FCA boosts private investor rights

Minority shareholders will have greater say in the governance of the companies they hold from mid-2014, if plans put forward by the Financial Conduct Authority (FCA) proceed unchanged.

The City watchdog has outlined changes to the listing regime, which it believes will not increase the regulatory burden on companies that comply with expected standards of behaviour, but will have a significant impact on those who deviate from them.

The 'package' of protections the FCA is proposing is designed to give minority shareholders additional voting powers and more influence in key decision-making.

All companies with a market share of £700 million and a controlling shareholder of 30 per cent or more will be affected by the regulation, which the FCA intends to implement in full in mid-2014.

Approximately half of the FTSE 100 index is thought to fulfil these criteria.

The FCA says its action has been prompted by concerns from the investment community regarding the governance of premium listed companies with a controlling shareholder and the protection of the interests of minority shareholders.

Examples of this include recent developments at Bumi and Eurasian Natural Resources Company, where large foreign investors were said to acting against minority shareholders wishes, impacting negatively on their share prices.

'Much of this debate has focused on the appropriate level of shares in public hands (the free float) for listed companies. In particular the investment community was concerned that where the interests of a controlling shareholder conflict with those of the minority, shareholders are likely to be disenfranchised due to their inability to participate effectively in the governance of the company,' the regulator explains.

Minority shareholders are not able to control more than 25 per cent of the total votes of the company, so some argue they are unable to ensure their views are properly reflected when important decisions are being taken.

This has led to some contributors to the FCA’s debate suggesting an increase in the minimum free float to as high as 50 per cent or even 70 per cent.

'Other stakeholders warned us of the potential for new measures in this area to impose disproportionate burdens on all companies, when in their view the vast majority of companies (including ones with controlling shareholders) are governed well.

'We were also warned that to significantly increase the general rights of minority shareholders risked turning minority protection into minority control,' the FCA adds.

The watchdog has decided not to increase the current requirement for 25 per cent of shares to be distributed to the public in European Economic Area states, constituting the free float.

Under the new rules, premium listed companies will have to document an agreement to regulate its relationship with a controlling shareholder. This includes ‘independence provisions’ to make sure the business remains independent of controlling shareholder influence.

If an inappropriate relationship arose between a premium listed company and a controlling shareholder enhanced, oversight measures would be activated and give minority shareholders the right to vote on all transactions between the controlling shareholder and the company, and veto them if they wish.

Minority shareholders will also be given additional voting power in the election of independent directors. The election of them will now be done through a 'dual voting structure', which means the independent directors must be separately approved by both the shareholders as a whole and independent shareholders as a separate class.

Finally, they will have enhanced powers for if a company tries to cancel its stock market listing.

The FCA says it believes the package will find broad support among both investors and listed companies, as there was general agreement across contributors that an essential part of effective governance was active engagement by all shareholders in their role as responsible shareholders of listed companies.

 This story was written by our sister website www.iii.co.uk

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