An analysis of the amended law of 24 May 2011 on the exercise of rights of shareholders in listed companies.

Background of the Amended Law

As the financial crisis has revealed risk-taking practice focused on short-term returns both from institutional investors and asset managers, the European Commission has announced several corporate governance initiatives to promote greater shareholder involvement and corporate sustainability.

As such, the Luxembourg law of 21 May 2011 on the exercise of certain rights of shareholders in listed companies as amended by the draft law(1) voted by the Luxembourg parliament on 10 July 2019 (the "Amended Law") implements Directive (EU) 2017/828 of the European Parliament and of the Council of 17 May 2017 amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement.

In order to encourage the long-term performance of listed companies, the Amended Law aims to:

  • extend its scope to institutional investors and asset managers holding shares in listed companies
  • ensure the exercise of shareholders' rights by allowing listed companies to identify their shareholders, and therefore requiring intermediaries to exchange shareholder-related information;
  • introduce an obligation of transparency in the voting of institutional investors and asset managers and transparency in the working methods of proxy advisors;
  • involve shareholders in director remuneration policy; and
  • ensure shareholders' control over transactions with related parties.

To ensure its effective implementation, the Amended Law also provides that managers shall be jointly and severally liable for any damage resulting from the breach of their obligations under this law (article 11ter of the Amended Law).

1. The exercise of shareholders' rights

1.1 The establishment of a framework enabling listed companies to identify their shareholders

1.2 The obligation for intermediaries to transmit information without delay from the company to its shareholders

2. The obligation of transparency for institutional investors, asset managers and proxy advisors

2.1 The mandatory transparency of institutional investors and asset managers

2.2 The obligation for proxy advisors to supply information on their methods and to disclose their conflicts of interest

3. The remuneration policy for directors subject to a shareholder vote

4. The shareholders' control over important transactions with related parties

1. The exercise of shareholders' rights

Shares of listed companies are often held through complex chains of intermediaries, which can be an obstacle to shareholders' engagement, as companies are unable to identify them.

Consequently, listed companies should have the right to identify their shareholders in order to be able to communicate directly with them. On the other hand, intermediaries should have the obligation to disclose information concerning the identity of shareholders at the company's request.

The Amended Law therefore aims at improving the transmission of information throughout the chain of intermediaries, including third-country intermediaries.

1.1 The establishment of a framework enabling listed companies to identify their shareholders

Article 1bis of the Amended Law lays down the right of the company to identify its shareholders. In order to ensure this right, on the request of the company or a third party nominated by the company, the intermediaries shall communicate without delay to the company information regarding shareholder identity, as defined in Article 1.

The identification of shareholders being essential, several possibilities are offered to companies in order to obtain the relevant information, i.e.:

  • The request for information on the identity of shareholders shall be transmitted without delay between intermediaries and the intermediary who holds the information must communicate it directly to the requesting company or to the third party designated by it. In addition, the company must be able to obtain the information from any intermediary in the chain of intermediaries that holds this information.
  • The company is entitled to request the central securities depository or other intermediary or service provider to collect information concerning the identity of shareholders, including from intermediaries in the intermediary chain, and to forward this information to the company.
  • At the request of the company or a third party designated by it, the intermediary must communicate to the company without delay the details of the next intermediary in the chain of intermediaries.

The intermediary who provides information for the purpose of identifying shareholders is not considered to be in breach of any restriction on disclosure provided for by contract or by any legislative, regulatory or administrative provision.

It is further provided that the personal data of shareholders shall not be stored by companies and intermediaries longer than twelve months after they have become aware that the person concerned has ceased to be a shareholder.

Lastly, the concerned persons have the right to rectify incomplete or inaccurate information relating to their identity as shareholders.

1.2 The obligation for intermediaries to transmit information without delay between the company and its shareholders

(a) Transmission of information

The intermediary's primary role is to transmit information. Article 1ter of the Amended Law governs the transmission of information from the company to the shareholder through the chain of intermediaries in order to ensure the effectiveness of the transmission of information to the shareholder, thus facilitating the exercise of his rights as such.

In particular, the information must be provided either in its entirety or in the form of a link to a website containing such information and the location of which is indicated by a notice. This obligation does not apply when the company sends such information or notice directly to all shareholders.

Once the information has been received by the shareholder, intermediaries must transmit to the company, without delay, the shareholders' instructions regarding the exercise of their rights arising from their shares.

Lastly, where there are several intermediaries in the chain of intermediaries, the information shall be transmitted between the intermediaries, unless it can be transmitted directly by the intermediary to the company or to the shareholder or to a third party designated by the shareholder.

(b) Facilitation of the exercise of shareholders' rights

The intermediary's role is also to facilitate the exercise of shareholders rights, in particular the right to participate in and vote at general meetings, and, where applicable, to exercise these rights on the instructions of the shareholder and in the interests of the latter.

