Introduction
Last week, the FCA finally published the new UK Listing Rules (which come into effect on 29 July 2024). What are the implications for shareholder rights?
According to the FCA’s Policy Statement which accompanied the New Listing Rules, the changes move to a ‘disclosure-based philosophy’ rather than an ‘ex ante approach’ which had certain rules which reserved certain rights to shareholders. The changes reduce shareholder protections and strengthen the power of Boards. Shareholder rights will instead have to be used to hold Board’s to account after the event. See here for our insights into what rights activist shareholders have in UK listed companies
The FCA states ‘These reforms may mean investors change how they engage with companies, making more use of shareholder rights at law and other mechanisms to scrutinise boards and business strategies’.
By way of elaboration, the FCA makes reference to:
- the Stewardship Code, a rather bland document encouraging dialogue between listed companies and shareholders which has not made a noticeable difference to active engagement; and
- rights of shareholders holding 5% of voting shares to propose resolutions at shareholder meetings, with a naïve statement that ‘there is no restriction on the type of resolutions that shareholders can propose, which gives shareholders a significant ability to hold the companies in which they invest to account and challenge decisions made’. In reality, the only resolution of any import that can be put forward is an ordinary resolution to appoint or remove directors, which requires more than 50% of shareholders attending and voting at the meeting to vote in favour. Whilst in extremis, this can of course significantly alter the direction of the company, it is a nuclear option and requires suitable directors to be found for appointment. One wonders what other resolutions the FCA can have had in mind? After all, management of listed companies is reserved to the Board and a resolution to direct a Board how to act invariably requires a special resolution to be proposed under the company’s articles of association which requires more than 75% of shareholders attending and voting at the meeting to vote in favour.
To date, many traditional institutional shareholders have not shown an inclination to act as proactive owners and change Board, preferring instead to sell positions when dissatisfiedwith performance. Maybe, they will be galvanised into action. Let’s see.
Key changes to shareholder rights and the implications for shareholders
- No shareholder vote on significant acquisitions and disposals for commercial companies
This is pretty significant and gives more power to boards of listed companies to enter into binding significanttransactions without regard to the wishes of shareholders.For acquisitions, the FCA has removed the requirement for historical financial information on the target. An announcement must be made when the key terms are agreed, but some information can be released later as long as it is done before completion.
The UK Market Abuse Regulation (MAR) largely impedes Boards from taking soundings from major shareholders on potential significant transactions because doing so improperly discloses inside information unless it falls within ‘market soundings’. Legal advice in this area tends to be highly conservative so Boards tend to spring significant transactions on shareholders and grandly point to the Board recommendation.
The FCA has clarified guidance in the Disclosure and Transparency Rules (DTRs) related to MAR supposedly to assist in taking ‘market soundings’ notwithstanding that no vote is required (new DTR 2.5.7G). It also asserts that ‘issuers retain a commercial incentive to engage shareholders prior to a transaction’. However, we somehow doubt the FCA’s assertion. In our experience, many listed companies shied away from extensive consultation when shareholder approval was required so it seems unlikely they will consult more when no shareholder approval is required. Moreover, unhelpfully from a legal perspective, the FCA emphasises that new DTR 2.5.7G is not an exemption to MAR and issuers must ‘consider their wider MAR obligations before selectively disclosing information to any shareholder’. Given the quagmire of guidance on MAR, we suspect that Boards won’t consult much for fear of premature disclosure of potential transactions by doing so.
So, unless a Board:
- makes an announcement of a possible transactionbefore entering into a binding contract (either proactively or due to a leak) and sufficient shareholders then voice opposition which the Board heeds; or
- decides to take market soundings in reliance on the ‘non-exemption’ (which inevitably will be taken from just a select few large shareholders) and changes its mind following such soundings,
there is no redress available to shareholders for a transaction they do not support other than taking some action after a binding transaction has been announced.
So what action could be taken after a binding transaction has been announced?
- Shareholders could requisition a shareholder meeting to consider resolutions to:
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- remove some or all the directors on the Board(>50% vote).
- direct the management to terminate the transaction (>75% vote).
But if the Company has entered into a binding agreement, that won’t stop the transaction and may result in breach of contract and damages.
Fiduciary duties are codified in the Companies Act2006 (CA2006) and include: s.172 (Duty to promote the success of the Company); s. 173 (Duty to exercise independent judgment); s. 174 (Duty to exercise reasonable care, skill and diligence).
Actions for breach of fiduciary duties are rare in the UK (other than post an insolvency) because to be actionable as a damages claim, breach of theseduties normally requires want of good faith. This might be established by showing at the least some conscious disregard for the duty or wilful ignoranceof it or some decision altogether outside the range of anything which could reasonably have been considered to be within the duties. Breach is unlikely to be established if the Board acted with care, whether or not with hindsight the decision did not promote the success of the company, particularly if the Board was scrupulous in taking advice from reputable and competent professionals.
