Shareholder Rights in the Intermediated Holding Structure

1
Shareholder Rights in the Intermediated Holding
Structure

• Agata Waclawik-Wejman, LL.M.
• Polish-German Banking Law Center
• Jagiellonian University, Krakow, Poland
• Stockholm Center for Commercial Law, Stockholm
  University
• Seminar on Shareholder Rights, May 19, 2008

2
Overview

• Exercising Shareholder Rights in Intermediated
  Securities Environment the company
  law-securities law cross-over
• Current EU and international legislative
  initiatives
• Removing Obstacles to Cross-Border Shareholder
  Rights Exercise in Europe The Legal Certainty
  Groups Works

3
Theses

• 1. The legal framework for the exercise of
  shareholder rights a significant link between
  company law and the law of intermediated
  securities
• 2. The modern framework for the exercise of
  shareholder rights will be a joint product of a
  number of EU and international initiatives
• 3. The effective and efficient cross-border
  exercise of shareholder rights not possible
  without a sound legal framework for cross-border
  intermediated securities holdings
• The LCG works on the recommendations regarding
• The EU-wide recognition of cross-border
  multi-tiered intermediated securities holding
  systems
• The duties of account providers with regard to
  corporate actions and voting
• Issuer/Intermediary liability after issuers
  performance vis-a-vis the intermediated system

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1. Exercising Shareholder Rights in
Intermediated Securities Environment
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Exercising the Shareholder Rights

• Basic shareholder rights
• Information
• Vote
• Corporate actions, e.g.
• Dividend
• Subscription Rights
• Basic rules of the exercise of shareholder
  rights
• Those who hold company shares at a certain point
  in time as determined by the law/the company, are
  authorized to exercise the shareholder rights
• You have to prove to the issuer that you are the
  shareholder the share certificate is the evidence

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Shareholder Rights and Certificated Securities

• Share
• A bundle of corporate rights agreement to use a
  certain form of evidence of being shareholder to
  the issuer
• Share certificate
• For the shareholder Evidence
• To the issuer Identification of the shareholder

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Intermediated holding systems The modified
relations between the issuer and investor

• The intermediary system substitutes the
  evidentiary system of certificated securities.
• The effect the investor enters into a legal
  agreement with its intermediary/account provider
  to purchase and manage securities.
• The issuer investor relationship is substituted
  by a set of legal relationships, with various
  rights and obligations related to the
  administration of this evidentiary system by the
  account provider, which
• Facilitate and streamline the process of mass
  turnover of securities / can channel certain
  communication between the issuer and the
  investor,
• Are more complex from the legal point of view
  the relationships between the issuer and account
  providers, and between the account providers and
  the investors /account holders.

8

• Intermediated Securities Holdings a simplified
  scheme

Issuer
Account Provider
Account Provider
Country A
Country B
Account Provider
Account Provider
Investor
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Cross-Overs between Company Law and the Law of
Securities Accounts

• The process of exercising the rights
• 1. Identifying the shareholder
• 2. Communicating with the shareholder the
  respective duties of account providers
• Notifications
• Communication from shareholders (voting, elective
  corporate actions)
• Distributions
• 3. The issuers liability for performance of its
  obligations

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2. Current EU and international legislative
initiatives
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The EU works on intermediated securities systems

• The EU identified the fragmentation of the
  securities clearing and settlement infrastructure
  as a key barrier to the capital markets
  integration in Europe
• The Giovannini Reports - Barriers technological,
  legal and tax
• Three expert groups CESAME, Legal Certainty
  Group and FISCO
• Private sector best practices as the primary
  solution, subsidiarity of the legislative
  solutions the industry work is still ongoing

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The Legal Certainty Group

• Deals with the legal issues related to
  intermediated securities holding structures
• Focuses on barriers to cross-border securities
  holdings
• Covers all types of intermediated securities
  holdings not only shares
• LCGs work on corporate actions (Giovannini
  Barrier 3) focuses on
• The role/duties of account providers in corporate
  actions processing
• The identification of investors to issuers
• The recognition of multi-tier holding of
  securities
• Builds upon the solutions proposed in the
  UNIDROIT Convention on Substantive Rules
  Regarding Intermediated Securities

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The UNIDROIT Convention

• Planned worldwide application
• A lot of room left for country opt-out
• EU can afford a higher degree of harmonization
• Artt. 7, 8, 26
• Account holders right to enjoy shareholder
  rights, if the account holder is not account
  provider
• Open issue, whether the investor can exercise the
  rights against the intermediary or the issuer, or
  both
• Duty of the intermediary to enable the account
  holders to receive and exercise their rights
• Removal of barriers to cross-border intermediated
  holdings of listed securities
• Recognition of multi tiered holding systems,
  including nominee systems, and of partial/split
  exercise of rights

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Shareholder Rights DirectiveVoting in Listed
Companies

• Equal treatment of shareholders (Art. 4)
• Record date with no strings attached, abolishing
  of share blocking ? harmonization of dates
• (Art. 7.1-3.)
• Removing excessive requirements on the proof of
  qualification as a shareholder ? facilitation of
  the exercise of voting rights by shareholder
  (Art. 7.4)
• Split voting ? nominee/omnibus account structure

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3. Removing Obstacles to Cross-Border Shareholder
Rights Exercise in Europe The LCG Works
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Legal Uncertainties in Intermediated Holding
Systems

• Because of the separation of the investor from
  the issuer, technological as well as legal
  uncertainties arise in relation to the exercise
  of voting rights, information and corporate
  actions to which the investors are entitled.
• The longer the chain of account providers, the
  longer the processing and thus the more risk and
  time pressure on the investor.

