One effect of the credit crunch has been an increased awareness of the importance of corporate governance. Following the increase in shareholder activism in 2008, there has been a further bout of shareholder revolt over the past few months - not least against some of Britain's biggest retailers, such as Marks and Spencer and Tesco.

Although none of this activity has had any legal ramifications, in terms of adverse publicity and shareholder relations the impact is profound. These and other companies are clearly facing increasing pressure to listen to their shareholders - and this at a time when the tools available to activists to get their business on the agenda and to rally support from other investors are about to be upgraded.

For a discussion of the existing ways open to activists and new rights that will soon become available thanks to the Shareholder Rights Directive, please see below:


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One effect of the credit crunch has been an increased awareness of the importance of corporate governance. Following the increase in shareholder activism in 2008, there has been a further bout of shareholder revolt over the past few months - not least against some of Britain's biggest retailers.

At its AGM on Wednesday 8 July, Marks and Spencer faced heavy opposition from its shareholders over Sir Stuart Rose's dual role as chairman and chief executive. Acting together with PIRC, the Local Authority Pension Fund Forum (which represents 49 pension funds with combined assets of over £75bn) put forward a special resolution to require the company to find an independent chairman to take over from Sir Stuart in July 2010. As expected, votes in favour of the resolution fell well short of the 75% majority required to pass it, but at 37.7% support for the resolution is a very strong showing for a company like Marks and Spencer. Sir Stuart claimed it as a win - but the company's deputy chairman has announced that a new chief executive will be appointed in 2010 and that Sir Stuart will step down as chairman before July 2011.

Recently Tesco has also had to deal with substantial shareholder opposition, with 41% of Tesco's shareholders rejecting a proposed change to the company's share option scheme to extend from one year to three years the period in which leaving or retiring executives would be permitted to exercise share options. This was the biggest shareholder rebuke to a FTSE 100 company for more than a decade.

In May, one in six Next shareholders voted against the directors' remuneration report and in particular the decision to alter the pay scheme of four senior executives. With an 18% vote against the decision taken in shortly before to share an additional £351,000 amongst the four executives (including the chief executive), and a further 8.5% withholding their vote, a quarter of the shareholders did not support the report.

Although none of this activity has had any legal ramifications, in terms of adverse publicity and shareholder relations the impact is profound. These and other companies are clearly facing increasing pressure to listen to their shareholders - and this at a time when the tools available to activists to get their business on the agenda and to rally support from other investors are about to be upgraded.

Companies Act

The Companies Act (subject to certain caveats) allows shareholder activists who want to force a public company to put their resolutions at shareholder meetings either to:

  • requisition a general meeting if between them they hold at least 10% of the voting paid up share capital of the company; or
  • requisition a resolution at the company's AGM if between them they either hold at least 5% of the total voting rights of members entitled to vote on the resolution, or if they are at least 100 members entitled to vote on the resolution and hold shares on which there has been paid up an average sum per member of at least £100.

Requisitioning an AGM resolution is almost invariably the chosen route, as the 5% threshold is much easier to achieve. The 100-member route is increasingly seen as a viable option, as 5% of a major public company can represent a huge investment. It is not necessarily a matter of an investor trawling for 99 like-minded others. In 2007, for example, the activist group Efficient Capital Structure set up 100 nominee accounts and bought enough Vodafone shares through them to achieve the threshold. This was said to have cost ECS £78,500 and to have been a "headache" logistically, but 5% of Vodafone would have cost £4.1bn. The Local Authority Pension Fund Forum took the same route when requisitioning its resolution at the Marks and Spencer AGM.

Shareholder Rights Directive

This EU Directive is being implemented in the UK on 3 August 2009 by regulations that will amend the Companies Act. It aims to improve corporate governance in EU companies traded on regulated markets (which in the UK means companies on the Official List, but not AIM companies) by enabling shareholders to exercise their voting rights and rights to information more easily. One of its objectives is that shareholder activism should be facilitated and encouraged.

For would-be activists, listed companies posting notices of meeting on or after 3 August will be subject to various changes and requirements, including:

  • the threshold for requisitioning a general meeting will be reduced from 10% to 5% of the voting rights.
  • a right for members to ask questions and have them answered at the meeting (subject to certain exemptions, including that answering would "interfere unduly with the preparation for the meeting, or involve the disclosure of confidential information").
  • members will be able, by serving a request on the company, to require the company to include items other than resolutions on the agenda of an AGM (unless the item is defamatory or frivolous or vexatious). The request must be received by the company not later than six weeks before the meeting or, if later, the time at which notice is given of the meeting. If the request is received before the end of the financial year preceding the meeting the company will bear the expenses.
  • additional information about the number of shares in issue, voting rights, members' resolutions and matters of business at the meeting will have to be available on the company's website during the notice period for the meeting.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 14/07/2009.