EU Commission proposes to amend Shareholder Rights Directive

In April 2014 the EU Commission published a proposal to amend the Shareholder Rights Directive (2007/36/EC) intended to encourage long-term shareholder engagement and to improve transparency of remuneration policies.

The proposal includes the following: 

  • Remuneration policy: Introduction of a so-called ‘say on pay’ policy, whereby shareholders will have the right to vote on a company’s remuneration policy in respect of directors at least every three years and the company’s obligation to publish an annual remuneration report – including the stipulation of a maximum level for executive pay.
  • Related Party Transactions: Introduction of the UK rules on an European level for the protection of (minority) shareholders' interests and detailed regulation in order to avoid abuse of such transactions (eg transactions exceeding 5 per cent of the companies’ assets will require the approval of the shareholder meeting; smaller transactions will have to be disclosed when concluding the transaction). 
  • Institutional Investors and Asset Managers: Stipulation of requirements to increase the level and quality of engagement (eg obligation to disclose, on an annual basis, their investment strategy and shareholder engagement policies regarding companies in which they invest). 
  • Proxy Advisers: Introduction of stronger transparency rules to ensure reliable and high quality recommendations (eg obligation to annually disclose key information relating to the preparation of their voting recommendations and to disclose any actual or potential conflicts of interest or business relationships).
  • Intermediaries: Introduction of rules improving transparency in identification of shareholders and the exercise of shareholder rights, in particular in cross-border situations (eg requirement to transmit shareholder and voting information).

In addition to the proposal, the Commission introduced a recommendation for a so-called ‘comply and explain principle’ which shall include the manner in which the company has departed from the applicable corporate governance code, the reasons for departure, how the decision to depart from a recommendation was taken, the timeframe of the departure and the measures taken to ensure that the company action remains consistent with the objectives of the recommendation, and of the code. Member States shall also ensure that the national Corporate Governance Rules make a clear distinction between the parts of the code which cannot be deviated from, the parts which apply on a ‘comply or explain’ basis and those which apply on a purely voluntary basis.

The proposals to revise the Shareholder Rights Directive have been submitted to the Council and EP for their consideration and final adoption. The Council and the EP consulted the European Economic and Social Committee, which voted in favour of the proposed amendments (at the 500th plenary session held on 9 and 10 July 2014). 

‘Gender balance on corporate boards’ – EU Commission presents new Fact Sheets

In September 2014 the European Commission presented a new fact sheet ‘Gender balance on corporate boards – Europe is cracking the glass ceiling’. This fact sheet confirmed the views of the fact sheet presented in June 2014 ‘Improving the gender balance in company boardrooms’ which addresses the aims of the Directive on Gender Balance (COM(2012) 614 final) proposed in November 2012. The fact sheets contain statistics on the proportion of women on the boards of large listed companies in the EU and aim to accelerate progress towards a better balance of women and men on boards of listed companies. The proposed directive sets a quantitative objective of at least 40 per cent representation of each gender for non-executive directors and supervisory board members.

The text on the proposed Directive was adapted on 20 November 2013 by the European Parliament and is currently being discussed by the Council of the European Union.

New reporting obligations for human rights and other ‘non-financial’ information

On 29 September 2014, the Council of the European Union adopted a directive dealing with the reporting  of non-financial and diversity information by public interest entities with more than 500 employees such as listed undertakings, banks, insurance companies or undertakings which are of significant public relevance because of the nature of their business, their seize or their corporate status. The information shall be included in the management reports of these entities. The directive amends the Accounting Directive (2013/34/EU) and aims at strengthening a company’s transparency and accountability. According to the regulation, these companies will, on an annual basis, be required to publish a statement relating to environmental, social and employee-related matters, respect for human rights, anti-corruption and bribery matters (‘CRS matters’). The report must include: 

  • a brief description of the undertaking’s business model;
  • a description of the policies adopted by the undertaking in relation to CSR matters, including the due diligence processes implemented to identify risks / ensure compliance;
  • the outcomes of those policies;
  • the principal risks relating to CSR matters linked to the undertaking's operations and how the undertaking manages those risks; and
  • relevant non-financial key performance indicators.

If a company does not adopt such a policy, it will have to explain why this is the case (‘comply or explain’ principle). 

In addition, a description of the diversity policy applied for the undertaking’s administrative, management and supervisory bodies with regard to such aspects such as age, gender, educational and professional background must be added in the corporate governance statement. If no diversity policy is applied, the corporate governance statement shall also include a clear explanation of why this is not the case. 

The directive will probably enter into force this year. The EU Commission is tasked with proposing non-binding guidelines on the details of what non-financial information will have to be disclosed by no later than 24 months after entry into force. Member States will have two years to incorporate the new provisions into domestic law. The first CSR reports will have to be published in relation to the first financial year after the transposition deadline (ie financial year 2017).

New framework on Market Abuse

On 12 June 2014, the Market Abuse Regulation (No 596/2014 – MAR) and the Market Abuse Directive (2014/57/EU – CSMAD) were published in the Official Journal of the European Union. The MAR and the CSMAD entered into force on 2 July 2014. Most of the MAR rules will be applicable from July 2016 and the CSMAD must be transposed into national law by 3 July 2016. 

The MAR amends and replaces the original Market Abuse Directive (2003/6/EC) and provides, among other things, for:

  • the broadening of the scope of existing market abuse rules to include financial instruments traded on multilateral trading facilities and organised trading facilities and to include OTC transactions; 
  • a ban on the manipulation of benchmarks (such as LIBOR); 
  • an extended definition of insider information, a catalogue of indicators for market manipulation and clarifications regarding directors’ dealings; 
  • the strengthening of the investigative and administrative sanctioning powers of regulators; and
  • the prohibition of attempted insider dealing and market manipulation. 

The CSMAD seeks to establish a harmonised framework for criminal sanctions of market abuse in Member States and provides, among other things, for:

  • common minimum rules on the definition of criminal offences for the most serious market abuse offences, ie insider dealing, market manipulation and unlawful disclosure of inside information;
  • the criminalisation of inciting or aiding and abetting market abuse; 
  • the liability and sanctions for market abuse offences regarding legal persons; and
  • the adoption of minimum levels of maximum prison sentences for natural persons of at least four years in cases of insider dealing or market manipulation, and 2 years in cases of unlawful disclosure of inside information.

The European Securities and Markets Authority (ESMA) has launched a consultation on the MAR in July 2014 and issued two consultation papers seeking stakeholders’ views on the draft regulatory and implementing technical standards (RTS/ITS) and Technical Advice (TA) which are in line with the mandate given to ESMA by the MAR. 

Germany has not yet presented a legislative proposal in order to implement the required provisions. On 29 November 2013, the Securities Supervision directorate of the BaFin published the ‘Guidelines on the Imposition of Fines in Administrative Offence Proceedings for Breaches of the Provisions of the Securities Trading Act (WpHG)’. The WpHG Administrative Fine Guidelines describe the principles and criteria for assessing administrative fines in the areas of ‘ad hoc publication requirement’, ‘voting rights’ and ‘financial reporting’, which are only partially in line with the requirements of CSMAD.

Consequently, there is a need for further regulation in order to meet the demands of the MAR/CSMAD.