Shareholders wanting to work together on “ad-hoc governance strategies” are unlikely to fall foul of the UK’s Financial Services Authority (FSA).
In a “safe harbour” letter to the Institutional Shareholders’ Committee, the FSA’s Sally Dewar sets out how its rules apply to shareholders wanting to work together to promote effective corporate governance in investee companies. Very specifically, the FSA says that its requirements “do not prevent legitimate activity of this nature.”
The FSA wrote the letter in response to concerns raised by investor trade association following Sir David Walker’s proposals to strengthen shareholder engagement. In a speech given in May, Hector Sants, FSA chief executive, said: “Investors also need to challenge management to ensure their plans are credible. A lesson for investors from this crisis must be that greater interrogation of how well a company is managed and the adequacy of its risk controls are all material factors fundamental to investment management. A focus of a firms’ risk-control framework must be an effective risk and audit committee and knowledgeable non-executives with a willingness to challenge senior management. Investors must play a role in ensuring such a framework is in place and effective.”
The FSA has set out its approach on the three key areas of its rules:
- The market abuse rules do not prevent investors from engaging collectively with the management of an investee company. However, trading on the basis of knowing another investor’s intentions or working jointly to avoid disclosure of shareholdings could constitute market abuse;
- FSA rules on disclosure of major shareholdings require that investors who have agreed to pursue the same long-term voting strategy should aggregate their shareholdings when considering whether their shareholdings reach the threshold for disclosure (3% of a company’s shares). However, this disclosure would be unlikely to be triggered by ad hoc discussions between investors on particular corporate issues; and
- Under the EU Acquisitions Directive that was implemented earlier this year, where investors are “acting in concert” they require FSA approval if they reach a controlling shareholding (10% or more of a company’s shares) in a regulated firm. “Acting in concert” is not defined in the Directive but the FSA does not view the requirement as preventing ad hoc discussions or understandings between investors that are intended solely to promote generally accepted principles of good corporate governance in firms in which they have invested.
Commenting on the letter, Alexander Justham, FSA director of markets, said: “There is nothing under FSA rules that prevents investors discussing matters when it is for a legitimate purpose. Our letter provides clarity to investors that they are free to engage with the boards of companies as Sir David Walker envisaged.”