EU Directive 2017/828 has now been published in the Official Journal and will come into force on the 9th June 2017. The Directive serves to amend Directive 2007/36/EC, which is more commonly known as the Shareholders’ Rights Directive (‘SRD’). The SRD was passed in 2007 ‘with a view to enhancing shareholders’ rights in listed companies.’ The financial crisis revealed that many shareholders supported management’s excessive short-term risk-taking and so, in 2012, the EU Commission published an Action Plan which set out the initiatives the Commission intended to take in order to enhance transparency and engage shareholders. Directive 2017/828 is the result.
The principal amendements to the SRD are:
- Identification of shareholders: Shares in listed companies are often held through complex chains of intermediaries, which can make it difficult or impossible for a company to identify its shareholders. This, in turn, makes it difficult for companies to contact shareholders, which is an essential feature to facilitating the exercise of shareholder rights. Accordingly, a new Art 3a is inserted which provides that Member States shall ensure that companies have the right to identify their shareholders. To faciliate this, companies will have the right to collect personal data on their shareholders ‘in order to enable the company to identify its existing shareholders in order to communicate with them directly with the view to facilitating the exercise of shareholder rights and shareholder engagement with the company.’ Companies will be able to store this data for as long as they remain shareholders.
- Institutional investor engagement: A new Art 3g provides that Member States shall ensure that institutional investors and asset managers comply with two requirements, or publicly disclose a reasoned explanation as to why they have not complied. The two requiremrnts are (i) institutional investors and asset managers shall develop and publicly disclose an engagement policy that describes how they integrate sahreholder engagement into their investment strategy, and; (ii) institutional investors and asset managers shall, on an annual basis, publicly disclose how their engagement policy has been implemented.
- Institutional investor investment strategy: A new Art 3h provides that Member States shall ensure that institutional investors public disclose how the main elements of their equity investment strategy are consistent with the profile and duration of their liabilities, in particular long-term liabilites, and how they contribute to medium to long-term performance of their assets.
- Transparency of asset managers: A new Art 3i provides that Member States shall ensure that asset managers disclose, on an annual basis, certain information to their institutional investors, such as how their investment strategy and implementation thereof complies with the arrangements in Art 3h and contributes to the medium to long-term performance of the assets of the institutional investor or the fund.
- Transparency of proxy advisors: A new Art 3j provides that Member States shall ensure that proxy advisors publicly disclose reference to a code of conduct which they apply and report on. If such proxy advisors depart from the recommendations of this code of conduct, they shall explain from which parts they depart, provide explanations for doing so and, where appropriate, any alternative measures adopted. Where proxy advisors do not apply a code of conduct, they shall provide a clear and reasoned explanation why this is the case. All proxy advisors will be required to diclose inforamtion set out in Art 3j(2).
- Right to vote on remuneration policy: A new Art 9a provides that Member States shall ensure that companies establish a remuneration policy as regards directors, and that shareholders have the right to vote on the remuneration policy at the general meeting. Member States may allow companies, in exceptional circumstances, to temporarily derogate from the remuneration policy, provided that the policy includes the procedural conditions under which the derogation can be applied and specifies the element of the policy from which derogation is possible. The company’s remuneration policy shall contribute to the company’s business strategy and long-term interests and sustainability, and shall explain how it does so. The remuneration policy shall explain how the pay and employment conditions of employees of the company were taken into account when establishing the remuneration policy.
- Transparency and approval of related party transactions: Transactions with persons related to the company can adversely affect the company and its shareholders, or place the directors in a conflict position. Accordingly, a new Art 9c provides that each Member State shall define what a ‘material transaction’ is. Companies that enter into material transactions with related parties must publicly announce the transaction at the latest at the time the transaction is concluded, and provide specified information relating to the transaction. Member States shall ensure that material transactions with related parties are approved at the general meeting or by the administrative or supervisory body of the company. Where the administrative or supervisory body has approved the transaction, then Member States may require that the shareholders in general meeting then have the right to vote on the transaction.
Member States have until the 10th June 2019 in which to implement the amended Directive. Remember that, until the UK formally leaves the EU, it remains bound to implement EU law. Article 50 has now been triggered and if, as expected, the UK leaves by the end of the Art 50 period (i.e. by the 29th March 2019), then the Amended Directive will not apply, unless the UK decides to implement it prior to leaving the EU. Accordingly, it will be interesting to see whether the government decides to begin the process of implementing the Directive.