rights to receive notices, to attend and vote at meetings, appoint proxies etc: see, for example, Table A in the Companies (Tables A—F) Regulations 1985 (SI 1985/805) regulations 38, 40–63. There are also certain default rules of law in so far as a company's articles do not make provision in this regard: see, for example, Companies Act 1985, ss 370, 372.
- Companies Act 1985, s 360, as supplemented by a company's articles of association, for example Reg 5 of Table A in the Companies (Tables A—F) Regs 1985 (SI 1985/805).
- See Underhill and Hayton, The Law of Trusts and Trustees by DJ Hayton (London, Butterworths, 16th edn, 2003), 575–97, and Trustee Act 2000, ss 1, 2 and Schedule 1, applying a duty of care to (inter alia) the powers conferred by Parts II and III of the Act in respect of trust investments. It must be remembered, however, that a trust instrument can remove or redefine many of the duties otherwise imposed by law on the trustees of that instrument: see for example Trustee Act 2000, s 26, Armitage v Nurse [1998] Ch 241 and Walker v Stones [2001] QB 902. (The Walker case is presently under appeal to the House of Lords.)
- Underhill and Hayton, supra, n. 8, 57–58.
- CLR Final Report, vol 1, § 7.1.
- CLR Final Report, vol 1, § 7.4.
- URN 99/1144, DTI, 1999.
- For a summary of the debate about why shareholders should occupy this central position in a company, see EV Ferran, Company Law and Corporate Finance (OUP, 1999), 131–33.
- Just a selection of those powers gives an idea of their extent: powers over the company's constitution (Companies Act 1985, ss 4–9); powers over the company's capital (Companies Act 1985, ss 80–96, 125–129, 135–141, 155–158, 159–181); powers to see accounts and information (Companies Act 1985, s 238); powers to dismiss directors (Companies Act 1985, s 303); powers over transactions where the company's board might be conflicted (Companies Act 1985, Part X); powers over political donations by the company (Companies Act 1985, Part XA); powers in connection with meetings of a company's members (Companies Act 1985, ss 368, 370, 372–377). These powers are almost invariably exercisable by a simple majority or a supermajority of the votes held by shareholders. For an analysis and justification of such majoritarian decision making by shareholders in a company, see BR Cheffins, Company Law: Theory, Structure and Operation (OUP, 1997), 67–69 and 237–38.
- There is a vast literature devoted to this topic. In July 1999, Cook and Deakin prepared a very comprehensive review of the literature for the Company Law Review Steering Group. Their work is available at <http://www.dti.gov.uk/cld/esrc1.pdf>. See also Ferran's critical summary of the debate about stakeholders in companies (Ferran, supra, n. 13, ch 4). Other recent contributions to the debate include RB Grantham, “The Doctrinal Basis of the Rights of Company Shareholders” [1998] CLJ 554; PW Ireland, “Company Law and the Myth of Shareholder Ownership” (1999) 62 MLR 32; JE Parkinson and others, The Political Economy of the Company (Oxford, Hart Publishing, 2001), ch 6; A Gamble and G Kelly, “Shareholder Value and the Stakeholder Debate in the UK” (2001) 9 Corporate Governance International Review 110; S Worthington, “Shares and Shareholders: Property, Power and Entitlement” (2001) 22 Company Lawyer 258 and 307, and Lord Wedderburn, “Employees, Partnership and Company Law” (2002) 31 Industrial Law Journal 99. Professor Farrar has also published a useful work for comparative purposes, Corporate Governance in Australia and New Zealand (OUP, 2001). Some scholars still challenge the present “shareholder focussed” model of the company, but, as Ferran concludes, that model “continues to command support in practice” (Ferran, supra, n. 13, 132).
- Supra, n. 2.
- Supra, n. 3.
- At the European level, the EU High Level Group of Company Law Experts has likewise accepted the importance of shareholder activism: see the Group's Consultation Paper, supra, n. 2, ch 3.2, para 1.
- Supra, text to n. 6.
- A shareholder has a prima facie right to transfer his or her shares, and a company's directors have no discretionary powers, independent of those explicitly conferred on them by the company's articles, to refuse to register a transfer of shares: Re Smith & Fawcett Ltd [1942] Ch 304.
- Pender v Lushington (1877) 6 ChD 70.
- Ibid.
- Reg 5 of Table A in the Companies (Tables A—F) Regs 1985 (SI 1985/805).
- Société Générale de Paris v Walker (1885) 11 App Cas 20.
- In re Perkins (1890) 24 QBD 613.
- Bradford Banking Co v Briggs & Co (1886) 12 App Cas 29; Mackereth v Wigan Coal & Iron Co Ltd [1916] 2 Ch 293.
- See Salomon v Salomon & Co Ltd [1897] AC 22, 55 per Lord Davey.
