The Shareholder Rights Directive becomes law.

Companies Act 2006. The Shareholder Rights Directive becomes law. Implementation of the EU Shareholder Rights Directive will require some changes to UK law relating to companies general meetings. The purpose of the Directive is to ensure that, throughout Europe, shareholders in publicly traded companies are fully able to exercise their voting rights and can hold companies to account by placing items of business on the meeting agenda, or asking questions. The changes offer increased opportunities for shareholder activists to make their voices heard, with a new right to table business at AGMs and a lower threshold for requisitioning meetings. For many companies, however, the most immediate practical impact of the Directive is that companies will have to hold all general meetings of shareholders on 21 days notice (rather than being able to hold EGMs on 14 days notice as is presently the case), unless shareholders have agreed in advance to the shorter period being used. In anticipation of this, many UK plcs that have recently held AGMs have obtained the necessary shareholder approval to allow EGMs to be held on 14 days notice. Such approval must be renewed annually. This note describes these and a number of other changes that will affect procedures for calling general meetings, voting by shareholders and the conduct of meetings. Introduction About the Shareholder Rights Directive The Shareholder Rights Directive ( SRD ) 1 aims to assist shareholders of EU companies which are traded on EU regulated markets to exercise their rights to vote and to obtain information about the companies in which they invest. Ultimately this is expected to improve corporate governance. The SRD is being implemented in the UK by regulations amending the Companies Act 2006. The new provisions affect meetings of which notice is given on or after 3 August 2009. 2 The Government has sought to keep changes to a minimum, as it considers that the regime of shareholder rights is well developed in the UK and already satisfies many of the SRD s requirements. Which types of company are affected? The majority of changes only affect companies whose voting shares are admitted to trading on a regulated market in an EEA state ( traded companies ). 3 AIM listed companies are not traded companies under this definition. However, in some cases, the changes affect all companies in order to minimise inconsistencies between the rules on voting and shareholder rights that apply to different categories of companies. For convenience, a table summarising the changes and actions to be taken is set out in the schedule at the end of this note. In the table, the changes are grouped into those which affect all companies and those which affect only traded companies. 1 2 3 Directive 2007/36/EC on the exercise of certain rights of shareholders in listed companies, adopted 11 July 2007. The Companies (Shareholders Rights) Regulations 2009 (SI 2009/1632). References in this note to provisions of the Companies Act 2006 are to the provisions as amended or by these Regulations. The definition of a traded company should be distinguished from the term quoted company which is also used in the Companies Act 2006. Quoted companies are companies whose equity shares are listed on the Official List in the UK or another EEA state, or are admitted to the NYSE or NASDAQ. A10710196/1/0.35/ July 09

Calling a general meeting General meetings held on 14 days notice Since October 2007, companies have been able to hold general meetings (except public company AGMs) on 14 days notice. The SRD imposes a minimum notice period of 21 days on traded companies, unless certain conditions are met. After 3 August 2009, in order to be able to call a general meeting, other than an AGM, on 14 days notice, a traded company must: for the general meeting in question, provide facilities to appoint a proxy by means of a website and the facilities must be accessible to all members holding shares with voting rights; and have passed a special resolution at the immediately preceding AGM, or at a subsequent general meeting, reducing the period of notice to not less than 14 days. 4 In anticipation of the new regime, many FTSE 100 companies have included the appropriate approval resolution in AGMs held in 2009. The regulations implementing the SRD confirm that such resolutions, passed before 3 August 2009, are valid. If traded companies wish to continue to be able to call a general meeting on 14 days notice, they will need to renew this resolution at their AGM every year. It is likely that this will become market practice and, as it preserves existing company powers rather than creating new ones, will be treated as a standard and non-contentious item of business. Preparing documents and providing shareholder information Traded companies will need to include additional information in notices of meeting and proxy forms and publish further information for shareholders on a website. Contents of notice of meeting As well as stating the time, date and place of the meeting and the general nature of the business to be dealt with, as currently required, 5 notices of meeting will need to include: the address of the website which contains the information described below; a statement that the right to vote at the meeting is determined by reference to the register of members and of the time that right is determined (included already by listed companies using CREST); a statement of the procedures for members to be able to attend and vote at the meeting (including the date by which they must comply); details of proxy appointment forms; where the company allows members to vote in advance or by electronic means, details of the necessary procedures and forms to be used; and a statement of the right of members to ask questions at meetings (see Conduct of meetings below). 4 5 Section 307A Companies Act 2006. Section 311 Companies Act 2006. A10710196/2/0.35/ July 09

