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  • Writer's pictureEddison Cogan Legal Team

Shareholders Rights and Activism

Updated: May 13

Overview

In the UK, the Companies Act 2006 (the Act) permits even shareholders with a relatively small proportion of a company’s equity to make their opinions known and thereby to influence the directors, decisions and direction of their company.

There are several types and channels of influence that can be exercised by shareholders:

  • The ability to join with other shareholders, including institutions so that small shareholders can be better informed;

  • The power of public opinion, especially in relation to publicly listed companies: The higher the profile of the company, the more publicity and influence shareholders are likely to generate, especially if an advocate can liaise with one or more journalists;

  • The ability to call and participate in general meetings;

  • The exercise of legal power through the ability to appoint and dismiss directors.

  • Influence can be exercised for two main goals, the promotion of environmental, social and governance (ESG) causes, and a proper focus on profitability, dividends and capital growth.


Legal and other sources of influence

The Act is the main source of power for shareholders (referred to in the Act as ‘members’) but legal sources of rights are often best combined with other mechanisms of engagement, for example privately via direct communication with Investor Relations departments, individual directors, the CEO, the board, or more publicly through chat boards, social media, press and media interviews.

As we shall see below, Section 90 of the Financial Services and Markets Act 2000 (FSMA), which grants shareholders who have suffered loss because of untrue or misleading statements or omissions in a prospectus a right to be compensated, can also be a powerful tool for shareholders.

Any shareholder can attend a company's general meetings and may use the opportunity to put questions to the board of directors and its chair.

Annual General Meetings

An AGM will include the election or re-election of the company's directors because the UK Corporate Governance Code requires that listed company directors be re-elected annually. In addition, the Investment Association's launching of a public register of FTSE All-Share companies, to show where those companies have had significant (20% or more) votes against any of their AGM resolutions, has increased scrutiny of these instances of shareholder dissent. A company that has a significant vote against any of its AGM resolutions is required by the UK Corporate Governance Code to explain, at the time of announcing the voting results, what consultation it will undertake with shareholders to understand the reasons behind the vote against, and will need to publish an update statement six months after that to describe what actions it has taken.

Removal of Directors

This can be a powerful lever for shareholders, and there is a statutory right for members to remove a director pursuant to section 168.

A director can be removed by a shareholder at general meeting by way of ordinary resolution, that is more than 50% of the hands raised or of votes if there is a poll. A shareholder wishing to propose the removal of a director must give special notice to the company of that proposal, and the company must then send a copy of the notice to the target director. The targeted director has the right to make representations.

Note that the articles may contain a clause (called a Bushell -v- Faith clause) which gives a director who is a shareholder multiple votes on a resolution to remove him/her – this may make it very difficult for a shareholder to remove a director. Once the meeting has been convened, the shareholders wishing to remove the director are entitled to get the resolution removing the director onto the general meeting agenda.

Who has the right to table a resolution?

At an Annual General Meeting (AGM) any number of members representing at least 5% of the total voting rights of all the members having a right to vote at the AGM; or not less than 100 members holding shares in the company on which there has been paid up an average sum per member of £100 or more (Section 314(2) of the Act).

At a General Meeting any persons who are entitled to requisition a general meeting under section 303 may at the same time specify a resolution to be included in the agenda at that meeting. Members holding not less than 5% of the paid-up capital that carries the right to vote at general meetings can requisition a general meeting (Section 303(2)). The requisition must state the general nature of the business to be dealt with at the General Meeting, that is, the nature of the resolution, and may include the text of a resolution to be proposed at that meeting. Pursuant to Section 168(1) the Board must ensure a copy of the notice is sent immediately to the director whose removal is proposed. Per Section 169(1) the director has the right to make written representations to shareholders and circulate a statement to them.

Companies Act – Shareholders Rights

Section 319A Traded companies: questions at meetings

(1) At a general meeting of a traded company, the company must cause to be answered any question relating to the business being dealt with at the meeting put by a member attending the meeting.

(2) No such answer need be given (a) if to do so would (i) interfere unduly with the preparation for the meeting, or (ii) involve the disclosure of confidential information; (b) if the answer has already been given on a website in the form of an answer to a question; or (c) if it is undesirable in the interests of the company or the good order of the meeting that the question be answered.

Sections 303–306 of the Act

These sections permit members holding 5% of paid-up share capital to requisition a general meeting and suggest the text of a proposed resolution.

Section 303 Members' power to require directors to call general meeting (1) The members of a company may require the directors to call a general meeting of the company.

