Background
ShareSoc’s Shareholder Rights Campaign has been one of our longest running and most important campaigns. The reason it is so important is that current deficiencies in the rights of beneficial shareholders severely hamper our ability, and that of shareholder action groups generally, to hold company managements to account. This impacts the effectiveness of many of our other campaigns. Visit the campaign page for further details and further explanation of the issues.
Since we launched the campaign in 2014, we have made considerable progress, by lobbying government on your behalf. ShareSoc and UKSA directors have held many meetings with government officials on this subject.
Firstly, the then BEIS department (now the Department for Business and Trade – DBT) finally agreed to sponsor a project by the Law Commission on “intermediated securities”. The Law Commission published a “scoping paper” in 2020, acknowledging the defects in current legislation.
Then, we worked closely with Mark Austin on his “Secondary Capital Raising Review”. As well as addressing impediments to issuers raising fresh capital, the Review also addresses issues identified in the Law Commission’s paper, in Chapter 10 of the Austin Review.
The Digitisation Taskforce and Its Interim Report
Following on from the above work, HM Treasury launched a “Digitisation Taskforce” (DT) in July 2022, led by Sir Douglas Flint, current chairman of abrdn and formerly group finance director and then chair of HSBC. The DT published an interim report on 11th July.
ShareSoc’s policy committee has been studying this report and is working on a response to Sir Douglas’s report. We have a number of serious concerns and would welcome your comments on this article. In essence, the current report proposes the abolition of share certificates WITHOUT guaranteeing the full rights that current certificated shareholders enjoy.
Prior to publication of the interim report, we had received indications that our concerns about shareholder rights would be addressed. So, it is most disappointing to find that they have not been addressed.
Policy Committee member Cliff Weight has drafted his more detailed thoughts below and responses to questions raised in the Interim Report. ShareSoc’s official response is being prepared in collaboration with our colleagues in UKSA and will be submitted and published here in due course. If our concerns are not satisfactorily addressed, then we will step up our campaigning activities regarding Shareholder Rights.
If you have not already done so, I urge you to sign the petition at the bottom of our Shareholder Rights campaign page. You can also donate to ShareSoc from the petition, which will help to fund our campaigning activities.
Mark Bentley
Director, ShareSoc
Detailed Commentary From Cliff Weight
The following commentary does not express ShareSoc’s official views but are those of one member of our Policy Committee – however, the Policy Committee is broadly in agreement with those views. ShareSoc will publish its official response to the Flint Interim Report shortly.
Flint Interim Report – My initial verdict
I have 6 main criticisms of the Digitisation Taskforce’s Interim Report; whose terms of reference can be read here.
First, the use of language in this interim report is incorrect. The DT interim report uses the word rights in the context of shareholder rights in many places. However, the report is often not at all clear that these are not rights, but are services that are defined in the terms and conditions that the UBO (ultimate beneficial owner = investor) who holds via nominee has agreed when he/she/they sign their contract with the platform/nominee. Interactive have started a plain English campaign. It is a huge shame that the DT have not followed the principles of plain English!
Second, there is a lack of statistical data and hence rigour in the report. For example, I would like to know the numbers of investors who have paper certificates and those who have nominee accounts where they also own shares (as UBOs – Ultimate Beneficial Owners). How many have both nominee and paper certificates? How many have paper only? Of these, how many different companies do they have shares in and what is the size of their holdings? A Venn diagram and/or structured analysis is essential to understand the scale of this problem.
Third, there is no consideration of the Swedish model of custody accounts, which are like segregated nominee accounts. This model of ownership allows individual investors to have the same rights as paper certificated ownership currently provides in the UK. The costs of such accounts (c500 Krona to set up and c500 Krona p.a. to run) are not prohibitive.
Fourth, these shareholder rights have existed for in excess of 200 years and are ones that should not be abandoned without more careful thought. The DT’s proposals would remove many of these rights (with a very weak alternative which are not rights) and in particular remove entirely the rights under S811(4) for those who have a proper purpose (with no alternative being offered). Rights under S116, 149 to 153, 303, 310, 311, 312, 314-316, 333, 333A, 338, 338A, 339, 768, 792, 793, 803, 808-811, and probably others too, will be removed.
