Europe’s much heralded Shareholders’ Rights Directive (2007) was meant to put an end to share blocking and immobilization and give all shareholders, irrespective of their locale, the same rights to vote across borders with minimum fuss. However, the best laid plans of regulators, shareholders and issuers appear to have been scuppered by the custodian banks, and not for the first time. (See our story on shareholder disenfranchisement at the Deutsche Bank meeting last year)
Yet again, domestic shareholders in German companies are getting preferential treatment of their votes at the expense of foreigners. Why? It’s not because German companies have engineered it that way, but because resident shareholders hold their shares in designated custody accounts. Foreign shareholders, as usual, have their shares put into pooled nominee accounts. This completely obscures their ownership and thus their individual voting rights. Even where an investor sees those shares in a designated account in their home custody system, once abroad their property is co-mingled with other asset owners.
Why has this suddenly become an issue? In the past two weeks Manifest has been contacted by numerous investors who have been confused and concerned by the mixed messages coming out from their global custodians about the status of their votes in Germany. Given that the continential European voting season is just around the corner, we shared their concerns and decided to get the facts on what was happening.
What some shareholders are being told by their custodian and the custodian-mandated voting intermediary, is that if they want to vote their German shares they will have to be re-registered in their own name on the company register and that, as a consequence, may not be able to settle their trades due to the complexity of the re-registration process. Re-registration sounds harmless enough but when there is any form of blocking or immobilisation investors just won’t vote due to the risks of not being able to trade their shares.
On deeper investigation we found that German companies were just as concerned as investors having already seen the impact of this blocking on other meetings – lower turnout. This lower turnout puts foreign shareholders and the companies at risk of a minority of shareholders using their disproportionate power inappropriately.
The root cause of the problem is a court case dating from February 2012 which ruled on nominee portfolio holdings disclosures. Although the case is a full year old, some custodians recently decided that because they might potentially be in breach of German legislation and potentially invalidate ALL the votes of the pooled account, they would change their procedures. So, instead of casting omnibus votes for the entire account, anyone wanting to vote would need to be in a designated account. So far so reasonable, account designation affords many benefits, notably transparency and security. However, ad-hoc re registration can be a long winded process and, if left to the last minute, is fraught with difficulty. Hence the blocking – the custodians can’t be certain that they can do the relevant reconcilliations and put the right shares in the right accounts in time. German proxy voting deadlines imposed by custodian banks are already some of the longest in the EU with shareholders often voting blind on the un-published counter-motions. Can there really be any justification for share blocking – especially when it boils down very poor administrative procedures which are in place for the convenience of the custodian rather than the security of the client?
The German shareblocking problem raises a number of interesting points:
- Why now? The 2012 German proxy season ran pretty much to normal procedure despite this court ruling
- Looking at the IR sections of German companies websites there doesn’t appear to be much of an issue with investors disclosing their significant ownership levels. This would seem to negate any real concerns about breaching the regulations
- The ruling itself has been referred to a higher court because of its ambiguous wording. Admittedly it might take another 18 months to get a final ratification regarding disclosures, however having spoken to German law firms, they thought it improbable that any action would be taken until the higher court had ruled.
- Haven’t the custodians left it rather late in the day to tell investors that their shares will be blocked if they want to vote?
- Resident German shareholders seem to manage to trade and vote their shares without any blocking or immobilisation thanks to their designated account structure – why aren’t custodians giving foreign shareholders the same rights?
- There are some German companies which have always had a requirement for beneficial owner disclosure (e.g. Allianz SE or Munich Re) and so clearly the custodians have coped in the past, what has changed?
In an attempt to get to the bottom of the problem and get a positive resolution, Manifest has been in dialogue with a number of German companies as well as the Deutsches Aktieninstitut and EuropeanIssuers. We have worked with the head of corporate governance at Munich Re, Dr Markus Kaum, to draft a memorandum which explains the facts of voting in Germany and that as blocking is unecessary, shareholders should insist that their votes should not be immobilised in any way during the re-registration and voting period. We are expecting the memo to be circulated in the next few days following approval by the remainder of the Dax 30 companies. In the meantime, Manifest is raising the matter with the European Commission as another example of custodian banks put their P&L considerations ahead of shareholders’ property rights and continue to frustrate the aims of efficient cross border voting.