IDENTIFYING THE BENEFICIAL OWNERS OF SHARES
ROWAN CLARKE, INVESTOR RELATIONS
The ability to interrogate a company’s share register to identify its beneficial owners provides important information to Directors. In addition to identifying who is making decisions to buy and sell shares, it enables the Board and senior management to identify such things as where voting power is held, who to talk to on ESG matters, and insights into how the composition of institutional ownership may impact a company’s access to, and cost of, capital. Information on beneficial ownership is particularly useful at major corporate events including takeovers. So who’s who on a share register?
Who’s who on share registers
Well at first glance there can appear to be an overwhelming array of accounts on a company’s register, however, the major accounts are likely to include:
- Personal, private company and SMSF and other trusts – these are typically beneficially owned by retail investors.
- Holdings by directors and management of the company. They may be acquired as part of a KMP remuneration, or through an employee participating in a share purchase plan. Key decision makers are often well informed about the ongoing business of a company and their trades are closely watched by regulators and other shareholders.
- Corporate shareholders – In most cases, they sit at the top of a share registry in terms of the relative size of their beneficial interest, and may include strategic investors, activists and competitors, and the company’s founders.
- Entrepot and Broker Accounts – Many brokers will take possession of shares from their clients in a variety of situations, such as prior to trade settlement, as collateral for loans, or in Prime Brokerage accounts.
- Custodial and nominee accounts – the most prominent shareholder on many registers, these accounts serve only to hold and provide ongoing administration of a shareholding. The decision to sell those shares, along with the exercise of voting rights often rest with an underlying beneficial owner. In many circumstances, particularly where there is an offshore beneficial owner, there may be numerous layers of custodial accounts between the register and end beneficial owner.
The role of Custodians and nominee accounts
This group of shareholders can create a lack of transparency for companies wanting a clear picture on where beneficial ownership sits. Professional investors that include superannuation funds, hedge funds and other managed funds are legally required to hold their investments in trust accounts not owned by them. The custodial account serves to facilitate this separation of ownership and investment decision making by the professional investor. The role of a custodian is not limited to superannuation firms and fund managers. They can be used by strategic shareholders and retail investors. Here, the custodian provides all ongoing administrative tasks that would have been time consuming or impractical for the investor.
Given that many investors employ custodians and the important role it plays to meet regulatory requirements, it is not uncommon for a custodian to hold shares on behalf of numerous investors. Similarly, in many cases, the identity of the custodian holding shares is dictated by the end beneficial owner (e.g. an industry fund), rather than the investment manager. Consequently, each investment manager generally controls the buying and selling decision of shares across more than one custodial account. This creates a multi-layered matrix of control and ownership, below what appears on the surface to be a simple shareholding structure.
In such cases it is highly likely that a Director will have no idea who are the beneficial owners of those shares; who can exercise the voting rights attached to them or even the most basic of information such as the location of the beneficial holders. And, while there is an ongoing requirement for large investors (i.e., substantial holders) to report their holdings, Prof. Comerton-Forde at UNSW recently noted that this remains untimely and of poor quality.
Benefits of finding the beneficial owners
At FIRST Advisers, we have the experience, technology and expertise to identify the true decision makers and beneficial owners behind a company’s custodial and nominee accounts. The depth of our analysis is unmatched and allows companies to understand the investment style and location of professional investors sitting behind custodial accounts on a share register. Let’s say BlackRock Fund Advisers is a large shareholder. Directors can identify if shares are held by index-focused funds or actively managed funds sitting under the BlackRock umbrella. The analysis is thorough and identifies the people who makes voting decisions in a fund. This level of detail empowers directors to predict emerging trends in a share registry. For example, if a company is operating in a mature sector with few plans to enter new markets, how likely will it be for existing growth-focused institutional investors to support a company’s ongoing strategy or remain invested?
With Deloitte Analysis forecasting superannuation funds will own more than 60% of the value of the Australian share market by 2038, it will only become more important for directors to understand where beneficial ownership lies behind custodial accounts on their share register.
 “An Analysis of S&P/ASX 300 and NZX 50 Share Ownership” – Australian Investor Relations Association (2021)
 “Dynamics of the Australian Superannuation System: The next 20 years” – Deloitte Analysis (2019)