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Proposal C: Clarifying '50 or more shareholders'

The issue

35. The market has raised the question as to how the '50 or more shareholders' definition is to be interpreted.⁷ Some share parcels are held by more than one person; for example, couples may hold a single parcel of shares jointly; two or more trustees may hold shares on trust for beneficiaries. Should each individual shareholder in the company be counted, or the number of share parcels that are held?
36. The Panel has considered this question and has concluded that the correct interpretation is that shareholders means each shareholder named in the company's share register. The Panel published its decision as to how it will enforce the Code in its Guidance Note: The meaning of 50 or more shareholders in the definition of Code company, in December 2007.
37. As the Guidance Note and a number of practitioners have suggested, notwithstanding the Panel's decision, the law is a little uncertain and the issue should be clarified in the TA. While this is not a new problem, the removal in 2006 of an asset threshold (of $20 million or more) from the definition of 50 or more shareholders made the question more acute. It is not known how many companies became Code companies as a result of removing the asset threshold.
38. The Panel is aware, from comments made by market practitioners both before and after issuing its Guidance Note, that some legal advisers had advised their clients that 50 or more shareholders means 50 or more share parcels (an interpretation the Panel does not accept) while others have been giving advice in accordance with the Panel's view expressed in the Guidance Note.
39. The term shareholder is defined in the Companies Act 1993, for the purposes of that Act, as follows:
    
    "Section 96 Meaning of "shareholder"
    In this Act, the term "shareholder", in relation to a company, means-
    
    
    1. A person whose name is entered in the share register as the holder for the time being of one or more shares in the company:
    2. Until the person's name is entered in the share register, a person named as a shareholder in an application for the registration of a company at the time of registration of the company:
    3. Until the person's name is entered in the share register, a person who is entitled to have that person's name entered in the share register under a registered amalgamation proposal as a shareholder in an amalgamated company."

Alternative options

40. The options are:
    1. Maintain the status quo (not preferred):
       Under this option, the uncertainty in how shareholders are to be counted, for the purposes of the Code, would remain.
    2. Counting share parcels rather than individual shareholders (not preferred):
       Defining 'shareholder' by share parcel would be consistent with the approach in the Australian takeovers legislation, which expressly states that joint holders of a parcel of shares are treated as one person when counting the number of members.⁸
       
       Such a definition was also favoured by some practitioners commenting to the Panel on its 2007 Guidance Note on the meaning of 50 or more shareholders. These practitioners argued that the underlying policy or intention of the legislation is to encourage competition for control; and the wider the shareholding base - in terms of 'parcels' rather than numbers of persons - the greater the potential for contested takeovers and the greater the need for regulatory protection. On the basis of this policy consideration the shareholding parcel definition was considered by these practitioners to be more appropriate.
       
       The TA and the Companies Act 1993 both came into force at about the same time. The Companies Act defined 'shareholder' by reference to the persons whose names are entered in the share register - i.e., the individual shareholder meaning. Historical indications, from early drafts of the Code, are that the intention of the Takeovers Panel Advisory Committee (which drafted the Code) was to use a definition in the takeovers regime that was in accord with the new Companies Act.
       
       The Panel recognises that persons can and will structure their shareholdings to fit their objectives. If the intent of restructuring is to avoid the Code, it would not matter whether the individual shareholding or the share parcel definition were included in the TA. Any structuring would merely take the interpretation into account and arrange matters accordingly. The use of companies or of trusts to own shares, for example, decreases the number of shareholders, respectively, whether the shareholders are counted individually or by parcel.
    There appears to be little in the way of policy reasons to make a change from the individual shareholder interpretation that is currently accepted. A change may mean that market participants who had sought advice on the application of the Code to them might need to seek further advice; it would be disruptive, costly and unsettling.
    
    
    3. Define 'shareholders' to mean individual shareholders (preferred).

Analysis of preferred option

41. This option effectively maintains the status quo while providing legislative certainty. The individual shareholder interpretation is also consistent with the definition of shareholder in the Companies Act.
42. The market appears to have generally accepted the Panel's interpretation that shareholder means 'individual shareholders' as contained in the Panel's 2007 Guidance Note. Market participants will have taken this interpretation into consideration when arranging their affairs (or when having re-arranged them as a result of the Guidance Note). If legal advisers had been advising their clients that 50 shareholders meant 50 share parcels, they will likely have remedied that advice since the publication of the Guidance Note.
43. To clarify this interpretation, the Panel considers that a definition of 'shareholder' could be inserted into the TA, which would define 'shareholder' in a way that is consistent with the Companies Act, section 96, definition.

Recommendation

44. The Panel recommends legislative clarification in the TA to support the 'individual shareholder' definition, which would be consistent with the Panel's approach as set out in its Guidance Note and consistent with section 96 of the Companies Act 1993.

Footnotes

7. See the definition set out on page 1.
8. Corporations Act 2001 (Cth), section 606(3).