The new rules for Controlling ShareholdersPrint publication
The new provisions regarding Controlling Shareholders are set out primarily in Listing Rule 6. This Listing Rule sets out requirements where the company has a “Controlling Shareholder”. A Controlling Shareholder is a person who on its own or who together with any person with whom it acts in concert, exercises or controls 30 per cent or more of the votes able to be cast on all or substantially all matters at general meetings of the company. There is no definition of parties acting in concert.
There is a requirement for a written binding agreement between the company and its Controlling Shareholder. The agreement must remain in place as long as the company continues to have a Controlling Shareholder. There are mandatory content requirements for this agreement, designed to ensure the company’s independence from the Controlling Shareholder:
- transactions and relationships with the Controlling Shareholder (and its associates) will be conducted at arm’s length and on normal commercial terms
- no Controlling Shareholder or any of its associates will take any action that would have the effect of preventing the company from complying with its obligations under the Listing Rules
- no Controlling Shareholder or any of its associates will propose or procure the proposal of a shareholder resolution which is intended or appears to be intended to circumvent the proper application of the Listing Rules.
A relationship agreement will typically cover matters beyond the three requirements just referred to. The Financial Conduct Authority (FCA) – the authority responsible for ensuring compliance with the Listing Rules – will not monitor those provisions although any such provisions must not be in breach of the related party transactions rules, set out in Listing Rule 11.
The Listing Rules contain provisions regarding the election of independent directors where the company has a Controlling Shareholder. A company with a Controlling Shareholder will have to ensure that the election or re-election of any independent director must be approved by separate resolutions of:
- the shareholders; and
- the independent shareholders (i.e. not including the Controlling Shareholder).
If either resolution is defeated, the company may propose a further resolution to elect or re-elect the proposed independent director provided that the further resolution must not be voted on within 90 days from the date of the original vote and may then be passed by a vote of the shareholders of the company voting as a single class. There will have to be a provision providing for this in the articles of association and it may be that the articles of association need to be amended to allow for this.
Listed companies with a Controlling Shareholder must include a statement by the board to the effect that the company has entered into a relationship agreement containing the independence undertakings just described and that the independence undertakings have been complied with throughout the accounting period. If either of these statements cannot be made, the company will have to explain why not. In addition, if an independent director refuses to support the board’s statement, the statement will have to say so.
If the Controlling Shareholder refuses to sign a relationship agreement, or the independence provisions in a relationship agreement are not adhered to, or an independent director disagrees with the board’s assessment of whether the independence provisions have been complied with, a regime of “enhanced oversight measures” will apply. This means that the exemptions from the full application of the related party rules in Chapter 11 of the Listing Rules will be suspended. In other words, ordinary course transactions, small transactions and other ordinarily exempt transactions will require shareholder approval (although the FCA would retain the right to waive this in respect of ordinary course transactions on a case by case basis). This regime would apply until a “clean” compliance statement is made in a subsequent annual report. The “enhanced oversight regime” does not detract from the other sanctions at the FCA’s disposal, including ultimately its right to cancel the listing.
Premium listed companies should consider whether they may be subject to the Controlling Shareholder regime. This may not be straightforward as the definition of Controlling Shareholder includes associates and concert parties. Please speak to us if you are unsure. If the regime does apply, or may apply in future, it may be necessary to amend the articles of association.