Where a notice calling an AGM of a traded company is given more than six weeks before the meeting takes place, the notice must also include statements of the rights of shareholders to require the company to: give notice of a resolution to be moved at the meeting (Section 338); and include a matter in the business to be dealt with at the meeting (Section 338A) see below. 6 Website information Before a general meeting takes place, traded companies will also need to publish certain information on a website. The information must be made available on or before the day on which notice of the meeting is given and kept available for two years. This information includes the matters set out in the notice of meeting and details of the total numbers of shares and voting rights in the company and of each class (as at the latest practicable time before notice of the meeting is given). In addition, the company must publish any members statements, members resolutions and 7 members matters of business which may be received, as soon as reasonably practicable. Proxy forms In order to facilitate shareholder voting across the EU, traded companies must give an electronic address for the receipt of proxy documents and information. The company: may give proxy, or this address when it sends out instruments of proxy or invitations to appoint a can make the address available on given until the end of the meeting. a website from the date when notice of the meeting is The effect will be that the company is deemed to have agreed that any document or information relating to proxies may be sent by electronic means to that address. Under the existing law, companies are not required to provide for electronic communications with shareholders, although 8 many large listed companies already do so. Powers of shareholders to require directors to call a general meeting As before, shareholders will be able to requisition a general meeting. 9 The level of shareholding required to do so is reduced from 10% to 5%, making it easier for activists to force a meeting. Members power to propose other matters of AGM business In addition to the existing right to propose a resolution for the AGM, shareholders have a new right 10 to request companies to include in the business to be dealt with at the AGM other matters of business which may properly be included in the business of the meeting. Such members matters include any which are not defamatory, frivolous or vexatious. Requests must be made by members representing at least 5% of the total voting rights or at least 100 members, must be accompanied by a statement setting out the grounds for the request and must be received either six weeks before the relevant meeting or, if later, the time at which notice is given of the meeting. 6 7 8 9 10 Section 337(3) Companies Act 2006. Section 311A Companies Act 2006. Section 333A Companies Act 2006. Section 303 Companies Act 2006. Section 338A Companies Act 2006. A10710196/3/0.35/ July 09

Traded companies which are required to include members matters in the business to be dealt with by the AGM will need to notify shareholders in the same way and at the same time (or, if later, as soon as reasonably practicable) as the notice of meeting is given, and also publish details on a website. 11 The expenses of circulating members matters will need to be borne by the company only if the request is duly made before the end of the financial year preceding the meeting. 12 Voting at general meetings The SRD is particularly concerned with facilitating voting in cross-border situations and where shares are held by nominees. It therefore requires that the rights of proxies should be the same as those of the appointing member and that nominees should be able to split their votes. As a result, clarifying amendments were required to the provisions in the Companies Act 2006 dealing with proxies and corporate representatives. Voting by proxy show of hands Section 285 of the Companies Act 2006 is amended to clarify that a proxy appointed by more than one member can vote both for and against a resolution on a show of hands if instructed to do so by different appointors. These provisions are subject to a company s Articles and, as is currently the case, the usefulness of a vote taken on a show of hands may be limited. The chairman should move to a vote on a poll whenever necessary to ascertain the true sense of the meeting. On a poll, one or more proxies may vote on behalf of a member, but only to the extent that the member is entitled to vote. Existing Articles may need to be amended to avoid confusion resulting from inconsistencies with the new wording in the Companies Act 2006. Chairman appointed as proxy A new provision 13 states that a proxy must vote in accordance with any instructions given by the member by whom the proxy is appointed. This provision does not directly affect the company since it applies to the relationship between the proxy and his appointor, but may apply to the chairman if he is appointed to act as proxy, as is frequently the case. According to the Government, this provision has been included for completeness in implementing the SRD and it is not intended to alter the current legal position. Nevertheless, proxies should note that the statutory statement may not allow proxies the same flexibility to use their discretion as presently exists under the common law. Representation of corporations at meetings Corporate shareholders and companies and their advisers will welcome amendments which clarify that multiple corporate representatives appointed by a single corporate nominee may vote in different ways from each other in respect of different blocks of shares. This replaces provisions which appeared to allow only one corporate representative to exercise the powers of the corporate shareholder at any one time. If multiple corporate representatives sought to exercise their rights in different ways, the rights would be treated as not having been exercised at all. 11 12 13 Section 340A Companies Act 2006. Section 340B Companies Act 2006. Section 324A Companies Act 2006. A10710196/4/0.35/ July 09

