Cross border voting rights of shareholders in Europe; a solved problem?
Mark van Loon 10875867
Final version
Date: 31st of July 2015 Master Thesis: 12 EC
Supervisor: B. van Schilfgaarde European Private Law
2
Table of Contents
1 Introduction ... 3
2 The rationale behind voting rights ... 5
2.1 Voting as an aspect of contracting ... 5
2.2 Voting as part of risk bearing ... 6
3 Development of shareholding ... 9
3.1 The Amsterdam Stock Exchange – the secondary market ... 9
3.2 Development to 21st century shareholding ... 10
3.3 Chain of intermediaries ... 12
3.4 Consequences to the voting rights in cross-border chains of intermediaries ... 15
4 Current legislation ... 19
4.1 Transparency Directive ... 19
4.2 Shareholder Rights Directive ... 20
4.2.1 Development of the Shareholder Rights Directive ... 20
4.2.2 Purpose of the Directive... 20
4.2.3 Articles regulating cross-border voting ... 22
5 Proposal for revision of Directive 2007/36/EC ... 26
5.1 Amendments of the Shareholder Rights Directive ... 26
6 Conclusion ... 32
3
1 Introduction
Nowadays a lot of companies in Europe have shareholders from different Member States. For these shareholders in foreign companies it is more difficult to be involved in the company; to exercise their voting rights as a shareholder. This is because of the fact that these shares are usually held through securities accounts with intermediaries, such as banks. In cross-border situations there is, most of the time, a chain of intermediaries between the shareholder and the company. A structure like this can be problematic for shareholders to exercise their voting rights effectively. This thesis will investigate what kind of problems can occur, how the European Union tries to solve these problems and if these solutions work.
This analysis will be divided into five additional chapters. The second section of this thesis explains the rationale behind shareholder voting; why do shareholders vote? The third chapter describes the development of shareholding from the very beginning in 1602 till shareholding in the 21st century. It discusses how shareholding turned into what it looks like now with a structure of cross-border chains of intermediaries. An explanation of how these chains of intermediaries work and the problems they can cause for investors in relation to exercising their voting rights follows. It discusses why we need regulation concerning this issue.
To ensure the shareholders are actually able to exercise their voting rights attached to their shares, the exercise of voting rights of these shareholders is regulated by the Shareholder Rights Directive 2007/36/EC. This Directive has taken away many barriers to the exercise of border voting but unfortunately it has not solved the issue of cross-border voting adequately. The fourth section describes the Shareholder Rights Directive 2007/36/EC and the problems still remaining.
In April 2014 the European Commission published a proposal for the revision of the Shareholder Rights Directive. It is supposed to encourage long-term shareholder engagement. Chapter five of this thesis explains what changes involving cross border voting are made by the Directive and what it will mean in practice for the exercise of voting rights by shareholders. It will discuss what the predicted consequences of the changes will be and if the proposal addresses the cross-border voting issues adequately. I will discuss whether, as a result of the changes, the ultimate investor of shares is able to effectively exercise his voting rights attached to these shares.
4 Finally, a conclusion will answer the question if the revision of the Shareholder Rights Directive solves all the problems regarding the effective exercise of cross-border voting rights of the ultimate investor.
The scope of the paper will be restricted to problems related to the exercise of shareholder rights in listed companies with dispersed (cross-border) share ownership. To be more specific: to problems arising from the fact that these shares are held and traded through securities accounts with intermediaries. The reason for this is because the issues discussed will apply the most to these types of companies.
The last thing I want to mention is that the purpose of this paper is to critically discuss the existing legal barriers and proposed solutions to cross-border voting of shareholders. The intention is not to come up with a definite solution for the problem.
5
2 The rationale behind voting rights
With the purpose of this paper being to find out if the proposed legislation of the European Commission can facilitate the effective exercise of cross-border voting in Europe, it only seems logical to first look at the question: Why do shareholders even vote? Before we can argue about the measures trying to facilitate cross-border voting we need to understand the importance of shareholder voting first. This chapter will explain the rationale of shareholder voting rights.
2.1 Voting as an aspect of contracting
In their article Jensen & Meckling state that, from an economic perspective, a company is only a name for a great web of contractual relationships between the firm, the consumers of output and the owners of many factors of production.1 These contractual relationships specify the rights, duties and limitations of each party.2 To fully specify every right, duty or limitations on the parties would be costly and inefficient. As savings in contracting costs will be among the benefits of the firm, much will be left to discretion.3 Corporate law tries to reduce the contracting costs by providing a standard form of contract regulating the corporate structure. These basic principles will only reduce the contracting costs to the extent they anticipate the intentions of both contracting parties.4 Therefore, corporate law can only cover the outlines of the relations among the parties. Something must fill in the details.5
Shareholding voting fills in these details. According to Easterbrook & Fischel ‘the right to vote is the right to make all decisions not otherwise provided by the contract’. Included with the right of the shareholders to make the decisions, is the right to delegate these decisions. 6 In this way the voters can elect directors and delegate them the discretionary powers over things the voters would normally control themselves. When there are many
1 Michael Jensen & William Meckling, ‘Theory of the firm: Managerial behavior, agency costs and ownership structure’, Journal of Financial Economics, October, 1976, V. 3, No. 4. 315. See also Frank H. Easterbrook & Daniel R. Fischel, ‘Voting in Corporate Law’, Journal of Law and Economics, Vol. 26, No. 2, Corporations and Private Property: A Conference Sponsored by the Hoover Institution (Jun., 1983). 401
2 Eugene F. Fama and Michael C. Jensen, ‘Separation of Ownership from Control’, Journal of Law and
Economics, Vol. 26, No. 2, June 1983. 302
3 Clifford W. Smith & Jerold B. Warner, On Financial Contracting: An Analysis of Bond Covenants, Journal of
Financial Economics 7 (1979). 121
4 J. Armour, H. Hansmann and R. Kraakman, ‘What is corporate law?’ in: R. Kraakman et al., ‘The Anatomy of Corporate Law: A comparative and Functional Approach’, Oxford University Press, 2009,
5 Easterbrook & Fischel (1983), supra n. 1. 402. 6 Idem, 402
6 persons entitled to vote, the probability that their vote is going to be of much influence to the outcome is very small. Therefore, not much of the voters will have the incentive to become well informed about the firm’s affairs and vote intelligently. If every shareholder thinks like this, and everyone is rational, nobody will vote. This problem is called the collective choice problem, also referred to as rational apathy.7 Whereas in a firm the managers are well informed and have a greater insight in the firm’s affairs, it is likely that voters delegate (part of) their powers to the managers and endorse their decisions most of the time.8
2.2 Voting as part of risk bearing
As discussed above, voting rights in companies exist due to the fact that someone needs to fill in the details of a contract when it is not complete. But how do we decide who should have these voting rights? As a result of the collective choice problem you might expect that voting rights should be held by well-informed people, like managers, but in fact the voting rights are exclusively held by shareholders. 9
