CBI response to European Commission consultation:
Fostering an Appropriate Regime for Shareholders’ Rights
Introduction
We welcome the opportunity to comment on the Commission’s consultation on shareholders’ rights. We are very supportive of the Commission’s intention to consult again at the next stage and to take the time to get the detail right. We would be happy to provide further input on future proposals, including with CBI members in
London or Brussels.
It is important that the Commission identify clearly the problems which need to be solved in order to get UK companies’ buy-in as to any solutions required and in order to enable them to respond to the different options for dealing with any problems. If the problems are clearly identified, then we will be happy to support legislation where necessary and where the benefits outweigh the costs, in line with the principles of better regulation. Where it is not clear that there are problems or if it is not clear that legislation is the answer then UK companies and investors are unlikely to be supportive of any Commission proposals.
We are supportive of the current UK system, where we believe that shareholders are able to exercise their rights, including cross border for those shareholders investing in
UK companies but based elsewhere in Europe. We are not therefore aware of major issues with shareholdings in UK companies held by those abroad. We understand, however, that UK shareholders may experience difficulties in exercising their rights across borders and therefore accept that shareholders may desire a common regime across Europe for shareholder rights.
However, we are aware of the difficulties encountered by the proposals for a directive on takeovers and the cultural differences between member states which may lead to compromise. We do not therefore support full harmonisation.
We would suggest that any proposals for a directive should therefore concentrate on the main principles rather than the detail of what is a complex area. We would also suggest that the next round of consultation offer various possible solutions on which companies are able to comment.
Finally, the Commission should also ensure that the work in this area is consistent with work in other areas, for example in the work on clearing and settlement and the
Transparency directive.
Susannah Haan – Legal Adviser – Company Affairs
DL: 020 7395 8047 DF: 020 7836 1114 E: Susannah.Haan@cbi.org.uk
CBI Centre Point 103 New Oxford Street London WC1A 1DU
T: +44 (0)20 7379 7400 F: +44 (0)20 7240 1578 W: www.cbi.org.uk
Director-General: Digby Jones President: John Sunderland

Background to CBI comments; some general observations on corporate governance
We support the overall objective of strengthening the rights of shareholders and creating a more robust environment for stronger corporate governance. An integrated legal framework where there is efficient information flow, allowing good communication and decision making, is desirable in creating an effective means of influencing control over a company.
We see shareholder rights as a key feature of the “comply or explain” regime for
Europe advocated in the Company Law Action Plan. The UK experience of strong shareholder rights as exemplified by the UK’s Combined Code on corporate governance has been that dialogue between companies and shareholders backed up by real powers on the part of shareholders can bring about cultural change without the need for legislation.
In order for the comply or explain regime to be allowed to work, however, shareholders need to be able to exercise their rights. Shareholders therefore need to be able to exercise those votes cross border.
The UK approach as set out by Cadbury places responsibility for corporate governance on the board. It is then up to the shareholders, not the regulator, to hold the board to account (except in cases of breach of laws or regulations).
This stands in contract to the US experience, where the preferred route has been legislation or litigation via securities regulation, enforced by the SEC, rather than shareholder empowerment through company law. There are therefore fundamental cultural differences in corporate governance between the US and the UK, although many outside observers may assume that systems in the Anglo-Saxon world are similar.
The US system relies on greater regulatory intervention and more oversight by external advisers such as auditors. The US has strengthened its securities law in the form of Sarbanes Oxley but has not given shareholders the same rights in company law as exist in the UK. For example, UK shareholders have the right to vote directors off the board at the AGM, and the right to vote against resolutions. US shareholders cannot vote against resolutions; they can only withhold votes. There have been moves recently to amend US legislation to allow shareholders to remove entrenched management and to propose directors themselves, but so far those proposals appear unlikely to succeed. Directors in the US are often appointed on a “staggered slate” which means that change can only take place over a number of years; in the UK, the shareholders have the power to remove the entire board.
