On 3 April 2017, the European Council announced that it had adopted, without debate, a directive which will amend the existing Shareholder Rights Directive. This will affect more than 8000 listed companies on EU regulated markets capitalising around €8 trillion. The enhanced transparency and shareholder engagement provisions in the directive will be of interest to shareholders and directors of listed companies, listed companies and institutional investors.
The amendment to the existing Shareholder Rights Directive (Directive 2007/36/EC) will enter into force following its publication in the Official Journal of the EU (the “Directive”). Member States will then have two years to transpose the Directive into national law. The purpose of the new rules is to improve the long-term sustainability of listed EU companies, enhance the efficiency of the chain of intermediaries and to encourage shareholder engagement. The authors were motivated by perceived shortcomings in corporate governance of listed companies, highlighted by the financial crisis.
The main changes outlined in the Directive are as follows:
Shareholders will have two opportunities to influence director’s remuneration, which should encourage a stronger link between pay and performance. Shareholders will have:
- the ability to vote on the directors’ remuneration policy. The policy will set out the criteria, which should be both financial and non-financial in nature, pursuant to which remuneration can be paid to directors. The outcome of the vote will be binding, unless the member state opts for an advisory vote when transposing the Directive; and
- the ability to vote on the remuneration report, to ensure that the implementation of the remuneration policy is in line with the policy. This report will set out a comprehensive overview of what the directors were paid in the most recent financial year. This vote will be advisory only. Member states will have discretion to enable small and medium-sized companies to replace this vote with a discussion on the remuneration report at their AGM. Where the shareholders vote against the remuneration report, the company should explain in the next report how the vote of the shareholders was taken into account. Likewise, if a discussion takes place at a company’s AGM concerning the remuneration report, the company should explain how the matters discussed were taken into account in the report.
The new rules stipulate that the directors’ remuneration report and the directors’ remuneration policy should be publicly disclosed ‘without delay’ after the shareholders’ vote at the AGM.
Institutional Investors and Asset Managers
The Directive will require institutional investors and asset managers to be transparent in how they invest and how they engage with listed companies.
The new rules, if implemented in their current form, will:
- require institutional investors to disclose how they take the long-term interests of their beneficiaries into account in their investment policies and how they incentivise their asset managers to do the same;
- require asset managers to report to the institutional investor on how they take the long-term interests of their institutional investors’ beneficiaries into account; and
- adopt a “comply or explain” approach in respect of disclosing certain information. For example, institutional investors and asset managers will have to publicly disclose a policy on shareholder engagement or explain why they have chosen not to do so.
Proxy advisors will also be subject to similar transparency rules.
Shareholder Identification, Exercise of Shareholders’ Rights and Facilitation of Cross-Border Voting
The Directive is designed to facilitate shareholders’ exercising their rights and aims to make it easier for shareholders resident in a different EU country to the listed company to participate and vote in general meetings of such companies. Notable changes are as follows:
- intermediaries will be obliged to pass certain information (including voting information) from the company to the shareholders, and vice versa;
- companies will be required to confirm the votes cast at the request of a shareholder; and
- companies will have the right to identify their shareholders and to obtain information on shareholder identity from any intermediaries that hold that information.
Related party transactions
The new rules will require companies to ensure that material related party transactions are approved by their shareholders or by an administrative or supervisory body according to procedures that prevent the related party taking advantage of its position and provide adequate protection for the interests of the company and the shareholders, including minority shareholders
The new rules will require companies to publicly announce material related party transactions, and any other information that is necessary to assess the fairness of that transaction, no later than the conclusion of the transaction.
The proposed amendment to the Shareholder Rights Directive will further strengthen shareholders’ rights in companies registered in the EU and listed or traded on a regulated market in the EU. Shareholders will be able to hold management accountable for their decisions and ensure that they take into account the long-term interests of the businesses. It is expected that the Directive will be published in the Official Journal of the EU shortly. Ireland will have 2 years from the date of the publication to adopt the Directive into Irish law. The Directive and its transposition into national law will be of interest to shareholders and directors of listed companies, listed companies and institutional investors.