Proposal to shield investors in at-risk companies

Shareholders of companies facing financial distress or low-priced bids to take them private would gain greater protection under a code proposed by a leading institutional investor.
The proposal is aimed at helping shareholders and companies in "emergency situations" by setting up investor committees to co-ordinate action. It would work in a similar fashion to the "London principles" adopted by banks to deal with corporate crises.
The code is being proposed by Hermes Pensions Management and Jonathan Charkham, a former Bank of England official and member of the Cadbury Committee on corporate governance in the early 1990s. The views of company executives and shareholders are being sought.
The code would apply when companies reached "a point of danger" that might lead to action by banks or bondholders to protect their interests - which often clash with those of shareholders.
It would also apply where a management has decided it might be better for a group to be "rescued from the stock market" by a friendly takeover or by being taken private at a price lower than that believed by shareholders to be the company's true value. It is envisaged the code would apply in two to three cases a year.
Peter Butler, head of corporate governance at Hermes, said: "Shareholders are so vulnerable when companies run into financial difficulties.” Mr Butler led the restructuring of the Berisford conglomerate in 1990s.
Hermes and Mr Chalkham suggest that in emergency situations investor committees be set up, possible with the help pf trade bodies. The committees should represent at least 10% of the shareholder base and no single investor should be allowed to dominate.
Other principles include requiring representatives to be ‘ringfenced’ from trading activities. This is aimed at dealing with conflicts of interest that ca arise when shareholders and boards exchange inside information on how company might be turned round.