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SHAREHOLDERS RIGHTS
By Ross Dillon, Board Member (Advocacy), New Zealand Shareholders’ Association Incorporated.
General
It often surprises people that the shareholders, the apparent "owners" of a company, do not have extensive direct control of its operations.
The reason for this is quite subtle: the assets of a company are owned by the company, not by its shareholders. Shareholders own a bundle of rights in relation to that company. Those rights do not include outright control of the company itself. In effect, a shareholder is not an "owner".
In small "one man" companies, this distinction is lost sight of, as in most circumstances it has no practical effect. However, in listed public companies, the distinctions between shareholders, management, and the company itself, has very real and practical effects.
The purpose of the Companies Act and its associated legislation, regulations, listing rules and ultimately case law, is to balance the rights and obligations of those separate components.
The purpose of the New Zealand Shareholders Association Incorporated is to optimise the rights of shareholders, to the long term benefit of investors, and to build confidence in the equity investment process itself.
Types of Rights
Management of the company is vested primarily in the Directors, so shareholders rights generally fall into one of 3 categories:
Taking direct control of certain very limited aspects of management (by shareholder resolution)
Exerting influence to encourage directors to perform their duties to the company.
Sanctions available to shareholders, where things have gone badly wrong.
Direct Control
"Major transactions" are a particular type of dealing, defined in the Companies Act. Essentially these involve dealings with the majority of a company’s assets. Where such a transaction is to be entered into, the company must obtain the consent of shareholders, expressed in a resolution from a general meeting.
Shareholders who object to that transaction can trigger a buy out mechanism in terms of certain provisions of the Companies Act. To trigger the mechanism a shareholder must vote against the resolution, the resolution must be passed by the meeting anyway, and then the shareholder give the required notice seeking a buy out. It should be noted that the buy out is not automatic, and in some cases the company can resist this. The buy out provisions can also be triggered where there are changes to the Constitution, or where rights attaching to shares are altered.
There are a number of other circumstances where the Companies Act requires a "special resolution" (75% of the shareholders voting in favour of a resolution in order for it to be binding on the company, or by a greater percentage if the Constitution so provides). Special resolutions are a particular method for ensuring shareholders have direct input into some major issues affecting the company. Any special resolution will trigger the minority buy out provision.
Shareholders can also promote resolutions directly, by putting the Board on notice and providing the text of a resolution. Certain time limits apply for requests for a shareholder resolution. However, shareholder sponsored resolutions are not always binding on the Board. The Companies Act, and the company Constitution, can and does distinguish between the rights and powers vested in the shareholders, and those vested in the Board. Power vested in one entity can not be exercised by the other.
Indirect Influence
In many cases, a shareholder resolution may be seen as a method of indirect influence. Even if the Board is not legally bound to perform a direction of the shareholders, expressed in a resolution, it would still be wise for them to bear such a direction in mind.
The directors are appointed by the shareholders in general meeting. Like politicians, if they do not perform, they may not get re-elected.
Shareholders have rights to certain of the company records and information. The receipt of the annual report is an example of the right of access to such information. Further information can be obtained and informally commented on, by letters to the Board. Such letters can provide helpful comments and suggestions, or can be critical of decisions made. Either way, the Board obtains feedback as to shareholder perception of their performance. Such correspondence can influence Board decisions.
Major shareholders tend to be adept at exercising these informal types of control, whether jointly with other such shareholders, or by individual direct approach to Board members. The power provided by a major shareholder’s block vote is very persuasive.
Minority shareholders have greater difficulty in doing this, but concerted coordinated activity of this nature can be quite effective. It is the general policy of the New Zealand Shareholders Association to facilitate such action on behalf of members. Our web page publishes all such correspondence.
The general meetings of a company always provide an opportunity to comment on Board decisions and performance. This has traditionally been the forum where disgruntled shareholders in particular have made their views known.
Sanctions
Apart from rights of direct control and indirect influence, there are a series of sanctions that shareholders can exercise against directors. The Companies Act spells out director’s duties to the company in some detail. It also provides for mechanisms for shareholders to pursue the company’s rights against defaulting directors. It should be noted that director’s duties are generally to the company. Not to the shareholders. This reflects the issues raised in the opening paragraphs.
There are also limited rights for shareholders to claim directly (as opposed to "standing in the shoes of the company") against defaulting directors. These rights either compel directors to fulfil their duties to the company, or more rarely allow the recovery of losses sustained by the company from the directors personally.
These types of rights always involve litigation, and specialist assistance would be required of anyone seeking to exercise them. In suitable circumstances, the New Zealand Shareholders Association may assist in leading and/or coordinating such action. In general terms, these are remedies of "last resort".
Conclusion
Fundamentally, shareholders interests in a company are defined by the Companies Act, associated legislation, and the company Constitution. It is not the same interest as an "owner". The interests of shareholders are balanced against the interests of the company, management, creditors, and the public interest.
Nonetheless, it is shareholders funds that are usually most at risk, and it is very important that shareholders interests be articulated and when necessary, enforced.
The New Zealand Shareholders Association exists for the purpose of articulating those concerns and where necessary leading or coordinating shareholder action, particularly for the protection of minority interests. |
