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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  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.
The claimants based their case on three grounds.
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).
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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