(2) The directors are required to call a general meeting once the company has received requests to do so from (a) members representing at least 5% of such of the paid-up capital of the company as carries the right of voting at general meetings of the company (excluding any paid-up capital held as treasury shares)

(4) A request (a) must state the general nature of the business to be dealt with at the meeting, and (b) may include the text of a resolution that may properly be moved and is intended to be moved at the meeting.

(5) A resolution may properly be moved at a meeting unless (a) it would, if passed, be ineffective (whether by reason of inconsistency with any enactment or the company's

constitution or otherwise), (b) it is defamatory of any person, or (c) it is frivolous or vexatious. (6) A request (a) may be in hard copy form or in electronic form, and (b) must be authenticated by the person or persons making it.

304 Directors' duty to call meetings required by members

(1) Directors required under section 303 to call a general meeting of the company must call a meeting (a)within 21 days from the date on which they become subject to the requirement, and (b) to be held on a date not more than 28 days after the date of the notice convening the meeting.

(2) If the requests received by the company identify a resolution intended to be moved at the meeting, the notice of the meeting must include notice of the resolution.

(3) The business that may be dealt with at the meeting includes a resolution of which notice is given in accordance with this section.

(4) If the resolution is to be proposed as a special resolution, the directors are treated as not having duly called the meeting if they do not give the required notice of the resolution in accordance with section 283.

305 Power of members to call meeting at company's expense

(1) If the directors (a) are required under section 303 to call a meeting, and (b) do not do so in accordance with section 304, the members who requested the meeting, or any of them representing more than one half of the total voting rights of all of them, may themselves call a general meeting.

(2) Where the requests received by the company included the text of a resolution intended to be moved at the meeting, the notice of the meeting must include notice of the resolution.

(3) The meeting must be called for a date not more than three months after the date on which the directors become subject to the requirement to call a meeting.

(4) The meeting must be called in the same manner, as nearly as possible, as that in which meetings are required to be called by directors of the company.

(5) The business which may be dealt with at the meeting includes a resolution of which notice is given in accordance with this section.

(6) Any reasonable expenses incurred by the members requesting the meeting by reason of the failure of the directors duly to call a meeting must be reimbursed by the company.

(7) Any sum so reimbursed shall be retained by the company out of any sums due or to become due from the company by way of fees or other remuneration in respect of the services of such of the directors as were in default.

306 Power of court to order meeting

(1) This section applies if for any reason it is impracticable (a) to call a meeting of a company in any manner in which meetings of that company may be called, or (b) to conduct the meeting in the manner prescribed by the company's articles or this Act.

(2) The court may, either of its own motion or on the application (a) of a director of the company, or (b) of a member of the company who would be entitled to vote at the meeting, order a meeting to be called, held and conducted in any manner the court thinks fit.

(3) Where such an order is made, the court may give such ancillary or consequential directions as it thinks expedient.

(4) Such directions may include a direction that one member of the company present at the meeting be deemed to constitute a quorum.

(5) A meeting called, held and conducted in accordance with an order under this section is deemed for all purposes to be a meeting of the company duly called, held and conducted.

Sections 314–317 of the Act

These sections permit members to require the circulation of a statement of up to 1,000 words regarding a matter to be dealt with at a general meeting and can, under Section 527 of the Act, require the company to publish a statement on its website about audit matters.

314 Members' power to require circulation of statements

(1) The members of a company may require the company to circulate, to members of the company entitled to receive notice of a general meeting, a statement of not more than 1,000 words with respect to (a) a matter referred to in a proposed resolution to be dealt with at that meeting, or (b) other business to be dealt with at that meeting.

(2) A company is required to circulate a statement once it has received requests to do so from (a) members representing at least 5% of the total voting rights of all the members who have a relevant right to vote (excluding any voting rights attached to any shares in the company held as treasury shares), or (b) at least 100 members who have a relevant right to vote and hold shares in the company on which there has been paid up an average sum, per member, of at least £100.

See also section 153 (exercise of rights where shares held on behalf of others).

(3) In subsection (2), a “relevant right to vote” means (a) in relation to a statement with respect to a matter referred to in a proposed resolution, a right to vote on that resolution at the meeting to which the requests relate, and (b) in relation to any other statement, a right to vote at the meeting to which the requests relate.

(4) A request (a) may be in hard copy form or in electronic form, (b) must identify the statement to be circulated, (c) must be authenticated by the person or persons making it, and (d) must be received by the company at least one week before the meeting to which it relates.

315 Company's duty to circulate members' statement

(1) A company that is required under section 314, to circulate a statement must send a copy of it to each member of the company entitled to receive notice of the meeting (a) in the same manner as the notice of the meeting, and (b)at the same time as, or as soon as reasonably practicable after, it gives notice of the meeting.

(2) In the event of default in complying with this section, an offence is committed by every officer of the company who is in default.

