For most shareholders, all that bothers them when buying shares is the price. But how you own the shares matters too. The UK Shareholder's Association (UKSA) warns that many shareholders could be handing over crucial rights without even realising it. Here's why.
Why shares aren't like TVs
In a shop you pay for, say, a TV you want, and you walk out of the shop as its legal owner. Not so a house (or a car). These are 'registered assets'. In the case of houses, the Land Registry keeps a register of the owners of every UK property. Legal title passes once the deeds to the property have been transferred from seller to buyer and the register has been updated.
A share is also a registered asset legal title must be updated on the relevant shareholders' register. This is usually handled by companies such as Equiniti (Equiniti.com). They in turn wait for an electronic confirmation from the CREST system. This takes care of the bit of a share deal that few ever see settlement. That's where the shares are paid for by the buyer's broker, delivered by the seller's, and re-registered. Unlike property, this doesn't take months it normally takes three working days. It's the way that this re-registration takes place that can sell shareholders short.
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The shadowy world of the nominee
You might assume that if you buy 1,000 Tesco shares, your name will end up on the share register. Not so. Most brokers run nominee accounts. A broker will set up a single account ('XYZ Nominees Ltd', say) on the register to act as the legal owner of its retail clients' Tesco holdings. These are "pooled" for legal registration purposes. As clients buy and sell, the nominee account is updated by the broker, but there's no re-registration into the name of any one client. This is partly because where shares are bought and sold within a tax-efficient wrapper such as an Individual Savings Account (Isa) or Self-Invested Personal Pension (Sipp), nominee accounting is compulsory. But even outside of these, the nominee system is preferred as it's cheaper. Shares are 'fungible' one looks much like another. So as long as the nominee records the right total number of Tesco shares, who owns which matters little to the broker. But it should matter to investors.
Why? If your name is not recorded on a share register, you are what the law calls the 'beneficial' owner of the shares. Any 'monetary benefit' is yours, such as a profit on resale, or any dividends. But those are not the only entitlements a shareholder enjoys. And it's these you can lose. There's the right to turn up and vote at shareholders meetings, or question the directors. With a nominee holding that entitlement actually remains with your broker. Sets of accounts will also go to your broker. You can request this data, but it's not provided automatically. Then there's the hassle if a broker goes bust. While you should get your investments back eventually, pooled nominee holdings could take months to unravel. And there is little you can do if the investments dive in value. There's also a potential takeover problem, detailed in the box below.
What to do
The only sure way to secure full rights is to get your name on the register. You could use share certificates, but as Justin Modray points out on Candidmoney.com, it's "the most expensive and outdated way to hold shares". A better route is via CREST personal membership. This has to be organised through a broker, but it may be worth it if you are a serious regular investor you get the same ease of trading as with a nominee holding, but no loss of rights. The CREST price levied on your broker is £10 a year. What you pay is another matter. Charles Stanley (020-7739 8200) offers one of the more competitive rates of £20 a year, plus VAT.
The takeover problem
Some companies are using a neat piece of law to get around having to talk to retail shareholders when they take over a company, as the UKSA's Eric Chalker notes. The City Takeover Code says a hostile predator must obtain 90% of a target's voting shares before the remaining shareholders can be forced to accept what's on the table. That stops large numbers of smaller shareholders being excluded if a predator tries to cut a deal with the target's larger shareholders. However, more and more deals are being done as a 'scheme of arrangement' (under Part 26 of the Companies Act).
As Chalker notes, as long as the target's directors agree to the predator's terms and recommend them to shareholders, a deal needs approval from just 50% of shareholders (as long as they hold at least 75% of the equity between them). It should be noted that, under Part 26 of the CA 2006, the 50% and 75% requirements apply only to those actually voting. This is radically different from the 90% required under the Takeover Code, which applies to all the equity in issue.When you couple this difference with the exclusion of nominee account users (as the article very clearly explains), it is immediately evident that a minority of shareholders, in both number and equity held, can determine the fate of a company. So a majority of shareholders with nominee holdings may object (or would do, given a chance), but a deal could still go ahead. This matters if, for example, you are a long-term shareholder in a company paying regular dividends that is bought by a firm with a very different policy.
Tim graduated with a history degree from Cambridge University in 1989 and, after a year of travelling, joined the financial services firm Ernst and Young in 1990, qualifying as a chartered accountant in 1994.
He then moved into financial markets training, designing and running a variety of courses at graduate level and beyond for a range of organisations including the Securities and Investment Institute and UBS. He joined MoneyWeek in 2007.
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