Shareholder rights and communications

The Act makes a range of significant changes to shareholder rights and communications, which thread through the different areas that the Act covers.
On the communications front, perhaps the most significant issue is the move to make electronic shareholder communications the default option.  Shareholder rights are boosted in a number of ways by the legislation, though, and these also have implications for shareholder communications.  One of the key changes relates to the exercise of shareholder rights by indirect investors – both information and voting rights.
Recent years have seen growing pressure to ensure that the beneficial owners of shares are not disenfranchised simply because they hold their shares through a nominee.  AGMs and voting rights are examined in detail on pp.12-13, but it’s important to note that the Act also allows a nominee shareholder to agree to pass on the information rights to the beneficial owner – and that includes the right to receive shareholder communications.
Interestingly, the electronic shareholder communications aspects of the Act in some ways reduce the pressure for indirect information rights, as more of that information will, one assumes, be posted online in any case.  It does, however, mean that any person with information rights can ask to receive hard copies of reports, notices of meting and so forth through the nominee.
Companies will be allowed to check on whether or not the beneficial owner wishes to retain information rights on an annual basis.  Any failure to respond to such a check within 28 days will mean that the company can assume that the rights have lapsed.
The Act also introduces a new statutory derivative claims procedure, enabling shareholders to sue a director or other party on behalf of the company.  This is intended to ease what was previously a pretty complicated and difficult claims procedure.
The fear, of course, has been that the new system would lead to a rush of claims against directors, particularly given the codification of directors’ duties in the Act (see pp.6-7).  There have been various stories in the press suggesting that various interest groups would use the new procedures to push a particular case, tying up valuable resources and executive time as companies fight each claim.  Whether this actually turns out to be the case remains to be seen, but there are several checks and balances in place to ensure that the number of claims is kept to a sensible level.
Perhaps the greatest barrier is the fact that court permission is required to continue a claim.  In the first instance, the claimant would need to produce clear evidence that there is a case to be heard; otherwise the court can dismiss the claim without requiring any evidence from the company.  Further hearings may follow that may require evidence from the company but there are significant barriers to shareholders being able to continue claims if it can be demonstrated that various procedures have been followed by the directors and/or the company and that the shareholder is not, for example, acting in good faith.
These checks and balances are designed to help companies and shareholders tread the fine line between making the process easier and keeping excessive or unmerited claims to a minimum.  As noted above, whether or not his works will only become evident once played out in the courts but there is certainly a view in the legal community that it should keep claims to a workable level.  Certainly, companies are being advised to introduce grievance procedures at board level, as these may then satisfy the court that a shareholder bringing an action is not acting in good faith.

Richard Carpenter, Development Director and corporate reporting consultancy and design agency Radley Yeldar

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