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Company Law

Analysis - guidance - compliance

07 MAY 2013

The plight of the indirect investor

Part 9 of the Companies Act 2006 contains three strands of provisions designed to ensure that indirect investors are able to play a meaningful role within their companies. That those provisions have their limits, however, was illustrated earlier this year in a High Court case in which the judge somewhat reluctantly found himself unable to allow three individuals to avail themselves of a minority protection measure in the Act because although they had an economic interest in the company in question, they were not themselves registered shareholders.

Eckerle v Wickeder Westfalenstahl GmbH

The underlying provision of the Companies Act 2006 with which the High Court was concerned in Eckerle v Wickeder Westfalenstahl GmbH [2013] EWHC 68 (Ch) was section 98, under which shareholders may apply to the court to cancel a special resolution under section 97 to re-register a public company as a private company.

The facts, in outline, were as follows.

  • DNick Holding plc was a UK-incorporated company which was listed in Germany.
  • The company had more than five million issued ordinary shares, but only two registered shareholders.
  • All but one of the ordinary shares were held by Bank of New York Depository (Nominees) Ltd on trust for institutions which held accounts with Clearstream, Deutsche Börse's clearing and settlement division. Trading was not in DNick's shares, but in ‘Clearstream Interests', which represented the underlying ownership rights in the shares.
  • With the support of Wickeder Westfalenstahl GmbH, which controlled just over 75% of the votes in DNick, a special resolution to re-register the company as a private company was passed pursuant to section 97.
  • Three individuals (the claimants) sought to establish that they had standing to apply to the court under section 98 to cancel the special resolution. The three were not registered shareholders, and their relationship with the company was described by the judge in the following terms: ‘The literal truth is that the Claimants hold the ultimate economic interests in underlying securities amounting to a specified percentage of the shares held by BNY on trust for the Clearstream account holders whose customers the Claimants are.'

The claimants based their case on three grounds.

  • First, they argued that they were ‘holders' of DNick shares for the purposes of section 98(1)(a), which specifies that an application to set aside a special resolution to re-register may be made ‘by the holders of not less in the aggregate than 5% in nominal value of the company's issued share capital'. The judge, Norris J, examined this argument with some care, but concluded that ‘holders' here referred to the company's registered shareholders, and not to the owners of the ultimate economic interest in the registered shareholders' shares.
  • In the alternative, the claimants argued that the effect of section 145 was to allow the owners of the ultimate economic interest in shares to exercise rights conferred on the registered shareholders such that in this case they could exercise BNY's right to apply to the court under section 98.

Sections 145(1) and (2) provide as follows:

‘(1) This section applies where provision is made by a company's articles enabling a member to nominate another person or persons as entitled to enjoy or exercise all or any specified rights of the member in relation to the company.

(2) So far as is necessary to give effect to that provision, anything required or authorised by any provision of the Companies Acts to be done by or in relation to the member shall instead be done, or (as the case may be) may instead be done, by or in relation to the nominated person (or each of them) as if he were a member of the company.'

In order to assess the impact of section 145 in relation to a particular company's affairs, clearly it is necessary to consider the contents of that company's articles. Here, DNick's articles provided that the institutions on trust for whom BNY held the company's shares were entitled to direct BNY as to how to vote.

Norris J rejected the claimants' argument on section 145. He observed that section 145(2) operated only to allow the nominated person to exercise such statutory rights as would enable any rights transferred by the articles to be exercised effectively, and felt that it was not necessary in order to give effect to the relevant provision of DNick's articles for the shareholder's right to      apply to the court under section 98 to be exercisable by the nominated person. In any case, the articles plainly did not confer any rights on the claimants; rather, as noted above, they conferred a right on the institutions on behalf of whom BNY held shares (ie the institutions of whom the claimants were customers).

  • The final argument employed by the claimants was that in practice the holders of the ultimate economic interest in DNick's shares were sometimes referred to as shareholders. Not surprisingly, the judge gave this point short shrift, taking the view that this did not affect the claimants' legal status. This was not an area, he felt, in which the concept of parties' ‘legitimate expectations' had any role to play.

It is worthy of note that Norris J was concerned about the fact that, in ruling against the claimants, he was preventing indirect investors from taking advantage of a statutory measure designed to protect minority shareholders.


There are several ways in which the problem of indirect investors who are unable to play a significant role in their company's affairs may be addressed.

One option is to encourage companies and nominee shareholders to take full advantage of the provisions of Part 9. In the case at hand, for example, it would presumably have been open to DNick to provide a wide power in its articles for the registered shareholders to transfer all of their rights to third parties. The difficulty with this approach is that most companies are likely to feel that the benefits of having a more engaged shareholder base would be outweighed by the increased administrative burden, and realistically any widespread cultural change is likely to come about only in the face of concerted pressure from shareholders and indirect investors.

Another option is to revise Part 9 in order to provide more robust protection for indirect investors. For example, the scope of section 153, which specifies certain statutory provisions in relation to which indirect investors may be treated as shareholders, could be widened, and indeed section 145 itself could be strengthened so as to oblige companies (or perhaps just listed companies) to provide a right in their articles for registered shareholders to nominate another person to exercise their rights. Whether, in practice, any substantive reforms could be introduced in the short-term is, however, another matter, for the experience of developing the existing text of Part 9 suggests that any reform process is likely to be lengthy and complex. On the other hand, it may be that EU action in this area will eventually force the issue.

The best option may, in fact, be to tackle the problem in a completely different way, namely by reducing the number of indirect investors. Professor John Kay's final report on the UK equity markets last summer indicated that indirect investors should be able to play a greater role in their company's life, but interestingly its specific recommendation in this area was that the government ‘should explore the most cost effective means for individual investors to hold shares directly on an electronic register'. This a sensible idea, and since the government's comments on it in its November 2012 response to the final report were positive (if a little vague), it may be that we can look forward to proposals to make it easier for investors to hold shares directly in due course.

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