We hope that Europe will follow the UK rather than the US approach, which we believe is not only less prescriptive but also more effective in terms of affecting the culture of boards rather than passing responsibility for compliance to the company’s advisers.
It should be a basic principle of company law that a company is responsible to its shareholders. Responsibility to others such as employees or creditors should be achieved not by company law but by employment or insolvency laws. We support companies’ responsibility to their shareholders and with this a robust dialogue between companies and their shareholders.
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CBI members support shareholder engagement, which is not to say that companies and shareholders always share the same views, but rather that the exchange of views is generally seen as positive in the long run.
The main power in the hands of the shareholders as owners lies in their ability to elect and remove directors. Their main responsibility is to satisfy themselves that the board is properly composed to suit the nature and purpose of the company and to exercise an effective discipline over the board, by scrutinising accounts, attending meetings and questioning directors on matters which may affect the business. The degree of control exercisable by the owners should be in proportion to their financial interest and risk i.e. the amount of the shares held.
In the UK, institutional shareholders hold a large proportion of the shares. These shareholders have the resources to exert significant influence on the companies. We support the work of the UK’s Institutional Shareholders’ Committee in its work on best practice for UK investors.
Smaller shareholders should be able to ask questions at the AGM; before the meetings, the board will spend a considerable amount of time on possible questions and answers and are also sensitive to individual shareholders’ letters. However, it is important that the chairman is able to prevent the AGM from being dominated by any one shareholder or group.
Costs
Some of the proposals within the consultation have the potential to add significantly to issuers’ costs on shareholder administration. In order to avoid excessive costs, it will be important that issues such as electronic dissemination are dealt with as much as possible on the basis of existing IT systems and databases. Most issuers outsource the actual keeping of the databases to external registrars. Forcing issuers to hold up to date real time information on the underlying owners would be excessively costly. We do not therefore believe that there should be any requirement or responsibility on issuers to:
(a) disseminate information directly to underlying beneficial shareholders (this could add significant postage costs). Underlying shareholders are in the position to access information of issuers' websites, or to obtain it from the intermediary; or b) confirm vote execution to beneficial shareholders (a matter which should remain entirely between the beneficial shareholder and the securities intermediaries, with the latter obliged to confirm votes have been cast as instructed, with associated costs to be settled by contract between the beneficial shareholder and the intermediary). where the information on the underlying shareholders is held by nominee companies rather than issuers.
The issue of the extension of shareholder rights and information to those beneficial owners who invest through nominees becomes increasingly important as the shareholder process is further dematerialised (made electronic). Proposals are currently being looked at in the UK for this to be dealt with at the nominee company / custodian level, where it will be optional for the custodian to offer the service, and the nominee operator will have the choice of which level of service to offer. Together, these should ensure that shareholders are able to choose the relevant level of investor service which they require.
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We believe that it is essential that any proposals should take an enabling rather than prescriptive approach, ensuring that options are available rather than specifying precisely the means by which these should be achieved in order to allow the market to develop such solutions now and in the future.
Specific comments
Scope- Listed Companies
4. Should the scope of the proposals be restricted to companies whose shares are admitted to trading (“listed companies”), and that member states could be invited to extend to non-listed companies?
We see these issues as firmly within the scope of company law rather than securities law. Nevertheless, we agree that the scope of any legislation should be restricted to listed companies in the first instance, since the cost / benefit analysis for non-listed companies is unlikely to be positive. Non-listed companies are often owner managed and accordingly have few shareholders, of whom even fewer are likely to own shares cross-border. Therefore, a mandatory extension of the regulations to these types of companies would be likely to merely add cost and administrative burden for little or no benefit.
However, we believe that companies themselves should have the option to utilise the regulations within the legislation rather than that Member States should individually decide whether or not to extend the scope to all companies.
Entitlement to control the voting right
5.1.1 Should the forthcoming proposals set up a framework to identify the person entitled to control the voting right as the last natural or legal person holding a securities account in the “chain” of intermediaries and who is not a securities intermediary within the European securities holding system, nor a custodian?
