05 June 2013

What’s in a name? Standing of beneficial owners of shares to bring applications

It is increasingly common nowadays for shares in companies to be held via nominee shareholders or other, similar arrangements. A recent English decision is a timely reminder that, where the legislation allows a shareholder to make an application to the Court, it is only the registered holder of the shares who is entitled to do so.

What’s in a name?  Standing of beneficial owners of shares to bring applications

In Eckerle & Ors v Wickeder Westfalenstahl GmbH & Anor, the English High Court considered an application under the UK Companies Act which allows a shareholder to apply to the court in particular circumstances.  However, the applicants were not the registered shareholders.  Rather, a bank (acting as a common depository agent) was and held the shares on trust for account holders of another entity, which included the applicants.  The High Court held that the legislation was clear and the applicants had no standing – only the bank as the registered shareholder could bring the application.

The issue has been previously considered and settled in Guernsey in the Royal Court decision in Synergy Classic Limited v D.E.S. Commercial Holdings Limited in the context of the remedy for unfair prejudice suffered by a member.  In that case, the applicants were the ultimate beneficial owners of the shares of the company in question.  However, the shares were actually held in the name of a nominee on behalf of an escrow agent, which had granted the applicants a proxy to take certain steps in relation to shareholder meetings, albeit not to bring an application in court.  The applicants brought an application under section 349 of the Guernsey Companies Law for an order under section 350 (relief for unfair prejudice).  The Royal Court considered the matter under reference to English authorities and ruled that the applicants had no standing to bring the application, as section 349 was only available to a “member of the company” – in that case, the nominee as the registered holder of the shares.  The Royal Court of Jersey has also adopted English principles in relation to unfair prejudice applications but has not yet had to consider the issue of nominee shareholders and prejudice suffered by beneficial owners (for example, in Prestigic (Wisley) Nominees Ltd v JTC Management & Ors). 

As observed by the High Court in Eckerle, this is not a particularly comfortable conclusion for indirect investors who are deprived of the sort of protection that ought to be given to minority shareholder.  However, the Royal Court of Guernsey has ruled that the wording of the legislation is what it is.  There is a message to those on both sides of the fence.  A beneficial owner of shares will need to ensure that the arrangements by which the shares are held via a nominee are such that the nominee will enforce its rights on behalf of the beneficial owner if required.  For companies concerned about militant investors, check the articles of association to see if these permit the company to recognise a nominee shareholder or anyone other than the registered shareholder. Although Eckerle is not binding on the courts of Guernsey and Jersey, the decision may be persuasive as company law in both jurisdictions is essentially English in origin.

Please note that this briefing is only intended to provide a very general overview of the matters to which it relates. It is not intended as legal advice and should not be relied on as such.

© Carey Olsen 2013