As a result, in the 2008 and 2009 AGM seasons it has been common for listed public companies to adhere to the ICSA (Institute of Chartered Secretaries and Administrators) guidance on multiple corporate representatives. 14 The guidance recommends appointing one designated representative (normally the chairman of the meeting) to act in accordance with the directions of multiple corporate representatives. This was intended to provide a pragmatic solution until the legislation could be clarified. After 3 August 2009, compliance with these procedures should no longer be necessary, allowing meeting administration to be simplified. The ICSA guidance is expected to be revised in due course. Chairman s casting vote Companies formed before 1 October 2007 have been specifically permitted to keep provisions in their Articles allowing the chairman a casting vote in order to resolve situations of deadlock. This saving provision will no longer apply to traded companies after 3 August 2009 as it is thought that giving the chairman a casting vote is inconsistent with Directive requirements for shareholders to be treated equally with regard to voting rights. The abolition of this right should have little practical impact as a listed company with a large number of shareholders is unlikely to rely on such a provision in any case. Votes in advance of a poll The SRD requires member states to permit voting in advance of meetings. Accordingly, a new provision 15 allows a company s Articles to provide for votes on resolutions on a poll taken at a meeting to be cast in advance of that meeting. We do not expect that companies will amend their Articles to allow for this as the same effect is achieved by appointing a proxy in advance of a meeting and giving specific voting instructions. In any case, a separate procedure where votes are cast in advance may lead to confusion and be less flexible, whereas a shareholder is always free to change the instructions he gives to his proxy. Share blocking prohibited In some EU states there is a practice of companies preventing trading in their shares in advance of general meetings so that shareholders having the right to attend the meeting can be identified. The SRD prohibits this practice with the aim of maintaining effective markets. As a result, and in line with regulations already affecting companies with shares trading through CREST, the Companies Act 2006 is amended to state that voting shareholders must be identified at a record date not more than 48 hours in advance of the meeting. At the same time, any provisions in Articles that make voting subject to dealing restrictions are prohibited. Conduct of meetings New duty to answer questions It has always been the case that shareholders exercising their right to speak at general meetings may ask questions. It is also part of normal meeting procedure for chairmen and directors to answer any such questions, although there was previously no statutory requirement for them to do so. 14 15 ICSA Guidance on Proxies and Corporate Representatives at General Meetings, reference number 080122. Section 322A Companies Act 2006. A10710196/5/0.35/ July 09

