On 9 June 2017, the EU directive 2017/282 on long-term shareholder engagement, also known as the revised Shareholder Rights Directive (SRD II), came into force. Most of the measures apply in all EU member states as of 10 June 2019. The remaining provisions, covered by European Commission regulation in September 2018, are to be implemented into local rules within 24 months.
The new rules were proposed to address investors’ short-termism and shortcomings in the corporate governance of listed companies, which were exposed by the financial crisis and created strong social and political criticism.
Among the hot topics were serious impediments to the exercise of shareholders’ rights; excessive short-term risk-taking by some investors and fund managers; and directors’ pay, which was perceived in some companies as excessive and not sufficiently justified by performance. The directive tries to address these and other issues while aiming to strike the right balance by providing a bundle of rights and obligations on companies, institutional investors, asset managers and proxy advisers.
On the one hand, companies have been granted the right to identify their shareholders but, on the other, they must provide greater transparency on executive pay and related-party transactions. Investors have gained more control over executive compensation and related-party transactions, but they will also be subject to more stringent transparency rules.
Overview of new requirements
1. Identification of shareholders
SRD II provides a right for companies to identify their shareholders, and intermediaries are obliged to cooperate in this process. That means that companies have the right to obtain information on shareholders’ identity from intermediaries.
To set up a communication channel ahead of annual general meetings, it is important for the issuer to identify its shareholders and ensure they receive all the information necessary in a timely manner, allowing for participation in the AGM.
Moreover, as the directive aims to enhance shareholder engagement, thus transferring more power to shareholders regarding the remuneration of directors and related-party transactions, an effective cross-border shareholder identification system is essential.
Unfortunately, the directive allows member states to impose a threshold of up to 0.5% of shares, or voting rights, below which companies will not be compelled to identify their shareholders.
The issue is that, given the dispersed ownership of many companies, we hear that if a threshold is set at 0.5%, few shareholders would be identified. For example, one of the large German blue-chip companies in the DAX30 currently has more than 200,000 shareholders. If you set a threshold at 0.1%, only between 30 and 50 shareholders would be identified. If the threshold is at 0.5%, not even 10 shareholders would be identified.
Another issue that currently many companies face is cost. In some countries shareholder identification is very expensive due to intermediaries’ fees. For instance, in Italy some companies pay €2.5m to identify its one-million shareholders (€2.50 per shareholder), or €1m in the case of 230,000 shareholders (€4.34 per shareholder).
In Germany the cost reimbursed for transfer of shareholder data by issuer to the intermediary is up to €0.10, meaning significantly less. Therefore, the provisions of the directive regarding proportionality and transparency of costs are very welcome. It is also important that there is healthy competition among the providers of such services and that companies have the choice of whose services to use.
2. Communication between companies and investors, and facilitation of exercise of shareholder rights
New rules aim to facilitate the exercise of shareholders’ rights and to increase shareholder participation and voting at general meetings. Intermediaries are obliged to provide all information from the company to shareholders that will ensure the appropriate exercise of their rights.
These provisions are important both for investors and companies as there have been many so-called “plumbing” issues within the intermediary chain, especially in cross-border situations.
As a result, investors are discouraged from active engagement as they often face high costs and administrative burdens. It may even happen that a shareholder is denied attendance at an AGM due to poor attention to deadlines or even improperly completed documentation.
EuropeanIssuers has been chairing the industry group that developed Market Standards for General Meetings, which attempted to improve the situation. Unfortunately, due to their non-binding nature, certain market participants did not see the incentive in complying. We hope that these standards will be taken into account as the commission implements regulation.
3. Directors’ remuneration
To comply with the new provisions, companies will need to provide for a remuneration policy in relation to directors and draw up a clear and understandable remuneration report, providing a comprehensive overview of the remuneration awarded, or due, in accordance with the remuneration policy.
The directive also grants shareholders the right to vote on the remuneration policy (ex ante) and on the remuneration report (ex post) of the company’s directors. The former is in principle a binding vote, while the latter is advisory.
The remuneration policy must be submitted to a vote whenever there is a material change and at least every four years. The policy should also be publicly disclosed after the shareholder vote at the general meeting. The directive provides that directors’ remuneration should contribute to the company’s business strategy, long-term interests and sustainability.
The directors’ performance should be assessed considering both financial and non-financial performance criteria. The commission is working on the guidelines aimed at standardised presentation of the remuneration report.
4. Related-party transactions
The directive requires companies to publicly disclose material transactions with parties related to the company no later that at the time a transaction is concluded.
They must be accompanied by all necessary information to assess the fairness of the transaction. Also, material related-party transactions shall be approved by the shareholders, or the administrative or supervisory body, to provide adequate protection for the interests of the company and all its shareholders.
Recognising the fundamental differences between company law systems in Europe, it was left to member states to define material transactions and whether the approval should be granted by the general meeting or by the administrative or supervisory body. Member states may also make exempt those transactions entered in the ordinary course of business and concluded on normal market terms.
5. Transparency for institutional investors, asset managers and proxy advisers
Institutional investors and asset managers shall develop and publicly disclose an engagement policy including information on the exercise of voting rights, monitoring of the investee company, dialogue with the company, and the management of conflicts of interest. If not, they need to provide a proper explanation as to why they have chosen not to do so.
Institutional investors are also required to publish the main elements of their investment strategy and arrangements with asset managers. Asset managers are required to disclose to institutional investors how their investment strategy and its implementation complies with their arrangements and contributes to medium to long-term performance of the assets.
Similar requirements apply to proxy advisors whose important role in providing research, advice or voting recommendations to shareholders, has been recognised.
Nevertheless, there are views that SRD II is only a step forward, and that more is necessary to improve engagement. In that respect, accountability of funds to investors—as funds invest other people’s money at no risk to their own—and of proxy advisors to issuers and investors, could be addressed.
The European Commission published the implementing regulation laying down minimum requirements on shareholder identification, transmission of information and facilitation of the exercise of shareholder rights on 10 September 2018.
The guidelines on remuneration are expected to be published by the second quarter of 2019. Meanwhile, member states are working on the transposition of the Directive.
Florence Bindelle is secretary general and Aleksandra Palinska is senior policy adviser at EuropeanIssuers.