In this Alert we outline two proposals and a (draft) recommendation that were recently made by the European Commission (EC):
- the proposal (COM 2014/213) to amend (i) the Shareholder Rights Directive (2007/36/EU) and ii) the recent Accounting Directive (2013/34/EU);
- the (draft) recommendation to improve corporate governance reporting ('comply or explain') (C (2014) 2165/2); and
- the proposal for the introduction of the Societas Unius Personae (SUP), i.e. the single-member company (COM 2014/212).
1. Proposal to amend the Shareholder Rights Directive and the Accounting Directive
The Shareholder Rights Directive provides for further rules on the exercise of certain rights of shareholders of listed companies: companies with shares listed on a regulated market located or active in a member state. With the proposal to amend the Shareholder Rights Directive, the EC aims to enhance effective and long-term shareholder engagement with listed companies. Shareholder engagement is considered to be the supervision by shareholders in the areas of strategy, performance, risk, capital structure and corporate governance. Furthermore, it is envisaged that listed companies will benefit from identifiable shareholders that are engaged and use their voting rights in a well-informed manner.
The proposal to amend the Shareholder Rights Directive and the Accounting Directive can be divided into five main subjects.
(1) Identification of shareholders, transmission of information and facilitation of the exercise of shareholder rights
According to the EC, investors are confronted with unnecessary obstacles when exercising their shareholder rights, especially in cross border situations. Shares in listed companies are often held indirectly, through a chain of banks and intermediaries. As a result , information does not always reach the ultimate person entitled to the share (the shareholder) and it is often unclear whether and how the intermediary exercises voting rights and other rights on behalf of such shareholder. According to the proposal to amend the Shareholder Rights Directive and the Accounting Directive, member states must ensure that intermediaries offer listed companies the option to identify their shareholders. Furthermore, listed companies will be expected to provide intermediaries with standardized information aimed at the shareholders in a timely manner. If more than one intermediary stands between the listed company and the shareholder, such intermediaries are expected to pass on the information to each other. Additional obligations will apply to the exercise of shareholders rights as well, such as the obligation of listed companies to confirm the votes that have been exercised by or on behalf of a shareholder.
(2) Transparency and shareholder engagement of institutional investors
Institutional investors and asset managers are required to develop a shareholder engagement policy. Such engagement policy relates to the exercise of supervisory and voting rights, the conduct of a dialogue with the company, the usage of proxy advisors and the control of actual and potential conflicts of interest. The engagement policy must be disclosed, together with the manner in which the policy will be implemented, the results of the policy and its medium and long term effects. Furthermore, institutional investors must disclose how their investment strategy takes into account the profile and duration of their investments. When an asset manager invests on behalf of an institutional investor, the material provisions of the agreement between such asset manager and institutional investor must be disclosed on an annual basis. The asset manager is expected to inform the institutional investor every six months about the compliance of its investment strategy and its execution in accordance with the agreement. At the same time, it should disclose the turnover ratio of its portfolio.
(3) Improving reliability, transparency and quality of proxy advisors' recommendations
It is often unclear how proxy advisors prepare voting recommendations and which considerations they take into account in the process. The independence of proxy advisors may be influenced by the parties to which they provide their services. As proxy advisors have a material influence it is desirable to increase their transparency. Proxy advisors will be required to take measures to guarantee that their voting recommendations are always based on a thorough analysis of all available information, and that such voting recommendations are not influenced by potential conflicts of interest or business relationships. Proxy advisors will also be required to disclose information on the preparation of their voting recommendations on an annual basis, specifying whether and how they engaged in dialogue with the company in preparing the recommendation.
(4) Influence of the general meeting on the remuneration policy for managing directors
According to the proposal to amend the Shareholder Rights Directive and the Accounting Directive, the general meeting should be authorised to vote on the remuneration policy for the managing directors. The remuneration policy should be submitted to the general meeting for approval every three years and should include the maximum amount of the total remuneration possible for the managing directors. The policy must specify how it contributes to the long term interests and sustainability of the company. Furthermore, the ratio between the average remuneration of managing directors and employees must be set out, and it should clarify why such ratio is deemed appropriate. Listed companies must prepare a remuneration report with an overview of the remuneration awarded to each individual director. The general meeting is authorised to vote on the report on an annual basis.