Implementation of the SRD means that traded companies will be obliged by law to answer questions which are put by members at a general meeting and which relate to the business being dealt with at the meeting. 16 There are certain situations where answers do not need to be given. These include circumstances where: giving an answer would interfere unduly with the preparation for the meeting or involve the disclosure of confidential information; the answer has already been given on a website in the form of an answer to a question; or it is undesirable in the interests of the company or the good order of the meeting that the question be answered. The regulations do not specify further how these exemptions are to be interpreted. Effect of the duty to answer questions The Government consulted in 1996 on whether shareholders should be given a statutory right to ask questions in order to facilitate shareholder communications. 17 The Government s concern at that time was that granting such a right could lead to procedural difficulties because, for example, chairmen might find it difficult to manage and curtail debate. Companies answering shareholder questions would also need to ensure they did not unwittingly reveal commercially strategic or price-sensitive information in contravention of certain obligations, such as those imposed by the Listing Rules. In reality, however, listed public companies are likely to have strategies for facilitating shareholder debate in line with best practice, such as is suggested by ICSA. 18 In addition, chairmen and directors are normally experienced at managing meetings and making sure that information given to the public does not reveal more than is legally permissible. As a result, the new statutory obligation to answer questions should be seen as affirming the current situation, rather than imposing an onerous new burden on companies. Preparing for questions From a practical point of view, it will be helpful to review meeting procedures and briefings for chairmen in the light of the new rules. In particular, companies may find it useful to take the following steps: considering the order of the items to be dealt with by the meeting and making sure that adequate time is provided for shareholder questions and debate; asking shareholders to submit questions in advance of the meeting; this should save time by allowing one answer to be given to common questions and also means that more detailed information can be set out in Q&A form on the website, as contemplated by the new legislation; and reviewing and updating shareholder communication material such as websites. 16 17 18 Section 319A Companies Act 2006. Shareholder Communications at the Annual General Meeting [Department of Trade and Industry] (1996). ICSA Guide to Best Practice for Annual General Meetings (1996). A10710196/6/0.35/ July 09

Electronic meetings The Companies Act 2006 is amended 19 to state that companies may hold and conduct meetings in such a way that people who are not present together at the same place may by electronic means attend, speak and vote at the meeting. The principle that shareholders may meet by being electronically in each other s presence so as to hear and be heard and to see and be seen has already been established in the UK by case law, 20 so this provision does not break new ground. Where traded companies use such facilities they may not impose restrictions that go beyond what is necessary and proportionate to establishing the identity of participants and ensuring the security of communications. As is currently the case, companies wishing to use electronic means to hold meetings should ensure that audio-visual and other equipment is fully suitable for linking together a potentially large number of shareholders to avoid a breakdown in communications which might put the validity of proceedings into question. Alternatively, companies may prefer to continue with the current common practice of broadcasting proceedings at a physical meeting, for example by webcast, whilst making clear that this service is provided for information purposes only. Provision of information after the meeting The law setting out the obligations of companies to publish poll results on a website 21 is amended to introduce additional requirements for traded companies. Where a poll is taken at a general meeting of a traded company, the traded company will need to ensure that the following additional information is available on a website: the number of votes validly cast; the proportion of the company s issued share capital (determined at the time at which the right to vote is determined) represented by those votes; and the number of abstentions, if counted. This information must be provided by the end of 16 days beginning with the day the meeting takes place or, if later, by the end of the first working day after the day on which the result of a poll is declared. Companies may need to slightly adjust their administrative procedures to comply with this section, although the information required should be easily obtained, including that relating to abstentions, as the Combined Code already requires information about votes withheld to be published. 22 What happens next? The schedule attached to this note summarises the changes described in this note and suggests actions that companies may wish to take. 19 20 21 22 Section 360A Companies Act 2006. Byng v London Life Assoc [1989] 2 W.L.R. 738 CA. Section 341 Companies Act 2006. Combined Code, Provisions D.2.1 and D.2.2. A10710196/7/0.35/ July 09

Following implementation of the SRD, the final remaining provisions of the Companies Act 2006 are due to be commenced on 1 October 2009. These include provisions relating to company formation and constitution and keeping directors residential addresses off the register, most of the provisions relating to share capital and provisions relating to the Registrar of Companies. For more information, see our client note: Companies Act 2006 Final Implementation 1 October 2009. Contacts If you require any further information about the developments described above, please contact Wilma Rix (+44 020 7456 4914) wilma.rix@linklaters.com, Lucy Reeve (+44 020 7456 3459) lucy.reeve@linklaters.com or Lucy Fergusson (+44 020 7456 3386) lucy.fergusson@linklaters.com or one of your regular contacts at Linklaters. Linklaters 9 July 2009 A10710196/8/0.35/ July 09

