Rules applied to activist shareholders who work together to promote effective corporate governance in companies in which they have invested have been revealed by the UK Financial Services Authority (FSA).

In a letter sent to trade associations, the FSA said its requirements do not prevent "legitimate activity of this nature". The FSA supports Sir David Walker's proposals to strengthen shareholder engagement with the boards of investee companies aimed at promoting good corporate governance.

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

The market abuse rules do not prevent investors from engaging collectively with the management of an investee company, according to the FSA statement. However, trading on the basis of knowing another investor's intentions or working jointly to avoid disclosure of shareholdings could constitute market abuse.

FSA rules on disclosure of major shareholdings require investors who have agreed to pursue the same long-term voting strategy should aggregate their shareholdings when considering whether their shareholdings reach the threshold for disclosure (3% of a company's shares). This disclosure would be unlikely to be triggered by ad hoc discussions between investors on particular corporate issues.

Under the European Union acquisitions directive implemented earlier this year, where investors are "acting in concert" they require FSA approval if they reach a controlling shareholding (10% or more of a company's shares) in a regulated company.

"Acting in concert" is not defined in the directive. The FSA does not view the requirement as preventing ad hoc discussions or understandings between investors that are intended solely to promote generally accepted principles of good corporate governance in companies in which they have invested.