A confirmation of vote must be sent when expressed electronically. Thus, within 2 months of the vote of the general meeting, the shareholder, or a third-party designated by the shareholder, may request confirmation that his vote has been taken into account by the company, unless this information is already available to him.

(c) Transparency of costs

Article 1quinquies allows intermediaries to charge fees for services rendered in respect of their obligations, provided that such fees are made public separately for each service and are non-discriminatory and proportionate to the costs actually incurred.

In order to avoid any deterrent effect on cross-border investment, any difference in the fees charged depending on whether shareholders' rights are exercised at national or cross-border level must be duly justified.

2. The obligation of transparency for institutional investors, asset managers and proxy advisors

Sustainable shareholder engagement depends on checks and balances between the different stakeholders. Institutional investors and asset managers are often important shareholders of listed companies and can therefore play an important role with regard to long-term performance of the company. Given that capital markets often exert pressure on companies to perform in the short term, institutional investors and asset managers should be transparent about their investment strategy and engagement policy.

2.1 The mandatory transparency of institutional investors and asset managers

(a) Engagement policy

Article 1sexies introduces an obligation for institutional investors and asset managers (i) to develop and publicly disclose an engagement policy that describes how they integrate shareholder engagement in their investment strategy, and (ii) to publicly disclose on an annual basis how their engagement policy has been implemented (including voting behaviour, explanation of the most significant votes and use of the services of proxy advisors) and how they have cast votes in the general meetings. However, such disclosure may exclude votes that are insignificant due to the subject matter of the vote or the size of the holding in the company. The information shall be available free of charge on the institutional investor’s or asset manager’s website.

Institutional investors and asset managers shall either comply with these requirements or publicly disclose online a clear and reasoned explanation for not doing so.

Furthermore, where an asset manager implements the engagement policy, including voting, on behalf of an institutional investor, the institutional investor shall make a reference as to where such voting information has been published by the asset manager.

(b) Investment strategy of institutional investors and arrangements with asset managers

Pursuing to Article 1septies, institutional investors shall publicly disclose how the main elements of their equity investment strategy are consistent with the profile and duration of their liabilities, in particular long-term liabilities, and how they contribute to the medium to long-term performance of their assets.

Also, where an asset manager invests on behalf of an institutional investor, whether on a discretionary client-by-client basis or through a collective investment undertaking, the institutional investor shall disclose certain elements regarding its arrangement with the asset manager. If the arrangement with the asset manager does not contain one or more of such elements, the institutional investor shall give a clear and reasoned explanation why this is the case.

The information shall be made available free of charge on the institutional investor’s website and shall be updated annually unless there is no material change.

(c) Transparency of asset managers

Article 1octies provides that asset managers shall disclose, on an annual basis, to the institutional investor with which they have entered into an arrangement how their investment strategy and implementation complies with that arrangement and contributes to the medium to long-term performance of the assets of the institutional investor or of the fund. Such disclosure shall enable the institutional investor to assess whether and how the asset manager has acted in the best long-term interests of the investor and whether he is pursuing a strategy that allows for effective shareholder engagement.

The asset manager is exempt from providing information directly to the institutional investor if such information was already available to the public.

2.2 The obligation for proxy advisors to supply information on their methods and to disclose their conflicts of interest

Many institutional investors and asset managers use the services of proxy advisors who provide research, advice and recommendations on how to vote in general meetings. To the extent that they can have a significant influence on investors' voting behaviour, proxy advisors should be subject to transparency requirements, including third-country proxy advisors.

Article 1nonies states that proxy advisors shall publicly disclose reference to a code of conduct which they apply and report on the application of that code of conduct.

If proxy advisors do not apply a code of conduct or depart from any of its recommendations, they shall provide a clear and reasoned explanation why this is the case or declare from which parts they depart.

Moreover, proxy advisors must disclose certain essential information relating to the preparation of their research, advice and voting recommendations as well as actual or potential conflicts of interest and commercial relationships that may influence the preparation of voting research, advice and recommendations. This information must remain available to the public on the websites of the proxy advisors for at least 3 years to enable institutional investors to choose the services of proxy advisors taking into account their past performance.

3. The remuneration policy for directors subject to a shareholder vote

Directors contribute to the long-term success of the company. In view of their crucial role in companies, it is important that the remuneration policy is determined in an appropriate manner by the competent bodies and that shareholders have the possibility to express their views.

The Amended Law regulates the remuneration of directors on the basis of an ex ante vote on the remuneration policy and an ex post vote on the remuneration report. These measures should prevent situations where the amount of a director's remuneration is not justified in view of his individual performance and the company's performance

(a) Right to vote on the remuneration policy

Article 7bis lays down the principle that companies must establish a policy for the remuneration of directors and submit it to the vote of shareholders.

In order to optimize the long-term performance of listed companies, it further enshrines the "Say on Pay" principle, i.e. the possibility for the shareholders of the listed company to express their views on directors' remuneration and that they are provided with the necessary information to give their opinion in an informed manner.

