On the 3rd April of 2017, the European Council formally adopted the new Shareholder’s Rights Directive, which is a revision of Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement. This Directive applies to those shareholders having shares which are admitted to trading on a regulated market situated or operating within a Member State. The revised Directive aims to encourage long-term shareholder engagement, increase transparency with respect to directors’ remuneration and improve shareholder oversight on related party transactions. The Directive also aims to add more transparency requirements for proxy advisors and to better facilitate the exercise of rights flowing from securities to investors.
The main changes included in the Directive are the following:
Stronger shareholder rights and the facilitation of cross-border voting
Through the Directive, Member States must take the necessary steps in order to ensure that intermediaries (e.g. banks) share necessary information with the company and with its shareholders. On the request of the company, the intermediary must communicate the name and contact details of the shareholders. Shareholders must be informed of the possibility that this information may be transmitted in accordance with this Directive. In addition, if the shareholders are natural persons, they must have the right to rectify or erase incomplete or inaccurate data, and once it is received by the company or the intermediary, this data may only be retained for up to 2 years.
On the other hand, in cases where the company does not directly communicate with its shareholders, the intermediary is duty-bound to pass on to the shareholders information related to their shares. Such information must be made available in cases where the information is necessary for the shareholder to be able to exercise a right flowing from its shares, or the information is given to all shareholders in shares of a particular class.
The Directive also imposes a duty on Member States to ensure that the intermediary facilitates the exercise of shareholder rights, in particular the right to participate and vote in general meetings. This will promote better cross-border voting, as shareholders which are not resident in the same Member State as the company will find it easier to participate and vote in the general meetings of such company.
New mandatory shareholder engagement policy
Institutional investors and asset managers will need to create a new policy on shareholder engagement. The engagement policy must outline the manner in which institutional investors and asset managers conduct certain activities, such as the exercise of voting rights, cooperation with other shareholders, and how shareholder engagement is integrated into their investment strategy. The engagement policy must also include policies with regards to actual or potential conflict of interests with respect to shareholder engagement. Institutional investors and asset managers must publish the engagement policy on an annual basis, including the procedure for its implementation and the ensuing results.
Enhanced transparency requirements for institutional investors and asset managers
New transparency requirements will be imposed on asset managers which will require them to publicly disclose how their equity investment strategy is aligned with the profile and duration of their liabilities and how such strategy contributes to the medium and long-term performance of their assets. Asset managers must disclose more information to the institutional investor, including how the portfolio was disclosed. In addition, any significant changes in the portfolio which occurred in the previous period must be explained. Asset managers must also disclose, in cases where the asset manager uses proxy advisors, the purpose of their engagement activities.
Enhanced transparency of proxy advisors
Under the new Directive, proxy advisors are required to adopt and implement adequate measures to guarantee that their voting recommendations are accurate and reliable, and are based on a thorough analysis of all the information which is at their disposal. Proxy advisors must disclose certain information with regards to the preparation of their voting recommendations, including the key features of the methodologies and models which they employ, the main information sources which they use and the total number of voting recommendations provided in the last year. Such information must remain public for a minimum period of three years.
New mandatory directors’ remuneration policy
The Directive imposes a new requirement on companies: the drawing up of a directors’ remuneration policy. The remuneration policy must outline clear criteria for the award of fixed and variable remuneration, including all benefits in whatever form. The policy shall also contain the main terms of the contracts of directors, including duration and the applicable notice periods and payments linked to termination of contracts.
Shareholders will have the right to vote on the remuneration policy with respect to directors. Companies may only pay remuneration to directors in line with such policy which has been approved by the shareholders. This policy must be reviewed and approved by the shareholders at least once every three years. The remuneration policy must be clear, understandable and in line with the business strategy, objectives, values and long-term interests of the company and it must incorporate measures which avoid conflicts of interest.
New mandatory remuneration report
The company must draw up a remuneration report which provides a comprehensive overview of the remuneration (including all benefits in whatever form) which was granted to all individual directors in the last financial year. The Directive outlines the information which must be included in this report, which includes any remuneration which was received by the directors of the company from any undertaking belonging to the same group.
Shareholders have the right to vote on the remuneration report of the past financial year at the annual general meeting. If the shareholders vote against the remuneration report, the company must explain in the next remuneration report whether or not (and if so, how) the vote of the shareholders has been taken into consideration.
Shareholders’ right to vote on related party transactions
A public announcement will be necessary in the case of transactions with related parties which represent more than 1% of their assets. Such announcement must be made at the time of the conclusion of the transaction, and the announcement must be accompanied by a report conducted by an independent third party assessing if it is made on market terms. The report must confirm that the transaction is fair and reasonable from the perspective of all shareholders, including minority shareholders.
With respect to transactions with related parties which represent more than 5% of the companies’ assets, or transactions which can have a considerable impact on profits or turnover, such transactions must be submitted to a vote by the shareholders in a general meeting. If the related third party transaction involves a shareholder, this shareholder shall not have a right to a vote. In these cases, the company may not conclude the transaction prior to the shareholders’ approval.
The new Shareholders’ Rights Directive is expected to be published in the Official Journal in the coming weeks, following which, Member States will have a 2 year period within which to transpose the Directive into national law.