Unless your name is on the share register of a company you are not a “Member” of the company and hence lose important legal rights (not just voting rights). Mark Austin understood this and (Para 10.11) pointed out: “A ‘drive to digitisation’ could radically overhaul the system to improve end investors’ ability to exercise their shareholder rights and for issuers to know who is on their shareholder register, including the ultimate beneficial owner. Taken to its extreme, this process would necessarily require changes that were both legal and operational in nature for the benefit of not just capital raising processes but wider shareholder rights and engagement in stewardship and other Environmental, Social and Governance (ESG) related activities.”
The DT seems to have ignored this guidance and reversed tack. The DT’s expression of the wish to rely on market forces to deliver beneficial owner rights and facilities is highly likely to be a dismal failure unless there is far more efficient regime for switching platforms and brokers in the UK with very tight short deadlines policed by the Financial Conduct Authority. This is especially important as exercise of rights by beneficial owners matters when a crisis hits a company.
Fifth, all those with a proper purpose should be able to access the information in the register of interests. Individual Shareholders have an important role in holding directors to account. They do this often by asking questions at AGMs, but where necessary, they will requisition shareholder resolutions and General Meetings. Shareholders need to be able to contact other shareholders to explain the issues and get their support. Access to email addresses will greatly enhance individual shareholders ability to do this. However, the DT is proposing to remove this ability to obtain a copy of the register of interests, so that only issuers should have the ability to access information below the level of what is recorded on the company’s share register. The logic for this recommendation is, I believe, faulty. In respect of S811(4), the proper purpose test works well. The registrars are the first point of call and when I recently asked, they could not recall any cases of abuse in UK quoted companies. Google Bard tells me of only two cases and these were private companies.
Sixth, the DT has not met its own terms of reference, numbers 3 (no degradation of rights) and 4 (investors to more effectively and efficiently communicate with a company’s entire shareholder base).
My draft responses to the DT’s questions are below. Their consultation includes 9 questions, but the most important to individual investors are questions 4, 5, 7 and 9.
Before getting into the “meat” of the Digitisation Taskforce interim report, I would like to comment on the line of attack often used as an excuse for de-prioritising shareholder voting rights. Statistically, it has been demonstrated that most individual shareholders do not vote (even when they have the ability to do so) most of the time. However, I believe there are two key factors that play a role in this (and they certainly apply to me personally):
- Most individual shareholder shareholdings are very small (relative to total votes), so individual shareholders will tend to think that their votes won’t make much difference.
- Most resolutions at most general meetings are routine and non-controversial, so there is not much motivation to vote on them.
Personally, I only make an effort to vote when there is a resolution that I have strong feelings about. ShareSoc Director Mark Bentley adopts a similar approach.
Some proposed responses to the questions posed in the Interim Report
Question 4 – is the ability to have digitised shareholdings held on a register outside the CSD important to issuers or UBOs?
I would like to see Option 2 re-examined. This option is viable in Sweden, where individual investors are offered both segregated and pooled accounts; and many individual investors choose to have segregated accounts.
I expect that there would be huge economies of scale if hundreds of thousands or millions moved to segregated accounts.
I would like to know the numbers of investors who have paper certificates and those who have nominee accounts where they also own shares (as UBOs). How many have both nominee and paper certificates? How many have paper only. A Venn diagram or structured analysis is essential to understand the scale of this problem.
In addition, Flint has rejected “Immobilisation”, without saying why, whilst Austin highlighted the opportunity (Para 10.15) “An additional option to computerise records of ownership is Immobilisation. This entails placing securities issued in paper form in the custody of a central party, who becomes the legal owner of the securities. Other investors hold through that depository. In contrast, securities issued in dematerialised form in CREST are not legally held by CREST; it is maintaining the register of legal owners rather than holding securities on custody. This nuance is important, as CREST does not appear on the register of dematerialised securities whereas in an immobilisation model, the central party providing custody services will be the only legal member for securities issued through a computer-based system on the company’s register.”