What is the reason the voting rights are exclusively held by the shareholders and not by bondholders, managers or other employees? Easterbrook & Fischel argue that the reason for this is that the shareholders have residual claims on the income of the company. Bondholders and employees respectively have fixed claims or negotiated compensation for their performance. Their gains or losses are not coherent with those of the company, while shareholders depend on good performances of the company to gain something as they are the last in line. As the residual claimants, the shareholders bear most of the marginal costs but also receive most of the marginal profits of a new undertaking. Therefore they have the right incentive to maximize the company’s economic results: the more profit the company makes, the more dividend the shareholders get. For this reason, shareholders should have the right to vote.10
Part of the voting rights of the shareholder is the power to appoint and dismiss managers. Knowing that at least part of their power to make decisions will be delegated to the managers, the shareholders appoint managers from who they expect to handle in the best interest for the company, and thus the shareholders. If the managers act in any other interest
7 Anthony Downs, ‘An Economic theory of democracy’, Journal of Political Economy, Vol. 65, No. 2 (April 1957), 146
8 Easterbrook & Fischel (1983), supra n. 1. 403 9 Idem
10 Idem; see also Jaap Winter, Shareholder Engagement and Stewardship: The Realities and Illusions of Institutional Share Ownership (2011). 2
7 than that of the shareholder, they run the risk of being dismissed and replaced by someone else. Despite the fact that the collective choice problem will prevent shareholders from making daily decisions, the managers, who take over these decisions, know that they are being watched by the shareholders with the right incentives. This will likely prompt managers to act in the shareholders’ interest in order to boost their own careers and to avoid being replaced.11
The modern corporate governance theories, in which the shareholders are able to fully participate in the decision-making process in the general meetings, are based on this economic view of shareholder participation.12
In theory participating shareholders are a precondition for good corporate governance, but in practice shareholders will not actually participate if they have the possibility to do so.13 An explanation for this passivity can be that individual shareholders usually have small interests in a company. This means that the costs to actively exercise control rights in the company will exceed the extent to which a shareholder may benefit from this. Taken into consideration that the shareholders are aware that the influence of their individual vote is practically nihil – the collective choice problem – they are more likely to stay passive or sell their shares.14 Research from 2007 shows that the average turnout was 53,1% at annual shareholder meetings of large issuers.15 This research was taken of 18 European blue chip indices.16 At some shareholder meetings the turnout was even as low as 3,5%, what proves that shareholder passivity is a real issue.17
Holding on to the theory mentioned above that good corporate governance needs active shareholders, the shareholder passivity needs to be solved. A high turnout is seen as a reliable signal for a healthy shareholder-management relationship. If the law or articles of association sets a minimum quorum for a certain decision, a low turnout may affect the validity of the meeting’s decision if this quorum is not met.18
11 Easterbrook & Fischel (1983), supra n. 1. 403 12 Winter (2011), supra n. 10. 1
13 Dirk Zetzsche, Shareholder Passivity, Cross-Border Voting and the Shareholder Rights Directive, Journal of
Corporate Law Studies, Vol. 8, No. 2, 2008. 13
14 Julian Velasco, ‘Taking Shareholder Rights Seriously’, U.C. Davis Law Review, Vol. 41, No. 2, 2007. 622; see also Michael C. Schouten, ‘The Political Economy of Cross-Border Voting in Europe’, Columbia Journal of
European Law, Vol. 16, October 2009. 7
15 Manifest Information Services Ltd, Proxy Voting 2007- A Pan-European perspective (2007), 50
16 A blue chip index is a stock index that tracks the shares of the top performing publicly traded companies. 17 Manifest 2007, supra n. 15, 56, referring to the 2007 Annual General Meeting of Charter European Trust PLC. 18 Dirk Zetzsche (2008), supra n 13, 7
8 One way to increase the incentive for shareholders to be active is to decrease the burdens to participate. Dirk Zetzsche studied the passivity of shareholders, especially the effects of law-making on efficient voting by shareholders. He argued that at least part of the burden to participate can be influenced a reduced by law.19 Another way that can be expected to increase the participation of shareholders is to grant them more powers.20 If the shareholders have the feeling their participation could affect the outcome of any election, their incentive to be active will be bigger. Legislative measures adopted by the Member states of the European Union over the last two decades have granted shareholders more rights to participate in corporate decisions. These rights will be further discussed in chapter 4.
19 Dirk Zetzsche (2008), supra n 13. 24
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3 Development of shareholding
The aim of this chapter is to explain which problems can arise with exercising cross-border voting rights of shareholders. To be able to do this we need to understand how shareholding has evolved during its existence. Therefore I will give a general overview of the development of shareholding. This overview will start in 1602 when the Amsterdam Stock Exchange was established. According to Fernand Braudel the Amsterdam Stock Exchange is considered to be the oldest ‘modern’ securities market in the world.21 Thereafter the further development of shareholding to the problems we are now facing with cross-border shareholding in the 21st century.
3.1 The Amsterdam Stock Exchange – the secondary market
The oldest ‘modern’ securities market in the world is what Braudel called the Amsterdam Stock Exchange. With ‘modern’ he referred to the fluidity of the market and the freedom of transactions of shares that were modern at that time.22 Before that the market was mainly about exchange of commodities. 23
It all started with the States General of the Dutch Republic which granted the Vereenigde Oostindische Compagnie (VOC)24 a charter, for a period of 21 years, in March 1602.25 The charter was an invitation to the people of the Dutch Republic to invest in VOC. They could, during a period of five months, subscribe to the capital stock of the company. This subscription of capital was a big success, especially in Amsterdam, where 1143 investors signed up for 57 % of the total stock with a value of ƒ3,679,915.26 The first page of the subscription book of the VOC contained a clause that allowed shareholders to transfer their shares to another party. The basic rules of share transfers were also given on this page: If an
21 Fernand Braudel. ‘Civilization and capitalism 15th-18th century: The wheels of commerce’. New York: Harper
& Row. 1983
22 Idem
23 Edward Stringham. ’The Extralegal Development of Securities Trading in Seventeenth Century Amsterdam’.
Quarterly Review of Economics and Finance 43 (2) 2003. 321
24 The Vereenigde Oostindische Compagnie (VOC), translated as United East Indies Company, was a Dutch trading company that was granted monopoly over the Asian trade.
25 The text of the original charter can be found online: http://www.vocsite.nl/geschiedenis/octrooi.html An English translation is available at: http://www.australiaonthemap.org.au/voc-charter/
26 The capital stock was divided into the six provinces Middelburg, Enkhuizen, Delft, Hoorn and Rotterdam with a total amount of ƒ6,429,588. Henk den Heijer, De geoctrooieerde compagnie: de VOC en de WIC als voorlopers
van de naamloze vennootschap (Deventer 2005) 61.