- Shareholders could attempt to take action against the directors for failure to properly assess if the proposed transaction is ‘fair’.
Under the new Listing Rules, the Board is required to make a public statement that the announced transaction is fair. There is no requirement to get a third party fairness opinion to support the Board statement but it seems likely that in many cases the Board will have engaged a financial adviser which might support the Board in reaching its fairness statement. However, as the opinion of the financial adviser will be addressed to the Company rather than the shareholders, it is unlikely that the shareholders would be able to take action against the adviser for their negligence. Such action would have to be taken by the Company.
Similar to the situation regarding action for breach of fiduciary duties, breach is unlikely to be established if the Board acted with care when making the public statement, particularly if the Board took independent advice.
In conclusion, there will not be much that shareholders can do other than hold directors accountable for failure after the event by voting for their subsequent removal. That pretty much puts responsibility for failed transactions in the same category as failed strategy. Maybe, shareholders will step up and hold Boards accountable in legal action but unless the law on director duties evolves to be more like that in the USA and damages are payable direct to shareholders rather than to the Company, it seems unlikely.
This is also significant. Related party transactions by their very nature raise a risk in the words of the FCA ‘that such a transaction will, or may, redirect value from shareholders to related parties, or is not in the best interests of the company’.
The only checks on this risk are:
- a requirement for the Board to conclude that the transaction is ‘fair and reasonable’ and for ‘conflicted directors not to take part in that decision’. Frankly, that merely accords with the company law requirements; and
- written confirmation from the sponsor that the transaction is ‘fair and reasonable’ before the transaction can proceed.
So what redress would shareholders have if the transaction was not ‘fair and reasonable’. In large part the analysis is the same as the position outlined above for significant transactions. However, there is potentially action which could be taken against the sponsor if it acted negligently. On balance, this will probably act as a restraint on improper arrangements.
Although commercial companies will need to ensure their independence from controlling shareholders (those holding over 30% of voting rights) a relationship agreement between the listed company and the controlling shareholder will no longer be required, although in practice we expect such agreements to be entered into.
Directors will need to give an opinion on shareholder resolutions put forward by a controlling shareholder when the directors consider that the resolution is intended or appears to be intended to circumvent the proper application of the Listing Rules. It will be interesting to see how this develops in practice and we can expect some fairly creative interpretations of what would constitute a circumvention of the proper application of the Listing Rules. At the end of the day, at least shareholders will have the final say on this.
Constitutional and voting requirements on the election of independent directors will be retained. That makes sense.
The FCA has not yet finalised its rules but:
- thankfully, the FCA has decided to retain the requirement for shareholder approval on material changes to investment policies and management fee charges. Abandoning this would have been madness;
- significant and related party transactions will follow the regime for commercial companies; and
- Boards will have to remain independent of the investment manager. Again, a departure from this would have been madness.
In our experience, non-executive Boards do not operate as an effective check on the investment manager of listed closed-end investment funds given the information disadvantage they have relative to the investment manager and the fact that they are not generally paid enough to be properly involved. This is a topic for another day.
Other changes which may be of interest to engaged shareholders
Removing the distinction between Standard and Premium listed companies
We support the proposal to merge Standard and Premium listed companies. It was far too confusing to have both categories, and hardly necessary given the existence of AIM for companies wanting a less regulated regime.
International secondary listing category
For non-UK incorporated companies with another listing on a non-UK market, subject to certain conditions, ongoing requirements effectively maintain standard listing rules. The key point here for shareholders is to understand the listing and ongoing regulatory and company law implications of investing in a non-UK incorporated company.
Dual/multiple class share structures
Institutional investors holding such shares can hold weighted voting rights implemented at IPO. These rights will be subject to transfer restrictions and a 10-year sunset provision after which enhanced rights will expire. This will probably encourage rounds of pre-IPO equity investment by institutional investors. The sunset will not apply to ‘natural persons’, i.e. directors and founders. Shareholders investing whether at the IPO or in the secondary market can do so in full knowledge of the way these shares impact their rights as shareholders. Caveat Emptor.
Reverse takeovers
Reverse takeovers still require prior shareholder approval and an FCA approved circular. The enlarged group would need to reapply for admission if the company wishes to continue the listing.
Conclusion
Overall, we note that these changes have been welcomed by those anxious about the demise of the London stock market. Whilst we understand this perspective, there will need to be a step change in shareholder engagement to hold Boards accountable given shareholder rights are being rolled back. Ideally, there needs to be a strengthening of shareholder rights in company law and a step change in how Boards are held to account in shareholder litigation.
