n Tydskrif vir die Suid-Afrikaanse Reg - Uncertificated shares : a comparative look at the voting rights of shareholders (part 1)




The power to vote is the most important tool a shareholder has to influence the behaviour of a company. However, uncertificated shares often rely on a structure that interposes multiple nominees between the issuing company and the underlying investor. Such a structure has the potential to dispossess the underlying investor of his rights.

One of the concerns faced by countries with advanced economies is that shares in large public companies have been converted from paper certificates, directly held by the shareholder, to electronic ones maintained in the books of various institutions. This change was necessitated by the "paper crunch" that first struck in the late 1960s, when trade volumes on stock exchanges reached such a high level that it became practically impossible to process the huge amount of paper documents that were generated. The electronic conversion brought great efficiencies to the trading and settlement of transactions on the stock exchanges, but it created a problem for shareholders and their ability to exercise their rights. By their very nature, electronic shares cannot be held by shareholders themselves. Instead, they are held as records in the systems of various intermediaries that make up a large web, at the centre of which sits the central securities depository, which is ultimately responsible for the orderly custody, transfer and settlement of all the shares and their transactions. The structure of the holding systems, however, means that the investor is usually not recorded as the shareholder of his shares. For the purpose of administrative efficiency, it is usually a nominee of one of the intermediaries that is recorded as the shareholder in the company's share register. Legally, then, it is this nominee that has all the rights attached to the shares, and the actual investor has none. This includes the right to vote.
In order to resolve this problem, countries such as the United States of America, the United Kingdom and South Africa have developed legal and structural frameworks that allow the investor to exercise his rights. In the United States, these mechanisms involve a system through which the rights of the shareholder are passed from one intermediary to the other down all the levels of the holding chain until they reach the investor, and then passing his voting instructions all the way back up the chain until they reach the issuing company. In the United Kingdom, this system is also used in some ways, but the legislation has been tweaked to provide the possibility for the indirect investor to have a direct relationship with the issuing company, thus bypassing the intermediary if the intermediary so chooses. In South Africa, the legislation has gone one step further and granted direct voting rights to the indirect investor by amending the definition of what a shareholder is. In addition, there is also an obligation on the intermediary to disclose the identity of the indirect investor (or the holder of a beneficial interest, as it is termed) to the issuing company. This creates a direct relationship between the indirect investor and the company, something that is not present in the regimes of either the United States or the United Kingdom.
However, the solution in South Africa is not perfect. Complexities in the proxy voting process mean that it is possible for votes to get lost or incorrectly assigned. The true way forward to ensure that the rights of indirect investors are protected and entrenched is to move to a centralised, direct custody system. This is a system where the name of the investor is recorded as the shareholder in the books of the central securities depository, the topmost level of the custody chain. In this way, the investor will have a direct relationship with the issuing company. Since he will also be recognised by the company as the shareholder, he will be able to exercise his rights, including the right to vote, directly, and without the intervention of any intermediaries. The South African legislators have shown good vision by enabling exactly such a system in the relevant sections of the Companies Act 71 of 2008, and Strate (Proprietary) Limited, the central securities depository, has introduced some account structures that have begun to take advantage of these changes. It is suggested, however, that the South African market should embrace the move to such a system, and implement it as a matter of priority.
In discussing this topic we will take a comparative look at the legal and structural frameworks surrounding uncertificated shares in the United States of America, the United Kingdom and South Africa, with a particular emphasis on the position in South Africa.
In order to understand the structure of the uncertificated market, we examine the various categories of uncertificated custody systems, and their differences, before focusing in some detail on the regulation of uncertificated shares in South Africa. Finally, we take an in-depth look at the shareholder voting processes in the three jurisdictions under discussion and make suggestions for the improvement of the position in South Africa.


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