On 3 April 2017, the Council of the European Union adopted a Directive amending the current Shareholders’ Rights Directive 2007/36/EC (“SRD”), which is meant to strengthen shareholders’ engagement in European listed companies. The revision of the SRD is part of the Commission’s 2012 Action Plan on company law and corporate governance.
The revised Shareholders’ Rights Directive (“SRD II”) is the result of certain specific shortcomings in corporate governance of European listed companies that were exposed by the financial crisis and created strong social and political criticism. Indeed, in many cases, shareholders supported excessive short-term risk taking by unscrupulous managers, and in many cases it appeared evident that high, often excessive directors’ pay was not justified by performance (or even rather the opposite). The SRD II tries to provide a response to this situation, without going as far as some voices had asked for, in terms that may have resulted in excessive interference with private companies’ internal governance. The text’s main official goal is to contribute to the sustainability of EU companies, thus resulting in growth and job creation, through shareholder long-term engagement and increased investment and voting transparency.
The main changes outlined in the SRD II are the following:
1. Identification of shareholders and facilitation of the exercise of shareholders' rights
The SRD II will allow companies to identify their shareholders and to obtain information regarding shareholder identity from intermediaries (i.e. an investment firm, a credit institution, a central securities depository, that provide services of safekeeping of shares, administration of shares or maintenance of securities accounts on behalf of shareholders or other persons). The purpose of this disclosure obligation is to facilitate the exercise of shareholders’ rights and to increase shareholder participation in and voting at general meetings. Intermediaries will also have to provide to shareholders all information from the company that will allow the appropriate exercise of their rights.
2. Control over directors' remuneration
Under the SRD II, shareholders will have the right to vote on the remuneration policy of the company’s directors. This remuneration policy must contribute to the company’s business strategy, long-term interests and sustainability. Also, the directors’ performance must be assessed taking into account both financial and non-financial performance criteria.
3. Transparency for institutional investors, asset managers and proxy advisors
The SRD II requires investors to either develop and publicly disclose a policy on shareholder engagement, or to give a clear and reasonable explanation as to why they have chosen not to do so (the so-called ‘comply or explain’ approach). This engagement policy must include the conduct of dialogue with the company, the exercise of voting rights, and the management of actual or potential conflicts of interest. The policy must also describe how the investor or asset manager monitors the company invested in.Proxy advisors - who analyze corporate disclosure and other information of listed companies with a view to informing investors’ voting decisions by providing research, advice or voting recommendations that relate to the exercise of voting rights - are subject to similar transparency rules, in view of the important role they play. They are required to adopt a code of conduct, as a guarantee of the reliability and quality of their recommendations on how to vote in general meetings of listed companies.
4. Related party transactions
The SRD II provides that transactions with parties related to the company (“related party transactions”) should be approved by the shareholders, the management or a supervisory body, to provide adequate protection for the interests of the company.
Also, companies will have to publicly announce material transactions at the time of the conclusion of the transaction in order to assess the fairness and accuracy of the transaction from a shareholder’s perspective.
The SRD II will be published in the Official Journal of the EU. The Directive will enter into force on the twentieth day following that of its publication, and Member States will then have up to two years to transpose the Directive into national law.