(3) A person guilty of an offence under this section is liable (a) on conviction on indictment, to a fine; (b) on summary conviction, to a fine not exceeding the statutory maximum.

316 Expenses of circulating members' statement

(1) The expenses of the company in complying with section 315 need not be paid by the members who requested the circulation of the statement if (a)the meeting to which the requests relate is an annual general meeting of a public company, and (b) requests sufficient to require the company to circulate the statement are received before the end of the financial year preceding the meeting.

(2) Otherwise (a) the expenses of the company in complying with that section must be paid by the members who requested the circulation of the statement unless the company resolves otherwise, and (b) unless the company has previously so resolved, it is not bound to comply with that section unless there is deposited with or tendered to it, not later than one week before the meeting, a sum reasonably sufficient to meet its expenses in doing so.

317 Application not to circulate members' statement

(1) A company is not required to circulate a members' statement under section 315 if, on an application by the company or another person who claims to be aggrieved, the court is satisfied that the rights conferred by section 314 and that section are being abused. (2) The court may order the members who requested the circulation of the statement to pay the whole or part of the company's costs (in Scotland, expenses) on such an application, even if they are not parties to the application.

Sections 338–340 of the Act

These sections permit members of public companies who hold 5% (or at least 100 members who have a right to vote and hold shares on which an average of at least £100 per member is paid up) to require resolutions to be put before an annual general meeting.

These provisions can include a resolution for the appointment of a new, activist-nominated director 338 Public companies: members' power to require circulation of resolutions for AGMs

(1) The members of a public company may require the company to give, to members of the company entitled to receive notice of the next annual general meeting, notice of a resolution which may properly be moved and is intended to be moved at that meeting.

(2) A resolution may properly be moved at an annual general meeting unless (a) it would, if passed, be ineffective (whether by reason of inconsistency with any enactment or the company's constitution or otherwise), (b) it is defamatory of any person, or (c) it is frivolous or vexatious.

(3) A company is required to give notice of a resolution once it has received requests that it do so from(a) members representing at least 5% of the total voting rights of all the members who have a right to vote on the resolution at the annual general meeting to which the requests relate (excluding any voting rights attached to any shares in the company held as treasury shares), or (b) at least 100 members who have a right to vote on the resolution at the annual general meeting to which the requests relate and hold shares in the company on which there has been paid up an average sum, per member, of at least £100.

See also section 153 (exercise of rights where shares held on behalf of others).

(4) A request (a) may be in hard copy form or in electronic form, (b) must identify the resolution of which notice is to be given, (c) must be authenticated by the person or persons making it, and (d) must be received by the company not later than (i) 6 weeks before the annual general meeting to which the requests relate, or (ii) if later, the time at which notice is given of that meeting.

338A Traded companies: members' power to include other matters in business dealt with at AGM

(1) The members of a traded company may request the company to include in the business to be dealt with at an annual general meeting any matter (other than a proposed resolution) which may properly be included in the business.

(2) A matter may properly be included in the business at an annual general meeting unless (a) it is defamatory of any person, or (b)it is frivolous or vexatious.

(3) A company is required to include such a matter once it has received requests that it do so from (a) members representing at least 5% of the total voting rights of all the members who have a right to vote at the meeting, or (b) at least 100 members who have a right to vote at the meeting and hold shares in the company on which there has been paid up an average sum, per member, of at least £100. See also section 153 (exercise of rights where shares held on behalf of others). (4) A request (a) may be in hard copy form or in electronic form, (b) must identify the matter to be included in the business, (c) must be accompanied by a statement setting out the grounds for the request, and (d) must be authenticated by the person or persons making it.

(5) A request must be received by the company not later than (a) 6 weeks before the meeting, or (b)if later, the time at which notice is given of the meeting.

339 Public companies: company's duty to circulate members' resolutions for AGMs

(1) A company that is required under section 338 to give notice of a resolution must send a copy of it to each member of the company entitled to receive notice of the annual general meeting (a) in the same manner as notice of the meeting, and (b) at the same time as, or as soon as reasonably practicable after, it gives notice of the meeting.

(2) Subsection (1) has effect subject to section 340(2) (deposit or tender of sum in respect of expenses of circulation).

(3) The business which may be dealt with at an annual general meeting includes a resolution of which notice is given in accordance with this section.

(4) In the event of default in complying with this section, an offence is committed by every officer of the company who is in default.

(5) A person guilty of an offence under this section is liable (a) on conviction on indictment, to a fine; (b) on summary conviction, to a fine not exceeding the statutory maximum.

340 Public companies: expenses of circulating members' resolutions for AGM

(1) The expenses of the company in complying with section 339 need not be paid by the members who requested the circulation of the resolution if requests sufficient to require the company to circulate it are received before the end of the financial year preceding the meeting.

