14 December 2015
Quorum levels, rejected and contested resolutions, proxy recommendations and governance developments in 2015
For companies and investors in the UK who have become accustomed to dramatic plot twists and showdowns taking place during the AGM season, the year that is coming to a close has brought a measure of relief. Not even the most enterprising journalist could discern a reprise of the so-called 2012 Shareholder Spring and overall most UK AGMs took place without a hitch. Although this trend also extends to continental Europe, there are notable exceptions, such as France, where levels of shareholder dissent reached a high point.
Looking back on the 2015 AGM season, some key elements provide an insight into how it played out. An overview should to take into account AGM quorum levels, rejected and contested resolutions, proxy advisor recommendations and the main corporate governance developments. This review of the 2015 AGM season focuses on companies which held their AGMs between 1 August 2014 and 31 July 2015 and are in the main large-cap stock market indices (for instance the FTSE 100 index for the UK).
Levels of AGM shareholder participation (i.e. quorum levels) can depend on a number of factors, including the type and location of a company’s shareholder base. However, they can also provide a signal of how engaged shareholders are. Low quorum levels can represent a risk for companies as they magnify the influence of determined minority shareholders and activist investors. For instance, an activist investor holding 10% will see their weight at the AGM rise to 20% if the quorum only reaches 50%.
During the 2015 AGM season, the average quorum was 70.6% for the FTSE 100 and 74.1% for the FTSE 250. In comparison, the mid-cap indices in France and Germany also recorded higher quorums than the large-cap indices, yet in the Netherlands the higher average quorum was recorded for the large-cap index.
Over the past five years the average quorum levels for FTSE 100 companies have held steady at around 71%. Meanwhile, the average quorum for FTSE 250 companies has increased by more than 8% (from 65.8% to 74.1%).
Case study: Germany
Germany provides an interesting example of how quorum levels can be affected by the legal and market context. Among the 30 companies in the DAX (the large-cap index), 15 have bearer shares and 15 have registered shares. Although the companies with registered shares have consistently had a lower average quorum, in 2013 their quorum plunged from 50.21% in 2012 to 34.7%, compared to 65.02% in 2013 for companies with bearer shares. There has been a moderate recovery in 2014 and 2015.
The issue originates from a 2012 ruling of the Higher Regional Court (OLG) in Cologne. It implied that not only the beneficial owner of shares but also the registered nominee (such as a custodian bank) had a co-responsibility to ensure that the issuer, and subsequently the market, would be notified of crossing disclosure thresholds. The interpretation by custody banks and voting service providers of this court ruling led to the imposition of temporary registration requirements in the issuers’ share register, for shareholders who wanted to vote at an upcoming shareholder meeting.
As processes differed and manual intervention was required in most cases, some share positions were unavailable for settlement while the holder of the voting rights appeared on the register (instead of the custodian bank). The fear of share blocking led a number of foreign shareholders not to exercise their voting rights for their full share position in German companies with registered shares.
The partial recovery of quorum levels in 2014 was mainly driven by clearer communication between market participants and changes in how registrations and votes were handled by intermediaries. However the stagnation between 2014 and 2015 shows that there is an ongoing problem.
A stark sign of how uneventful the 2015 UK AGM season has been is that in the FTSE 100 only one company – Intertek Group – had a board-proposed resolution rejected by shareholders. At its AGM the advisory vote on the directors’ remuneration report failed to achieve support from shareholders, with 51.68% of shareholders voting against the resolution.
In comparison, there were no rejected resolutions among the companies in the Dutch and Swiss large-cap indices, and one resolution was rejected among German large-cap companies (Commerzbank).
This year, among the FTSE 100 AGMs, 52 companies saw at least one board-proposed resolution receive more than 10% shareholder opposition (compared to 60 in 2014). The total number of resolutions that received over 10% opposition amounted to 95, compared to 127 resolutions in 2014. The most commonly contested resolutions were proposals to allow companies to call EGMs at 14 days’ notice, followed by authorities to issue shares with and without pre-emptive rights. The third most commonly contested resolutions were remuneration report and remuneration policy votes. Given the focus that is often placed on executive remuneration, it is interesting that only five companies’ remuneration report votes received less than 80% support.