According to the special calculator of the International Institute of Social History this would have a value of approximately €100 million today. http://www.iisg.nl/hpw/calculate.php
10 investor wanted to transfer his shares to a third party he needed the approval of two company directors. Their role was to check if the parties had traded according to the company’s rules. If the transfer was approved, the traders had to go to the East India House and ask the bookkeeper to transfer the shares to the buyer’s account in the capital book. Such a transfer in the capital book involved transaction costs for the bookkeeper and the stamp tax on the deed of transfer. The positive account in the capital book was the only evidence of the share ownership. Bearer shares didn’t exist at that time.27
Because of these clear rules for transferring and ownership of the shares, the secondary market for VOC shares took a start right after the subscription period was over.28 At the end of the charter (21 years later) another big incentive to trade shares emerged. The VOC did not liquidate the company but instead, they requested to prolong the charter, which was granted by the States General. This resulted in the capital stock of the VOC becoming fixed and the investors couldn’t touch their money for a long period. Usually investors don’t want this so there was a need to use the secondary market to transfer their shares.29 This was the start of the ‘modern’ securities market.
3.2 Development to 21st century shareholding
In the development of shareholding two kinds of securities came into existence: tangible securities (bearer-shares) and intangible securities (registered shares). Tangible securities are embodied in a negotiable note or certificate and are transferable by its manual delivery. Intangible securities however are usually not embodied in certificates and only transferable in the books of the person who issued them.30
Although tangible securities are easily transferable, they have four major disadvantages. First, these types of securities require the issue and physical movement of large amounts of paper. As the financial market developed rapidly and cross-border transactions occurred more often, the required movement of paper became highly inefficient and cumbersome. Secondly, to prevent forgery the certificates require security printing which includes all kind of technical features. This makes them expensive to produce. Thirdly, since they are transferable
27 Lodewijk Betram, PHD-thesis, THE WORLD’S FIRST STOCK EXCHANGE How the Amsterdam market for Dutch
East India Company shares became a modern securities market, 1602-1700, 2011
28 Oscar Gelderblom and Joost Jonker, ‘Completing a financial revolution: The finance of the Dutch East India trade and the rise of the Amsterdam capital market, 1595-1612’, The journal of economic history 64 (2004) 641-672
29 Henk den Heijer (2005) supra n.26. 59,63
30 Roy Goode, ‘The nature and transfer of rights in dematerialized and immobilized securities’, The future for
11 by manual delivery, they are risky. If the share certificates are stolen, the thief can pass the title to a bona fide purchaser.31 The final problem is that the location of the certificates keeps changing where they are distributed over a number of jurisdictions. This means that the law governing their transfer constantly changes too. A lender trying to take security over a portfolio will have to comply with various national laws, each with its own requirements and rules.32 There was a need for an alternative to solve these disadvantages.
The first step in achieving an alternative was the immobilization of shares. This means that the physical shares are located in a central securities depository (CSD)33. The physical shares are administered in affiliated institutions of the CSD. The private investor, in turn, holds a securities account with such institution. Because of this system the transactions can be processed by entries in the books of the affiliated institutions only instead of the physical movement of paper shares.34
A more radical alternative is the complete dematerialization of shares, which means that the shares are not embodied in any physical form at all. The existence of these shares will be limited to the records maintained by the CSD.35
This modern-day trading system does not come without any disadvantages either. In their article Kahan & Rock formulate a general conception of who the shareholder is (the economic or beneficial owner of the shares) and what the shareholder has (shareholder rights: to vote, to sue, to receive dividends, et cetera).36 However, if the shares are registered in the name of an intermediary, on behalf of the economic owner, a distinction may arise between the legal status as a shareholder and the economic ownership.37 In a jurisdiction with immobilized or dematerialized shares, where an investor holds certain shares through an intermediary, this intermediary will be the registered person and thus the formal shareholder. As a result, this registered person, who is not the beneficial owner, will have the privilege to exercise the shareholder rights, but little incentive to do so. After all, he will not benefit from exercising these rights. On the contrary, any benefits of exercising the shareholders’ rights
31 Bona fide purchaser: the purchaser could not and should not have known that the certificates were stolen. This means that he should have bought them for the right value without knowing the other party stole them. 32 Roy Good (1996) supra n. 30. 110
33 Euroclear is an example of an CSD. More information about this structure in the next paragraph ‘Chain of intermediaries’.
34 Anthony Hainsworth, ‘Shareholder Rights Directive and the Challenge of Re-Enfranchising Beneficial Shareholders’, Law & Financial Markets Review. 11, 2007. 11
35 Idem.
36 Marcel Kahan & Edward Rock, ‘The Hanging Chads of Corporate Voting’, Georgetown Law Journal, Vol. 96. 2008. 1240
37 Richard C. Nolan, ‘Shareholder rights in Britain’, European Business Organization Law Review, issue 2, June 2006. 570
12 will go to the economic owner of the shares.38 He therefore does have an economic incentive to exercise the shareholders’ rights but has no rights against the company to do so. Hence, the power to exercise the shareholders’ rights and the economic incentive to use these rights are separated. More about the disadvantages of the use of intermediaries will be discussed in the following paragraphs.
3.3 Chain of intermediaries
Cross-border share ownership of European listed companies has highly increased in the last years. By the end of 2007 37% of the European market was owned by foreign investors. In 2014 this was grown to 44% of all the shares.39 Foreign investors are investors located in another country than the one where the company is listed. With these numbers it only seems logical that any barriers to cross-border voting will have a negative effect on the voting turnouts at the general meetings.40 There is not much empirical data available yet on cross-border voting, but the evidence that is available indeed indicates that voting turnouts at general meetings do decrease in proportion to the increase of foreign investors.41
The barriers of cross-border voting in Europe can be divided in two types. The first type of barrier is one with respect to the organization of general meetings. There are many regulations and practices in the Member States of the EU to comply with while organizing general meetings. 42 Therefore some shareholders who are entitled to vote might be prevented from doing so due to practical matters. Imagine an Italian investor who is a shareholder in a Dutch company headquartered in Amsterdam. He might be prevented from voting in the general meeting just because he is not able to travel to the Netherlands and doesn’t get the opportunity to cast his vote in absence.
The other type of barrier to cross-border voting is caused by the complex systems of modern day shareholding.43 This chapter will try to explain how this structure works and what the consequences of the system are for shareholders.
Nowadays, shares are usually held through securities accounts with intermediaries.44 These intermediaries can be for example banks or brokers who offer professional custodial or
38 Idem.
39 Michael Schouten (2009) supra n. 14. 5; see also Proposal of 09-04-2014 for the revision of the Shareholder Rights Directive.
