Nominee Accounts
ATTENDING AND VOTING AT GENERAL MEETINGS IF YOU ARE IN A NOMINEE ACCOUNT

It is important to emphasise that only “Members” of the company are guaranteed the right to attend any General Meetings and vote on resolutions put to members. Members will be listed on the share register and only those who hold their shares in either paper certificate form or are “Personal Crest Members” will be listed in the register. If you hold shares in the nominee account of a stockbroker, you will not be on the share register and you are not a “Member” of the company. You are only the “Beneficial Owner” of the shares.

The shares held on your behalf (and for other clients) by stockbrokers in a nominee account are typically “pooled” and there will be one entry in the register for all of them, in the stockbroker’s name. The company will therefore not know you and will not recognise you as a shareholder. Indeed they will definitely not allow you to vote directly, and can bar you from attending or speaking at General Meetings. There is an alternative to “pooled” nominees used by very few stockbrokers which are “designated” nominee accounts, but the shares are still in essence held in the nominee’s name.

Attending a General Meeting

Many companies will allow you to attend at General Meetings if you sign in as a “Guest”, even if you are not a beneficial shareholder – but this is purely at their discretion. They may still prevent you from asking questions or speaking (do not assume the Chairman will waive that restriction as some do!). It is worthwhile checking with the company beforehand on their policy in regard to “Guests” if you wish to attend a Meeting – small companies are often more flexible than big ones. If you are a shareholder in a nominee account, you must get a “Letter of Representation” or “Proxy” from your stockbroker – see below – if you wish to speak or vote.

If there is a “show of hands” vote on the resolutions at a General Meeting (as normally takes place), any “Guests” should not be putting their hands up of course as they have no rights to vote! For this reason some companies issue “voting cards” to members so non voters can be recognised when a vote takes place.

Voting at a General Meeting

How do you get to vote if your shares are in a nominee account? First bear in mind that if you are holding shares in a nominee account, only your stockbroker can in theory vote those shares (because it is their name on the register).

However, there are three ways that in practise enable you to exercise a vote, and the first two involve getting the voting rights assigned to you. These are:

1. By the broker appointing you as their proxy for the number of shares for which you are the beneficial owner. Such a proxy will normally enable you to attend the Meeting also, and would need to be lodged with the registrar a few days before the relevant Meeting (and a copy supplied to you which you can present if you attend the Meeting).

2. By obtaining a “letter of representation” from the broker in respect of the number of shares for which you are the beneficial owner. This is equivalent in some ways to a proxy appointment. This also will enable you to attend the Meeting and vote as if you were the owner of the shares at that Meeting (if a poll is called or on a “show of hands” vote).

The third way to vote is via a mechanism that some brokers have introduced where you can notify them how you wish to vote and they will submit a proxy form to the company (instructing the Chairman how to vote on their behalf). You will of course realise that the broker might get conflicting instructions from their various clients, but this can now be handled because the broker can vote so many shares “for” a resolution and so many shares “against” (i.e. they can split their total votes depending on the number of “instructions” they receive, ignoring the votes where they receive no instructions). But you will still need a separate “letter of representation” or a copy of the proxy form if you wish to attend a Meeting in person.

Only a few brokers offer this voting facility on an automatic basis at present (along with information provision also because unless you receive the documents issued by the company you may not know how to vote) – the ones we know of are Brewin Dolphin, Killik & Co., Natwest Stockbrokers, TD Waterhouse and The Share Centre.
If none of the above mechanisms are used, then your broker may simply not vote your shares (or in some cases they might even make their own minds up on how to vote).

To determine which of the above facilities might be available to enable your vote to be exercised, you should contact your stockbroker, or examine the contract terms that they have put in place. There may be a charge for issuing a proxy letter or letter of representation, but the third way (if available) is usually free of charge.
If there is a really critical vote, or your shares are held by a stockbroker who has not “enfranchised” their clients (i.e. enabled voting via one of the above means), then you may want to “re-materialise” your holding into a share certificate or transfer it into a Personal Crest Account so that you are on the share register – but this can take many days to do. Whatever you decide to do, bear in mind that you have to sort this matter out several days before the actual Meeting, to ensure the company receives a proxy vote in time. Any received after the deadline (which is a few days before the meeting) will be ignored, with no exceptions.