We agree with the principle that the ultimate beneficial owner of a share should be able to exercise his/her rights as shareholder without encumbrance or inconvenience from securities intermediaries or depositaries. However, the means to achieve this should be addressed within the securities holding chain between the beneficial owner and the registered shareholder. The ultimate owner should be able to delegate voting responsibility to the intermediary. We are not convinced that an EU legislative framework is required to achieve this and would need to see more information on the barriers, which may exist.
It is an underlying principle of UK company law that companies only recognise the registered shareholder as the shareholder and are not required to take note on the share register of nor deal directly with underlying beneficial owners. This principle should be protected.
It is important that there is a simple and workable system that creates certainty as to who controls the legal right to vote and that the voting right be as close as possible to the person who receives the benefit. Certainty is important to avoid fraud / error and ensure that shares are only voted once.
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As this is a complex area, we believe that if there are to be proposals, these should establish high level principles only and not seek to set out the details of how this should be achieved.
Should the proposals also provide for a securities intermediary who is not admitted as a participant in a European securities system but holds shares of clients the possibility to designate his clients in its place as controlling the voting rights?
We believe that this is an unduly complex approach. The ABI has suggested that the person who is entitled to receive the dividend should be the person who controls the voting rights. This is typically the person on the share register. If the person on the share register is not the ultimate investor, it should be up to that person to seek instructions from the beneficiary.
And should it be compelled to designate the identity of its clients at the request of the issuer?
We support section 212 of the UK Companies Act 1985, which allows companies to seek information about its shareholders. We believe that it would be useful for this provision to be adopted at EU level, together with an ability for the company to impose restrictions on the shares if the person does not respond.
We do not believe that the proposals should address the issue of costs.
5.1.2 Should the provisions allow the ultimate investor to exercise the entitlement to control the voting rights? Should the ultimate investor in all cases be offered the possibility, either to provide the financial intermediary with voting instructions or to be given power of attorney by the same financial intermediary?
The ultimate investor should have the entitlement to control the voting rights unless this has been delegated to another party. The shareholder should always have the power to instruct an intermediary on how to vote or to give a power of attorney to that person.
We would not wish, however, to see detailed EU legislation about how this ought to be done.
5.1.3 Should securities intermediaries be required to certify to the issuing company who the ultimate investor entitled to control the voting rights is and for how many shares?
What is the best option to allow for such an authentication and certification process?
Should the proposal address the issue of who bears the costs in this authentication?
See comments above re section 212 Companies Act 1985 which we believe provides an effective solution. The important point is that intermediaries are only required to certify who controls the voting rights on demand. This significantly reduces the cost burden.
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We do not agree that the proposals should address the issue of costs.
5.2 Do you consider the practice of securities lending create problems for the exercise of voting rights, in particular in a cross-border context that should be tackled at EU level? Should the provisions aim at enhancing transparency and protecting the interests of long term investors?
The practice of security lending may create an issue when trying to exercise votes.
However we understand that where the stock lending documentation is properly prepared, that these issues are addressed within the contractual documentation and therefore see no reason why this needs to be dealt with by EU legislation.
5.3 Are there any problems associated with the holding of depository rights that should be addressed in the proposals?
If so should it allow holders of depository rights to be recognised as holding the rights attached to he underlying shares and that any specific exclusion from voting right should be removed?
No fixed view has been formed at this stage.
Pre-Annual General Meeting Stage
6.1 Should the forthcoming proposals contain provisions regarding the disclosure of GM notice and materials and some standards for the dissemination of such information? What should these standards be?
We support the right of shareholders to submit resolutions to the general meeting, subject to our comments here and in response to 7.3 below. Again, we believe that it is important to retain flexibility and a regulatory light touch here and so would not wish to see too much detail at EU level. It will be important for the Commission to consult on different possible options at the next stage in order to allow companies to respond on individual provisions.