40 Voting turnout is the percentage of eligible voters who cast their vote. 41 Dirk Zetzsche (2008), supra n 13. 3
42 High Level Group of company law experts, Final report on Cross-border Voting in Europe 2002. 16 43 Idem.
13 brokerage services. The structure where securities are held through a chain of intermediaries contains two main problems: First, it is virtually impossible for a company to identify its ultimate investors; the ones running the economic risk. I mentioned in chapter 2 that the shareholders running the economic risk should have the right to vote, because they have the right incentive to vote for the best interest of the company. Secondly, if the company is able to identify them, the ultimate investors won’t have the right to vote because they are not the ‘formal’ shareholders in the books of the company. I will come back to these problems in paragraph 3,4 but first I will try to explain the complexity of this system with a basic example of how the chain of intermediaries could look like in cross-border shareholdings.
A Spanish investor who wants to acquire shares in a Dutch public company does not just buy the shares from the company itself. The shares of a company are placed in custody of a Central Securities Depository, which in the Netherlands is called Euroclear Nederland.45 The shares held in custody are administered in affiliated institutions of Necigef. The Spanish investor holds a securities account with his Spanish bank or stockbroker (from now on just referred to as ‘bank’). As a foreign bank, the Spanish bank will probably not be an affiliated institution of Necigef. The Spanish bank will normally hold an omnibus account with an affiliated institution of Necigef. An omnibus account is a securities account kept in its own name with another financial institution. The investments of all the clients of the bank are administered jointly. The bank, as holder of the securities account, is the one who holds the title to the shares, despite the fact that he is holding them for his clients. As a result the bank, and not the investor, is authorized to exercise the shareholder rights, including the voting right.46 This is obviously depending on the applicable law in this situation. Paragraph 3.4. will explain how to determine the applicable law. In reality all kinds of separate chains of intermediaries are possible. Winter tries to show this with the following diagram:
45 Euroclear Nederland is the commercial name of Nederlands Centraal Instituut voor Giraal Effectenverkeer B.V. (NECIGEF) In 2002 Euroclear acquired 100% of the shares in NECIGEF and it became part of Euroclear under the name of Euroclear Nederland; For the clarity of the paper I will use the name Necigef because some of the sources I use are from before 2002.
14 Diagram of the possible chains of intermediaries: 47
Company
Necigef
Swiss bank that Affiliated Sicovam Affiliated
holds securities itself institution institution
S p ani sh bank French bank Euroclear Cedel
Finnish bank Global German bank Custodian
Custodian Italian Asset bank manager
M an ager
I n ves t o r
What the diagram intends to show is that different chains of intermediaries are possible between the company and an investor. In practice the chains are much more diverse than what this diagram shows.48 The chain of intermediaries used in the example with the Spanish private investor is underlined and marked in red in the diagram. As you can see our example is pretty straight forward. In reality however, it is not possible to trace the route of intermediaries between the investor and the company. For each intermediary there are multiple links with other intermediaries possible to get higher up the chain. Due to the fact
47 Jaap Winter (2000) supra n. 46. 15 48 Idem.
15 that intermediaries often hold securities through omnibus accounts, they do not keep records of the chain of intermediaries for each individual investor. Take the example of the Italian bank in the diagram: The investor has a securities account with the Italian bank and wants to acquire shares in the red/underlined company. The investor gives his bank the order to buy shares in the company. Subsequently the Italian bank has two options; use the global custodian or Euroclear as an intermediary. Because the Italian bank does not keep records for each individual investor, we are lost already. If the Italian bank would know through which intermediary the shares are being held for each individual investor (let’s say the global custodian in this case), he still doesn’t know which route the shares go through after Global custodian. After the global custodian, the shares could have gone through Euroclear or Cedel and this are only the options in the diagram. As said before, in practice there might be a lot more options. As a result we do not have any certainty about which chain of intermediaries holds certain securities on behalf of the investor.49
3.4 Consequences to the voting rights in cross-border chains of intermediaries
The key issue of a chain of intermediaries is that the ultimate investor is not able to exercise his voting rights. This issue can be divided in two different parts: first, it is nearly impossible for a company to identify the ultimate investors. Secondly, if the ultimate investors are identified, they may not have the right to vote because they are not the ‘formal’ shareholders in the books of the company.
Paragraph 3,3 explains why it is virtually impossible to identify the ultimate investor. Intermediaries do not keep records of the chain of intermediaries for each investor because they hold their securities through omnibus accounts. This way it is hard to track every move of certain shares belonging to an individual investor.
The second question is a bit more complicated to answer. If the ultimate investor is not the shareholder in the books of the company, who is? For companies it is basically impossible to determine who is entitled to exercise the voting rights. The reason for this is that the cross-border chains of intermediaries are frequently established in various countries. Applying the law of the intermediary would mean that multiple legal systems will be applicable to grant a property-law claim to the shares with the attached voting rights.50 This usually adds up to multiple clients with multiple rights to exercise the voting rights belonging
49 Jaap Winter (2000) supra n. 46. 16 50 Jaap Winter (2000) supra n. 46. 19
16 to the shares.51 So if everyone in the chain of intermediaries can claim the right to exercise the voting right it is impossible for the company to know who to recognize as being entitled to the rights.
To determine who is entitled to exercise the voting rights we need to answer some questions. According to Winter in his article about ‘cross-border voting in Europe’ one of the first questions that arise is: which law is applicable to determine who is entitled to vote in a cross-border chain of intermediaries? As regards to the person entitled to exercise the voting rights in the general meeting, the applicable law is the ‘lex societatis’52. In other words, the law that governs the legal status of the company is applicable. This lex societatis can be determined in two ways: according to the ‘incorporation theory’ or the ‘real-seat theory’. In the incorporation theory, for example used in the Netherlands, the lex societatis is the law of the country where the company is incorporated and has its statutory seat. The real-seat theory, for example used in Germany, determines the lex societatis by looking at where the company has its management and control centre, where their real seat is located. The right to vote is usually given to the shareholder by the national laws of the Member States.53
The following question would then be, bearing in mind that most of the intermediaries hold their securities accounts in their own name, who is seen as the shareholder in these cross-border chains of intermediaries? And which law determines who the shareholder is? The original rule that applied for bearer securities was that the law applicable was the law of the country in which the certificates were located, the ‘lex situs’. 54 The purpose of the lex situs principle is to determine the law governing the interests in real property and tangible assets by looking at the law where the assets are physically located.55 As we discussed above, this no longer works in the modern system because the only evidence of shareholding these days are the book entries and the shares are intangible. This means that the shares have no physical location. Keeping in mind that the only evidence of the investor’s interest in the securities is in the books of its immediate intermediary (in the books of the intermediary’s intermediary the investor is not recorded anymore), it makes sense to use the location of the
