A new Directive (Directive (EU) 2017/8281) (“New Directive”), which amends the existing Shareholders’ Rights’ Directive (Directive 2007/36/EC), must be transposed into Irish law by 10 June 2019. The amendments, which are designed to encourage long-term shareholder engagement and to enhance transparency between companies and investors, will apply to companies whose shares are listed on EU regulated markets such as the Main Securities Market of Euronext Dublin.
The principal amendments are as follows:
Remuneration of directors
Companies will be required to establish a remuneration policy for directors to be put to a vote of shareholders at the AGM at least once every four years. The vote shall be binding on the company unless Ireland, by exercise of a permitted discretion under the New Directive, provides for the vote to be advisory only.
If Ireland provides that the vote shall be binding, companies may only pay their directors in accordance with a remuneration policy, as approved. If a remuneration policy is not approved, a company may continue to pay its directors in accordance with an existing approved policy (or, if none has previously been approved, existing practices) and will be required to submit a revised policy for approval at the following AGM.
If Ireland provides for the vote to be advisory, companies may only pay their directors in accordance with a remuneration policy that has been submitted to such a vote. In such circumstances, if a remuneration policy is not approved, a company will be required to submit a revised policy for approval at the following AGM.
The New Directive provides that a remuneration policy should contribute to the company’s business strategy, long-term interests and sustainability and explain how it does so. Where a company awards variable remuneration, the remuneration policy is required to set clear, comprehensive and varied criteria for the award of the variable remuneration. Furthermore, the policy is required to indicate the financial and non-financial performance criteria, including, where appropriate, criteria relating to corporate social responsibility, and explain how they contribute to the company’s business strategy, long-term interests and sustainability.
Companies will also be required to draw-up a clear and understandable remuneration report, providing a comprehensive overview of the remuneration (including all benefits in whatever form) awarded or due during the most recent financial year to individual directors, in accordance with the remuneration policy.
The remuneration report for the most recent financial year will require to be put to an advisory vote of shareholders at the AGM. However, for small and medium-sized companies, Ireland has a discretion under the New Directive to provide, as an alternative to a vote, for the remuneration report to instead be submitted for discussion as a separate item on the agenda at the AGM.
Identification of shareholders
Companies will be given enhanced rights to identify their shareholders and to obtain information on shareholder identity from any intermediary in the chain that holds the information, with a view to facilitating the exercise of shareholder rights and shareholder engagement. The New Directive recites the view that the identification of shareholders is a prerequisite to direct communication between shareholders and companies and therefore essential to facilitating the exercise of shareholder rights and shareholder engagement (recognising, in listed companies, that shares are often held through complex chains of intermediaries).
Facilitation of the exercise of shareholders rights
Intermediaries shall be required to facilitate the exercise of rights by shareholders, including the right to participate and vote in general meetings, which shall comprise at least one of the following:
- that the intermediary makes the necessary arrangements for the shareholder or a third party nominated by the shareholder to be able to exercise the rights themselves; or
- the intermediary exercises the rights flowing from the shares upon the explicit authorisation and instruction of the shareholder and for the shareholder’s benefit.
Intermediaries will also have the obligation to deliver to shareholders in a standardised and timely manner, all information from the company that will enable the appropriate exercise of their rights.
Furthermore, intermediaries will be required to publicly disclose any charges related to the new rules regarding shareholder identification and the facilitation of the exercise of shareholders’ rights. Ireland has a discretion under the New Directive to prohibit the charging of fees for these services.
Institutional investors, asset managers and proxy advisors
Engagement policy of institutional investors and asset managers
Institutional investors and asset managers will be required to either (i) develop and publicly disclose an engagement policy that describes how they integrate shareholder engagement in their investment strategy (and publicly disclose, on an annual basis, how that policy has been implemented) or (ii) publicly disclose a clear and reasoned explanation why they have chosen not to comply with one or more of those requirements.
Investment strategy of institutional investors and arrangements with asset managers
Institutional investors will be required to 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. Furthermore, institutional investors will be required to publicly disclose certain information regarding their arrangements with asset managers who invest on their behalf.
Transparency of asset managers
Asset managers will be required to disclose, on an annual basis, to institutional investors with which they have entered into investment arrangements how their investment strategy and implementation thereof complies with those investment arrangements and contributes to the medium to long-term performance of the assets of the institutional investor or relevant fund.
Transparency of proxy advisers
Many institutional investors and asset managers use the services of proxy advisors who provide research, advice and recommendations on how to vote at general meetings of listed companies. While proxy advisors play an important role in corporate governance by contributing to reducing costs of analysing company information, they may also have an important influence on voting behaviour of investors.
Proxy advisors will be required to publicly disclose reference to a code of conduct which they apply and report on the application of that code of conduct. Where proxy advisors do not apply a code of conduct, they will be required to provide a clear and reasoned explanation why this is the case. Where proxy advisors apply a code of conduct but depart from any of its recommendations, they will be required to declare from which parts they depart, provide explanations for doing so and indicate, where appropriate, any alternative measures adopted.
In addition, proxy advisors will be required to publicly disclose, on an annual basis, certain information in relation to the preparation of their research, advice and voting recommendations, including the essential features of the methodologies and models they apply and the main information sources they use. Proxy advisors will also be required to identify and disclose without delay to their clients any actual or potential conflicts of interests or business relationships that may influence the preparation of their research, advice or voting recommendations and the actions they have undertaken to eliminate, mitigate or manage the actual or potential conflicts of interests.
Related party transactions
Material transactions with related parties will require to be approved by the shareholders in general meeting or by the board according to procedures which prevent the related party from taking advantage of its position and provide adequate protection for the interests of the company and of the shareholders who are not related parties, including minority shareholders. Ireland has discretion under the New Directive to formulate its definition of what would constitute a material transaction.
We await with interest how Ireland will chose to implement the amendments to the Shareholders’ Rights Directive and, in particular, how it exercises its choices and discretions where permitted under the New Directive. In addition, having regard to international governance trends, it will be interesting to see if Ireland will consider extending any of the protections of the Shareholders’ Rights Directive to Irish companies listed on markets other than EU regulated markets, e.g. the multinational trading facilities operated by Euronext Dublin. To date, the Irish approach to transposing directives of this type has been to take a minimum implementation approach, and not to extend their protections beyond that required by EU law. We will keep you updated as matters develop.