The consultation document states that: 'Investors argue that they should be allowed to file items and resolutions much more easily, with relatively low shareholdings and only few days befo re the release of the agenda or the GM’s day.'
As a practical matter, on receipt of a shareholder proposal, an issuer is required to ensure that the proposal had the required amount of support, by verifying the holdings of those shareholders submitting the proposal, and also to ensure that it meets all EU and local legal requirements (e.g. in the UK that it is capable of being put, is not defamatory etc.). Issuers must also be given the opportunity to prepare a response to the proposal. Only once these steps have been taken, can the process of preparing and printing the materials begin. All of this takes some considerable time, so the gap allowed between receipt of proposals and the meeting is critical.
The current situation in the UK allows shareholder proposals to be submitted 6 weeks
(i.e. 42 days) before the meeting, and materials to be submitted 21 clear days before the meeting, leaving less than 3 weeks to complete all the checks plus preparation and printing. For companies which regularly receive shareholder proposals, this generally leads to an actual mailing date very close to the deadline. This is not ideal, particularly when the mailing includes a large US population.
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The suggestion has been made that shareholders should have the right to submit proposals after notice of a general meeting has been given, i.e. in response to materials received. It is not clear how the issuer would be able to circulate information regarding these filings, if they are submitted so close to the publication or meeting date, particularly if issuers are still required to circulate information in paper format, even to a small proportion of their investors. It is difficult to see how it would be fair to the vast majority of shareholders if a minority group could submit a resolution to a meeting which the issuer was obliged to table, if there was not sufficient time to inform all other shareholders that such a matter was to be voted on.
Time would be needed not only to inform shareholders but to collect proxy votes and also to allow those other shareholders sufficient time to reach a considered view on the issues raised.
We believe that if any recommendation is given for a minimum period prior to the meeting for dissemination of materials, there should be an equivalent recommendation regarding time limits for submission of shareholder proposals, in order to allow sufficient processing time prior to release of materials.
See also response to 7.3 below.
Should issuers maintain a specific section on their web site where they would have to publish all GM related information?
Issuers should maintain information on their general meeting on either their own web site or a similar “depository” web site to facilitate easy access electronically for shareholders. We believe that the majority of UK companies already utilise their web sites for such information. Again any proposals should allow for flexibility – provided that the information is available to shareholders, the precise means should not be prescribed.
Sho uld issuers’ web sites or such dedicated sections of their web sites contain also a description of shareholders’ and investors’ rights in relation to voting (in person or in absentia) and with regard to the GM (rights to ask or table resolutions)?
We are not entirely clear as to what this proposal is aimed at and would ask the
Commission to clarify its policy intentions in the next round of consultation together with a cost / benefit analysis of any proposals.
We would agree that issuers’ websites should contain a copy of any company specific information on shareholder rights, such as the memorandum and articles of association in the UK (which are also publicly available for all UK public and limited companies from Companies House). However, we do not believe that the company should be responsible for advising shareholders of their general rights under company law.
Shareholder documentation is already sufficiently long and complex without additional descriptions. In addition, we cannot see that the company is the logical place for shareholders to obtain general information about shareholder rights as opposed to company specific information. General information would be precisely the sort of information which is not cost effective for any one company to offer but rather
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for a central body to provide. There is also the question of whether companies could be liable for failing to advise shareholders adequately of company law.
The logical place is surely rather from private shareholder organisations or from central government bodies in the UK and other member states such as Companies
House. If there are websites which do offer such information, some companies may wish to provide a link from their website for information to their shareholders but we would look to the Commission to publicise the availability of such websites as we are not aware that this information is currently readily available. In addition, the market itself may develop such sources without the need for legislation.
We note that the Commission has brought out proposals for amendment to the 4 th and 7 th company law directives which would require companies to publish information on shareholder rights in their annual report. We believe that in order to comply with these proposals, it should be sufficient for companies to publish a short statement cross-referring to their website / the availability of such documents as the memorandum and articles at a relevant depositary such as Companies House.
