Imagine a world in which companies don’t know who owns them – an Orwellian nightmare where effective control of your firm lies in the hands of shadowy, indeterminate, nameless owners.
Now slap yourself and wake up. We’re in the third millennium, for goodness sake: an age of transparency, openness and technology. How difficult can it be to identify your shareholders? Well, even in this day and age, the answer appears to be ‘Not that easy at all, actually.’
‘For most companies, it is very, very difficult,’ maintains Mark Hill, managing director of UK-based agency, IR Group. ‘It involves someone really digging to find out. I don’t envy them their jobs at all.’
To be sure, some companies really have it tough. Those firms that labor under a bearer share system (whereby the share certificate, and not registration, represents proof of ownership) can identify their shareholders with about the same degree of certainty as Nostradamus – and he’s dead.
‘A lot of international companies operate with bearer shares,’ explains Richard Davies, managing director of UK-based shareholder analysis agency, Fulcrum Research. ‘And that makes it very difficult to track ownership. We tend to conduct a global telephone survey of fund managers, but that doesn’t say where the actual owners are and the fund managers don’t disclose that information. And the other problem with these surveys, of course, is that they are very labor-intensive.’
‘We find it extremely difficult to identify our bearer shareholders,’ concedes Jantiene Klein-Roseboom, vice president of investor relations at the Dutch airline company, KLM. ‘We monitor ownership quarterly,’ she adds. ‘We use various sources: 13F filings from the US, records of the depository banks in countries where we are listed – the Netherlands, the US, Germany and Belgium – dividend payment records, as well as conducting annual comprehensive institutional ownership surveys both in Europe and the US.’
‘We look at filings,’ adds Davies, ‘but they tend to provide very low coverage of ownership. In the UK, it’s easy and in the US filing isn’t bad but outside of there you’ll find that public filing levels are low.’
A registered share system can obviously remove some of this hassle but it’s not a magic wand. When it comes to identifying shareholders, it too is fraught with difficulty. Come off it, you’re thinking, that’s why we have registered shares – just look at the register! If only it were that simple. ‘There’s such a rapid movement of shares, and in such massive quantities that it’s incredibly hard to keep up,’ argues Hill. ‘You’ve got to be prepared to throw a lot of resources at it.’
Well then I’ll just spend money on it, you might say. The problem is, even if you have the cash, determining ownership can be a convoluted, brain-melting process.
‘For a start, there are two types of ownership,’ explains Davies. ‘There’s institutional ownership and beneficial ownership. Institutional ownership refers to the institution that’s managing the funds, but it’s the beneficial owner that is usually considered to be the owner.’
Can of worms
So what’s the problem? you might think, I’ll look at the register and see who these beneficial owners are. Not so fast. In the UK and most other countries with a registered share system, beneficial owners rarely appear on the register. Instead, their ownership is very often registered under nominee names.
‘Sometimes that nominee is the literal investor,’ explains Hill. ‘Prudential Nominees Limited is the nominee for the Pru, so the fund manager is the investor. But very often the nominee is just a custodian bank: in fact, in the bigger UK listed companies, it is common for the custodian, such as [Chase Manhattan Bank’s subsidiary] Chase Nominees, to own 25-30 percent of the shares through multiple beneficiary accounts. So the custodians, for a fee, will deal with all the administrative details such as tracking and dividend administration and will be working for up to 400 beneficiaries.’
Crikey, you’re saying to yourself, then mine is a hopeless task. Relax. There is some recourse: ‘In the UK, section 212 of the Companies Act 1985 gives companies the right to find out who has an interest in their shares,’ explains Davies. ‘We use section 212 notices to crack the overseas custodian banks.’
Under section 212, a company can demand to see what is lurking behind the nominee name and see who the beneficiaries are. The nominee is legally obliged to provide this information. ‘So the beneficiary might be, say, Somerset City Council,’ illustrates Hill, ‘the fund might be managed by Mercury Asset Management and the nominee name might be Mercury Nominees. For our purposes, though, we’re interested in finding out who is managing the funds.’
Who’s behind Mrs McGuire?
Praise be, you think. This section 212 is a godsend. But before you get too over-joyed, be warned that the information on and behind the register can often be a little sparse. It doesn’t bother with the middle men. Consider this example, from the Index of Nominees and their Beneficial Owners (published by Fulcrum Research). The nominee name is London Wall Nominees Limited. A section 212 probe reveals that, among the beneficiaries, is a Mrs E F M McGuire. Excellent, well done. But what good is that? As Hill says, the crucial information is who is managing the funds. With the greatest respect to Mrs McGuire, it is unlikely that she’ll be actually controlling her portion of the stock or making those key investment decisions. An IRO would want to be speaking to the fund manager and the register can fail to come up trumps in this respect. So what to do?
‘Sometimes that is the case,’ concedes Hill. ‘You’ll often have to phone round and that obviously takes a lot of leg work. But, to be honest, it’s very rare for you not to be able to find out. It means having to be prepared to irritate the beneficiary but normally they will tell you. They’re not actually obliged to but they normally do.’