Case study: France
France provides an interesting counterpoint to the uneventful AGM season in the UK and elsewhere in Europe. Among the CAC40 companies surveyed, shareholders at the AGMs of eight companies rejected 13 resolutions: GDF Suez, Kering, Orange, Pernod-Ricard, Renault, Veolia, Vinci and Vivendi.
Additionally, eight shareholder proposals (including two filed by PhiTrust to maintain single voting rights) were filed at the AGMs of EDF, Orange, Safran, Total and Vivendi. All failed to gather sufficient support from shareholders and were therefore rejected.
Finally, among the CAC40 companies surveyed, 29 companies saw at least one resolution receive more than 10% shareholder opposition. The total number of resolutions that received over 10% dissent amounted to 146.
Many institutional investors rely on proxy advisory firms for meeting agenda analysis and recommendations to inform their voting decisions.
A negative recommendation from a proxy advisor can have an adverse impact on the vote outcome of a given resolution.
During the 2015 AGM season, 18 FTSE 100 companies received at least one against or abstain recommendation from the proxy advisory firm ISS, for a total of 23 resolutions. Additionally, 85 FTSE 100 companies received at least one against or abstain recommendation from proxy firm Glass Lewis, for a total of 120 resolutions. It should be noted that the bulk of the negative Glass Lewis recommendations depend on the fact that it routinely recommends against short notice periods for EGMs, which are proposed by most FTSE 100 companies.
In line with our findings on the rejected and contested resolutions, it appears that among the main European markets French companies have received a high number of negative recommendations from proxy advisors. Among the 37 CAC40 companies surveyed, 28 companies received at least one negative recommendations from ISS and 22 companies received at least one negative recommendation from Glass Lewis.
One of the main corporate governance developments that took place in the UK during the 2015 AGM season was the publication of an updated statement of principles from the pre-emption group. The pre-emption group was initially set up in 1987 to produce a statement of principles to be taken into account when considering the case for disapplying pre-emption rights. Its most influential guideline provides that companies should seek an ‘authority to issue non-pre-emptively no more than 5% of ordinary share capital in any one year’ and that ‘companies should not issue more than 7.5% of the company’s ordinary share capital for cash other than to existing shareholders in any rolling three-year period’.
In March 2015, the group published a revised version of its statement of principles. The main amendment to the previous version of the principles introduces flexibility to undertake non-pre-emptive issuance of equity securities in connection with acquisitions and specified capital investments. In addition to the generic 5% limit mentioned above, the principles now state that companies may seek an authority of ‘no more than an additional 5% of issued ordinary share capital provided […] the company confirms that it intends to use it only in connection with an acquisition or specified capital investment’. Therefore, the long-standing limit allowing disapplication of pre-emptive rights for up to 5% of issued share capital has been increased to 10% (under certain conditions) and the 7.5% limit over any three-year rolling period continues to be in place.
Case study: Europe
The change in the best practice guidelines on the exclusion of pre-emption rights in the UK, highlights a gradual convergence between the best practices across Europe.
For many years, in most continental European markets a level of dilution without pre-emptive rights of up to 20% was considered best practice, although the UK has applied the above mentioned 5% limit since 1987. In recent years, however, through a combination of tighter best practice codes and investor guidelines, it has been common in Europe for companies to limit their requests to a 10% exclusion of pre-emptive rights. For instance, in France in 2013 the AFG Recommendations – a leading corporate governance code – set its dilution limit to 10% and this is now accepted by all the main proxy advisors in France.
More recently, a number of Dutch companies have moved away from the traditional local model (requesting a 10% generic exclusion of pre-emption rights plus a further 10% exclusion in the case of mergers or acquisitions) and shifted to limiting the exclusion of pre-emptive rights to 10% only. It is interesting to see how the UK best market practice has now also moved away from an inflexible 5% limit.
It now looks like a European consensus may be forming, which could put further pressure on companies that continue to propose authorities without pre-emptive rights exceeding 10%.