Voting of deposited shares: Overview, definition, and example
What is voting of deposited shares?
Voting of deposited shares refers to the process by which shareholders who have deposited their shares with a custodian or depository entity retain the right to vote on matters related to the company, such as elections of directors, mergers, or other significant decisions. The deposited shares are typically held in a central depository, and the shareholders who own them are still entitled to exercise their voting rights, even though the shares are physically held by a third party.
This process is often used in situations where shares are held in bulk by institutions like banks or custodians, and the actual shareholders want to participate in voting without needing to physically attend meetings. The depository typically acts as an intermediary, ensuring that votes are cast according to the instructions of the beneficial shareholders.
Why is voting of deposited shares important?
Voting of deposited shares is important because it allows shareholders to exercise their rights and have a say in key company decisions, even when their shares are held by a custodian or depository. This is particularly relevant in modern financial markets where shares are often held in bulk by institutional investors or through electronic systems, making direct participation in shareholder meetings challenging for individual shareholders.
For businesses and organizations, ensuring that shareholders can vote on important issues, even when their shares are deposited, supports corporate governance and transparency. It also strengthens shareholder engagement by making it easier for them to participate in the decision-making process.
Understanding voting of deposited shares through an example
Imagine a public company that has millions of shares in circulation. Many of these shares are held by institutional investors, such as banks, pension funds, or mutual funds, which deposit the shares in a central depository for safekeeping. When the company holds an annual general meeting (AGM) to elect new directors, those institutional investors have the right to vote on behalf of the shareholders they represent.
To facilitate the voting process, the custodian or depository sends instructions to the beneficial shareholders (the actual owners of the shares), asking them how they wish to vote. The shareholders then provide their voting instructions, and the depository ensures that the votes are cast according to their instructions. This allows shareholders who don’t directly attend the meeting to participate in the election of directors or other important matters.
In another example, a company’s shareholder agreement might require that all shares, even those deposited in a custodian, must be voted on by the beneficial owner of the shares. In such cases, the depository provides a system for shareholders to cast their votes electronically or through a proxy, allowing them to influence company decisions without attending in person.
An example of a voting of deposited shares clause
Here’s how a voting of deposited shares clause might appear in a shareholder agreement or company policy:
“The Depository shall provide the Beneficial Owner with the opportunity to instruct the Depository on how to vote the shares held in custody at the time of any shareholder meeting. The Beneficial Owner shall have the right to direct the vote for each share, and the Depository shall cast the vote accordingly, provided that such instructions are received in writing or electronically prior to the meeting date.”
Conclusion
Voting of deposited shares is a critical practice in modern corporate governance, ensuring that shareholders retain their right to vote on important company decisions, even if their shares are held by a custodian or depository. This practice helps facilitate shareholder participation, promotes transparency, and strengthens the decision-making process within companies. By allowing shareholders to vote on key matters remotely or through intermediaries, businesses can improve shareholder engagement and compliance with governance standards.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.