(No, this is not a paid blog post. I personally asked Mark to write for the Banker's Umbrella. I feel very strongly that the voice of shareholders is being drowned out in today's market and we need societies like Sharesoc to help individual investors)
Do you own the shares in your portfolio?
Probably not. The vast majority of individual shareholders in UK 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 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, 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 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 British 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 APCIMS web site here: www.apcims.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 central securities depositories Regulation (“dematerialisation”). ShareSoc is pressing the UK government to legislate, so as to ensure that this doesn’t end up being implemented via a “corporate nominee” by default. Without legislation mandating electronic registration, even current certificated shareholders would no longer be members of the company who’s shares they owned.
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.
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.
ShareSoc can be found at www.sharesoc.org