Shareholder rights to requisition a general meeting and to propose resolutions

Recent high profile interventions made by investors in the affairs of GlaxoSmithKline, Carlton-Granada, BP and BskyB, amongst others, have highlighted the powers that shareholders possess to requisition shareholder meetings and force votes on topics of their choosing. In July 2002, an institutional investor in British Land, Laxey Partners, actually forced a vote at the AGM of the company on proposals requiring John Ritblat to split his roles of Chairman and Chief Executive and also a buy back of shares.

Since a resolution forcing the directors of a company to take a certain action normally requires a special resolution (passed by 75% of the votes cast), the object of requisitioning a meeting and proposing a resolution is often to remove the directors of the company and replace them with appointees whose views on the management of the company reflect those of the requisitioning shareholders. A resolution to remove a director using the powers contained in the Companies Act only requires an ordinary resolution (passed by a bare majority of votes cast) and most listed company articles of association allow shareholders, provided advance notice is given to the company, to put forward a director and appoint him to the board by ordinary resolution.

Of course most of the time relationships will not deteriorate to the extent where a shareholders' requisition is actually used. But shareholders may use the threat of such a requisition and the attendant bad publicity to force the board to take account of their concerns.

The following is a reminder of the key technical points in relation to these powers.

Members' resolutions and statements (section 376)

• Members holding one-twentieth of the total voting rights of all members, or a mere 100 members who each hold on average £100 of paid up capital, may require the company to:
• Notify all members of any resolution which the requisitionists intend to move at the next AGM. This is known as a 'members' resolution'. The proposed resolution must be supplied to the company at least six weeks before the AGM
• Circulate a statement of not more than 1,000 words which relates to any business to be dealt with at the AGM or an EGM. The statement must be supplied at least one week before the meeting. Where a members' resolution is to be moved at an AGM, normally the requisitionists will take advantage of this right to explain the reasons for their proposal. The company may refuse to circulate the statement only if it is designed to 'secure needless publicity for defamatory matter'
• In each case, the requisitionists must put the company in sufficient funds to meet the expense of sending documents to the company's shareholders. In practice, this acts as a disincentive to shareholders to use these rights
• Any proposed resolution must be consistent with the rules laid out both in the Companies Act and the company's own constitution
• Where a members' resolution is moved at the AGM, one of the requisitionists will normally demand that a poll be taken of the votes cast, and may seek to gain publicity for the number of votes in favour

Requisitioning an extraordinary general meeting (EGM) (section 368)

• The signatures of shareholders holding at least 10% of a company's paid up share capital are required to requisition an EGM
• A requisition calling for an EGM must state the 'objects' of the meeting. In practice this means that the requisitionists will set out the resolutions which they want put to the meeting. Commonly the resolutions will include the removal of all or some of the company's directors (see below)
• The requisition must be deposited at the registered office of the company
• The directors must send out to shareholders notice of the meeting within 21 days and the meeting must be held within 28 days of the notice. Failure by the directors to do so means that the requisitioning shareholders may do it themselves and re-claim their expenses from the company, which in turn must deduct the amount of the expense from the remuneration of the directors in default.
• Although they are not obliged to do so, the directors will usually circulate a statement explaining the circumstances in which the meeting has been called and giving their views on the resolutions proposed. In most cases they will oppose the resolutions and recommend that shareholders vote against them

Removal of directors (section 303)

• The power to requisition an EGM and propose resolutions is most often used in connection with a takeover offer for the company. For example, shareholders who would welcome an offer may use the power to remove directors who they believe are seeking to frustrate or prevent an offer. The power is also sometimes used when a bidder has acquired over 50% of the voting rights following a takeover, but the company's directors refuse to resign and are thought to be taking decisions which are contrary to the interests of the majority shareholder
• Irrespective of anything in the company's articles, the shareholders may at any time remove any director by an ordinary resolution. The person(s) proposing the resolution must notify the company at least 28 days before the date of the meeting
• Unless the AGM happens to be imminent, this power will be used in conjunction with the power to requisition an EGM, and the requisitioning shareholders will specify that the objects of the meeting are the removal of the existing directors (under section 303) and the appointment of replacement directors (under section 368), plus any other resolutions
• The requisitioning shareholders may also use their right under section 376 to require the company to circulate a statement explaining why they want the director(s) replaced
• Any director who is the subject of a resolution to remove him from office has the right to protest his removal by making written 'representations', which the company must circulate to shareholders, and by speaking at the meeting where the resolution is considered
• Where replacement directors are to be appointed, the requisitioning shareholders must ensure that the correct procedures in the company's articles of association are followed
• The company's articles may of course provide for directors to be removed from office or appointed in other circumstances – the right of removal given by section 303 is a 'minimum' which can be added to but not reduced

Borrowing votes

A tactic sometimes used by disgruntled shareholders to increase their voting power in conflicts with the company's management is to "borrow" the shares of other shareholders under a stock-lending arrangement. Normally such arrangements are used to facilitate short selling – ie. borrowing shares and then selling them in the hope that the price subsequently falls and they can then be bought back at a lower price. But in a typical stock lending arrangement, the lender transfers legal title to the stock to the borrower, who is normally entitled to vote the stock as it chooses. The borrower then transfers back equivalent stock at the end of the arrangement.

A shareholder wanting to punch above its weight at a general meeting can therefore 'borrow' votes through a stock lending agreement. Laxey Partners are understood to have done this in order to increase the number of votes in favour of their members' resolutions at the British Land AGM in 2002. In the event, the number of votes in favour was insufficient and the resolutions were defeated, but on some occasions borrowed votes could just tip the scales.

For further information, please contact Sandra Rafferty at [email protected] or on +44 (0)20 7367 2904 or Matthew Willoughby at [email protected] or on +44 (0)20 7367 3508.