In our September newsletter we informed you that the Law Commission had been asked by the Department for Business, Energy and Industrial Strategy to look into intermediated securities, the perceived challenges with ultimate investors exercising rights and consider what if any changes or enhancements could be made to the existing model.
On 11th November the Law Commission released their report. As expected, it does not make any recommendations. It does however lay out some potential options as identified during their work with the market and their expert advisory panel, on which we represented the registrar sector.
The report recognises that the current model, through which some investors choose to hold their investments through intermediaries, continues to provide significant benefits by increasing efficiency and delivering economies of scale and convenience for ultimate investors, some of whom hold diverse, cross-border portfolios. However, there remains some criticism over areas such as corporate governance, transparency and uncertainties as to legal rights of ultimate investors.
Some matters discussed within the report include the fact that ultimate investors may not be able to exercise any right to vote without the authority or engagement of the intermediary. The report also discusses the concerns raised by some shareholder groups around schemes of arrangements and the perceived inadequacies of the s.793 provisions within the Companies Act 2006.
The Commission appear to indicate a preference to retain the current model, but work on targeted changes that could alleviate some of the problems felt by market participants. Such work may include greater legal certainty in some areas including previous work of the Commission, enhancing investor rights, improving corporate governance including:
- Creation of a new obligation to arrange for ultimate investors, upon request, to attend meetings and vote;
- Extend the application of the Shareholder Rights Directive to ultimate investors;
- Improve the procedure for s.793 to better help issuers identify ultimate investors
- Consider removing the 'headcount' test found in s.899 of the Companies Act 2006;
- Review of the Companies Act 2006 and the Financial Services & Markets Act 2000 by the Commission to identify provisions that inadvertently disadvantage ultimate investors.
The Commission has also recognised the benefits that the introduction of dematerialisation could bring to the market and by extension provide alternative solutions for ultimate investors in how they hold their investments or exercise rights.
The Commission makes clear that it is now for the Government to decide what if any further work should be conducted either by themselves or by the Commission.