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FSA sends letter to clarify the role of activist shareholders
Practical Law UK Legal Update 4-500-2247 (Approx. 3 pages)
FSA sends letter to clarify the role of activist shareholders
by Laura Hodgson, Norton Rose LLP
| Published on 15 Sep 2009 |
This article is part of the PLC Global Finance August e-mail update for the United Kingdom.
Speedread
The FSA has written to the Institutional Shareholder Committee (ISC) to set out how activist shareholders should engage with the boards of companies in which they have invested to promote good governance. The letter responds to concerns expressed by institutional investors over the extent to which more active shareholder engagement was consistent with elements of the existing regulatory regime.
The FSA has written to the Institutional Shareholder Committee (ISC) to set out how activist shareholders should engage with the boards of companies in which they have invested to promote good governance.
Stronger shareholder engagement with boards of directors was among the recommendations of Sir David Walker in his July Consultation 'A review of corporate governance in UK banks and other financial industry entities'.
The failure of institutional investors to use their influence to prevent poor management has been seen by many commentators as one of the failings at the root of the current financial crisis.
FSA chief executive, Hector Sants, believes that investors have a responsibility to be more active - both individually and in collaboration with other investors - to maintain the effectiveness of boards and to prevent mis-management.
The letter to the ISC responded to concerns expressed by institutional investors over the extent to which more active shareholder engagement was consistent with elements of the existing regulatory regime.
The main areas which had raised concerns were: market abuse; disclosure of substantial shareholdings; and change in control. The FSA letter sets out the regulator's approach to these issues:
- Market abuse. The FSA states that the market abuse rules do not prevent investors from engaging collectively with the management of an investee company. However, the FSA considers that trading on the basis of knowing another investor's intentions or working jointly to avoid disclosure of shareholdings could constitute market abuse.
- Disclosure of substantial shareholdings. The FSA rules on disclosure of major shareholders require that investors who have agreed to follow the same long-term voting strategy should aggregate their shareholdings when considering whether their shareholdings reach the threshold level required for disclosure. This is unlikely to include the kind of ad hoc discussions and understandings which might be reached between institutional shareholders in relation to particular issues or corporate events.
- Change in control. Under the EU Acquisitions Directive, implemented in the UK earlier this year, FSA approval is required when investors are acting "in concert" and where a controlling shareholding is reached in a regulated firm (10% or more). Although "acting in concert" is not defined in the Directive, the FSA considers that it is not intended that the phrase should capture ad hoc discussions and understandings reached in good faith solely aimed at exerting influence intended to promote generally accepted principles of good corporate governance.
The FSA letter states that the regulator is "satisfied that there is no fundamental inconsistency" between existing regulatory requirements and an increase in collective engagement by institutional shareholders designed to raise concerns on corporate issues or matters of governance.