Contrast the problems above with the situation where you hold shares in a Personal Crest Account (or in certificated form, although in the modern era the former is much better in most respects). In that case you can turn up at any General Meeting and be recognised as a member (i.e. a shareholder with voting rights).

Indeed you don’t even need to remember to bring with you the meeting registration form that some larger PLCs issue because the registrar can always check your name is on the register (they bring a copy to the meeting) and any reasonable proof of identity will suffice – although you probably won’t even be asked to show one.
Another possible way to ensure you can attend meetings, even if your holding is primarily in a nominee account, is to buy a small number of shares and hold them in certificated form or in a Personal Crest Account. Indeed one share will suffice. That will also ensure you get notices from the company as all other members do, and it will enable you to get into the meeting, speak or ask questions, but you can only vote for those shares you hold in that form of course.

A further alternative is of course to identify a shareholder who is on the register, and ask them to appoint you as their proxy (instead of the default of the “Chairman”). By submitting the proxy form to the company, naming you as their proxy, this gives you the right to attend the meeting (and speak at it). The person making you their proxy, can put their voting instructions on the form, or leave it blank so you can use your discretion if a poll is called. Obviously though if you are representing a shareholder as proxy, that normally means they cannot also attend and vote themselves.

Can these arrangements be changed after you have submitted a proxy form? In summary yes. A later proxy form is usually taken to replace an earlier one when received by the registrars.

Incidentally if you have submitted a proxy form as a member, naming the Chairman as your proxy before a meeting, you can of course still attend the meeting in person. You can also change your vote if a poll is called. If you are on the register it is always worthwhile submitting a proxy vote naming the Chairman (of the meeting) in case you cannot attend the meeting due to a last minute problem.

If you understand all the above, you will understand why ShareSoc recommends Personal Crest Accounts, and for those accounts that have to be in nominees (such as ISAs) that you choose one of the brokers who do enfranchise their shareholders. However ShareSoc would like to see company law changed to simplify this whole area and ISA users not be forced into nominee accounts. At present most shareholders in nominee accounts are disenfranchised – they don’t know how to vote, or simply cannot, and usually don’t receive information about a company’s affairs. These are key elements of our policy manifesto.

If you wish to do something about the enfranchisement of nominee shareholders, please make sure you join ShareSoc and support our campaign on this issue.

The following article was published in the ShareSoc Informer Newsletter in May 2013 and spells out the rights taken away by the use of nominee accounts, and why they are so damaging to the interests of investors.

Are you a shareholder? Probably not.

The vast majority of individual shareholders in public companies hold their shares in nominee accounts, i.e. in accounts created by their stockbrokers to record their interest in the shares of companies. Does that mean that in law you are a member of the company with all of the rights and protections provided by Company Law (i.e. under the Companies Act 2006)? The simple answer is no!

This legal position was reinforced by a recent High Court judgement in the case of Eckerle and others versus Wickeder Westfalenstahl GmbH. Mr Eckerle (who was represented by ASB Law) opposed the re-registration of the latter company from being a public company to a private company. There is a little known provision in the Companies Act that enables a holder of more than 5% of the shares in a company to oppose such re-registration as being prejudicial to the financial interests of a minority, by application to the Court.

The defendants (represented by Orrick Herrington & Sutcliffe) simply argued that the plaintiffs had no legal standing in law because they were not “members” of the company (i.e. not shareholders on the share register), and that claim was upheld by the court. Therefore the application was rejected.

Wickeder Westfalenstahl was a company registered in England but formerly traded on a German stock exchange. As is common in Germany, all the shares in the company were actually held by a bank as trustee with the interests of individual shareholders being recorded by them, i.e. they acted as the nominee operator and simply recorded the “beneficial interest” of individual shareholders in their trust records.