51 Jaap Winter (2006) supra n. 44. 2 52 Idem
53 Idem
54 Richard Potok, ‘Legal certainty for securities held as collateral’, International Financial Law Review 18 Int'lFin.
L. Rev. (1999). 12
17 intermediary as the lex situs. This approach is known as the place of the relevant intermediary approach (PRIMA).56
The application of different legal systems can lead to conflicting rules and therefore claims of colliding voting rights. Under Dutch law, for example, the holder of an omnibus account holds the securities in his own name (on behalf of someone else but in his own name) and must therefore be recognized as the person who holds title of the shares and thus authorized to exercise the voting rights.57 This means that the underlying parties are excluded from these rights. In our example with the Spanish investor, the Spanish bank would have been granted the voting rights under Dutch Law, to the exclusion of the investor. The investor will probably have a claim to be recognized as shareholder according to their national (Spanish) law, but not under Dutch law.58
Thus, investors may be unable to exercise their voting rights in the general meeting if it comes to cross-border situations, unless the intermediaries are willing to cooperate. Winter comes up with the argument, which I completely endorse, that in the end, only a few will deny that “the investor who paid for the shares and runs the economic risk of the shares should be able to determine how the shares held on his behalf will be voted.”59 How can we ensure that this will be realized through the chain of intermediaries? In theory the solution seems simple: the parties could just put a clause in their contract that secures the cooperation of the intermediary. This way the intermediary would be forced to forward the voting instructions of the investor upwards in the chain of intermediaries. In practice adding these clauses to a contract might be difficult to accomplish.60 Many investors, especially private investors, are not in the position to negotiate such a clause with their intermediaries. Even if the investor was able to do this, all the other intermediaries in the chain would have to work along with the clause to make the voting process efficient.61 This might become a problem since the investor does not have a relationship with the other intermediaries in the chain. It probably doesn’t even know who these other intermediaries in the chain are, because it is basically impossible to determine through which exact chain the shares are being held in name of the investor. It is not realistic to think an investor is capable of negotiating contracts with every intermediary who could be involved in the chain of intermediaries. And if one of
56 Idem.
57 Dutch Giral Securities Trading Act (Wge); see Jaap Winter (2000) supra n. 42. 19 58 Jaap Winter (2000) supra n. 46. 19
59 Jaap Winter (2006) supra n. 44. 2 60 Michael Schouten (2009) supra n. 14. 7
61 Either forward the voting-instructions or the proxy-request upwards in the chain, or issuing a subproxy downwards in the chain.
18 them does not provide the required service, there’s a hitch leading to the voting process not being effective.62
Another way is trying to exercise the voting rights directly. To be able to claim the right to vote in accordance with the law that is applicable to their property-law position, the investor needs a written power of attorney (a proxy) from the person who holds title to the shares. This proxy can be provided directly to the investor if the person who holds title to the shares knows who the investor is. This proxy can also be given to the nearest intermediary in the chain and will have to be passed on by every intermediary in the chain as a subproxy until it reaches the ultimate investor. The investor needs to put in a request for the proxy through his intermediary. This request must be forwarded through the chain by the succeeding intermediaries. Here is where the cooperation of the intermediaries is necessary.
The same thing will apply if the information needs to go the other way; voting instructions or proxy-requests from the investor back to the intermediary that holds title of the shares under the domestic law of the company. This structure is slow, cumbersome and does not always function properly which leads to a high risk of losing votes in the chain of intermediaries.63
To align with Winters argument the key issue here is to ensure that the investor is able to determine how the shares hold on his behalf, will be voted64. To accomplish this goal, we need to address the problem of multiple entitlements in the chain by identifying the ultimate investor. Therefore a regulation is needed which secures the cooperation of all the intermediaries in this process to eventually get to the ultimate investor in the chain. The next chapter will discuss how existing legislation deals with the problems of cross-border voting.
62 Jaap Winter (2006) supra n. 44. 4-5
63 Kahan & Rock (2008) supra n. 36. 1249-1251: Imagine for example votes get lost because the voting instructions don’t get to the right intermediary in time to vote in the general meeting because of the long chain between the original investor and the intermediary eligible to vote.
19
4 Current legislation
Most European legislation on company and securities law is made in form of directives.65 These are legal instruments do not have direct effect. They are addressed at the Member States who are obliged to adapt their national law in accordance with the principles set out in the directive.66 When it comes to cross-border voting the Transparency Directive67 and the Shareholder Rights Directive68 are relevant.
4.1 Transparency Directive
The Action Plan from the Commission of 1999 with the aim of creating an integrated financial market stressed the need to draw up a Directive upgrading the transparency requirements.69 This Directive came in the form of the Transparency Directive with the aim to promote an efficient and transparent securities market.70 Although the Directive encourages foreign shareholders to participate in the general meetings, facilitating cross-border voting is not the primary concern of the Directive.71 According to Schouten, ‘the issue of cross-border voting rights has only been addressed head-on with the adoption of the Shareholders’ Rights Directive’.72
65 Michael Schouten (2009) supra n. 14. 8
66 The effect of a directive is different compared to that of a regulation which does have direct effect. 67DIRECTIVE 2004/109/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 15 December 2004 on
the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC; In this article referred to as Transparency Directive.
68DIRECTIVE 2007/36/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 11 July 2007 on the
exercise of certain rights of shareholders in listed companies; In this article referred to as Shareholder Rights Directive.
69 Transparency Directive 2004, Recital 3; Commission Communication of 11 May 1999 entitled ‘Implementing the framework for financial markets: Action Plan’
70 Transparency Directive 2004, Recital 38;
71 Transparency Directive 2004, article 13; see Michael Schouten (2009) supra n. 15. 8 72 Michael Schouten (2009) supra n. 14. 8
20 4.2 Shareholder Rights Directive
4.2.1 Development of the Shareholder Rights Directive
In the end of 2002, a High Level Group of Company Law Experts, chaired by Jaap Winter, presented its Final Report of the group on ‘a Modern Regulatory Framework for Company Law in Europe’ to EU Commissioner Frits Bolkestein.73 The focus of this report was on corporate governance in the EU and the modernization of European Company Law. One of the recommendations of this report was that the problems related to cross-border voting of shareholders should be solved urgently. In response on the report of the High Level Group, the European Commission wrote a communication to the European Parliament and the Council entitled: ‘Modernising Company Law and Enhancing Corporate Governance in the European Union - A Plan to Move Forward’.74 This communication endorsed the view that problems related to cross-border voting should be solved as a matter of urgency and preferably through a directive.75 On July 11th 2007, the Shareholder Rights Directive (SRD) was adopted.
4.2.2 Purpose of the Directive
The purpose of the SRD is set out in the recitals at the beginning of the directive. The main objective of the directive is set out in recital 14: “to allow shareholders effectively to make use of their rights throughout the community.” The European Parliament and the Council discuss different goals in the other recitals to help achieve effective exercise of voting rights.
