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Do you know your rights, if someone holds shares for you?

A recent case* has highlighted the need for anyone who instructs someone else to hold shares on his behalf, to take steps to ensure that the rights he would enjoy as the legal owner of the shares are preserved.

It is not uncommon for shares in companies to be held by nominee shareholders. In such circumstances, the legal owner of the shares is the nominee and it is his name that will appear on the register of members of the company. Under company law, the rights of a person who has appointed the nominee to hold shares on his behalf are limited.

The recent case was brought in respect of a right under the Companies Act 2006 which is conferred on “the holders of not less… than 5 per cent… of the company’s issued share capital”. It was clear that the applicants held the economic interest in the necessary percentage of shares. However, the court held that the economic interest was not sufficient; the right is only available to the registered shareholders.

The decision has fairly broad application, since there are many other rights under the Companies Act 2006 which are framed in similar terms, including:

  1. the right of a “member” to bring a derivative claim – a claim brought in the name of the Company in respect of an alleged breach of duty by a director (s.260, Companies Act 2006); and
  2. the right of a “member” to apply to court for an order that the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally (s.994, Companies Act 2006).

The recent case suggests that (save where there are express provisions to the contrary in the Companies Act 2006) the courts will take a similarly restrictive view of the “members” who qualify to bring derivative claims and claims for relief from unfair prejudice.

The decision is not, perhaps, surprising. However, it does illustrate the importance of a strong contractual agreement between a beneficial owner of shares and his nominee. Such an agreement should, amongst other things, ensure that the beneficial owner is able to direct the nominee to make applications to court on his behalf.

Recommendation:

If you have a beneficial interest in shares which are held for you by a nominee, it would be advisable to check that the terms of that arrangement extend to an ability for you to call upon the nominee (as the legal owner) to bring an action at your direction.

*Eckerle (and others) v. Wickeder Westfalenstahl Gmbh (and another) (2013).

Proposals for a register of beneficial interests:

In a separate move relevant to beneficial owners of shares, a consultation has been launched in relation to a proposal for there to be a register recording the beneficial interest in the shares of English incorporated companies. The suggestion is intended to aid the identification of criminal activities and tax evasion and it follows from a commitment made by the Prime Minister, David Cameron, at the G8 summit in June of this year.

If a register of beneficial interests is adopted, this would mark a significant divergence from the current law and it could have wide ranging implications (particularly if the register was made public). It is thought that such a move could prompt further use of offshore structures, given that jurisdictions such as the British Virgin Islands have already indicated that they would only create a central registry of beneficial owners when international money-laundering standards require all countries to do the same.

For further information, please contact Kelvin Balmont, Andrew Beedham, Ed Foulkes, Simon Thomas or Simon Smith.