Thus, shareholders have the right to vote ex ante on the remuneration policy at least every 4 years and at the time of any material change.

The company only pays remuneration to its directors in accordance with a remuneration policy that was the subject of a vote at the general meeting. Such vote is advisory but when the general meeting rejects the proposed remuneration policy, the company submits a revised policy to the vote of the next general meeting. The articles of association of the company may however provide that the vote on the remuneration policy expressed at the general meeting is binding in which case the company may only pay remuneration in accordance with such remuneration policy.

In order to ensure that shareholders express themselves in an informed manner, the remuneration policy must in particular describe the various fixed and variable components of directors' remuneration, including any bonus or benefit in any form whatsoever.

In addition, after the vote on the remuneration policy, the remuneration policy and the date and result of the vote must be made public without delay on the company's website and remain freely available to the public, at least during the period for which it applies.

In exceptional circumstances, companies are allowed to temporarily derogate from certain rules of the remuneration policy, such as fixed or variable remuneration criteria, provided that it is essential for the preservation of long-term interests or the viability of the company.

(b) Right to vote on the remuneration report

Article 7ter introduces a second vote concerning the information to be provided in the remuneration report and the right of shareholders to vote on this report.

The company is required to draw up a clear and comprehensible remuneration report that provides a complete overview of the individual remuneration of directors during the most recent financial year. By introducing shareholders' voting rights on the remuneration report, shareholders will have the means to verify whether the remuneration policy has been properly implemented.

The information to be included in the report is necessary to enable shareholders to have a reliable and complete picture of the remuneration of each director and to express their views on the terms and level of remuneration of directors and on the relationship between remuneration and the individual performance of directors.

In order to enhance the transparency of this information, the remuneration report should be published on the company's website, which will allow easy access to this document and allow potential investors and stakeholders to be informed about directors' remuneration. The remuneration report shall remain available on the company's website for at least 10 years.

Concerning the vote on the remuneration report, it is specified that the shareholders' vote is also advisory and the company should explain in the following remuneration report how the opinion of the general meeting was taken into account.

However, instead of voting on the remuneration report, small and medium-sized companies may submit the remuneration report to shareholders at the annual general meeting for discussion, and as a separate agenda item. In this case, the company will have to explain in the following remuneration report how the discussion held at the general meeting was taken into account.

As regards the processing of personal data contained in the remuneration report, they must be processed for the purpose of increasing the transparency of companies with regard to directors' remuneration, with a view to enhancing the responsibility of directors and the right of shareholders to scrutinise directors' remuneration.

Therefore, in order to limit interference with the right to privacy and the protection of personal data of directors, the disclosure to the public of the personal data contained in the remuneration report is limited to 10 years. Therefore, at the end of this ten-year period, companies will delete all personal data from the remuneration report or cease to make the remuneration report public.

The company's directors have a joint responsibility to ensure that the remuneration report is prepared and published in accordance with the requirements of the Amended Law.

4. The shareholders' control over important transactions with related parties

Article 7quater aims to prevent possible damage to companies and their shareholders resulting from transactions with related parties who may be tempted to appropriate part of the value of a company. It is specified that only material transactions are subject to the approval of the shareholders or the company's management or supervisory body, as the case may be.

Since the provisions of the 1915 Law apply, the management body is allowed to refer the approval to the general meeting if it so wishes or if it proves necessary due to a conflict of interest, for example.

To define material transactions, the Amended Law states that must be taken into account:

(i) the influence that information relating to the transaction may have on the economic decisions of the company's shareholders; and (ii) the risks that the transaction creates for the company and its shareholders who are not related parties, including minority shareholders.

This definition must be based on the nature of the transaction and the position of the related party, rather than the use of a quantitative ratio.

Companies shall publicly disclose material transactions no later than the time of their conclusion, specifying the identity of the related party, the date and value of the transaction and any other information necessary to assess the fairness of the transaction.

Companies shall also publicly disclose material transactions between related parties of the company and the subsidiary of the company. When the transaction with related parties involves a director or shareholder, the said director or shareholder, as the case may be, participates neither in the approval nor in the vote.

However, companies may waive these requirements for transactions entered into in the ordinary course of business and concluded under normal market terms. For such transactions, the management body must establish an internal procedure to periodically assess whether these conditions are fulfilled and related parties may not participate in this assessment.

Companies are not subject to the above requirements with respect to:

  1. transactions between the company and its subsidiaries, provided that they are wholly owned or that no other related party of the company has an interest in the subsidiary;
  2. transactions concerning the remuneration of directors, or certain elements of the remuneration of directors, granted or due, in accordance with Article 7bis;
  3. transactions concluded by credit institutions on the basis of measures to preserve their stability, adopted by the Financial Sector Supervisory Commission; and
  4. transactions offered on the same terms to all shareholders, when equal treatment of all shareholders and protection of the company's interests are ensured.

Finally, transactions entered into with the same related party, concluded in any 12-month period or in the same financial year and that were not subject to the requirements stated above must be aggregated.