They argue that holders of shares carrying voting rights should be able to exercise these rights given that they are reflected in the price they have paid76. Therefore, obstacles deterring shareholders from voting should be removed. Besides that, certain minimum standards should be introduced to protect investors and promote an effective exercise of shareholder voting rights.77 Another goal set out in the recitals, is that foreign shareholders should be able to exercise their rights in relation to the general meeting as easily as domestic shareholders. Obstacles hindering the exercise of voting rights without physically attending the general meeting should be removed, what can be beneficial for domestic shareholders,
73 Final report: http://www.ecgi.org/publications/documents/report_en.pdf
For the summary of the report: http://www.ecgi.org/publications/documents/presscomm_group_en.pdf 74 Communication of the Commission: ‘Modernising Company Law and Enhancing Corporate Governance in the
European Union - A Plan to Move Forward’, 21 May 2003.
75 Communication of the Commission (2003), supra n. 70; 24 76 Shareholder Rights Directive 2007; recital 3
21 who cannot attend the general meeting, as well. To be able to cast an informed vote, timely notice should be given of the general meeting and the possibilities which technologies offer these days to make information directly available should be exploited.78 Voting without attending the general meeting in person can only be subject to constraints necessary to verify the identification of the shareholder.79 Good corporate governance requires an effective process of proxy voting.80 Limitations that make proxy voting cumbersome and expensive should therefore be removed. Worth mentioning is that recital 10 includes a part which explicitly states that “this directive does not impose any obligation on companies to verify that proxy holders cast votes in accordance with the voting instructions of the appointing shareholders.” If there are financial intermediaries involved, the effectiveness of voting instructions relies on the efficiency of the chain of intermediaries. It needs the cooperation of every intermediary in the chain. The intermediaries will need to facilitate the exercise of voting rights to enable the investor to effectively exercise his rights. 81 The last goal is transparency of the voting results. These results should be made transparent, at least through the company website, after the general meeting.82
Will accomplishing these goals be enough to solve the problems related to cross-border voting? To answer this question I will discuss whether the European Parliament and the Council implemented these goals properly in the Directive by having a detailed look into the articles concerning cross-border voting.
78 Shareholder Rights Directive 2007; recital 6 79 Shareholder Rights Directive 2007; recital 9 80 Shareholder Rights Directive 2007; recital 10 81 Shareholder Rights Directive 2007; recital 11 82 Shareholder Rights Directive 2007; recital 13
22
4.2.3 Articles regulating cross-border voting
All of the rules in the SRD are practical and necessary to solve the problems of cross-border voting in Europe. However, they are not sufficient to facilitate effective cross-border voting of investors holding shares through intermediaries.83 By comparing the articles of the SRD to the goals set in the recitals and the problems I mentioned in the previous chapter, I will try to find out what is still missing to facilitate effective cross-border voting of investors.
The Member State in which the company has its statutory seat shall be competent to regulate matters covered in the SRD. References made to ‘the applicable law’ are references to the law of that Member State.84 Article 2 of the SRD formulates the definition of the ‘shareholder’: “the natural or legal person that is recognized as a shareholder under the applicable law. This definition does not comply with the goal set in recital 3, that holders of shares carrying voting rights should be able to exercise these rights given that they are reflected in the price they have paid. And obstacles deterring shareholders to vote should be removed. The natural or legal person that is recognized by the applicable law as the ‘shareholder’ is not always the ultimate investor, i.e. the person who should be able to exercise the voting rights. The definition of the shareholder in the SRD still leaves the problem that the ultimate investor is not identified.
Article 4, 8 and 12 of the SRD try to accomplish the goal of equal treatment of foreign – and domestic shareholders, i.e. foreign shareholders should be able to exercise their rights in relation to the general meeting as easily as domestic shareholders. The company shall ensure that all the shareholders in the same position with regards to the exercise of their rights will be treated equal.85 Well the questions then are: When is treatment equal? Does this mean that two shareholders from different countries both just have to find out how they are able to attend the general meeting, or does it mean that we have to make sure they can both exercise their voting rights with the same amount of effort? And when are they in the same position? Are they in the same position when they acquired the same sort of shares, or does their actual position (country) play a part? The SRD is not clear on this point what can lead to different interpretations by different Member States with unequal treatment as a result. Article 8 is about participation in the general meeting by electronic means. Member States shall allow companies to offer their shareholders any form of participation in the general meeting by electronic means. Participation by electronic means can only be subject to requirements that
83 Jaap Winter (2006) supra n. 44. 3-6; see also: Michael Schouten (2009) supra n. 14. 9 84 Shareholder Rights Directive 2007; article 1(2)
23 are necessary and proportionate to ensure the identification of the shareholder and security of the electronic communication. So basically the SRD facilitates the participation in the general meeting by electronic means, but the Member States cannot guarantee that the companies will actually effectuate this opportunity. In the end, the companies have the power to decide if they offer participation in general meetings by electronic means; the Member States cannot force them to do so. According to this, there is no guarantee that foreign shareholders can exercise their voting rights as easily as domestic shareholders. This means that, even if the ultimate investor can be identified, he will probably not be able to participate in the general meeting, if it’s a foreign shareholder, because of the distance. The Member States will also allow the companies to offer their shareholders the possibility to vote by correspondence in advance of the general meeting.86 This can only be subject to requirements that are necessary and proportionate to identify the shareholders. Again the Member States allow the companies to offer voting by correspondence but they cannot force the companies to actually make use of this opportunity. Thus there is no guarantee that the shareholders can exercise their voting right at the general meeting without being physically present.
To be able to cast an informed vote, the shareholders should be timely noticed of the general meeting. The Member States shall ensure that the information needed to cast an informed vote is made available through the company’s website at least 21 days in advance.87 The system where the information is issued through a publication available for all shareholders is called the ‘pull system’, whereas the ‘push system’ means that all the information is forwarded by post or electronic means to each shareholder. The advantage of the ‘pull system’ is that there is no identification process needed and thus less cumbersome compared to the ‘push system’.88 In my view a notification at least 21 days in advance gives the shareholders more than enough time to get sufficiently informed to cast their vote.