Should the proposals deal with the way informati on is “pushed” by the issuer to the ultimate investor? If so, which of the two approaches (chain or direct) is preferable? Should the possibility be given to the ultimate investor to opt out of such identification system?
The information would be most cost efficiently disseminated on a request basis from investors who actually want the information. If the information is also retained on a company’s web site this would ensure that investors were aware of where to get information or make requests.
If issue rs are to “push” information then this should be done through the chain with intermediaries facilitating the process and issuers using the share register as the distribution list. The chain system is the least costly system since it relies upon existing contacts. In order for companies to send information direct, they would need to keep two sets of information – those on the shareholder register and the ultimate investor or beneficial owner.
However, we do not believe that this is a matter for EU legislative proposals. As long as the information is published on the company’s website or made available through a central website, shareholders should be able to access that information. Legislative proposals should be restricted to a requirement that the information be available to shareholders; how this is done should not be a matter for legislation.
6.2 Do “share blocking” requirements represent a barrier to exercising voting rights, especially for cross-border investors? Should the forthcoming proposals require the abolition of share blocking requirements and propose an alternative system to determine which shareholders are entitled to vote at the GM?
Share blocking is perceived as a barrier to effective/efficient cross border voting.
A “record date” system is widely supported with the suggestion of a 48 working hour deadline to ensure that the ownership of the shares and the control of the voting rights is as close to the meeting as practicable.
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Shareholders Rights in Relation to the General Meeting
7.1 Should Member States be prevented from imposing requirements on companies regarding the venue of the GM that would act as a barrier to the development of electronic means of participation? Should additional criteria be defined at EU level to enable shareholders participation to the
GM by electronic means?
In principle, we would agree that Member States should not be permitted to impose requirements on companies regarding where the location of the meeting is if this acts as a barrier to electronic participation.
We support the use of electronic voting so that shareholders are able to participate in meetings by electronic means, but there should be no requirements at EU level for issuers to do this. The commercial considerations must be evaluated in each case on their own merits. Only where the benefits out weigh the costs and practicalities should it be utilised. Any proposals should be limited to enabling companies to use electronic means of participation in the general meeting without specifying the detail of how this should work. In any event, the take-up of electronic voting has increased in recent years to the extent that it seems likely that it would be standard practice for almost all companies by the time any EU proposals could be passed and implemented into national legislation.
We would, however, question any right for shareholders to ask questions by electronic means, preferring that only shareholders that attend the meeting should be able to do so at the meeting itself. There is nothing to prevent shareholders from asking questions outside the general meeting and most companies will take replies to such letters / emails very seriously. It is difficult to see how it would be possible for a chairman to conduct a meeting with large numbers of real and virtual attendees, particularly with the need for security identification to ensure the existence of a right to vote. Any such meeting would probably be very costly and unwieldy. It is important that the chairman should have sufficient flexibility to manage and ultimately to close the meeting.
We would also wish to state that, while we support the use of electronic communication where appropriate, we believe that it is useful for both sides for companies to hold annual meetings where the directors can meet shareholders face to face.
We do not therefore believe that additional criteria should be defined at EU level.
7.2 Should the forthcoming proposals define minimum standards on the way shareholders’ questions may be filed and dealt with at the GM? If so what should the minimum standards be?
See 6.1 above. We would not support detailed proposals at EU level.
7.3 Should the directive define certain criteria concerning the maximum shareholder threshold for the tabling of resolutions and placing items on the GM agenda and the timing to file these ahead of the GM? If so, what should the minimum criteria be?
We support the right of shareholders to submit resolutions to the general meeting, subject to our comments here and in response to 6.1 above.
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We believe the criteria should be defined and support the proposal by the High Level
Group / the present UK Companies Act 1985 provision, i.e. 5% shareholder rule.
