GREIT02130 - Conditions and Tests: maximum shareholding: reasonable steps: identifying holders of excessive rights

The first criterion for arrangements to be reasonable is that the company must have in place a mechanism to identify shareholdings that might give rise to the payment of a dividend that would trigger the 10% maximum shareholding rule.

As the share register of a company records the legal owner and the number of shares they own, simply picking out those with 10% or more is not sufficient. This is because the register does not reflect who is beneficially entitled to the dividends or who holds the voting rights. For example, N1 may be shown as the owner of 18% of the shares, but if N1 is acting as nominee for A, B and C who each own 6%, then N1 is not a excessive shareholder. If N2 owns 5% of the shares but is acting as nominee for A, relying on the company register will not pick up A as a person beneficially entitled to 11% of the dividends of the company.

The Companies Act (CA) 1985 also places a number of obligations on shareholders to notify interests in a company to the registrar. Under sections 198 and 202 CA 1985, a person generally has to notify the registrar when their interest is material, which is when it reaches or exceeds 3% of the relevant share capital. ‘Relevant share capital’ for a UK-REIT will be the single class of ordinary share capital in issue.

The list of persons who have declared a material interest in the company (the principal company in the case of a Group REIT) is therefore a good starting point for identifying excessive shareholders. It is unlikely to contain more than 30 names, and as there is a further requirement to notify the registrar if interests change by 1% or more, only those approaching 9% need to be tracked.

For notification purposes, interest includes family and corporate interests, so the % interest shown in the list will tend to be greater than the % interest of any one beneficial owner. The list should not therefore miss out on interests that have been fragmented.

Where the shares are held by an authorised unit trust, OEIC or under discretionary management arrangements, the requirement to notify is when the interest reaches 10%. Also, notification applies only to voting shares. This means that tracking names on the list of material interests will not give early warning where AUTs etc own the shares, nor will it pick up owners of excessive holdings that include preference shares.

Notification is required within two days of an interest becoming material, reaching 10% in the case of an AUT, OEIC or other discretionary arrangements, or changing by 1%. If a shareholding becomes excessive in the days immediately before a dividend record date, a dividend may be paid in respect of that shareholding. The company therefore needs arrangements in place to deal with that eventuality (see GREIT02145).

First suggested addition to the Articles of Association

As the Companies Act notification requirements are not adequate, a company must take additional steps to ensure that HoERs are identified. This may take the form of a provision in the company’s articles reinforcing the CA 1985 disclosure of interest rules. This might include the following elements:

• a requirement for shareholders to notify the company if the shares they hold form part of an excessive shareholding;
• a right for the board to require information in relation to any shares in order to determine whether the shares form part of a excessive shareholding; and
• a sanction that dividends would not be paid on those shares in the event of failure to comply.

To cater for the possibility that shareholders may decide not to comply with a request from the board (which would not have the same criminal consequences that follow from ignoring a notice under section 212 CA 1985), the sanction would need to apply if no reply was received by a particular date. 14 days would be reasonable for this purpose.

A company that has included such rights to require information and uses reasonable diligence in using those rights and its rights under the Companies Act 1985 to identify HoERs will be regarded as having taken reasonable steps in relation to the identification of excessive shareholders.