The traditional split in the distribution in power is that directors run the company, and shareholders own it. Directors make important decisions about the constitution and the strategy of the company, and often require shareholder approval for certain decisions. English companies are part of society, and as soon as they lose sight of that they run into trouble. The shareholders are an important part of the power mechanism, as has been graphically demonstrated by recent events.
The longest piece of legislation for us is in fact the Companies Act [2006], which establishes the precise governance of the English company. An ordinary resolution of the members (or of a class of members) of a company means a resolution that is passed by a simple majority. and a special resolution of the members (or of a class of members) of a company means a resolution passed by a majority of not less than 75%.
All is not lost then if the shareholders wish to exert influence over the running of the English company. For example, a company may by ordinary resolution at a meeting remove a director before the expiration of his period of office, notwithstanding anything in any agreement between it and him. In July 2011, activist investors have been successful in their attempt to remove two directors at Aim-listed Aurora Russia, in a rare example of shareholder activism forcing change at a listed private equity firm. Aurora Russia, which trades on London’s AIM and focuses on investing in the Russian market, has confirmed that Dan Koch and Alexandr Dumnov have resigned as directors of the company in a move aimed at improving the company’s corporate governance. The men were widely considered to be too close to the Aurora’s founders and managers John McRoberts and James Cook to be deemed independent, according to two people familiar with the situation. Aurora declined to comment further. The departure of the two men from Aurora’s board was reported as being one of several demands being made by two of the company’s largest shareholders; Timothy Slesinger and Peregrine Moncreiffe together hold around 20% of Aurora’s shares either directly or through the management of investment funds.
Pay is another target of ‘shareholder activism’. Public companies are required to prepare a directors’ remuneration report and put the resolution on the report to a shareholders vote. The vote to be held will be an ordinary resolution to approve the remuneration report and gives the shareholders the opportunity to consider the company’s remuneration policies and the remuneration paid to directors in the previous financial year. The shareholders vote is only advisory and no aspect of an individual director’s entitlements under a service contract is conditional on approval by the shareholders.
There has been much talk latterly about a great wave of “shareholder activism” against excessive executive pay, a so-called the “Shareholder Spring” – and there has been a 100% increase in the number of rejections by investors of FTSE 100 companies’ remuneration policies, from just one decisive rebellion in some years to a grand total of two this year. This week’s 60% vote against the remuneration report of WPP, the media giant, against the 60% rise to The decision of the shareholders is only advisory and the board of the advertising conglomerate can ignore it if they wish, but the company’s Chairman, Philip Lader, said: “We take the remuneration report vote seriously. We’ll consult with many share owners and we’ll then move forward in the best interest of our share owners and our business.”
Robert Peston warns that the “shareholder spring” may not, as such, exist. Peston writes on the BBC website, “Strikingly, though, a deeper analysis of this so-called “shareholder spring” of investor uprisings shows it may not really exist. There have been just four defeats so far of companies in votes on their so-called “remuneration reports”, and only one of these companies has been in the FTSE100 list of biggest businesses. That does not represent an exponential increase in shareholder rebellions.”
The Companies Act [2006] also provides for the important, but overall unlikely to succeed, mechanism known as the “derivative action“. The 2006 Act introduced a new statutory derivative action, giving shareholders the ability to bring a civil action on behalf of the company against a director (or against a third party) in respect of the director’s conduct. The ability to bring a derivative action is dependent on the company itself having a claim. These types of action should usually be considered as an action of last resort. There is a two-stage procedure for the shareholder seeking to bring the derivative action. Firstly, the applicant will be required to make a prima facie case for permission to continue a derivative action. Secondly, but before the substantive action begins, the court may require evidence to be provided by the company. However, courts have strong powers and discretion
Shareholders finally have a statutory right to apply to court for relief where the company’s affairs have been carried out in a way which has been unfairly prejudicial to the interests of its shareholders. In general, these actions also involve a lengthy time process and are likely to take as long, if not longer, than a derivative action. These actions are also rare in the context of listed companies, as the most natural remedy is for the investor to sell its holding in the market. In general, as long as a company has acted within the confines of its constitution, it is often considered difficult to succeed with unfair prejudice petitions. However Grace v Bagiloli [2006] was rare decision on the remedies appropriate when a minority shareholder’s claim succeeds in a case of where excessive dividends in the company were considered unfairly prejudicial.
All these recent events demonstrate that, whilst the shareholders own the company and not considered to be involved in the day-to-day running of the company, they exert in fact a huge amount of power potentially. Successful companies are ones which value people, including the citizens who work within them as well as customers. In this way, lawyers are well placed to act as the linchpin between corporates and the rest of society, as elegantly discussed by Porter and Kramer in the Harvard Business Journal.