Shareholder Rights Directive implemented 3 August 2009 Summary of the main changes to UK company law and actions to consider All companies Changes affecting all companies Effect on CA 2006 Action Clarification that proxies appointed by more than one appointor are entitled to vote both for and against the resolution on a show of hands, if so instructed by separate appointors S.285 amended, new S.285A Update meeting procedures manual Consider poll voting for all substantive resolutions Brief chairman Consider updating the wording of the Articles, if relevant 5% of members able to requisition a general meeting S.303 amended None Company Articles may allow poll votes to be cast in advance of the meeting (rather than just providing for appointment of a proxy to vote at the general meeting) Traded companies may only limit any such rights to the extent necessary to identify the voter New S.322A None Clarification that multiple corporate representatives representing separate parts of a holding may vote in different ways in respect of their shares S.323 amended Update meeting procedures Consider updating the wording of the Articles, if relevant Proxies obliged by statute to vote in accordance with instructions given by the appointing shareholder Statutory statement confirming that meetings may be held in a way that allows persons not physically together in the same place to attend, speak and vote at the meeting by electronic means New S.324A New S.360A None None A10710196/9/0.35/ July 09

Only traded companies Additional changes affecting traded public companies General meetings must be held on 21 days notice unless: the general meeting is not an AGM; the company offers facilities for all shareholders with the right to vote to appoint a proxy by means of a website; and the shareholders have approved a special resolution permitting general meetings to be held on 14 days notice Notices of meeting will need to include additional information (including details of websites containing required information and various statements about shareholder rights to attend and vote at the meeting and to ask questions) Notices of AGM given more than six weeks before the meeting will need to state shareholder rights to require the company to: give notice of a resolution to be moved at the meeting; and include a matter in the business to be dealt with at the meeting Effect on CA 2006 New S.307A Action Enabling resolution to be added to AGM business for annual renewal, if not already dealt with at 2009 AGM Discuss with registrars the feasibility of putting electronic voting/proxy facility in place at short notice, if not used as standard S.311 amended Update notices of meeting S.337 amended Update notice of AGM if sent out six weeks before the AGM is to take place Before a general meeting, companies must publish on a website information about the business of the meeting and voting rights at the meeting At general meetings, companies must answer any question put by a member relating to the business being dealt with at the meeting Appointments of proxies and termination of proxy authority must be in writing and companies will only be entitled to ask members for evidence of identity and voting instructions, An electronic address for receipt of proxies will need to be provided New S.311A New S.319A Ss.327, 330 and 333 amended New S.333A Provide for website communication if not already used and update information publication procedures Brief chairman and board Review proxy authority procedures and update as necessary A10710196/10/0.35/ July 09

Shareholders to be entitled to ask for other matters (not just proposed resolutions) to be included in the business to be dealt with at an AGM Additional information will need to be included when companies publish poll results on a website after a general meeting has taken place New Ss.338A, 340A and 340B Companies receiving such requests will need to: inform all shareholders of the other items of business in the same manner as notice of meeting was given publish information on a website; and bear the cost of doing this if shareholder requests were received before the end of the financial year preceding the AGM S.341 amended Update information publication procedures Share blocking prohibited record date to be used Chairman s casting vote abolished New S.360B Amendment to the Third Commencement Order None Delete from the Articles, if such provision exists This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts at Linklaters. Linklaters LLP. All Rights Reserved 2009. Please refer to www.linklaters.com/regulation for important information on the regulatory position of the firm. We currently hold your contact details, which we use to send you special reports such as this and for other marketing and business communications. We use your contact details for our own internal purposes only. This information is available to our offices worldwide and to those of our associated firms. If any of your details are incorrect or have recently changed, or if you no longer wish to receive this special report or other marketing communications, please let us know by emailing us at marketing.database@linklaters.com. A10710196/11/0.35/ July 09