(2) Otherwise (a) the expenses of the company in complying with that section must be paid by the members who requested the circulation of the resolution unless the company resolves otherwise, and (b) unless the company has previously so resolved, it is not bound to comply with that section unless there is deposited with or tendered to it, not later than (i) six weeks before the annual general meeting to which the requests relate, or (ii) if later, the time at which notice is given of that meeting, a sum reasonably sufficient to meet its expenses in complying with that section.

Section 979

At shareholdings above specific levels, members may have the power to block resolutions or decisions, for example, those holding more than 10% can block the squeeze-out of minority holdings following a takeover offer. Members holding more than 25% can of course block a Special Resolution in a general meeting (which requires a 75% majority) as well as being able to block an attempted takeover by way of Scheme of Arrangement. 979 Right of offeror to buy out minority shareholder

(1) Subsection (2) applies in a case where a takeover offer does not relate to shares of different classes. (2) If the offeror has, by virtue of acceptances of the offer, acquired or unconditionally contracted to acquire (a) not less than 90% in value of the shares to which the offer relates, and (b) in a case where the shares to which the offer relates are voting shares, not less than 90% of the voting rights carried by those shares, he may give notice to the holder of any shares to which the offer relates which the offeror has not acquired or unconditionally contracted to acquire that he desires to acquire those shares.

(3) Subsection (4) applies in a case where a takeover offer relates to shares of different classes.

(4) If the offeror has, by virtue of acceptances of the offer, acquired or unconditionally contracted to acquire (a) not less than 90% in value of the shares of any class to which the offer relates, and (b) in a case where the shares of that class are voting shares, not less than 90% of the voting rights carried by those shares, he may give notice to the holder of any shares of that class to which the offer relates which the offeror has not acquired or unconditionally contracted to acquire that he desires to acquire those shares.

Section 994 Conduct Unfairly Prejudicial and Section 260 994 Petition by company member (1) A member of a company may apply to the court by petition for an order under this Part on the ground (a) that the company's affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least himself), or (b) that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.

(1A) For the purposes of subsection (1)(a), a removal of the company's auditor from office (a) on grounds of divergence of opinions on accounting treatments or audit procedures, or (b) on any other improper grounds, shall be treated as being unfairly prejudicial to the interests of some part of the company's members. Section 260 claims against a director (or shadow director) for breach of fiduciary duty Under certain circumstances, a member may also bring a derivative claim against the directors of a company under Section 260 of the Companies Act. This is a means by which the court may use its discretion to permit a member of the company to bring a claim on behalf of the company itself for certain wrongs committed by the directors.

260 Derivative claims

(1) This Chapter applies to proceedings in England and Wales or Northern Ireland by a member of a company (a) in respect of a cause of action vested in the company, and (b)seeking relief on behalf of the company. This is referred to in this Chapter as a “derivative claim”.

(2) A derivative claim may only be brought (a)under this Chapter, or (b) in pursuance of an order of the court in proceedings under section 994 (proceedings for protection of members against unfair prejudice).

(3) A derivative claim under this Chapter may be brought only in respect of a cause of action arising from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company. The cause of action may be against the director or another person (or both).

(4) It is immaterial whether the cause of action arose before or after the person seeking to bring or continue the derivative claim became a member of the company. (5) For the purposes of this Chapter (a) “director” includes a former director; (b) a shadow director is treated as a director; and (c) references to a member of a company include a person who is not a member but to whom shares in the company have been transferred or transmitted by operation of law.

Aggrieved Groups of Shareholders

Aggrieved investors who believe that they have suffered losses due to a listed company falling short of its obligations to provide accurate and timely disclosure of matters relating to its securities may take action pursuant to the Financial Services and Markets Act 2000 (FSMA).

Section 90 of the FSMA grants shareholders who have suffered loss because of untrue or misleading statements or omissions in a prospectus a right to be compensated, regardless of the shareholder's ability to show reliance on the prospectus in question. Section 90A FSMA permits similar actions for market announcements but requires the claimant to show reliance.

Under both sections, compensation is paid directly to the claimant. The cost of litigation (in time, money and emotional costs) usually makes these kinds of actions more suitable when undertaken by an activist acting in collaboration with a group of shareholders. However, institutional investors are showing some willingness to engage in this kind of action, for example in the action brought under Section 90A FSMA against Tesco plc in respect of a 2014 market announcement of income and trading profits.

Another example was the claim brought by thousands of institutional and retail investors against RBS under Section 90 FSMA, alleging that the prospectus from its 2008 rights issue did not properly and fairly present the bank's financial position and omitted relevant information.

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