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Published 6 August 2020
On 13 March 2020 the High Court of Justice sanctioned a recommended cash offer by Anglo American PLC for the entire issued and to be issued share capital of Sirius Minerals PLC, to be effected by a scheme of arrangement.
At the sanctioning hearing, a number of small and unsophisticated investors holding shares in dematerialised form via nominees argued that the offer would lead them to suffer substantial losses on their investments.
The investors had purchased the shares in late 2018 and early 2019, when the shares were trading at around 20 pence or more per share.
Anglo American’s offer was 5.5 pence a share, a significant drop from the price at which investors had bought, but nevertheless at a premium to the pre offer price of around 3 to 4 pence per share.
A registered member of Sirius Minerals and former director of the UK Individual Shareholders Society opposed the scheme arguing that “tens of thousands” of small and unsophisticated investors were not involved in the voting process on the basis that they held a beneficial interest in the shares, as opposed to legal ownership.
Distinguishing between beneficial and legal ownership is critical when it comes to voting rights: under English law, a company recognises only the legal owner (i.e. the person whose name appears on the share register). The share register records as members those with legal title to the shares and the beneficial and ultimate owners will never appear on the register. A consequence of this is that only members are entitled to and receive documentation, including voting papers, that are sent to shareholders.
An investor who purchases dematerialised shares via a nominee only owns a beneficial interest in the shares and is therefore not a member of the company.
Large numbers of investors, including individuals, institutions, and funds, purchase shares in dematerialised form (i.e. electronic), rather than traditional paper shares, from banks, brokers, ISA companies, and financial institutions, known as nominees or custodians. Only long standing shareholders are likely to have paper certificates and be registered members.
In the UK, CREST is the electronic settlement system for shares traded on the Main Market or AIM. Electronic shares are recorded under the nominees and custodians’ names (also known as CREST members). CREST members are entered into the companies’ register of members and are the legal owners of the shares. There is no reason why an individual cannot have their own CREST account in which case they would be both the legal and beneficial owner of the shares. However, this is unusual save for large or active investors. The large majority of individual shareholders hold through a nominee, which is the cheaper option.
Nominees have a duty to contact the beneficial owners if the arrangement between the two requires it and seek instructions as to how the shares should be voted. Since nominees act as intermediaries between the company and the beneficial owners, even if it were the case that a nominee would fail to carry out voting instructions given by a beneficial owner, the latter would not have the right to complain to the company as it would not have the benefit of a direct contractual relationship. The complaint would be against the nominee to recover any loss that might have been suffered. The company can only recognise the legal owner of the shares.
In the case of Sirius Minerals, sanctioning the scheme was the lesser of two evils. After having unsuccessfully attempted to obtain new financing, the company would have burnt through its cash by the end of March 2020, leaving shareholders with nothing. The case, however, highlighted the difficulties experienced by beneficial owners in having a say on how a company’s business is conducted. After all, it is the beneficial owners, not the legal owners, who bear the cost of the investment and have the economic interest in the shares .
There is no reason why beneficial owners should be disadvantaged as they could have an arrangement with their nominee that they will be sent all communications from the company and that the nominee will act on their instructions. This may not be acceptable to certain nominees for administrative reasons or because of cost. It is easier to agree that a nominee will vote in accordance with instructions from a beneficial owner without the nominee having the obligation to forward documentation. This would require a beneficial owner to keep up to date with company announcements, which should not be difficult.
In August 2019, the Law Commission published a Call for Evidence, inviting consultees to answer 28 questions on the difficulties associated with dematerialised securities.
The Call for Evidence closed on 5 November 2019 and the Law Commission aims to publish a scoping study in autumn 2020. The study will inform public debate, develop a broad understanding of potential options for reform and seek a consensus about issues to be addressed in the future.
A number of responses by consultees are available on the internet. For example, see The City of London Law Society Response to the Law Commission’s Consultations on Intermediated Securities.
Consultees opposing a change in the law argued that because a substantial number of listed companies have large pools of beneficial owners (based in the UK and overseas), a requirement to trace and contact each one of them would constitute an excessive burden.
Consultees recommended, as an alternative, tightening the regulatory landscape by ensuring that effective and transparent communication between nominees and beneficial owners takes place.
If you require advice on shareholders’ rights or other areas of corporate law, please feel free to contact Clive Garston.
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