C.I.R.A. Legislation, perception & reality

1. C.I.R.A.Legislation, perception & reality Workshop 18 Feb 2004 Nick Arbuthnott

2. Legislation • Systems with legal teeth Norway – domestic & foreign investors have to declare holdings U.K. - ditto How & why they work

3. Legislation • Norwegian Public Limited Companies Act: • Proof of Shares • Article 4-9 • When a shareholder is listed in the share register, the company is to give the share-holder notice of this. • The notice is to be dated and the details about the share-holder that have been registered are to be indicated. If there is a change in the registration, the share-holder is to be notified.

4. Legislation • Manager Registration • Article 4-10 • A bank, custodian or a manager, which has been acknowledged by the King, can be listed in the share-register instead of a foreign share-holder when the shares are listed on a foreign exchange. The King can agree that the managers register the shares belonging to foreign owners also in other instances than in the one mentioned above. • The share-register shall contain information about the money-manager’s name and address, and confirmation that this company is the manager of the shares. There should also be information as to how many shares are managed by each manager.

5. Legislation • A manager does not have other rights in the company other than the right to receive dividends or other remuneration in proportion to how many shares are managed, including new shares at the time of a stock-split. The managers are entitled to receive such remuneration. • If the company or the governing authority demands it, the manager is obligated to release information as to who owns the shares covered by the management agreement, and how many shares are owned by each beneficial owner. • The King can prescribe registration of the managers, including the manager’s duty to inform the governing authority about the ownership of the managed shares.

6. Legislation • Compare Norway with Sweden & Finland where a fully comprehensive system of domestic disclosure does not apply to foreign shareholders, meaning companies have to commission expensive shareholder ID to look at non-domestic shareholders • To note that legislation is inevitably reflected in how custodial banks behave : several global custodians WILL supply information of holders (beneficial / money manager / sub-custodian) for British & Norwegian companies (because they know they can be forced to do so) – but will not for, e.g. Swiss or Swedish

7. Legislation • UK model • Section 212 • Impact on designated accounts • Impact on pooled accounts • The teeth

8. UK shareholder obligations • can only hold shares if registered • obligation to disclose beneficial name • s212 CA 1985 • obligation to disclose investment of over 3% and movements above and below • s198 - 208 CA 1985 NB: Declarable stake information must be announced immediately by the company and no later than close of business on following day. NNB: Company must maintain a register of all investors declaring under s212 per s213 CA 1985.

9. Legislation • Systems without legal teeth • Switzerland • Sweden How & why they don’t work

10. Systems without legal teeth • At custodial level • Custodian declines to reply • At sub-custodial level • Sub-custodian declines to reply • Beneficial owner declines to reply • Impact on IRO • ID rates : lower, has less accurate view of shareholder base • Cost escalates dramatically

11. Good + bad Shareholder ID • ‘Broker’ Analysis of shareholdings in XYZ plc (June 2003) • Ordinary analysis: • SIS SEGAINTERSETTLE (52.7m shares) listed as largest shareholder in Switzerland. This holding is in fact a Swiss clearing house. Within SIS Segaintersettle, CFI has identified large holders such as UBS Global Asset Mgmt (Zurich),Credit Suisse (Zurich) and Zürcher Kantonalbank. • CLEARSTREAM BANK AKTIENGESELLSCHAFT (DE) (37.5m shares) listed as largest German shareholder. This is a Luxembourg-based clearing house. CFI has identified underlying holders including Union Investment GmbH and Hansa Invest.

12. Good + bad Shareholder ID • Shareholding stated by BAYERISCHE HYPO-UND VEREINSBANK AG (DE) (16m shares) is a custodian position. CFI has identified underlying holders including Activest, MEAG and AM Generali. • BANQUE INTERNATIONAL LU (13.5m shares) listed as largest Luxembourg shareholder. This holding is in fact a Luxembourg Custodian. Within this custodian, CFI has identified holdings on behalf of Julius Baer Investment Management, Vontobel Asset Management AG and Dexia BIL. • CITICORP INVESTMENT BANK SA (LU) (10.7m shares) listed as 2nd largest Luxembourg shareholder. This is a misclassification of a holding by BHF Bank in Frankfurt (Custodian). CFI has identified underlying holders including Deutscher Investment Trust (DIT) and Frankfurt - Trust Investment-Gesellschaft mbH.

13. Good + bad Shareholder ID

14. Perception - reality • Identifying shareholders • Public filings • Fine to see a very partial view (public filing may be 60%, may be only 30% of institution’s total position in a stock) • Very out of date • Shareholder ID • Timely but expensive • Other sources • Brokers • Feedback during or following roadshows Vs. remaining in the dark

15. Legislation again • EC directive on transparency • Motives (fairness for investors, matching quarterly US company filings) • Direction • Likely outcome • The missing piece of the jigsaw : ownership (not mentioned at all in the original draft)

16. Where legislation might go • Nowhere much • The proposed directive makes clear that on shareholder transparency, “an issuer’s home market will be able to continue to impose more stringent transparency requirements” than the EC • And nowhere fast • EC is still deciding on the number & levels of declarations of major stakes & nothing else, as has been under discussion for 10 years

17. Legislation + corporate governance • What is seen to be driving the market • On the buy-side : the wish to know ever more about the company : • On the corporate side : how to communicate most effectively, comprehensively & efficiently • In the media : watching companies communicate badly • In the political arena : proecting the investor

18. Legislation + corporate governance • Communication with all investors • As per US legislation, any discrimination between investor classes (e.g. institutional & retail) is out of the question • Recent cases like Shell and Sainsbury in the UK make it clear that chief executives or chairmen have to communicate with the investment community before taking decisions or announcing bad news • Voting • “Companies that invest a lot in IR know who their real shareholders are and have a better dialogue with them. IR professionals are missing out on voting.” Sarah Wilson, Manifest

19. Legislation + corporate governance • The combination of technology (web-casting, blast e-mailing) and corporate governance regulation will mean companies have to communicate with all their shareholders equally and at the same time. This means a vague or partial knowledge of the company’s shareholders (“I only need to know the top 20 shareholders) will not suffice • Increasingly interactive IR will help companies keep up to speed on their shareholders (identity & actual holdings) but the process is incomplete & requires annual ID at the least to enable benchmarking of the success of the IR programme as a whole.