Fair play for private investors

The DTI recently issued its consultation document Shareholder Communications at the Annual General Meeting to which the company law committee of the Law Society has published a response.

The report considers whether AGMs provide an appropriate forum for individuals who want to have their views heard and whether the meetings ensure the effective stewardship of a company. It also explores options for legislative reform.

Most companies have private meetings with their major shareholders to sound out their views and enable them to pursue their concerns. It is rare for the views of institutions to be expressed publicly, although they are increasingly making public statements about the standards of corporate governance they expect of companies in which they invest. However, the influence of institutional shareholders is still mainly exerted behind the scenes.

Although there are more individual private shareholders than institutional investors, they hold only 20 per cent of the voting power in most listed companies. Usually, their only opportunity for face-to-face communication with a company is at the formal AGM.

Each year, the directors frame and put resolutions to the shareholders of a company. Under Section 376 of the Companies Act, specified levels of minority shareholders can require the company either to give notice of a resolution they wish to propose, or to circulate a statement on a resolution or other business to be proposed by the directors at the AGM. But the cost of circulating the resolution or statement has to be borne by the requisitioning shareholders, unless the company agrees to bear it.

The DTI paper puts the cost of a separate mailing to shareholders at between £50,000 and £100,000. The Law Society committee says it is not aware of any cases where the cost has been a deterrent, and has examples of cases where companies have agreed to circulate resolutions without charge.

The Companies Act makes no provision governing the asking of questions by shareholders at AGMs. At larger AGMs, questions have to be pre-registered before the meeting. Although some think this rule is designed to silence shareholders, it is sometimes the only way of ensuring the meeting proceeds in an orderly fashion.

The DTI paper briefly considers introducing a statutory right to ask questions, but quickly concludes that, given the detailed rules which would be required, it is a matter best left to the development of best practice by companies. This view is supported by the company law committee.

After the introduction of the Crest fast-track share dealing system, the cheapest way for private individual shareholders to hold shares in the system will be to use a nominee service, probably a broker's. This means that the nominee, rather than the underlying beneficiary, will appear in the company's register, be entitled to receive company circulars and attend company meetings.

Currently, two provisions of the Companies Act aim to enable the wishes of a beneficial holder who is not the registered holder of the shares to be put forward at meetings. These are:

Section 375, which enables a corporate registered shareholder to authorise a person to act as its corporate representative at meetings. That representative can exercise the same powers as the registered shareholder. However, only one corporate representative can be appointed which makes using this power impracticable for most nominee companies holding a block of shares on behalf of more than one beneficial owner.

Section 372, which permits shareholders to appoint other persons as their proxy. But the rights of a proxy at a meeting of a public company are limited – the proxy is not strictly entitled to speak at the meeting and may only vote if a poll is called.

The DTI paper explores options for amendment of these two provisions.

The recent emphasis on public accountability and corporate governance has resulted in some individual shareholders wanting to make their views heard at AGMs. The introduction of Crest will dramatically increase the number of private individual shareholders whose direct rights in relation to the company and its meetings will be curtailed.

The company law committee believes AGMs are well run in most companies, that shareholders receive appropriate information from their company's management and are given adequate opportunity to express their views. It finds it hard to envisage provisions which would be significantly better than the current rules.