7.4.1 Should the proposals oblige Member States to introduce in their national company law the possibility for all companies to offer shareholders the option of voting In absentia (by post, electronic or other means)?
We believe that Member States should be obliged to require companies to allow voting in absentia. We do not believe that it is necessary for the proposals to specify the precise means, merely to ensure the availability of the option.
Again it will be important that any proposals are kept simple and to ensure that votes are only counted once. The UK system of proxies is considered to work well in this regard.
7.4.2 Should the proposals contain provisions to further facilitate the use of proxy voting across Member States and to lift obstructive local requirements? If so, what should be the minimum criteria, defined at EU level, taking into account the constraints of cross- border voting?
Member States should not restrict the use of proxy voting. However, care needs to be taken to distinguish between local customs which prohibit the use of proxy voting as opposed to those which may be used as an alternative i.e. the show of hands in the
UK. Voting on a show of hands is perceived as assisting shareholder democracy in that it keeps shareholders attending a meeting engaged. There is a safeguard by way of a requirement on the chairman to disclose if the proxy vote would be different.
Further debate on specific practices would be useful in order to engender an informed debate between companies and shareholders as to which practices are real barriers to proxy voting.
Post-General meeting Information
8.1 Should companies be obliged to disseminate the results of votes and minutes of the GM to all shareholders and/or to post these on their web site within a certain period following the meeting?
We would agree that the information should be available on the company web site (or equivalent) in electronic form. This should include minutes, voting, results etc.
As best practice, many UK companies already send out the results of the votes at each AGM and a synopsis of the key issues raised at the meeting to their shareholders with the final dividend posting (which of course follows the AGM). We would oppose any legislative requirement to do this within a statutory timescale, which would require a separate posting.
To disseminate this information after the meeting would place a significant and unnecessary burden on the issuing companies, particularly if it were to be sent out in hard copy format. Issuing companies should not be required to send out the information of the meeting, unless formally requested to do so by the investor.
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8.2 Does the non-confirmation of vote execution hinder significantly the exercise of their voting rights? If so, should the proposals address the issue by defining obligations on issuers and securities intermediaries to provide and pass automatic confirmation of vote execution along the chain from the issuer to the ultimate investor?
We note that voters at parliamentary elections do not have the right to receive confirmation that their votes have been cast.
We would query whether this is a matter for legislation or whether in fact this should be part of contractual arrangements for those who wish to receive it (and not all shareholders will). This could have the potential to impose huge costs. The availability of confirmation may be desirable, provided that this does not impose such costs on companies. More research is needed on what is proposed and any impact.
If there is to be legislation, it should be limited to the right to receive confirmation, but should not attempt to prescribe how such confirmation should be given. This will allow the market to develop its own solutions and to adapt in the future as technology changes. We believe that possible solutions would most likely be contractual arrangements covering institutional shareholders only or allowing companies to make a minimum charge for providing the confirmation in order to cover their costs. The costs of providing paper confirmation would be huge but would be less for electronic confirmation. In any event, such information could not be distributed until after the general meeting has been completed.
But we do not think it desirable to provide for such solutions in legislation as this is a developing area and legislation would risk setting provisions in stone and preventing the market from developing its own solutions.
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The CBI: The Voice of Business
The CBI is the UK's leading business organisation, speaking for some 240,000 businesses that together employ around a third of the private sector workforce.
Member companies, which decide all policy positions, include:
- 80 of the FTSE 100
- some 200,000 small and medium-size firms
- more than 20,000 manufacturers
- over 150 sectoral associations.
No other UK organisation represents as many major employers, small and mediumsize firms or companies in the manufacturing or service sectors. As well as companies, the CBI also has within its membership investors, intermediaries, registrars, banks, and the London Stock Exchange. CBI members have been involved in UK corporate governance from the original Cadbury Report to the 2003 revision of the Combined Code.
With offices across the UK as well as in London, Brussels and Washington, the CBI coordinates British business representation around the world
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