Direct approach
The US technique approaches the problem from another angle. ‘In most cases we get the information from the funds themselves,’ says David Geliebter of New York-based stock surveillance and financial information provider, Carson Group. ‘The UK and Australia are different from the rest of the world. In the US, we get about 80 percent of our information straight from the fund managers or the investment trust. I think it’s quicker that way. It might involve more effort but I think it’s worth it. It does require a process of building relationships but the fund managers do want the information to get out because indirectly, of course, it’s in their interests.’
For some companies, tracking share ownership is little more than a matter of curiosity. But for others, it is a matter of survival. In fact, the word ‘globalization’ must be getting on the nerves of their investor relations officers. Because, while most companies frenetically push for a truly multinational shareholder base, others have no choice but to keep a large chunk of their shares local.
Defense companies and airlines nearly always face this problem. The former has to concern itself with national security issues while the latter faces the political hurdle of protecting bilateral traffic rights.
‘The issue is that air traffic rights are not owned by companies,’ explains KLM’s Klein-Roseboom. ‘They are negotiated between governments. So if China, for example, considered that KLM was no longer a Dutch company, KLM would lose Dutch route rights in China.’
This complicates things. Having established that ‘ownership’ refers to underlying, beneficial ownership, it’s now also necessary to pin down the definitions of ‘domestic’ and ‘foreign’, a distinction that, in the current climate of consolidation and global expansion, appears to be constantly blurred.
British Airways requests section 212s regularly but George Stinnes, head of investor relations, accepts that in a global economy determining whether a pension fund is domestic or foreign can be a ‘gray area’. Klein-Roseboom adds, ‘Regardless of our efforts, we will never know 100 percent of our shareholders, although we have a pretty good idea about geographic distribution of our shares.’
Moving benchmark
It remains unclear how safe a benchmark that is – if the shares are held by Merrill Lynch Mercury Asset Management on its own account does that make them American or British? Stephanie Hughes, investor relations manager for Australian airline, Qantas, agrees that it can be a little confusing but says, ‘I’m not sure if this is a hard and fast rule. But you can’t really look at where the funds are based because they are often based in several different countries. So we would look at who the fund managers are actually managing funds for. We’d get a breakdown of the beneficiaries. These tests obviously can’t look at every single mom and dad but you can see whether a substantial amount or a majority of your investors are domestic. And I think we’d be fairly conservative about it and get our legal people to have a good look at it. If in doubt, we’d assume that it’s a foreign holding.’
‘When companies come to us,’ confides Davies at Fulcrum Research, ‘they tend to have a very low awareness of their foreign share ownership.’ And it is a woolly area, which is constantly being diluted; the foreign/domestic distinction is subsiding as the global economy evolves. ‘Eventually in Europe,’ speculates Lufthansa’s investor relations officer, Ralph Link, ‘the European Commission may step in and change the situation so that ‘domestic’ means ‘European’. We know the European Union would like that but it’s so political I can’t see it happening in the next two or three years.’
‘We already have global fund managers,’ says Davies at Fulcrum. ‘Look at HSBC. Where is that managed?’
Beady eyes and common sense
Even without concerning oneself with fund managers, a beady eye must still be kept on share ownership. It’s better for some than others, however. Both Klein-Roseboom at KLM and George Stinnes at British Airways point out that they are not fettered by legal restrictions. They have to apply a common-sense approach. ‘Effective control is more important than percentage ownership,’ says Klein-Roseboom.
Stinnes explains: ‘If there was just one foreign shareholder that owned 25 percent and lots of wider, smaller domestic shareholders, it’d be fair to say that the foreign shareholder had effective control of the company. At the same time, if the company was 40 percent UK-owned and the remaining 60 was shared between a wide foreign spread, then that might be an area for debate. We would have to convince the UK government that we had not ceased to be a UK airline. Of course, then we’d be in a vulnerable position. Fortunately, that’s never happened.’
Likewise, KLM has never had to take action but Klein-Roseboom explains that it has granted the government a put option it can exercise if ‘a substantial or majority part of KLM’s share capital would not demonstrably be Netherlands owned.’ Stinnes explains that British Airways’ board of directors can halt an increase in foreign ownership by threatening to stop registering shares.
Laid down in law
For other countries, percentage ownership comes first. Some states legislate to ensure this mathematical majority of domestic ownership. Hughes explains that her company’s IPO was swiftly followed by the Qantas Sale Act, limiting foreign ownership to 49 percent. Lufthansa’s Ralph Link says that the German government enacted similar legislation after Lufthansa was privatized while, under Canadian law, foreign ownership in Air Canada is limited to 25 per cent of outstanding shares.
Qantas, then, has to be super-vigilant. ‘British Airways owns 25 percent of our shares so that leaves another 24 percent available to foreign investors,’ say Hughes. ‘We reconcile our foreign ownership every few weeks and if there is more than a 1 percent shift in the level of foreign ownership, we’d release that to the Australian Stock Exchange. If the figure moves to 49 percent, then people will receive notice of that. Thirty days later, if the figure is still above the threshold, we’ll release another notice. After 60 days, people may have to be divested of their shares – and the last on the register would be the first off it. But, generally, if people find out that it’s above 49 percent, that tends to dampen enthusiasm for the shares because, obviously, people don’t want to be divested.’
‘You’d just let people know about the situation,’ agrees Stinnes. ‘That tends to discourage them from investing in the first place.’
You might refer to it as a sort of anti-investor relations.
