Professor Lorraine Talbot and Dr Andreas Kokkinis
The question of transparency of ownership of shares in companies, technical as it may appear and neglected as it may have been in company law literature, cuts across several areas of policy and raises fundamental questions of political economy. Japan is one of the countries that is currently grappling with the complexities of beneficial ownership transparency, having attracted criticism by international bodies for the moderate to low transparency provided by its legal framework. As researchers in Japan consider possible reforms in disclosure requirements for beneficial owners of shares in Japanese listed companies, in the context of increasing dominance of institutional investors, we have done work on the historical development and current implementation of disclosure arrangements for beneficial owners of shares in England.
There is both a public and private rationale for the transparency of share ownership through disclosure. Public interest-orientated rationales for transparency include combating financial crime and tax evasion and preventing certain types of private wealth from remaining hidden. Private interest-orientated rationales include operationalising takeovers, takeover regulation and capital market efficiency – though most scholars would reject the notion that the takeover of large or socially significant enterprises is a purely private matter. Indeed, any neat distinction that could plausibly be drawn between different rationales for disclosure in distinct legal regimes (crime prevention for AML-oriented rules, enabling shareholder engagement for stewardship-oriented rules, and market efficiency in takeover-oriented rules) would run the risk of erasing the complicated history of the development of the law in this area and of obscuring the transcending demand for full public transparency as a condition for the social license of corporate power.
In our paper, which will appear at the Journal of Business Law in early 2025, we assess the emergence of share ownership transparency in English company law set against a long-standing history of the “real” owners of company shares ability to hide their identity as beneficial owners behind a nominee whose name is registered as the legal owner. We show how transparency was set within a larger project to empower shareholders and to enhance their interests, inadvertently becoming entangled in the rise of corporate takeovers. In doing so, we demonstrate that transparency continues to be shaped by public policy, shareholder primacy, management control and corporate private ordering, and how strongly worded legislative provisions, either in the context of company legislation or anti-money laundering legislation, are often made ineffective by the courts on the basis of enforcing directors’ duties and protecting human rights respectively. We reflect on aspects of the different approaches of Germany and France, the regimes of which still manifest certain unmistakable national characteristics, despite extensive European harmonisation. Finally, we assess what might be learnt from these experiences for Japanese policy makers as they consider options to increase the transparency of beneficial ownership of shares.
We conclude that disclosure rules on the beneficial ownership of shares have developed in a way which is both very specific to the English and Welsh jurisdictions and very general to a particular development in capitalism. On the former, equitable rules have shaped how they may be used and have provided a bridge between statute and the private ordering enabled in English company law. On the latter, British capitalism has early developed financialised mechanisms to enhance shareholder value, including through an active market in hostile takeovers.
Siems and Schouten (2010) have argued that developed countries tend to have more stringent ownership disclosure rules than transition and developing countries. However, as the example of Japan suggests, while most wealthy economies tend to have sophisticated disclosure rules, a lack of effective disclosure rules is not necessarily indicative of a less developed or transitioning economy. Thus, we would take issue with the claim that disclosure rules are a key indicator of a more advanced economy.
An alternative explanation, considered by Siems and Schouten, is that developed disclosure obligations for listed companies are essentially an anti-takeover mechanism and hence they are likely to be found in systems with dispersed share ownership like the UK and the US. Our analysis of the emergence of disclosure in the UK is more nuanced. The tradition of the wealthy protecting and hiding their wealth, managed for centuries under trusts, was continued under the share registration system from the nineteenth century. Subsequently, there emerged other reasons for wanting to know the identity of beneficial owners, including hostile foreign ownership. However, regulation to achieve this (first in the 1948 Companies Act) was very light touch as governing and financial powers sought more generally to empower shareholders and to restrict management power. In the context of the unexpected and rapid increase in hostile takeovers from the 1950s, limited disclosure requirements for beneficial shareholders were allowing bidders to acquire companies through nominees by stealth, and enabling takeovers at cut prices to the disadvantages of target shareholders. This required some rebalancing between shareholder privacy and management power, resulting in some disclosure requirements and later some automatic thresholds. These measures did not aim to thwart takeovers but to regulate them in the interests of shareholders, by ensuring shareholders of the target receive the highest possible price for their shares. The recent decision in Eclairs Group Ltd v JKX Oil and Gas plc [2016] underlines the judicial credo that regulation is there to enable takeovers while protecting shareholders, rather than to enhance managerial power to thwart takeovers. Acting in the best interest of the company, as per Percival v Wright [1902], is no longer a defence.
Our account explains uneven development of disclosure rules generally and its slower development in countries where takeovers were not prevalent, specifically countries that, until relatively recently, had highly concentrated share ownership, such as Japan. In such systems, family ownership of companies is common and there tends to exist thick social networks connecting major companies. Continental European countries are outliers in this narrative, as they have less share dispersal than the UK (and the US) but have adopted UK style takeover regulation prompted as noted above, by pro market neoliberal politics and ambitions to encourage a pan-European market for corporate control. However, the concentrated share ownership in their companies means they have embraced disclosure in more limited forms. As ever, the outcome reflects the balance between political and financial power and their mediation in law.