Tuesday, July 2, 2019
The Second Shareholders’ Rights Directive 2017/8281 (“SRD II”), which amends the First Shareholders Directive 2007/36/EC, came into force on 9 June 2017. Member States were required to transpose the majority of the provisions of the Directive into national law by 10 June 2019. At the time of writing, the Irish implementing Regulations were yet to be published by the Department of Business.
The stated purpose of SRD II is to enhance the position of shareholders by increasing transparency in the investment chain, holding investors accountable for investment decisions and encouraging long-term shareholder engagement between companies and investors.
SRD II applies to companies having their registered office in a Member State and the shares of which are admitted to trading on a regulated market situated or operating within a Member State.
Why has the European Commission revised the Shareholders Directive?
In the aftermath of the financial crisis, it was clear that many in the investment community had not adequately considered the repercussions of certain types of investments across the EU and globally.
The Commission acknowledged that complex financial models, poor shareholder engagement, excessive risk taking and inappropriate incentive structures ultimately contributed to poor corporate governance resulting in the savings of millions of people being put at risk. The financial crisis exposed shortcomings in the first Shareholders Directive, which had been implemented in Europe months before the crisis took hold.
The Commission responded by developing SRD II, which aims to promote the long-term sustainability of EU companies as well as encouraging long-term shareholder engagement.
What are the main changes?
It is the Commission’s view that in order to encourage long-term shareholder engagement and to facilitate the exercise of shareholder rights, companies need to be able to easily identify their shareholders so that they can communicate with them directly.
SRD II provides all companies with the right to identify shareholders by obtaining shareholder identity information from intermediaries. The disclosure requirement obliges any intermediary from a chain of intermediaries (e.g. investment firms, credit institutions) at the request of a company to provide to that company relevant information to facilitate the exercise of shareholders rights including voting at general meetings.
Intermediaries who hold shareholder information must ensure that the information is transmitted to the companies without delay. This obligation extends to third-country intermediaries (outside the EU) who hold shares of EU companies for Shareholders. Furthermore, intermediaries will have to provide to shareholders all information from the company that will allow the appropriate exercise if their rights.
The European Commission’s implementing Regulation 2018/1212 which lays down the requirements as regards to shareholder identification, transmission of information and facilitation of shareholders rights will apply from 3 September 2020.
The SRD II requires Member States to ensure that all companies establish a remuneration policy for directors with the shareholders having the right to vote on this policy at the general meeting.
Pursuant to SRD II a directors’ remuneration policy must contribute to the business strategy of the company, its long-term interests and its financial sustainability. SRD II discourages remuneration policies linked to short-term objectives. In advance of a shareholders vote, an assessment of a director’s performance must be carried out by the company using both financial and non-financial performance criteria, including environmental and governance factors to facilitate the shareholders’ voting decision.
The SRD II further provides that the remuneration policy and the results of the vote should be publicly disclosed after the vote of the shareholders at the general meeting.
In a move to improve transparency relating to institutional investors and asset managers SRD II creates a new ‘comply or explain’ duty on financial institutions. Institutional Investors and asset managers are required to make public their approach to shareholder engagement and how voting rights are exercised.
Shareholder engagement policy information must be made available on the institutional investor’s or asset manager’s website. Alternatively, Member States can provide that this information may be published by other means that are easily accessible to companies online.
Many institutional investors use the services of proxy advisers who will now be required to adopt a public code of conduct and prepare reports relating to the application of this code of conduct.
SRD II provides that transactions with related parties must be submitted for approval by the shareholders, management or supervisory body, to provide protection for the interests of the Company and of shareholders who are not a related party, including minority shareholders.
Companies should publicly announce material transactions no later than the time of the conclusion of the transaction, identifying the related party, the date and the value of the transaction and any other information that is necessary to assess the fairness of the transaction. This could involve publishing details on the Company’s website.
The SRD II amendments to the first Shareholders Rights Directive undoubtedly strengthen shareholders rights in EU companies. Furthermore, it shows that the Commission sees the promotion of transparency and accountability across Europe as a key priority.
In advance of SRD II coming into force, companies should review how they communicate with their shareholders to ensure compliance. Intermediaries should also ready themselves in anticipation of company demands from them for specific shareholder information to aid public transparency.
As for the UK, while it remains a member of the EU, SRD II is expected to be implemented pre-Brexit and during any agreed transition period.
Article written with the assistance of Deirdre Brannigan.