The Amended Shareholders’ Rights Directive

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 Amendments

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.

Implementation

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.

Further information

The EU Commmission’s factsheet on the SRD can be found by clicking here. The EU Council’s press release on the amendments made to the SRD can be found by clicking here.

UK Company Law and Brexit.

In the days following the UK’s decision to leave the EU, there has been much talk on the effect that Brexit will have upon our system of law. Whilst most discussion has focussed on the effect that Brexit will have upon our constitutional arrangements or workers’ rights, it is also important to consider the effect that Brexit will have upon our system of company law. Unfortunately, the current uncertainty regarding the terms on which the UK will leave the EU (if indeed it does) means that a definitive answer cannot be provided, but several principal possibilities can be advanced.

First, the UK could, despite the referendum result, decide to remain in the EU. There has been a notable backlash to the referendum result (and the method of campaigning prior to it) and politicians in the main political parties do not appear keen to issue the Art 50 notification in the immediate future. If the UK does not leave, then clearly little will change. It should also be noted that, until the Art 50 procedure has been completed (irrespective of whether an agreement is reached), the UK will remain a Member State of the EU and will remain bound by EU law, both enacted and upcoming. So, for example, if the proposed EU Directive on Board Diversity is passed prior to the UK’s exit from the EU, the UK will technically remain bound to implement it, providing that the exit procedure under Art 50 has not been completed by the Directive’s implementation date.

Second, the UK could leave the EU, but retain its membership of the single market, most likely through becoming a member of European Free Trade Association and then joining the European Economic Area (‘EEA’). Amongst those in favour of Brexit (and those who wish to remain, but reluctantly accept Brexit), this currently appears to be the most popular option. EEA Member States are subject to the EEA Agreement, which provides that EEA States remain bound by EU legislation relating to the four freedoms (namely goods, persons, services, and capital) and commit to closer cooperation in other specified areas (e.g. research and development, the environment, education and social policy). EEA States are not subject to certain areas of EU law (e.g. the Common Agricultural and Fisheries Policy, monetary union, and Justice and Home Affairs). The upshot of this is that there would be some EU derived company law that the UK would no longer be bound by, but, as most company law directives apply to EEA states, the bulk of EU company law would still bind us. All told, a Brexit that involved EEA membership would not likely result in major changes to our system of company law. Of course, the disadvantage of the EEA route is that we would be bound by large sections of EU law and, whilst we could express opinions on proposed EU law reform, we would be unable to vote on such laws. For a country that has contributed so strongly to the development of EU law in financial areas, this will be a notable disadvantage.

Third, the UK could leave the EU and not seek to retain membership of the single market. For obvious reasons, this is widely regarded as an extremely unattractive option, and it would potentially have the most impact upon our system of company law. The UK would no longer be bound by EU law, but the exact effect this would have upon UK law would depend upon the type of EU law in question:

  • EU Treaties are given legal effect under UK law by virtue of s 2(1) of the European Communities Act 1972. In the event of a Brexit that resulted in the UK not being bound in any way by EU law, the 1972 Act would either be repealed, or amended so as to provide that EU law is no longer supreme and Treaty provisions are no longer implemented under UK law.
  • Regulations are directly applicable and become part of UK law when passed, without the need for any further implementation.  Regulations that have not been implemented via legislation would cease to apply to the UK. However, Parliament does occasionally enact Acts of Parliament or amends existing Acts in order to implement EU Regulations and such provisions will remain in effect until such time as Parliament decides to repeal, amend or replace them. Subordinate legislation made under the European Communities Act 1972 that implements EU Regulations (e.g. the Financial Services and Markets Act 2000 (Market Abuse) Regulations 2016, which implements the Market Abuse Regulation) will be automatically revoked if the 1972 Act is repealed. However, instead of repeal, the 1972 Act could be amended to provide that such subordinate legislation will remain in effect, or the law could simply be enacted anew.
  • Directives are not directly applicable and must be implemented to have effect domestically (unless the implementation period has passed, in which case they can acquire vertical direct effect). Acts of Parliament that implement directives will remain in place until such time as Parliament decides to repeal, amend or replace them (e.g. Part 13, Chs 3 and 4 of the Companies Act 2006 which contain the implementations of the Shareholder Rights Directive). Subordinate legislation made under the European Communities Act 1972 that implements EU directives (for example, the Statutory Auditors and Third Country Auditors Regulations 2016 were enacted primarily to implement the Statutory Audit Directive) will be automatically revoked if the 1972 Act is repealed. However, instead of repeal, the 1972 Act could be amended to provide that such subordinate legislation will remain in effect, or the law could simply be enacted anew.

