Shareholder activism: Exercising shareholder rights

You own shares in a company. Those shares give you rights. Right? Actually, the position is not always so straightforward. In the UK, there are a range of rights which can be exercised by shareholders under the Companies Act 2006 (CA 2006).

These can be powerful tools at an activist’s disposal. However, in many cases, these rights can only be exercised by shareholders who are registered as members in the company’s statutory register. Shares in public companies in the UK are often held through a “chain of ownership” with the ultimate party being the custodian whose CREST account appears on the company’s register of members. This can pose difficulties when it comes to beneficial shareholders trying to exercise their rights.  

Intermediated security chain

Under the UK’s system of intermediated security ownership, investors are rarely the legal owner of securities, but rather they own a beneficial interest in the security. Most investors’ securities are held through the intermediated security chain, with the ultimate party being the custodian whose CREST account appears on the company’s register of members. This CREST member is the legal owner of the securities.

What does this mean in the context of shareholder activism?

In the UK, we tend to think that there are a number of legal tools available to shareholder activists. However, it would be more accurate to say that there are a number of legal tools available to those who meet the definition of “member” as set out in the CA 2006: members of the company are those who are registered as such in the register of members (s. 112 CA 2006). In many cases, this will be the custodian whose CREST account appears on the register of members. The following rights can only be exercised by “members”:

• Attending a general meeting
• Voting at a general meeting
• Counting towards the threshold for requisitioning a general meeting (s. 303 CA 2006)
• Counting towards the threshold for requisitioning a resolution to be proposed at a general meeting (s. 303 CA 2006)

That said, s. 153 of the CA 2006 enables indirect investors to count towards the shareholder threshold for various rights, including the proposing of a resolution at an AGM (s. 338 CA 2006), subject to certain safeguards designed to ensure that only genuine indirect investors are allowed to count towards the threshold. Section 145 CA 2006 also permits companies to grant rights in their articles to indirect investors, including the right to requisition a general meeting under s. 303 CA 2006. However, as outlined in the Law Commission’s scoping paper into intermediated securities, this is rarely included in company articles.

For those rights which can only be exercised by “members”, investors will need to be prepared to navigate the intermediated ownership chain.

What if I hold Depositary Receipts (DRs)?

There are further potential hurdles which investors in English companies listed on US and other foreign stock exchanges may face when trying to exercise shareholder rights. DRs have become a popular instrument which companies use to access non-domestic capital markets. For example, an English company listed on a US stock exchange might issue American Depositary Receipts (ADRs).  DRs are typically issued by a depositary bank and represent shares held by the depositary bank. Investors will, therefore, not themselves hold shares; these will be held by the depositary who will issue DRs which represent those shares. The rights vested in shareholders under English law will therefore be vested in the depositary as shareholder (as opposed to the investors holding DRs).  

There will be a Deposit Agreement which governs the relationship between the depositary, on the one hand, and the holders of DRs, on the other. Whether holders of DRs have a right to direct the depositary to enforce its rights as a shareholder will depend on how that Deposit Agreement is drafted. 

The position of investors holding DRs was highlighted by the ‘battle for Abcam’ that took place in 2023. In that case, Dr Jonathan Milner, who was seeking to requisition a general meeting, paid $600,000 to convert his ADSs into shares (in order to exercise the right to requisition a general meeting) and another $600,000 to convert them back again. You can read our analysis here.

Conclusion

It’s easy for investors to assume that they are able to exercise the rights laid down for shareholders in the CA 2006. However, the reality is that the intermediated security chain through which shares are often held in the UK can make this far from straightforward. Navigating the intermediated security chain is likely be one of the most challenging and practically demanding tasks. The position is, potentially, even more complicated for English companies which are listed on the US or other foreign exchanges. 

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