In response to concerns raised by boardroom battles between significant shareholders at companies such as Bumi and Eurasian Natural Resources Corporation (“ENRC”) the Financial Services Authority (“FSA”) is seeking to strengthen minority shareholder protections. The FSA is particularly hoping to address specific issues of concern regarding UK-listed companies that have dominant and influential shareholders, and operate in foreign countries. In a consultation paper published in early October, the FSA proposed changes to the United Kingdom Listing Authority (“UKLA”) Listing Regime, which sets the requirements that companies listed on the London Stock Exchange (“LSE”) must meet to establish and maintain their listings.
The FSA acknowledged that companies with an “overseas asset base controlled by a majority shareholder” are a “sizeable” portion of companies seeking an independent public offering (“IPO”) on the LSE. Recently, to address these concerns the FSA has focused on amending requirements for reverse-takeovers and a company’s “free float” as it relates to liquidity. However, the new consultation shifts more focus onto the corporate governance standards at these companies and their role in strengthening investor confidence in premium listed companies with controlling shareholders.
At ENRC, the company’s three founders maintained a significant control of its share capital after its listing with a low free float. Following reported conflicts with the controlling shareholders, two non-executive directors were not reelected at ENRC’s 2011 AGM and concerns about the company’s corporate governance practices have repeatedly made headlines since then.
Garnering even more visibility lately, Bumi’s boardroom disputes resulted in co-founder Nathaniel Rothschild resigning from the company’s board on October 15. Despite Mr. Rothschild’s close to 12% ownership in the company, the Bakrie family and Samin Tin, who jointly own a 47.6% stake of Bumi’s share capital, attempted to remove Mr. Rothschild as the company’s co-chairman and four other directors in February 2012 through calling a special meeting. Although the call for the special meeting was withdrawn, several director changes took place following a boardroom agreement.
However, boardroom tensions continued as the company announced an investigation into “potential financial and other irregularities” in PT Bumi Resources, run by the Bakrie family, and Bumi’s other Indonesian operations. In early October, the board received a proposal from the Bakrie Group to cancel their holdings in Bumi in exchange for purchasing the Bumi’s operating assets, effectively unwinding the company. In Mr. Rothschild’s resignation letter he alleged that chairman Samin Tan was “not trying to protect the interests of minority shareholders” and was “complicit in their oppression” by backing the Bakries’ proposal, which he believes is “obviously not in the interests of minority shareholders”. Mr. Rothschild also accused another significant shareholder of acting in concert with the Bakrie Group.
The FSA’s consultation is seeking feedback on its proposals to address corporate governance issues and concerns at play in the dramatic Bumi and ENRC scenarios. Such significant shareholder battles have the potential to dramatically erode investor confidence and in turn, weaken the perception of the stability of UK-listed companies, and in turn the UK’s listing regime. In particular, the UKLA’s premium listing regime aims for companies in its segment to “meet the UK’s highest standards of regulation and corporate governance.” The new proposals would apply to premium listed companies regardless of their country of operation, specifically targeting companies with overseas assets bases like Bumi.
The FSA’s new corporate governance proposals would implement the concept of a “controlling” shareholder as an entity or concert party with 30% or more ownership of a company’s share capital. The changes encompass tougher entry requirements including a defined and disclosed relationship agreement, and are also meant to be “meaningful ongoing obligations,” with companies required to notify the FSA if they are not in compliance. Companies would be required to allow independent shareholders to approve material relationship agreement changes and to implement a new dual voting requirement for the election of independent directors, which the FSA arrived at as “a way in which the voice of independent shareholders could be heard without it becoming dominant”. Independent shareholders will be defined as all shareholders other than the controlling shareholder and their associates.
A key proposal is that companies with a controlling shareholder will be required to either have a board that consists of a majority of independent directors, or an independent chairman and independent directors making up at least half the board. As suggested, this could be a premium listing requirement or could be in line with the “comply or explain” approach of the UK Corporate Governance Code. Should this become a requirement, companies who fall out of compliance would have a six month period to find a new independent director.
Under the new dual voting structure independent directors will be voted on by independent shareholders and by all shareholders. If the results from the voting bases conflict, a further vote will take place within 90 days on a simple majority basis. This proposal for a dual voting requirement is particularly interesting in giving a distinct say to independent shareholders, and then allowing time for shareholder engagement when the voting results of independent shareholders and all shareholders are in conflict. An emphasis on engagement is in line with the British approach to corporate governance but such a “cooling off period” may not be as applicable in other markets.
Although the extent of new disclosure requirements and corporate regulations that the UKLA will ultimately implement remains to be seen, the FSA has made it clear it is interested in establishing independent shareholder protections without creating rule of the minority.