The lawyers for Mr Eckerle argued that he was enfranchised by the Company’s Articles of Association and section 145 of the Companies Act. However, the Court determined that the Articles of Association could not be interpreted that widely. This left Mr. Eckerle without redress as a minority shareholder.

Mr Justice Norris stated that this was not a particularly comfortable decision for him to make as it deprived the claimants, as indirect investors, of the sort of protection which those who formulated the Act thought ought to be extended to minority shareholders.

Now you might think that this is of academic interest, or unlikely to be something that will concern you. But that is not the case, for anyone who invests in smaller quoted companies.

For example, consider the recent events at VSA Capital Group which was an AIM listed company and the subject of a delisting proposal. There are more details of what happened at that company in a separate report on our blog and in the ShareSoc Newsletter. The directors narrowly won the delisting vote, mainly because a number of shareholders in nominee accounts seemed to have difficulty in voting, or their votes were delayed and hence not counted. In many respects, the vote was questionable. Now another provision of the Companies Act (Sections 342/343) enables any shareholder (or group of shareholders) with more than 5% to apply for an independent review of a vote. But obviously in this case with shareholders mainly in nominee accounts, they may have no legal standing to do so!

Would the nominee operator do so on their behalf? Probably not because although they might have a legal responsibility to vote as requested by the beneficial owner (as applies to ISA accounts for example), they have no duty to take wider action.
In practice VSA Capital Group might now choose to convert to a private company and there would be little to stop them, based on the above precedent.

So in essence, the nominee system not only makes it difficult for shareholders to vote (and act as owners of the company which is what in essence they are), but it also fatally undermines your rights as a shareholder.

Use a Personal Crest Account rather than a Nominee Account

There is one simple answer to this problem that all shareholders should be aware of:

Do not hold your shares in a nominee account. Hold your shares so that you appear on the share register of the company. You can guarantee this by holding a paper share certificate (not particularly recommended in the modern age), or by being a Personal Crest Member (which is highly recommended). The latter is an electronic share registration system which operates similarly to a nominee account and is usually no more expensive. However only a limited number of stockbrokers support such accounts – some of them are Charles Stanley (not CS Direct), Brewin Dolphin (inc Stocktrade), Killik, Redmayne Bentley and W.H. Ireland (you can find a complete list by using the search facility on the Wealth Management Association’s web site here: www.thewma.co.uk/buy-and-sell-shares/find-a-firm ).

Investment Laws and Regulations need changing

That still leaves the problem of ISA and SIPP accounts which currently have to be in nominees. ShareSoc would like to see this situation changed by revision of the relevant Regulations. Please support our stance on this matter.

There should also be a new “name on register” electronic system to replace share certificates, as is being mandated by the EU as part of the “dematerialisation” proposals to ensure all share trading is done electronically.

Investors should be warned

ShareSoc would also like to see all clients of stockbrokers being warned about the dangers of nominee accounts when they open accounts. Apart from the issues covered above, most nominee accounts are “pooled” with no clear identification of individual holdings. This can create enormous difficulties when stockbrokers get into financial trouble and go into administration or liquidation – not an uncommon event in reality. Often there are poor records and an inadequate reconciliation of holdings in the nominee name (and hence on the register of the company) with individual holdings. It sometimes takes years to sort out who owns what, with some shortfalls also common.

Summary

To summarise, although ShareSoc encourages investors to invest directly in companies, and act like owners, if you are in a nominee account you are not legally a shareholder. You are simply someone who holds an indirect interest as a “beneficial owner”, i.e. you are entitled to receive any dividends that result, can buy or sell that interest, and may be able to instruct your nominee operator how to vote, but you do not have all of the rights afforded to registered members and your interests may not be protected by the Companies Act as you may otherwise have thought.

This is not only dangerous to your legal claim on those shares, but also fatally undermines your rights as an investor.

Please support ShareSoc to get this changed. Note that ShareSoc has launched a campaign to improve shareholder rights and tackle the problems associated with the nominee system – see this web page for more information: Shareholder-Rights