- ShareSoc and the UK Shareholders’ Association, who represent individual investors in the UK, welcome the Treasury Report on Secondary Market Placings.
- The recommendations, when implemented, will help to create a more level playing field for individual investors.
- The report also highlights the problems of disenfranchisement faced by retail shareholders in nominee accounts and proposes new systems which will allow retail investors to participate on fair terms in placings and fund raisings.
The UK Shareholders’ Association said:
“The UK Shareholders’ Association fully supports the Review’s recommendations. They are clear, practical and implementable. Many address issues which are long overdue for reform. We particularly like the proposals which will help to ensure that companies can raise capital quickly and efficiently, without incurring unnecessary cost and without compromising shareholder protections and pre-emption rights.
We also like the proposal that retail shareholders should be involved in all capital raisings. This, coupled with a call for ‘an ambitious drive to dematerialisation’, really does move the secondary capital raisings’ regime into the twenty-first century.”
“ShareSoc, which represents individual shareholders, is pleased with the report.
ShareSoc Director Cliff Weight commented, ‘The proposals regarding fund raising are helpful. We are delighted with the recommendations for restoring shareholder rights, about which we have campaigned since ShareSoc was formed in 2011. When the Review’s recommendations are implemented, individual investors will be able to participate more easily and equitably in fund raisings. Scope for them to exercise their shareholder rights will be improved and, as a result, so will corporate governance.’”
HM Treasury announced this review in November 2021 – Click here
HM Treasury issued the report on 19th July to coincide with the Chancellor’s speech at the Mansion House Dinner.
The report is now published and is 266 pages. Here is the link plus a few comments from others….Happy reading.
ShareSoc particularly like the recommendations on page 157:
Recommendation: Section 793 of the Companies Act 2006 should be amended to additionally require disclosure of the identity of the ultimate investment decision maker or beneficial owner in relation to a share
9.56 In this regard, key requirements for accelerated fundraising structures are that the medium of communication involved in a s793 request enables investors to be contacted quickly and that the information goes beyond the legal holder to the decision maker in respect of the shares. We would therefore recommend the following:
(a) Decision-maker: The Companies Act 2006 should explicitly set out that a company may request information on the decision maker in respect of shares it has issued.
(b) Contact details: ‘Contact details’ of the person interested in the shares should relate to both the legal holder and the decision maker specified above and should include an electronic means of communication in both instances, including an email address at a minimum.
(c) Delegation: There should be a formal mechanism for a company to delegate the ability to request information to a third party.
and on page 18-20:
Raise the priority of an ambitious ‘drive to digitisation’ to facilitate innovation, stewardship and improved market infrastructure, which is actioned by a Digitisation Task Force with an independent chair and a clear set of principles to be followed
21. Moving to a system where all shareholders – both institutional and retail – hold their shares in fully digitised form will be of huge benefit to the UK capital markets if done effectively. An appropriate legal and regulatory framework could significantly improve the effectiveness of existing listing regime protections, contribute to better stewardship outcomes and lead to better engagement between issuers and their investors. It would also allow the full benefits of many of the recommendations in this Review to be realised and, in some cases, the fundraising structures made even more efficient.
However, despite the significant amount of time that has been spent in recent years considering what digitisation should mean and how to implement it, a combination of factors have contributed to a lack of progress.
Despite the vast majority of publicly traded shares being held in dematerialised form, the need to accommodate manual, paper-based processes for the residual certificated shareholder base leads to inefficiencies and increased cost for issuers and investors. And whilst the intermediated shareholding system that the UK capital markets currently has brings advantages in the form of efficiencies and economies of scale and can make trading quicker, cheaper and more convenient, cost and efficiency have arguably been prioritised over corporate governance and transparency, particularly in relation to retail investors. This should be addressed as all beneficial holders of shares, whether institutional or retail, should be able to exercise their shareholder rights effectively and efficiently.
The practice of investors holding certificates can and should be eradicated, in a way which preserves their rights to vote, receive information and participate in corporate actions. Similarly the current intermediated securities chain from central securities depository to end retail investor has, if approached with ambition and commitment, significant potential for reform and improvement. However, it is clear that a voluntary framework is unlikely to be effective and progress is more likely to be secured through imposing formal obligations on intermediaries to notify and provide underlying beneficial owners with the option to attend meetings, vote, receive information and participate in fundraisings, for example.
Going further, the implementation of the Shareholder Rights Directive II could be revisited so that the provisions facilitating the identification of shareholders, transmission of information and the exercising of shareholder rights could be applied to the underlying beneficial owner of a share as well as to the legal owner whose name is included on the company’s shareholder register.
While both of the above could form steps in a digitisation process, digitisation should ultimately involve creating a system to provide near real-time transparency on investment decision makers and share owners. It may involve substantial changes being made to the current structure, including clarifications and revisions from a legal perspective that have already been identified. The use of innovative technologies, such as distributed ledger technology, should be explored alongside tried and tested technologies which could create more efficient shareholder engagement, such as online presentations, app-based platforms and online and automated telephone-based payments.
In any event, the move to an ambitious digitised shareholding system should be made more of a priority. It is a key part of the UK positioning itself as a pro-innovation jurisdiction. It can and should be seen as a key component of the effective implementation of the Government’s and the FCA’s commendable innovation and ESG agendas. In particular, it could be brought together with the Bank of England and FCA’s Financial Market Infrastructure Sandbox that was announced last year – for example, the criteria for MTFs applying to test in the FMI Sandbox could include how the MTF’s DLT settlement arrangements could facilitate beneficial owners exercising their shareholder rights.
To put it bluntly, the recommendations in this Review to make fundraising structures quicker and cheaper and to involve all shareholders, including retail, meaningfully in every fundraise will only be fully realised if the UK securities holding model is updated to ensure it does not prevent issuers from understanding the detailed make-up of their investor base and all end investors from being able to exercise their shareholder rights in an effective and efficient way.
The drive to an ambitious digitised shareholding structure should be coordinated and driven by a newly established Digitisation Task Force, with an independent chair to head it and a technically experienced second-in- command – who have no ‘skin in the game’ – similar to the Bank of England Settlement Task Force headed by Pen Kent and Iain Saville that was established to drive the adoption of CREST. The principles and terms of reference that the Digitisation Task Force is to follow should be agreed and clearly set out at the point of its establishment. The exercise will require strong commitment across both regulatory and governmental authorities as well as across the market.
The arrangements between issuers, registrars, clearing systems and banks for the holding and settlement of securities is often referred to as the ‘plumbing’ that underpins the effective and efficient functioning of the UK capital markets. The pipes between these entities that enable, in particular, retail investors to exercise their shareholder rights need to be updated and modernised where necessary to create a shareholding system in the UK that works equally well for all shareholders as well as issuers.
Now is the perfect time to turbo charge this ambitious drive to digitisation – which is likely to have to happen piecemeal rather than in one big bang given the complexity involved – and to position the UK markets as the innovation leader in this area, as is already happening with listing regime reform and in relation to crypto and financial market infrastructure more generally.
Implementation: HMT / BEIS Timetable: Near term
This is an official ShareSoc News Item written by ShareSoc Director, Cliff Weight.