Question 5 – do you agree with the taskforce recommendation that the optimal architecture is for all digitised shareholdings to be recorded in the CSD and managed and administered through nominees?
No.
It is unclear if the main platforms (e.g. Hargreaves, interactive investor, AJ Bell) will want to recruit new customers who only have shares in 1 or 2 companies. Currently they offer incentives to new customers and it would be helpful if the DT were to obtain a promise from leading platforms that they would continue to do this for at least until the end of 2025.
As noted above it is unclear how many potential customers there would be.
It is also unclear if the registrars would offer a service for companies with lots of small shareholders (who currently hold via paper certificates) and what the level of charge would be for this. Currently the issuer bears the costs of the paper certificated system. This has been the principle for in excess of 200 years and one that should not be abandoned without more careful thought.
Investors may also not be aware of the finer details of their interest in shares where the platform, understandably, seeks to simplify the user experience and only includes a description of the legal arrangements in lengthy terms and conditions which may not be reviewed in detail by the retail investor. It is therefore up to organisations like ShareSoc and UKSA to fight on behalf of such investors to ensure their rights are protected.
Question 7 – do you agree that facilitation of shareholder rights should be left to market forces, with full transparency as to whether access to such rights is available and where it is, clear communication around ease of access and charges allowing shareholders to choose between full service or lighter touch models?
No. These shareholder rights have existed for in excess of 200 years and one that should not be abandoned without more careful thought.
First, the use of language in this interim report is incorrect. The interim report uses the word rights in the context of shareholder rights in many places. However, it is often not at all clear that these are not rights, but are services that are defined in the terms and conditions that the UBO (ultimate beneficial owner = investor), who holds via nominee, has agreed when he/she/they sign their contract with the platform/nominee.
Interactive have started a plain English campaign. It is a huge shame that the DT have not followed the principles of plain English!
Each of the rights needs to be considered. In particular, but not limited to, voting rights. These rights of shareholders have existed for over 200 years and the DT proposals would remove many of these rights (with a very weak alternative which are not rights) and in particular remove entirely the rights under S811(4) for those who have a proper purpose (with no alternative being offered). Rights under S116, 149 to 153, 303, 310, 311, 312, 314-316, 333, 333A, 338, 338A, 339, 768, 792, 793, 803, 808-811, and probably others too, will be removed.
In particular: S153 Exercise of rights where shares held on behalf of others: members’ requests
(1) This section applies for the purposes of—
(a) section 314 (power to require circulation of statement),
(b) section 338 (public companies: power to require circulation of resolution for AGM),
[F1(ba)section 338A (traded companies: members’ power to include matters in business dealt with at AGM),]
(c) section 342 (power to require independent report on poll), and
(d) section 527 (power to require website publication of audit concerns).
There is also important case law that may be overridden by the DT’s proposals.
Question 9 – do you agree that only issuers should have the ability to access information below the level of what is recorded on the company’s share register? Should there be restrictions on how issuers can use that information, including sharing the information?
No. All those with a proper purpose should be able to access the information in the register of interests. The logic for this recommendation is, I believe, faulty. In respect of S811(4), the proper purpose test works well. The registrars are the first point of call and when I recently asked them could not report any cases they can recall of abuse for quoted companies. Google Bard tells me of only two cases, both private companies.
Mark Austin’s review and the Law Commission Review highlighted the need for reform to S793 requests. Mark Austin’s Recommendation was: Section 793 of the Companies Act 2006 should be amended to additionally require disclosure of the identity of the ultimate investment decision maker or beneficial owner in relation to a share …including an email address at a minimum.
Cliff Weight
ShareSoc Policy Committee Member
Post Date: August 16, 2023
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Our thinking continues to develop. I would add these comments to the answer to Question 4.
