Shareholder identification is the process through which a company obtains the identity and holdings of the investors behind the names on its share register. Most shares in listed companies are registered in the names of depositories, custodians and brokers' nominee companies, so the register alone does not show who the real investors are. Identification procedures give the company a legal right to ask intermediaries for that information. Companies use the results to communicate with investors, to prepare for votes and to monitor changes in their ownership.
The term is most closely associated with the European Union's revised Shareholder Rights Directive, known as SRD II, which created a common right of identification for companies listed on EU regulated markets. Comparable but separate mechanisms exist in the United Kingdom and the United States. It is distinct from anti-money-laundering checks on a firm's own customers, and from public beneficial ownership disclosure by investors who cross reporting thresholds.
Modern shareholding is intermediated. An investor's shares are held by a broker or custodian, which may hold through a global custodian, which in turn holds through a local agent at the central securities depository. At each level many clients' holdings are commonly pooled in an omnibus account. The share register therefore shows a short list of nominees, and the information about who stands behind them is spread along the custody chain.
The EU framework
SRD II, adopted in 2017, gives listed companies the right to identify their shareholders and obliges intermediaries to cooperate. An implementing regulation setting standard formats and deadlines has applied since September 2020. The main features are:
- Who can ask. The issuer, or an agent it appoints, may send a disclosure request. Member states may limit the right to holdings above a threshold, which cannot be set higher than 0.5 per cent of shares or voting rights.
- Who must answer. Every intermediary in the chain holding the shares for someone else must respond, including intermediaries based outside the EU that serve holders of in-scope shares.
- What is disclosed. The response gives the shareholder's name, contact details, a unique identifier such as the LEI identifier for a legal entity, the number of shares held and, if requested, the type of holding and the date from which the shares were held.
- Confidentiality. Disclosure under the directive is not treated as a breach of contractual or legal restrictions on revealing client information, and the data may be kept only for a limited period.
How a request is processed
The issuer sends the request to the depository, stating the security and the record date at which holdings are to be reported. Each intermediary passes the request down to the next intermediary in the chain without delay and, in parallel, sends its own response directly to the address named in the request. This means that the issuer receives replies from many firms at different levels and must piece them together.
For a custodian bank the work involves receiving requests in a standard ISO 20022 message format, checking that the request is genuine and the security is in scope, extracting client holdings as at the record date, and replying within the regulatory deadline. Positions that were pending settlement or on loan at the record date need careful treatment. Volumes are concentrated in the weeks before the annual meeting season.
Other jurisdictions
In the United Kingdom, a public company may serve a notice under section 793 of the Companies Act 2006 on anyone it knows or reasonably believes to be interested in its shares, requiring details of the interest; failure to reply can lead to restrictions on the shares. In the United States, a company can obtain from brokers and banks a list of beneficial owners who have not objected to disclosure, while those who have objected remain anonymous to the issuer. Several Asian markets record holdings at investor level at the depository, which makes identification straightforward.
Uses and limitations
Knowing its shareholders allows a company to direct shareholder communication, to canvass support ahead of a shareholder meeting, to check that proxy voting instructions correspond to real holdings, and to spot an activist or potential bidder building a stake.
The EU regime has known weaknesses. The directive did not define "shareholder", so member states differ on whether the person to be reported is the registered nominee or the end investor. National thresholds and transposition details vary, and responses can be incomplete where a chain runs through several countries. The data shows holdings at a single date and says nothing about who directs the voting where an asset manager acts for many funds. It also does not reach derivative positions that give economic exposure without ownership. The European Commission has reviewed the directive's operation with a view to closing some of these gaps.