Indirect investors: know where you stand

by Orrick, Herrington & Sutcliffe LLP

Orrick, Herrington & Sutcliffe (Europe) LLP recently won a landmark case in the English High Court for client, Wickeder Westfalenstahl GmbH ('Wickeder'). The case highlights to investors in public companies holding their shares through nominees the dangers of relying upon the minority shareholder protections provided by the Companies Act 2006 (the 'Companies Act').


The case involved an English public limited company – DNick Holding plc ('DNick') - whose operations were based entirely in Germany and whose share capital was traded on a segment of the Deutsche Boerse, via the settlement system Clearstream.  Until developments in German company law in the late 2000s, the use of English limited companies in Germany and structures of this type were not uncommon.

DNick had two shareholders listed on its register of members: an individual and a company under the control of Bank of New York Mellon ("BoNY"). Both shareholders of record were nominees, and the corporate shareholder held title to the DNick share capital on trust for the account holders in Clearstream. The banks or financial institutions holding such Clearstream accounts traded beneficial interests in such shares – referred to in the DNick articles of association as "Clearstream Interests" ("CI's") - through system book entries. The account holders were not therefore trading the legal title in, nor trading depositary receipts representing, such shares.

Wickeder was an indirect investor, having funded a Clearstream account holder to purchase a majority interest in DNick CI's on its behalf. By making the necessary proxy elections via its Clearstream account holder, Wickeder approved a shareholder resolution to re-register the company as private. The claimants, who were individuals and held the economic interest in a minority stake of CI's, sought to rely on section 98 of the Companies Act to cancel the re-registration resolution. The relief requested by the claimants included that Wickeder or DNick should purchase the claimants' interests.

Is a 'holder' the same as a 'member'?

The claimants began proceedings alleging that their economic interests in CI's constituted them as 'holders of not less than 5% in nominal value of share capital' in DNick, which was a qualification to obtaining section 98 relief. 

Wickeder moved to strike out on the basis that the claimants had no such standing.  It argued successfully that the use in section 98 of the term 'holder' was interchangeable with the term 'member' and should not be construed more broadly, as the claimants suggested. The Companies Act defines 'member' as the person named on the company's register of members, being the holder of legal title to such shares (i.e., in this case, BoNY and the nominee individual).

The Court agreed that it was apparent from the internal logic of section 98 that 'holder' meant 'member' and no more. It referred to many places in the Companies Act to demonstrate that non-members could only exercise members' rights if special provision had been made. For instance, in addition to those named on the register of members, a person to whom shares are transmitted under operation of law may, under section 260(5)(c) of the Companies Act, bring a derivative claim under the Companies Act. Furthermore, the Court was unwilling to grant relief that could result in shares being purchased for the benefit of dissentient beneficial interest holders, where the member holding legal title to such shares (i.e., BoNY) was neither an applicant nor a party involved in the litigation.

How 'beneficial' are rights under section 145?

Section 145 of the Companies Act permits a company to insert provisions in its articles of association enabling a shareholder to nominate another person (e.g., a beneficial interest holder) to enjoy specific rights of the member.

In this case, the DNick articles made provision for the CI holders, being the depositary banks holding accounts with Clearstream, to appoint BoNY or any other person as proxy to vote at general meeting. 

The claimants invited the Court to find that the DNick articles of association should be construed so as to confer on them (as opposed to the CI holders) such right to vote by proxy. Furthermore, the claimants argued that the ability to exercise such right entitled them to exercise any accompanying statutory rights, including section 98. The Court found against them on both points. 

First, the Court determined that the drafting of the DNick articles of association did not support such a construction. In this case, to construe the articles of association strictly, such that only the CI holders were afforded rights to vote, receive dividends, etc., was logical; the identities of the CI holders could be easily ascertained by Clearstream, whereas the holders of beneficial interests below that could not. Indeed, one of the benefits of DNick's corporate structure was to afford an end-investor (such as Wickeder or the claimants) the ability to keep its investment confidential. Furthermore, the Court was adamant that the articles of association should be interpreted as they appear and should not take account of equitable considerations/constraints, or of the 'legitimate expectations' of any claimant; to do so would undermine the credibility of the market in the company's shares.

Last, the Court confirmed that, although section 145(1) can confer on a nominated person rights under the articles of association and, so far as necessary, any linked statutory rights, this does not overrule section 145(4), which requires that only the member may enforce such rights.

Can CREST help?

CREST is the settlement system used in the UK for shares traded on AIM and the Main Market of the London Stock Exchange. It differs from Clearstream in that individual members can hold CREST accounts in their own name; they can therefore remain as legal owners of the underlying shares and avoid the issues of the above case. The use of CREST in this manner is, however, often impractical for individuals and a nominee entity is often interposed. Furthermore, the use of CREST may be inappropriate or unavailable for a company operating entirely in a jurisdiction other than the UK.

The Court confirmed that had the claimants joined the legal shareholder, BoNY, to the application it would nevertheless have been restricted from raising an action under section 98 on behalf of the claimants. The remedy is not open to a person who has "consented to or voted in favour of the resolution", even if it exercises votes attaching to various of its shares both for and against the resolution. Although it was not raised at the hearing, it is arguable that the claimants would not have been so restricted had they, prior to the resolution being voted on, been able to procure that BoNY transfer to a separate BoNY nominee the shares representing their underlying interest.

In summary, therefore, the case highlights:

  • that the Court will strictly construe the Companies Act and will avoid an approach that enfranchises beneficial interest holders; to permit such a 'liberal' approach would lead to administrative chaos for traded companies; and
  • the importance of taking local law advice at the time of investment. The rules governing the settlement of foreign securities are confusing; in this case, for instance, the Deutsche Boerse segment on which trading took place referred to the CI's as "shares", even though this was not the case.

Eckerle and Others v (1) Wickeder Westfalenstahl GmbH and (2) DNick Holding plc [2013] EWHC 68 (Ch), [2013] All ER (D) 150

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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Orrick, Herrington & Sutcliffe LLP

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