The bulk of UK company law is not derived from Europe, meaning that a complete split from the EU with no participation in the single market would be likely to have notable effects in specific areas only, including the following.

  • Perhaps the most notable impact would be to the UK’s Listing Regime, which has been strongly influenced by EU law. The Prospectus Rules implemented the Prospectus Regulation and the Prospectus Directive, and the Transparency Directive was implemented by the Disclosure and Transparency Rules. Parliament could simply decide to keep existing law in place, which would be a wise solution given the complexity of the law in this area and the desire to maintain the UK as a leading financial centre. Even if such laws were kept in place, EU law would continue to evolve meaning that, over time, EU law and domestic law could drift apart, which could have an effect upon the UK’s reputation as a leading financial centre. The inability to ‘passport’ prospectuses into EU Member States would also provide a notable barrier to UK companies that wish to list their shares in other countries, and vice versa. Currently, the Prospectus Directive allows companies with FCA-approved prospectuses to passport their prospectuses into other EEA states, thereby facilitating cross-border investment and allowing companies to list shares on multiple European markets. If we were completely free of EU law, the UK would lose the ability to passport prospectuses in this way. Indeed, even the EEA option would result in a reduction in passporting rights.
  • The UK’s market abuse regime has been strongly influenced by EU law, notably the Market Abuse Regulation. Domestic laws that implement EU law in this area operate in order to maintain integrity in our financial markets and, as the UK is a leading financial centre, I would not expect the government to seek to amend these laws substantially, if at all.
  • Recently, the Statutory Audit Regulation and the Statutory Audit Directive were implemented in the UK by the Statutory Auditors and Third Country Auditors Regulations 2016. It seems unlikely that amending these rules post-Brexit would be a priority. What may change is that the FRC’s ability to influence EU policy would likely wane, and it would cease to be a member of the Committee of European Audit Oversight Bodies.
  • UK companies that wished to merge with companies in EU states would find such mergers more difficult, as they would not be covered by the Cross-Border Mergers Directive which, as the name suggests, serves to facilitate cross-border mergers between companies in differing EU Member States. A new framework would need to be created to allow UK companies to merge with companies in EU Member States.
  • The Takeover Directive was implemented in the UK by the City Code on Takeovers and Mergers. However, the Directive itself was heavily influenced by the pre-Directive version of the City Code, so notable changes in takeover regulation are not expected.
  • The Statute for a European Company allows for the creation of a European public limited liability company, known as the Societas Europaea (‘SE’). Should the UK leave the EU, then it is likely that UK companies that have adopted SE status would lose that status. In practice, this will not be a major issue as the SE has not been popular in the UK. At the time of writing, only 53 SEs are headquartered in the UK.
  • Insolvency law is largely domestic, but cross-border insolvency matters are largely regulated by the Regulation on Insolvency Proceedings. Cross-border insolvencies will become more complex as there will be jurisdictional issues to determine. Further, UK insolvency professionals (notably liquidators) will not be automatically recognised as competent in other Member States.

There are also practical differences worth noting, chief among them being that many multinational companies choose the UK (notably London) as their base of EU operations. A UK outside the EU and EEA is not such an attractive country for a company’s headquarters and companies, especially financial services companies, may choose to relocate their headquarters or move parts of their business to other EU States. Indeed, the Governor of the Bank of England warned as much, and a PWC report has contended that up to 100,000 financial services jobs could be lost by 2020 as a result of Brexit. The European Banking Authority, an independent EU Authority that regulates the banking sector and is based in London, is reportedly also preparing to relocate.

In conclusion, it cannot yet be predicted with certainty what the effect of Brexit will be on UK company law, as there is considerable uncertainty about what form Brexit will take, if indeed it happens at all. What can be stated is that it is difficult to envisage any company law-related benefits will result from the UK leaving the EU. Regulation in some areas might be reduced, but this will not be an adequate trade-off for the benefits that might be lost, especially if participation in the single market is reduced.

Image credit: image used under Creative Commons CC0 licence. Image created by stux and downloaded from Pixabay.