(5) Improving transparency and influence of shareholders on related party transactions
Shareholder approval will be required for significant transactions with related parties, for example transactions with a managing director or a majority shareholder. Significant transactions are transactions that either represent more than 5% of a company's assets or that have the potential to have a significant impact on a company's turnover or profits. If a shareholder is involved with such a transaction, he must refrain from voting in the general meeting on the approval of the transaction. All related party transactions involving a value of more than 1% of the company's assets, must be disclosed on completion. Such disclosure must be accompanied by a statement of an independent expert, evidencing that the transaction was entered into on competitive terms and is fair and reasonable for the shareholders. Member states can include an exception for intragroup transactions in their national legislation.
It is envisaged that the amendments in both directives come into force at the beginning of 2015. Subsequently, the amended directives must be implemented in Dutch legislation within 18 months. The Ministry of Security and Justice has presented the proposal to amend the Shareholder Rights Directive for public consultation. In this Alert we will refrain from discussing the required amendments in Dutch legislation at this stage.
2. Recommendation corporate governance
The EC further issued a (draft) recommendation that aims to improve the quality of corporate governance reporting ('comply or explain'), which includes the following:
- corporate governance codes must make a clear distinction between the parts of the code which cannot be derogated from, the parts which apply on a 'comply or explain' basis and those which apply on a purely voluntary basis;
- if a company deviates from the applicable code, this must be clearly presented in such way that this is easy for shareholders, investors and other stakeholders to find, for example by following the same order as the recommendations in the code;
- for each individual recommendation of a code the company has departed from, the company should specify: (i) in what manner it is departed from the code; (ii) the reason for departure; (iii) how the decision to depart from the recommendation was taken; (iv) when the company intends to comply if the departure is for a limited period; and (v) if applicable, which measures were taken instead of compliance, clarifying how the measures attribute to good corporate governance of the company.
Once it has reached an agreed form, the European member states should bring this recommendation to the attention of the national monitoring committee, listed companies and other stakeholders in order to improve the quality of corporate governance. Member states are invited to report to the EC on the measures taken one year after the final recommendation is published, in order to enable the EC to monitor and assess the situation.
3. Proposal Single-Member Company Directive
Again an attempt is made to establish a legal form that can be applied in all countries in the European Union: the Societas Unius Personae (SUP), a single-member company. The proposal aims to limit the restrictions on the freedom of establishment when incorporating a subsidiary in another member state. The SUP is considered to be a particular form of the private limited liability company. According to the proposal for the single-member company directive, the SUP has the following characteristics:
- it is formed by converting a national legal entity or by incorporation by a natural or legal person;
- it will have only one shareholder and may issue only one share;
- the share capital of the SUP shall be at least one euro;
- a format will be prepared containing the provisions that must be included in the articles of association of the SUP at its incorporation;
- it will have full legal personality upon registration with the trade register;
- it will be governed by the national law of the member state where the SUP is registered;
- the registration of a SUP can be fully effected electronically, without the founder being required to be physically present in the country of registration;
- a distribution to the shareholder may take place upon proposal by the managing board;
- a distribution may only take place if the SUP satisfies a balance sheet test, demonstrating that after the proposed distribution the net assets of the SUP will not be lower than the amount of the share capital increased with the statutory reserves. Furthermore, the managing board of the SUP must provide a written solvency statement confirming that the SUP will continue to be able to pay its liabilities after the distribution. Managing directors can be held personally liable if they recommended or effectuated a distribution and if they knew, or should have known, that the SUP did not comply with the above. The sole shareholder can be expected to repay the distribution, if he should have known this.
- The sole shareholder is authorised to instruct the managing board.
The wording of the proposal does not contain a date when it will come into effect.
The Ministry of Security and Justice has also presented the proposal for the Single-Member Company Directive for public consultation.