Good corporate governance requires an effective process of proxy voting. Let’s start by saying that an effective process of proxy voting not means that there is good corporate governance, but it helps. The SRD gives shareholders the right to appoint any natural or legal person as a proxy holder as long as this person has legal capacity.89 Limitations that make proxy voting cumbersome and expensive are removed and proxyholders shall vote in
86 Shareholder Rights Directive 2007; article 12 87 Shareholder Rights Directive 2007; article 5
88 Pavlos E Masouros,. ‘Is the EU taking shareholder rights seriously?: An essay on the importance of shareholdership in corporate Europe’. European Company Law 7, no 5 (2010). 197
24 accordance with the voting instructions.90 Intermediaries with multiple clients even have the possibility to appoint a proxy to each of his clients.91 But is this an effective process of proxy voting? If the purpose of proxy voting is just to have the possibility to appoint someone who van vote for you if you are not able to be present at the general meeting, then yes this is an effective process of proxy voting. This can be a good solution if the companies don’t make use of their permission to offer any form of participation by electronic means or voting by correspondence in advance of the general meeting. But if the purpose of proxy voting is to facilitate the effective exercise of voting rights by the ultimate investor, then no, the articles in the SRD do not provide an effective process of proxy voting. The SRD mentions in his recitals that it does not facilitate an effective process of proxy voting by saying that “this directive does not impose any obligation on companies to verify that proxy holders cast votes in accordance with the voting instructions of the appointing shareholders.” If the companies are not obliged to verify if the votes are cast in accordance with the voting instructions, proxy voting is not reliable for the issuer of the proxy. For the ultimate investor who needs a proxy to be able to exercise the voting rights of the formal shareholder this possibility to appoint a proxy is not satisfying. He still needs the cooperation of the intermediary. The ultimate investor can request a proxy but he depends on the appointment from an intermediary. The SRD does not require intermediaries to appoint a proxy to the ultimate shareholder.
In its recitals the SRD mentions that intermediaries should facilitate the exercise of voting rights to enable the ultimate investor to exercise his rights in cross-border situations, but this doesn’t come back in any of the articles92. This is a pity because it would make a huge difference if intermediaries were required to facilitate the ultimate investor in exercising his voting rights.
Companies shall publish the results of the voting on its website within a period that shall not exceed 15 days, determined by the applicable law.93 This is entirely in accordance with the goal set regarding the transparency of the voting results.
In my view, the SRD fails to achieve its goal because it contains two essential shortcomings. Firstly, most of the articles facilitate choices for the companies or intermediaries to help facilitate the exercise of voting rights by the investor. An article about proxy voting where the formal shareholder (so in face intermediary) gets the right to appoint a proxy holder, where
90 Shareholder Rights Directive 2007; article 10(4) 91 Shareholder Rights Directive 2007; article 13 92 Shareholder Rights Directive 2007; recital 11 93 Shareholder Rights Directive 2007; article 14
25 the Member States should require from the intermediary that he facilitates the exercise of voting rights by the ultimate investor. 94
Secondly, the SRD does not address the key problem. As discussed in chapter 3, the key problem is that the ultimate investor cannot exercise its voting rights effectively. The reason for this is that multiple intermediaries are the ‘formal’ shareholder and thus entitled to exercise the voting rights. The ultimate investor runs the economic risk and should therefore be entitled to exercise the voting rights. By identifying this investor we can resolve the problem of multiple entitlements in the chain of intermediaries. We need regulation that addresses this problem by requiring from every ‘formal’ shareholder to facilitate the identification of the ultimate investor.
Regulation addressing this problem still does not exist. Last year the European Commission proposed to revise the SRD.95 The next chapter will discuss if this revision will be sufficient to address the problem of cross-border voting in Europe.
94 Jaap Winter (2006) supra n. 44. 3-6
26 5
Proposal for revision of Directive 2007/36/EC
In April 2014 the European Commission presented a proposal for a Directive of the European Parliament and of the Council amending Directive 2007/36/EC96 as regards the encouragement of long-term shareholder engagement and Directive 2013/34/EU97 as regards certain elements of the corporate governance statement.98 The overarching objective of the revision of the Shareholder Rights Directive is to contribute to ‘the long-term sustainability of EU companies, to create an attractive environment for shareholders and to enhance cross-border voting by improving the efficiency of the equity investment chain in order to contribute to jobs creation and EU competitiveness.’99 For this research only the revisions to enhance cross-border voting are relevant. To accomplish the enhancement of cross-border voting two more specific objectives need to be realized: the reliability and quality of the advice of proxy advisors need to be ensured and the transmission of cross-border information (including voting) across the chain of intermediaries needs to be facilitated, in particular through shareholder identification.100 Although ensuring the reliability and quality of the advice of proxy advisors will help improve the quality of cross-border voting, I will only focus on the revisions proposed to improve the transmission of rights flowing through the chain of intermediaries. The reason for this is that I think shareholder identification is the only way to ensure that the ultimate investor can exercise his voting rights. The role of proxy advisors will not be of influence in identifying the ultimate investor.
5.1 Amendments of the Shareholder Rights Directive
The Commission proposed to add the chapters Ia and Ib after article 3 of Directive 2007/36/EC. Chapter Ia concerns the identification of shareholders, transmission of information and facilitation of exercise of shareholder rights.101 The first article of chapter Ia is article 3a regarding the identification of shareholders. It requires Member states to ensure that intermediaries offer listed companies the possibility to get the identification of their
96 Shareholder Rights Directive 2007
97 DIRECTIVE 2013/34/EU OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings.
98 Proposal of 09-04-2014 for the revision of the Shareholder Rights Directive 99 Idem; Explanatory Memorandum, 2
100 Idem; Explanatory Memorandum, 5-6 101 Idem; Explanatory Memorandum, 17
27 shareholders (par 1). At first sight, the proposal looks like it really forces the intermediaries to facilitate the identification process of the ultimate investor. This will enable him to exercise his voting rights effectively. Instead of allowing the intermediaries to facilitate the identification of the shareholder, the Member States need to ensure that the intermediaries offer the possibility to companies to get the identification of their shareholders. In this way the intermediaries are obliged to help facilitating the exercise of cross-border voting instead of having the choice to do so when its suits them best. The only catch of the proposal is that intermediaries can only be forced to provide the names and contact details of the shareholders on request of the company. The proposal leaves it up to the companies to decide whether they want the identification of the shareholders or not.
