A FTSE SMALL CAP Group Counsel & Company Secretary writes...
I have a couple of questions about a listed company director (non-executive) who is associated with a significant shareholder in the company (i.e. appointed with the agreement of the board at the request of that shareholder):
- UKCGC Provision B.1.1 states that a director is not independent if the director “represents a significant shareholder” – is there any guidance as to what “significant” means in this context – so could a director be non-independent (because the shareholder they represent has a “significant” holding in the company) but then become independent with the passage of time if that shareholding reduces to an “insignificant” level and stays there?
- If a listed company has a non-independent director who represents a significant shareholder, then are there any particular consequences to be aware of? Should the company put in place a protocol or agreement with the shareholder to ensure that the director maintains confidentiality and ensures all shareholders are treated equally etc? What do companies typically do in these circumstances? (ignore for these purposes the provisions regarding a “controlling shareholder”)
Thanks for the post on 6 September, that is really useful. I appreciate you taking the time to answer my rather long-winded “exam question”!
Having been in this situation a couple of times before, here’s my contribution:
On Q1 I’d be inclined to use the definition of “related party” in LR11 – this says that a significant shareholder is one that controls 10% or more of the voting rights or equity, or did so in the preceding 12 months.
In terms of what happens if that shareholding reduces, I guess you’ll have to anticipate and deal with this in whatever documentation you have with the shareholder – there must be some de minimis level (5%?) where it becomes inappropriate for them to have continued board representation (or where your other investors think it has become inappropriate!)
On Q2, the individual needs to acknowledge that as a director of your company, they owe all of their legal duties to the company and shouldn’t (unless you’ve agreed otherwise) be sharing all information they receive with the shareholder they “represent” (in law they don’t, of course). There may be times when they have to recuse themselves form board meetings, if the conflict of interests is too great. Again, something to anticipate and address in an agreement.
The second thing to watch for is where the director becomes aware of inside information, then the shareholder may (depending on how you’ve addressed the information-sharing point above) be restricted from dealing if they fall within the definition of a ‘Person Closely Associated’ with that director/PDMR under MAR. If they are a long-term investor, this probably isn’t a big deal, but if they are actively trading in your shares this is a very real problem.
Finally, from the question it isn’t clear whether this is a financial or strategic/industrial investor. If the latter and they compete with you in any way, then you’ve got a world of pain looming dealing with the competition/anti-trust law consequences (I’ve been there!) and having to redact board materials where there is any forward-looking information on your marketing intentions.
Hope this helps.