On 8 July 2015, the European Parliament voted to amend the European Commission's proposals to amend the Shareholder Rights Directive (2007/36/EC) (SRD).
What is the SRD?
The SRD, which was adopted in 2007, sought to improve corporate governance in companies whose securities are traded on the EU's regulated markets. Since its adoption and following the aftermath of the financial crisis, the European Commission has consulted on various proposals to enhance the corporate governance of EU listed companies, with a particular focus on encouraging a 'long-termist' view amongst shareholders.
European Commission's proposals to amend the SRD
In April 2014, the European Commission proposed several amendments to the SRD. Click here to read our article for more detail on the original proposals. In summary, the proposals provide for:
- the disclosure of, and shareholder influence over, directors' remuneration
- the increased transparency of proxy advisors in relation to their voting recommendations
- the increased transparency of voting and engagement policies of asset managers and institutional investors
- the identification of a company's shareholders by requiring that intermediaries must offer companies the right to have their shareholders identified and must facilitate the exercise of shareholder rights, and
- the improvement of shareholders' oversight of a company's related party transactions.
European Parliament's adopted amendments to the proposals
On 8 July 2015, the European Parliament resolved to adopt amendments to the Commission's proposal. Click here to read the revised text or read on for a brief summary of some of the key amendments.
Increased transparency on tax reporting
The new proposals require that large undertakings, public interest entities and issuers whose securities are traded on EU regulated markets publish specific financial information in the notes to their financial statements. Such information, which must be audited and published on a consolidated basis for each financial year, will include information on profits or losses before tax, taxes on profits or losses and public subsidies received. Large undertakings and issuers must also publicly disclose information regarding tax rulings, providing a breakdown by Member State and by third country in which the undertaking in question has a subsidiary. There are specific exemptions to the proposals which include exempting certain undertakings whose employees and turnover do not exceed specific thresholds and where an undertaking's information is disclosed by the information published by its parent undertaking in a Member State which is also subject to the same rules.
Shareholder say on director’s pay
The proposals to amend the SRD provide for the disclosure of, and increased shareholder oversight over, directors' remuneration. In the UK, companies are required to submit their director remuneration policies to a binding shareholder vote. In contrast, the European Parliament's proposed amendments provide Member States with discretion to decide whether the shareholder vote on remuneration policy should be binding or advisory.
As in the UK, Member States must also provide that shareholders have the right to hold an advisory vote on the remuneration report of the past financial year during the annual general meeting. Where shareholders vote against the remuneration report, the company is required to enter into a dialogue with its shareholders to identify the reasons for the rejection.
Other amendments include providing that, where the policy indicates financial and non-financial performance criteria for variable remuneration, the value of shares should not play a dominant role in the financial performance criteria and the share-based remuneration should not represent the most significant part of the directors’ variable remuneration.
Oversight of related party transactions
The provisions have been amended so that materialtransactions with related parties, rather than transactions that represent more than 1% of the company's assets for transactions which must be announced, or 5% of the company's assets for transactions to be submitted to a shareholder vote. Material transactions are to be defined by Member States, taking into account: (a) the influence that the information about the transaction may have on the decisions of those who are involved in the approval process; (b) the impact of the transaction on the company’s results, assets, capitalisation or turnover and the position of the related party; and (c) the risks that the transaction creates for the company and its minority shareholders.
Member States must define specific rules regarding the report assessing whether or not a related party transaction is on market terms, including the entity responsible for providing the reports, which must be one of an independent third party, the supervisory body of the company, or a committee of independent directors.
Transactions between the company and one or more of its group members and its joint ventures are exempt from the provisions provided that those group members or joint ventures are wholly owned or that no other related party has an interest in those members or the joint ventures. So group members which are not wholly owned (for example, members which are only 95% owned by the company) would not be exempt. Such intra-group transactions are not caught by the UK related party regime. Member States may also exclude transactions entered into in the ordinary course of business and concluded on normal market terms.
Transparency of proxy advisors
The Commission's original proposals to increase the transparency of the proxy advisor regime have also been expanded and include provisions which require Member States to provide that proxy advisors shall refer to their applicable code of conduct. Where they depart from any recommendations of that code, the proxy adviser should declare this, and explain their reasons for doing so and whether they have adopted any alternative measures. All such information must be published on the proxy advisor's website.
Identification of shareholders and facilitation of the exercise of shareholder rights
The original proposals provided that Member States must ensure that intermediaries offer companies the right to have their shareholders identified. The amendments to the provisions include clarifications regarding the shareholder information that must be communicated to the company immediately on request and provisions which require public disclosure of the minutes of general meetings and the results of votes via the company's website.
The European Parliament has decided not to close the first reading, but will enter into informal talks with Member States with a view to seeking agreement on the final version of the legislation. It is expected that the amending directive will be adopted by late 2015 or early 2016. The current version of the legislation envisages implementation by Member States within 18 months of the legislation's entry into force.