EU Directive 2017/828, amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement, was published on May 17 2017. As its title indicates, the directive aims to increase shareholder engagement in listed companies with their corporate seat in the European Union. It must be transposed into national law by June 10 2019.
In the directive's own words:
"Effective and sustainable shareholder engagement is one of the cornerstones of the corporate governance model of listed companies, which depends on checks and balances between the different organs and different stakeholders. Greater involvement of shareholders in corporate governance is one of the levers that can help improve the financial and non-financial performance of companies."(1)
In order to achieve its ambitious goal of greater shareholder engagement, the directive contains provisions on:
- 'say on pay';
- facilitation of exercise of shareholders' rights and increased regulation of institutional investors, asset managers and proxy advisers; and
- related party transactions.
Say on pay
Say on pay describes the involvement of shareholders in matters relating to the remuneration of directors (comprising the members of both the management board and the advisory board). According to the directive, the remuneration policy of listed companies must be determined in an appropriate manner and shareholders must have the possibility to express their views regarding the remuneration of the company's directors. As instruments for shareholder participation, the directive obliges member states to implement:
- a remuneration policy; and
- a remuneration report.
The remuneration policy is a tool to describe the various components of directors' remuneration and should contribute to the company's business strategy and long-term interests. Directors' performance should be assessed using financial and non-financial (eg, environmental or corporate social responsibility) performance criteria. Shareholders will have the right to vote on the remuneration policy at least every four years. Member states may implement this vote either as a binding or advisory vote. The remuneration policy must then be published on the company's website.
As a second step, shareholders have the right to vote annually on a remuneration report which shows all remuneration components paid to individual directors. This vote is of an advisory nature only and has no effect on the paid remuneration. However, the remuneration report for the following year should show to what extent shareholders' votes have been taken into account. The remuneration report will show the development of remuneration in comparison with the development of the company and the average salary of each employee. The remuneration report must be published on the company's website.
Increased regulation of intermediaries, institutional investors, asset managers and proxy advisers
In order to increase shareholder engagement, the directive contains several obligations for intermediaries, institutional investors, asset managers and proxy advisers. On the one hand, the directive contains obligations for intermediaries towards listed companies, as every listed company will be enabled to identify its shareholders and obtain information from any intermediary that holds the information. On the other hand, intermediaries have to facilitate the exercise of shareholder rights (eg, the right to participate and vote in general meetings) and are obliged to deliver to the shareholders all information necessary in a standardised and timely manner. The shareholders can obtain, at least on request, confirmation that their votes have been validly recorded. Further, intermediaries must publicly disclose the applicable charges for their services.
Institutional investors and asset managers must develop and publicly disclose an engagement policy that describes how they integrate shareholder engagement in their investment strategy. This policy must also include information on how the voting rights attached to the shares are exercised or how potential conflicts of interest in relation to the engagement will be managed. Most of the obligations follow the 'comply or explain' principle; institutional investors and asset managers must either comply or publicly explain why they chose not to comply. Beyond that, institutional investors, asset managers and proxy advisers must publicly disclose certain information like the pursued investment strategy, arrangements between institutional investors and asset managers or proxy advisers' code of conduct.
Related party transactions
Another key objective is to regulate so-called related party transactions. For the purpose of defining a 'related party', the directive refers to the International Accounting Standards (see IAS 24.9) and thus includes group companies, core shareholders and the core shareholders' management team, including their family members and companies controlled by these individuals. The provisions on related party transactions apply only if the transaction is material. It is for the member states to further define this threshold.
The protection system regarding related party transactions consists of two stages, whereby member states can choose to apply the same or different thresholds. The first stage consists of the full disclosure of all material data on the related party transactions until its conclusion at the latest. The second stage consists of a mandatory approval of the general meeting or the supervisory board.
Exceptions to this regime may apply if, among other things, the transactions are entered into during the ordinary course of business and concluded on normal market terms or if they are entered into between the company and its 100% subsidiary.
The directive provides several options for member states when transposing the directive into national law. Depending on how the respective national legislatures make use of these options, there will be minor or major changes to the national law.