The Financial Services Authority (FSA) has clarified its rules applying to activist shareholders hoping to promote effective corporate governance in companies in which they have invested.

The supervisory body has sent a letter to trade associations informing them that its requirements do not prevent legitimate activity of this kind, and said it strongly supports proposals in Sir David Walker's Review of the corporate governance structures in banks which recommend the strengthening of shareholder engagement with the boards of investee companies. The letter, the FSA said, clearly states that its rules do not stand in the way of Walker's recommendations.

"There is nothing under FSA rules that prevents investors discussing matters when it is for a legitimate purpose," commented Alexander Justham, FSA director of markets. "Our letter provides clarity to investors that they are free to engage with the boards of companies as Sir David Walker envisaged."

There are three areas set out in the FSA's approach to the rules. These state that market abuse rules do not prevent investors from engaging collectively with investee companies' management, although trading on the basis of knowing another investor's intentions or working jointly to avoid shareholdings disclosure could be equivalent to market abuse. Rules on the disclosure of major shareholdings require, the FSA said, that investors who have agreed to pursue the same long-term voting strategy should aggregate their shareholdings when considering whether the have reached the threshold for disclosure (three per cent of a company's shares). However, disclosure would be unlikely to be triggered by informal discussions between investors on corporate issues.

The final rule is that under the EU Acquisitions Directive, implemented earlier in 2009, FSA approval is required if investors reach a controlling shareholding of ten per cent or more of a company's shares in a regulated firm.

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