October 4, 2012
FSA hates controlling shareholders
I suppose that will happen when a large, influential company with a controlling shareholder finds itself in the middle of a phone hacking scandal. That said, the proposed changes to the FSA listing standards are at first glance a relatively extreme move against the power of controlling shareholders.
The FSA proposes to further strengthen the Listing Regime by adopting greater corporate governance requirements for companies with a dominant shareholder. The FSA will increase the tools available to independent shareholders to influence the governance of the companies in which they have invested. These proposals include:
- introducing the concept of a ‘controlling shareholder’;
- requiring an agreement is put in place to regulate the relationship between such a shareholder and the listed company;
- and ensuring that this agreement is complied with on an ongoing basis. This will ensure that the company is managed independently from that shareholder.
The FSA also recognises the important role that the independent directors play in these circumstances. Therefore it will also insist on a majority of independent directors on the board where a controlling shareholder exists and introduce a new dual voting procedure to allow independent shareholders to have more say in their appointment.
The idea here appears to be to take the "control" out of controlling shareholders and put more power to elect directors in the hands of minority/non-controlling shareholders. That's a pretty big move. By isolating controlling shareholders from the boards of the companies that presumably own, that would change the nature of a control position. I know the phone hacking scandal was bad, but this seems like an over-reaction. So, going forward if you own more than 50% of the stock of a UK listed firm, you'll have scarcely more influence over the direction of the firm than a minority shareholder? I wonder whether, following implementation of these listing standards, control premiums will go down for UK listed companies. Worth following as this develops.
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I find it interesting that securities regulators and stock exchanges put such little faith in the efficacy of corporate law. In the US, Canada, the UK and Australia, corporate law doesn't treat directors who are nominated by large shareholders ("nominee directors") any differently from other directors. They all have the same duties of care, loyalty and confidentiality and there is case law that shows that any nominee director who takes orders from the shareholder who apppointed him puts himself and his appointing shareholder at risk.
Posted by: Lawyer Guy | Oct 4, 2012 6:24:45 AM
Almost as if on cue - a reader sent me a link to Simon v Shocking Technologies. Directors have an "unremitting duty of loyalty to the corporation." Yes, it may be difficult to balance at time, but that's what is required.
Posted by: bjmq | Oct 9, 2012 5:38:00 AM