Zetsche argues in his article about ‘shareholder passivity’ that granting the companies a choice doesn’t have to be a problem. This is due to the fact that from the company’s perspective, the voting turnout at the general meetings is a reliable signal for the shareholder-management relationship. Most companies regard high voting turnouts to be a reliable signal saying that there is a good shareholder-management relationship.102 Zetsche says that “this is due to the fact that shareholders encourage management to work hard, and keep management at bay in its efforts to gain excessively from profits provided on the back of the shareholders (as holders of the residual claim) and lenders.” According to empirical studies, these monitoring efforts of shareholders are presumed to enhance the firm value.103 Additionally, a high voting turnout will help to meet minimum quorums in general meetings. If the law or articles of association of a company sets a minimum quorum for certain decisions, a low voting turnout may affect the validity of these decisions. Therefore the company prefers to identify and mobilize as many shareholders as they can for the general meetings.104
Based on the statement of Hainsworth in his article regarding the Shareholder Rights Directive, there is also the chance that companies will abuse their powers.105 He argues that companies can be unwilling to develop sophisticated and reliable systems and protocols for shareholder voting. Identifying their shareholders can be costly, keeping in mind that the intermediaries can charges fees or prices for the services to the company. Furthermore the companies can be afraid of the fact that they have to deal with different corporate cultures of the cross-border shareholders. These shareholders might subject them to a stricter control in
102 Zetzsche (2008), supra n. 13. 7
103 PA Gompers, JL Ishii & A Metrick, ”Corporate Governance and Equity Prices”, Quarterly Journal of
Economics, 118:1, 2003, 107
104 Zetzsche (2008), supra n. 13. 7 105 Hainsworth (2007), supra n. 34. 11
28 comparison to what they are used to by their residential investors.106 Thus the company might decide to refrain from putting in a request to have its shareholders identified, or only do it if they expect a positive response. So basically the proposal allows the companies to decide the outcome of the voting process in general meetings. An identification request to enable shareholders to exercise their votes will be put in by the company if they anticipate that these shareholders will cast their votes in alignment with the company’s strategy. On the contrary, the company might refrain to put in a request for the shareholder identification if it expects a negative outcome of the voting. As a result, the companies decide if and when the shareholders can effectively participate in exercising the rights attached to their shares, whereas we discussed in chapter 2, in good corporate governance active participation of shareholders should be their own choice. If the company does not choose to request identification of the shareholders, nothing changes compared to the SRD of 2007. All the problems discussed in chapter 4 will still be part of the cross-border voting process.
According to article 3a (par 2) of the revision, the Member States also need to ensure that, when requested from a company, the intermediaries shall communicate without undue delay the names and contact details of the shareholders. It is possible that there is more than one intermediary in the holding chain. If this is the case, the request of the company and the names and contact details of the shareholders shall be transmitted through the chain of intermediaries without undue delay. If the shareholders are legal persons, their unique identifier, where available, should be transmitted. An identifier allows a legal person to be identified by a number that is unique in Europe. It is created by the Regulatory Oversight Commissee (ROC) to ‘improve the cross-border access of citizens and businesses to legal means in Europe as well as to improve the interoperability between legal authorities within the EU.’107 The unique identifier will make it easier to track the companies in cross-border settings by searching for them digitally.108
A request from a company for shareholder identification would enable and facilitate the shareholder to make a well-informed decision and to exercise his rights attached to his shares. But with the explicit statement in the impact assessment from the European Commission that ‘the Shareholders Rights Directive does not aim at harmonising the concept of the "shareholder" or defining who the beneficial owner of a share is’, I am not sure if this is an addition to what we already had in the Directive of 2007. If the identification will not go
106 Michael Schouten(2009) supra n. 14. 4
107 Website of ROC: www.leiroc.org; for more information about the identifier for legal person see website. 108 Proposal of 09-04-2014 for the revision of the Shareholder Rights Directive; 17
29 further than identify the formal shareholder, we will not solve the key problem of cross-border voting in Europe. Accomplishing that shareholders are well-informed could be done according to the pull-system discussed in chapter 4, via the website of the company.
Again the Commission chooses not to facilitate the exercise of cross-border voting rights of the ultimate investor. It stays with the definition of the formal shareholder that is recognized as a shareholder under the applicable law what means that non-beneficial intermediaries can still be entitled to exercise the voting rights. Thus the beneficial owners are still dependent upon the cooperation of the intermediaries to facilitate the effective exercise of their voting rights. As I’ve mentioned before, this is a key issue of the problems in cross-border voting. We need to ensure that the beneficial owner, the ultimate investor in a cross-border situation is able to effectively exercise the voting rights attached to his shares. The Commission needs to revise the definition of the shareholder, or add the definition of the ultimate investor to his articles, to really make a difference. Concluding that without this revision the proposal will be useless and not solve the issue of cross-border voting, I will continue evaluation the proposal by reading the word ‘ultimate investor’ instead of ‘shareholder’ to see if this changes anything.
Article 3b deals with the transmission of information. Companies can choose not to communicate directly with their shareholders (ultimate investors). The Member States are, if this is the case, required to ensure that the information related to their shares shall be transmitted to the shareholders (ultimate investors) by the intermediary without undue delay in the following cases:
a) if the information is necessary to be able to exercise a right of the shareholder(ultimate investor) flowing from his shares, or
b) the information is directed to all the shareholders(ultimate investors) with shares in that class
It is also possible to transmit the information to a third party if this is in accordance with the instructions given by the shareholder (ultimate investor). The companies shall be required by the Member States to provide the intermediary with the information referred to in paragraph 1 in a standardized and timely manner (par 2). If the intermediaries receive information, related to the exercise of the rights flowing from their shares, back from the shareholders(ultimate
investors), they are obliged by the Member States to transmit this to the company, in
accordance with their instructions, without undue delay (par 3). In a holding chain with more than one intermediary, the information shall be transferred between intermediaries without unnecessary delay (par 4).
30 After including the ultimate investor in article 3b, it finally looks like it can help solving our issue. This is the first article that actually ensures the transmission of information through the chain of intermediaries. By including the ‘ultimate investor’ in the article, the intermediaries are required to transmit the information all the way back to the ultimate investor instead of the formal shareholder. This article protects the ultimate investor against the abuse of power by the companies. Paragraph 2 forces them, even if they do not communicate directly with their ultimate investors, to provide necessary information through the chain of intermediaries. The intermediaries are required to transfer this information between intermediaries without undue delay to the ultimate investor. The ultimate investor is now the last station of the chain instead of the formal shareholder. The requirement for companies and intermediaries to facilitate the transmission of information is exactly what we need. Don’t let them choose to facilitate the exercise of voting right by the ultimate investor, but require them to do so. Without the ‘shareholder’ changed into the ‘ultimate investor’, my conclusion is the same as before. This article does not help in facilitating the exercise of the voting rights by the ultimate investor. With the ‘wrong’ definition of the shareholder, the same problems still exist.
Article 3c regulates the facilitation of the exercise of shareholders’ (ultimate
investors) rights. It requires Member States to ensure that intermediaries facilitate the
exercise of the shareholders’ (ultimate investors) rights. This includes the right to participate and vote in the general meetings. This facilitation shall at least include one of the following:
a) The intermediary will make the necessary arrangements for the shareholder (ultimate
investor), or a third person nominated by the shareholder, to be able to exercise the
rights themselves.
b) The intermediary will exercise the rights flowing from the shares according to the explicit authorization and instructions of the shareholder(ultimate investor) and for his benefit.(par 1)
The Member States shall also ensure that the companies will confirm the votes cast by or on behalf of the shareholders (ultimate investors) in the general meetings. In the case the intermediary casts the vote, it will be required to transmit the voting confirmation to the shareholder (ultimate investor). If there is more than one intermediary in the holding chain, the confirmation shall be transmitted through the chain of intermediaries without undue delay (par2).
This article ensures that the ultimate investor is able to determine how his shares will be voted. The intermediary will either make the necessary arrangements for the shareholder to