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• Cross-border Holdings

Issuer
Account Provider
Account Provider
Country A
Country B
Account Provider
Account Provider
Investor
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Cross-border chains of account providers

• Art. 4 SRD Equal treatment of shh
• Longer chains of intermediaries
• Differences in holding patterns
• Not all countries recognize multiple
  tiers/foreign holding patters/foreign chains of
  intermediaries
• Problems
• Legal recognition of shareholder rights/obstacles
  to the exercise of rights
• Timeliness

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Barrier examples Dividends

• Strict non-recognition of cross-border chains of
  intermediaries the last link in the local chain
  of holding is considered shareholder ? the
  foreign shareholders do not get dividend, but
  some type of compensation (different tax regime
  would apply)
• Identification of shareholders requirement
• Regulatory purposes
• Taxation
• Partial dividends (only to those shh who agreed
  to be identified) not always permitted
• Withholding tax procedures
• Best case scenario delays in payment for foreign
  shareholders
• Worst case scenario intermediary taxed as
  shareholder (last tier in the local chain of
  holdings)
• Differences between the dates relevant for
  determination of the entitlement
• Discrepancies may lead to duplication of
  entitlements or disapearance of entitlement at
  certain moment

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Barrier examples - Voting

• Notifications delays, lack of information
• Strict non-recognition of cross-border chains of
  intermediaries the last link in the local chain
  of holding is considered shareholder ? only the
  intermediary can vote
• Prohibition of split voting and partial voting
• Prohibition of further proxies
• Non-recognition of certificates of shareholding
  issued by a foreign entity
• Application of threshold reporting duties,
  mandatory bid duties etc. to the intermediary

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The Solutions

• Identifying the shareholder
• Enabling shh rights exercise
• Recognizing the multi-tiered chains of
  intermediaries
• Recognizing the cross-border chains of
  intermediaries / and the different holding
  patterns
• Notifications (SRD does it for voting in listed
  companies)
• Harmonizing the dates relevant for the
  entitlement (SRD does it for voting in listed
  companies)
• company law measures needed for other corporate
  actions
• the private sector standards should provide the
  guidelines
• Harmonizing cross-border tax collection
  procedures
• FISCO
• The issuer side
• Identification of the shareholder to the issuer
• Determining liability after the issuer pays to
  the upper tier intermediary
• Reconciliation and the protection of the issuer
  against multiplication of shares

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The Solutions - Duties of account providers

• Apart from the core duties related to keeping
  accurate book entries of securities for the
  investors
• In the intermediated securities world, investors
  require certain assistance of intermediaries to
  exercise the rights and enjoy the benefits vested
  in their securities

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Solutions Duties of intermediaries - ctd.

• The spectrum of intermediaries duties considered
• Assistance in the evidencing and identification
  of the investor vis-à-vis the issuer
• e.g. issuing a certificate for the investor which
  the investor can show to the issuer in order to
  be entered on a list of shareholders for a
  particular corporate event,
• Operating a channel of communication between the
  investor and the issuer
• Passing up and down the chain of account
  providers the information between the issuer and
  the investor
• What scope of communication/information flow?
• Whether partial or full-fledged communication
  provided, may vary from corporate event to
  corporate event
• The actual exercise of investors rights on
  behalf on the investor
• (Esp. in legal systems which attribute the legal
  ownership of securities to the intermediary,
  rather than the investor)
• Collecting and distributing to shh any company
  distributions received
• Is the when and if received principle
  sufficient?
• Exercising the rights, e.g. voting, on behalf of
  the shareholder, following the instructions of
  the investor
• unless otherwise provided in the contract between
  the account provider and the investor?

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Solutions Duties of intermediaries - ctd.

• Various types of rights/corporate actions
• Mandatory and optional corporate actions
• Distributions, requiring no action from shh,
  electives, complex (voting, asking questions)
• The exercise of some rights must be intermediated
• Dividends and other distributions
• The exercise of some rights does not need to be
  intermediated
• Voting?

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Summary

• 1. The legal framework for exercising the
  shareholder rights the link between company law
  and the law of intermediated securities
• 2. The modern framework for the exercise of
  shareholder rights will be a joint product of a
  number of EU and international initiatives
• 3. The effective and efficient cross-border
  exercise of shareholder rights not possible
  without a sound legal framework for cross-border
  intermediated securities holdings
• The LCG works on the recommendations regarding
• The EU-wide recognition of cross-border
  multi-tiered intermediated securities holding
  systems
• The duties of account providers with regard to
  corporate actions and voting
• Issuer/Intermediary liability after issuers
  performance vis-a-vis the intermediated system