- See Part 73 of the Civil Procedure Rules.
- Kirby v Wilkins [1929] 2 Ch 444, 454 per Romer J. Pending any instructions about voting from the beneficial owner, the registered holder can vote the shares in the beneficiary's interests: ibid. For another good example of a beneficial owner directing dealings by a registered owner (a transfer of shares, rather than casting votes attaching to the shares), see Vandervell v IRC [1967] 2 AC 291, as analysed by the present author in “Vandervell v IRC: A Case of Overreaching” [2002] CLJ 169. A beneficiary with a limited interest in shares should not be able to instruct the registered holder how to vote them, unless the trust concerned makes contrary provision, as the registered owner should vote in the interests of all beneficiaries. To the extent that Butt v Kelson [1952] Ch 197 casts doubt on this proposition, it must be regarded as inconsistent with the fundamental principle that the trustees manage the trust estate impartially, of their own motion and for the benefit of all the beneficiaries, a principle re-stated in Nestle v National Westminster Bank plc [1994] 1 All ER 118, 135 per Staughton LJ.
- Stapledon and Bates (supra, n. 4, 296–97, 322–28) offer an interesting preliminary cost benefit analysis which supports reform of the law to enable a company to enfranchise those who invest in its shares through intermediaries. In short, the benefits are: (i) reducing the complexity of present voting arrangements which must involve the registered holder of the share (in fact, the involvement of the shareholder has been reduced to a bare minimum in a system like that adopted by BP plc, where the owner of shares acts essentially in the USA as a company registrar would in the UK—infra, text to n. 40); (ii) allowing a company to maintain a better record of those beneficially interested in its shares (as Stapledon and Bates note, such information is already available to an extent because (a) companies presently use firms to discover such matters, and (b) Companies Act 1985, s 212 allows public companies to discover such information for themselves—and see also n. 51 infra); and (iii) a likely increase in activism by institutional investors which very commonly use intermediaries to hold shares on their behalf. Stapledon and Bates also acknowledge that there will be transitional and ongoing costs in any reform of the law to enfranchise indirect investors in shares. These are: (i) the transitional costs of setting up any new system; (ii) the cost of an increased workload for companies or their registrars in maintaining necessary records; (iii) the costs of transferring rights from intermediary to indirect investor.
- CLR Final Report, vol 1, § 7.4.
- See Stapledon and Bates, supra, n. 4, 325–27.
- Though the Company Law Review did not advert to this practice, the Government's White Paper in response to the Review did so: Modernising Company Law, supra, n. 3, 23 at § 2.40.
- The FTSE 100 companies which have so far made such provision are: Astrazeneca plc, BP plc, Diageo plc, Gallaher Group plc, Glaxosmithkline plc, mmO2 plc, National Grid Group plc, Northern Rock plc, Powergen plc, Scottish Power plc, Vodafone Group plc and WPP Group plc. See Appendix 1.
- Other means of enfranchising indirect investors are set out in Appendix 1.
- See <http://www.bp.com/investor_centre/private_inv/ads_holders/help.asp>.
- Ibid. Precisely equivalent treatment is not possible, because of differences in securities regulation between the UK and the US. For example, rules differ between the two countries about when a company can set its record date for determining who is entitled to vote at a particular company general meeting.
- See BP's Articles of Association, Articles 144A–152, reproduced as Appendix 4.
- Companies Act 1985, s 14.
- Supra, n. 36.
- See in particular articles 145 and 150 of BP's Articles, reproduced in Appendix 4.
- Supra, n. 34.
- The 8 companies are Astrazeneca plc, BP plc, Gallaher Group plc, Glaxosmithkline plc, National Grid Group plc, Scottish Power plc, Vodafone Group plc and WPP Group plc. See Appendix 1.
- The CREST system presently operates under the Uncertificated Securities Regulations 2001 (SI 2001/3755).
- See Appendix 1 below.
- See <http://www.powergenplc.com/financial_information/shareholder.asp#company> under the heading “Company Nominee Service” and <http://www.powergenplc.com/financial_information/agm2001.asp> at n. 4.
- See Appendix 1.
- Supra, n. 34.
- Supra, nn. 43, 45 and their accompanying text.
- See Appendices 2 and 3.
- Stapledon and Bates note that companies sometimes commission analyses of their own registers of members, using external firms to do the work, in order to discover where voting rights lie (supra, n. 4, 296). They also note that s 212 of the Companies Act 1985 gives a public company the power to discover interests in its shares (ibid, 321–22). In fact, the effect of s 212 is very commonly reenforced by a company's articles of association. Such articles give the company's directors wider powers than s 212 to demand information from a shareholder about interests in the shares he or she holds. They also provide civil sanctions for non-compliance with the demand—for example, disenfranchisement of the shares concerned. Articles of this sort are very common: the articles of every FTSE 100 company were surveyed by the author when preparing Appendix 1, and every such set of articles contained a provision of this sort. In the author's experience, a company will principally use any such provisions in its articles to discover beneficial interests in shares it has issued, precisely because those provisions will confer broader powers and tougher sanctions than section 212.
