Tightening the LSE’s listing rules – Is it in the minorities’ interests?

Asset managers are pressuring UK regulators to tighten listing standards in the wake of a perceived compromise of corporate governance principles subsequent to the successful entry of some new entities on to the London Stock Exchange.

The Association of British Insurers response called on the FSA to go further, voicing concern that “an erosion of standards of listing in recent years … has impacted on the quality of the leading UK stock market indices to the detriment of savers and investors”.

An assistant director of capital markets at the ABI cited a more recent example of several flotations on the LSE by foreign-based natural resources companies in which existing shareholders retained an overwhelming majority of the equity duly flouting the 25% free float regulations.

The Financial Services Authority, subsequent to an inquiry into proposed listing rule changes in Jan 2012, documented a number of debatable amendments including for clamping down on reverse takeovers to avoid their being used as a “back door” route into the FTSE 100, as well as giving minority investors greater power to veto resolutions.

Without derogating into a discussion around the technicalities of free floats-those shares issued by the company that should from a regulatory point of view be available for trading in the market and the complex weighting mechanisms applied thereto by the various stock exchanges, I think it is more important to pick up on the issue of minority shareholders and their voting rights –something which is touched upon in the King Report on Corporate Governance for South Africa 2009 and further elaborated on in the Companies Act 71 of 2008.

King III states that there must be equitable treatment of all holders of the same class of shares issued by the company as regards those shares, including minorities, and between holders of different classes of shares in the company, except where it is necessary to protect the interests of the shareholders of those classes that have a priority in ranking. It goes on to say that minority shareholders should be protected from abusive actions by or in the interests of the controlling shareholder.

The New Companies Act 71 of 2008 goes on to detail the types of protection offered to minorities. The starting point is the codification of the fiduciary duties of directors who are liable for damages as a result of the contravention thereof. The first type of protection offered by the Act enables the minority shareholders to institute action against directors should they suffer damages due to a director’s breach of his fiduciary duties.

Statutory relief is also available to minority shareholders in the event of oppressive or prejudicial conduct, or abuse of separate juristic personality of the company. The new Act further provides for an application to determine or protect a shareholder’s rights or to rectify harm done to a shareholder. This it must be said is in addition to the available common law and statutory remedies. Other new statutory remedies for minority shareholders introduced in the new Act allow for dissenting minorities to request a court to review a fundamental transaction – a merger or takeover. Lastly, the new Act allows any shareholder to apply to court in order to declare a director to be delinquent or under probation.

Given the alignment with the UK companies Act 2006 which similarly echoes the enforcement of directors duties by minority shareholders, it seems strange that the FSA would conduct a fundamental review which would look to give minority investors greater power to veto resolutions.

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