We think that Option 1 is potentially a better option than Option 3. It is important to understand and recognise that Option 1 has one shareholder register, but with two components. Flint on page 14 refers to two registers, which is not the case and his choice of words is misleading and unhelpful. Option 1 will be the most familiar solution for the millions of existing paper certified shareholders. Much of the existing friction between the current paper system, investors and the platforms will be eliminated when the existing arrangements are digitised:
i. paper cheques
ii. paper annual reports, notices of GMs, proxy notices, dividend confirmations
iii. postage of the above
iv. execution of sales of shares
v. transfer of shares from the digital system to platforms.
In addition, there will be no need for certificated shareholders to identify and go through Know Your Customer, Anti-Money Laundering and other processes with a nominee platform that are deemed by them as necessary to hold and administer investors’ dematerialised interests.
Furthermore, as the registrar already has the bank details and other history, the process of identifying “lost” shareholders will be done by the Issuer/Registrar and not a platform/nominee who will not have such information.
We would like to see a proper cost comparison of Option 1 and Option 3. We believe Option 1 will lead to more cost savings than Option 3 and that more of these cost savings will be passed on to investors in Option 1 than in Option 3.
Option 3 is a (much) more significant change than Option 1. It has higher risks and as any good businessperson knows risks should be avoided unless the cost benefit is very clear. The main risks of Option 3 compared to Option 1 are:
i. Negative PR from removal of paper certificates and replacement by a much more complicated system, combined with removal of existing rights so that Press headlines like “investors’ shares are worth less[1]/devalued” may be used. The fact that UKSA, ShareSoc and the Registrars’ Group are all highlighting the feasibility of Option 1 increases the risk of negative PR.
ii. (Potentially) higher costs of Option 3/ the lack of detailed cost comparisons.
iii. If you digitise the existing register you can leave it for Issuers to determine if/how to manage unresponsive holders (many companies already perform tracing and forfeiture arrangements) and consequently there’s no enforced cost]
iv. Higher numbers of untraced shareholders, which might lead to years and years of negative press stories as old worthless share certificates turn up.
v. Removal of competition to platforms and concentration of all shares within CREST, puts investors at risk to future price increases. This is particularly the case for smaller customers, who at some stage in the business cycle may be deemed as uneconomic. In addition, the difficulties of moving from one platform to another are well known and the subject of various FCA studies. Option 3 potentially increases this risk.
Option 1 also allows the continuation of the existing shareholder rights and property rights that will be removed under Option 3.
[…] Sharesoc’s comments are here: https://www.sharesoc.org/sharesoc-news/flint-interim-report-a-betrayal/ […]
Their seems to me three conditions to be fulfilled for shareholders with a small quantity of shares to exercise any control over the company in which they have invested:
• A requirement to be able to receive relevant company communications.
• A requirement to be able to vote on any company resolutions.
• A requirement for individual shareholders to access the entire company shareholder register. The company will have access to the entire register and without allowing controlled access by individual shareholders the Board of Directors will only face opposition by institutional holders.
I consider that all shareholders should receive the same rights otherwise, as has been shown in other markets, there will be a ‘race to the bottom’. Why would any small shareholder wish to, as is implied, pay more for access to some, or all, shareholder rights? Most shareholders realise they can do little to affect the outcome of a AGM resolutions, directors remuneration or share schemes etc etc, in a public company: Currently the only rational option is to vote with their feet.
For the reasons stated above the companys entire shareholder register should be publicly assessable to identify individaul shareholders. This should be considered an essential part of enabling shareholder democracy.
From my own experience this is true as most AGM’s and resolutions are non- contentious and I do not bother to attend or vote. However, when a conscientious resolution is put forward by the Board, or a new director is proposed against the wishes of the Board, I would want to both take an interest and to be able to hear both sides of the argument and then be able to vote accordingly.
Similarly, I would not want, for example, to necessarily attend and vote at the AGM of my local Sports Club – but I do want the right, if I am a member, to be able to do so.
Thanks Robert: nail hit on head!
Rest assured that our response to Flint will make these matters clear.