- What is meant by the “register” in Companies Act 1985, s 360 may not be immediately apparent from the wording of the section. However, the context and provenance of the section make it clear that the “register” is the company's own register of its members. First, section 360 is found amongst other provisions about the company's own register of members. In addition, section 360 is ultimately derived from Companies Act 1862, s 30, and the context of s 30 (ss 25–30 of the 1862 Act) clearly indicates that the word “register” there referred to the company's own register of its members. Section 360 should consequently be construed in the same way.
- Supra, n. 14.
- Companies Act 1985, ss 7, 9, 14, 16.
- Supra, text to n. 39.
- An enabling rule of company law is prima facie preferable to consensual arrangements where it allows participants in companies to achieve what is otherwise difficult for them to secure: see Cheffins, supra, n. 14, 218. Furthermore, the enabling rule proposed here would not be subject to the objection that it might allow those who use it to impose costs on others who have not consented to bear those costs. See also the summary of Stapledon's and Bates's arguments, supra, n. 30.
- Current techniques used to enfranchise indirect investors in a company are briefly described in Appendices 1–3. One such technique, used by BP, is reproduced in full as Appendix 4.
- Supra, n. 11.
- Supra, text to n. 36.
- Supra, text to n. 44.
- Supra, text to n. 31.
- Again, take BP plc as an example. It uses Lloyds TSB Registrars as its registrar. See <http://www.bp.com/investor_centre/private_inv/ord_share_contacts.asp>.
- For quite unrelated reasons, a company may yet have to discover and keep records of those who have some beneficial interest in securities it has issued: see “Beneficial Ownership of Unlisted Companies: A Consultation by Her Majesty's Treasury and the Department of Trade and Industry” (London, HM Treasury, 2002) available at <http://www.hm-treasury.gov.uk/Consultations_and_Legislation/beneficial/consult_beneficial_index.cfm>. The proposals in that paper stem from a desire to stamp out money laundering and financial crime, not a wish to enfranchise indirect investors. The costs involved in the proposals appear totally disproportionate to the likely benefits from them.
- Underhill and Hayton, supra, n. 8, 57–58.
- See for example the Law Commission consultation paper Trustees’ Powers and Duties (Law Com No 146, TSO, 1997) and the consequent report, Trustees’ Powers and Duties (Law Com No 260, Scot Law Com No 172, TSO, 1999).
- Australian law allows a company to note on its register of members that certain shares are held on trust only if the company has received formal notice to that effect: see Corporations Act 2001 (Cth), s 169(6).
- The potential for such disputes is huge. Who will have the governance rights attaching to shares when X holds them on trust for Y, Y holds for Z etc etc? Who will have the rights when shares are charged? Entitlements, even absolute entitlements, which arise under settlements on the occurrence of prescribed events may not be clearly established, because there may be equivocal evidence of the event which causes vesting of the entitlement. What if an entitlement to the shares, and to the governance rights attaching to them, appears to be established but is later set aside: are the votes tendered by the person whose entitlement is subsequently set aside to remain valid? Examples could be multiplied.
- Supra, n. 11.
- See the Individual Savings Account Regulations 1998 (SI 1998/1870) and more generally “ISAs, PEPs and TESSAs” (Inland Revenue Booklet IR2008, available at <http://www.inlandrevenue.gov.uk/pdfs/ir2008.htm>).
- See Appendix 1.
- Supra, n. 11.
- Note CLR Final Report §§ 1.10–1.11.
- Supra, n. 29.
- See the Report of the Committee of Enquiry into UK Vote Execution (London, National Association of Pension Funds 1999), § 1.7.
- CLR Final Report, vol 1, § 7.3.
- For a description of Barclays Sharestore, see <http://www.investor.barclays.co.uk/shareholder/faqs.html>. In respect of Powergen's company nominee service, see <http://www.powergenplc.com/financial_information/shareholder.asp#company> under the heading “Company Nominee Service” and <http://www.powergenplc.com/financial_information/agm2001.asp> at n. 4.
- Underhill and Hayton, supra, n. 8, 490–91.
- Financial intermediaries will be prima facie subject to regulation by the FSA, because they will conduct a business which requires authorisation from the FSA: see Financial Services and Markets Act 2000, ss 19, 22, 23, 31, Part IV and Schedule 2 Part I. Under Article 66 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544) some few intermediaries might be exempted from regulation by the FSA, but it unlikely that many firms whose business includes acting as a financial intermediary will fall within this exemption.
- The Principles for Businesses Instrument 2001.
- The situation where the company is responsible for shares being held by an intermediary is addressed above: see Part C.
- Underhill and Hayton, supra, n. 8, 624. The duty may not arise when there is no need for a trustee to inform a beneficiary of some entitlement to a payment, because the beneficiary will already know about it—for example, when a payment is made directly to the beneficiary pursuant to a mandate from the trustee.
- Supra, n. 79, Principle 7. The more detailed requirements for communication, set out in the FSA's Conduct of Business Rules (Conduct of Business Sourcebook Instrument 2001) Chapter 8 may well not apply to an intermediary because of Chapter 11 of those Rules.
- See rule 14b-2(b)(3) of the General Rules and Regulations promulgated under the Securities Exchange Act of 1934, discussed in SM Klein, “Rule 14b-2: Does it Actually Lead To The Prompt Forwarding Of Communications To Beneficial Owners Of Securities?” (1997) 23 Journal of Corporation Law 155 and L Loss and J Seligman, Securities Regulation (New York, Aspen Publishers, Inc, 3rd edn, 2001), § 6-C-6.
- Supra, section C(3).
- Supra, text to n. 32.
- Corporations Act 2001 (Cth), ss 169, 231, 250E, 1091C, 1096A. See HAJ Ford, RP Austin and IM Ramsay, Ford's Principles of Corporations Law (Sydney, CCH, 2002 update), vol 2, § 21–100.
- See the Malaysian Companies Act 1965, s 163(3), (4), and the Singaporean Companies Act 1967, s 195(3), (4).
- Companies Act 1993 (NZ), ss 89, 92, 96.
- Companies Ordinance (HK) (cap. 32), ss 23, 28, 101.
- Section 51(1) provides that: “A corporation … may … treat the registered owner of a security as the person exclusively entitled to vote, to receive notices, to receive any interest, dividend or other payments in respect of the security, and otherwise to exercise all the rights and powers of an owner of the security.” Section 51(4) then provides that: “A corporation is not required to inquire into the existence of, or see to the performance or observance of, any duty owed to a third person by a registered holder of any of its securities or by anyone whom it treats, as permitted or required by this section, as the owner or registered holder thereof”.
- See Stapledon and Bates, supra, n. 4, 314–15.
- A company's freedom to set the terms on which indirect investors participate in the company might be constrained by some statutory minimum standards, in the same way that a company's dealings with its members are presently regulated by law in Companies Act 1985, ss. 372–74. Such minimum standards might be contained in the successors to those provisions.
- See Appendix 4 for an example of how a company, BP plc, deals with such matters presently in its articles of association.
- Supra, text to n. 36.
- See Stapledon and Bates, supra, n. 4, 316–17.
- For an analysis of when a particular type of rule is appropriate—enabling (permissive), default (presumptive) or mandatory—see Cheffins, supra, n. 14, 216–63.
- Supra, section C(4).
- Ibid.
- Compare the recommendation of the Company Law Review, supra, n. 11.
- See the Official Listing of Securities (Change of Competent Authority) Regulations 2000 (SI 2000/968).
- See <http://www.fsa.gov.uk/ukla/1_responsibilities.html>, and in particular “Objectives of the UKLA”.
- Ibid.
- See rule 12.43A of the Listing Rules (London, UKLA, 2000). The Combined Code on Corporate Governance itself is reproduced as an appendix to the Listing Rules.
- The requirements were most recently set out in rule 13.8 and Appendix 1 to Chapter 13 of the Listing Rules. The rule and the Appendix were repealed in January 2000 and were not replaced.
- COM (2001) 280.
- See the speech of Sir Howard Davies to the Annual Listing Rules Conference on 21 June 2002, available at <http://www.fsa.gov.uk/pubs/speeches/sp98.html>.
- Ibid.
- See the EU press release available at: http://www.europa.eu.int/rapid/start/cgi/guesten.ksh?p_action.gettxt=gt&doc=IP/02/1209|0|RAPID&lg=EN&display=>.
- Supra, text to n. 11.
- Supra, n 29 and section D.
- Supra, text to n. 64.
- Supra, text to n. 32.
- Supra, n. 78.
- Supra, text to n. 106.
- See <http://www.euroclear.com/eoc/level0/03MR001.asp>
- This Report was published in August 2002 and is available at <http://www.jura.uni-duesseldorf.de/dozenten/noack/texte/normen/amsterdam/final.htm>.
- Final Report of the High Level Group, supra, n. 2, 53–6.
- Final Report of the Expert Group on Cross-Border Voting, supra, n. 116, 6 and ch 5.
- Supra, text to n. 31.
- Supra, section E(1).
Journal of Corporate Law Studies
Volume 3, 2003 - Issue 1