There is a perception that before the financial crisis, shareholders supported excessive short-term risk taking and did not engage with or monitor the companies that they had invested in, leading to poor corporate governance in the race for short-term returns. The Shareholder Rights Directive was introduced in 2007 to better enable shareholders of EU companies to exercise their rights.
In 2017, the Shareholder Rights Directive was amended by the Shareholder Rights Directive II, which has been implemented into English law through a variety of legislative measures. In that amendment there are some changes that could affect your business.
This article explains what the legislation says and sets out the extent to which the changes could affect your business, particularly if you are a company incorporated or operating in the EU, an asset manager or an investor carrying out life assurance activities or occupational pension schemes.
- What is the Shareholder Rights Directive?
- Aspects of your business that may be affected by the SRD II
- What do organisations need to do under the SRD II?
- Additional disclosure rights under the SRD II
- Requirements for asset managers and investors under the SRD II
- Shareholder identification under the SRD II
- Directors’ remuneration under the SRD II
- Related party transactions under the SRD II
What is the Shareholder Rights Directive?
The Shareholder Rights Directive is a form of European Union (‘EU’) legislation called a directive. A directive requires that the member states of the EU put the EU’s legal directions on a specific matter into practice as part of their national law. The member states have some discretion as to how to do this.
The Shareholder Rights Directive came into effect to better enable shareholders of EU incorporated companies to exercise their rights by introducing the following requirements:
- As a general rule, a notice period of at least 21 days for general meetings of shareholders. This is the case unless the company has electronic voting and a shorter notice period was approved at the previous general meeting by two-thirds of the voting shareholders, in which case a company may call a general meeting, other than its annual general meeting, on at least 14 days’ notice).
- A notice of a general meeting is to be sent to each shareholder and published on the company’s website.
- A date should be set where the company assesses a person’s right to participate in and vote at a general meeting based on the shares they hold (called a ‘record date’). The record date establishes who can participate and vote at the general meeting.
- The company should to post information about its general meetings, including details on how to vote, on its website throughout its general meeting notice period until the end of the day of the general meeting.
- Shareholders should be able to put items or draft resolutions on the agenda of the general meeting or an annual general meeting (so long as the items meet certain criteria).
- Shareholders can vote in writing before a general meeting (a postal vote).
- Shareholders should be able to electronically appoint proxies (persons to attend the meeting on the shareholder’s behalf) and to vote at and attend meetings electronically.
- The principle that shareholders have the right to ask questions about the agenda of a general meeting and for those questions to be answered by the company.
- Where an intermediary company is acting on behalf of the shareholder, the intermediary must provide the company with a list disclosing the identity of each shareholder it represents and the number of shares voted on their behalf.
- Results of shareholder voting at a general meeting should be published on the company’s website.
The Companies (Shareholders’ Rights) Regulations 2009 (SI 2009/1632) implemented the Shareholder Rights Directive into English law and the Companies Act 2006 was amended to incorporate the key provisions of the Shareholder Rights Directive.
Ten years later in 2017, the Shareholder Rights Directive was amended by the Shareholder Rights Directive II (‘SRD II’), as the EU wanted to encourage long-term shareholder engagement so that investors think about and engage with their investments on a long-term basis. As a consequence, this can improve corporate governance in those companies and allow open communication between shareholders and the companies that they invest in. This is particularly true where shares of listed companies are held through complex chains of intermediary companies, which makes finding out the identity of shareholders difficult.
The SRD II aims to make it easier to identify who a company’s ultimate shareholder is and to ensure that shareholders can exercise their rights but also take some interest in the governance of the company that they are investing in.
The SRD II is largely now implemented into English law, so if you are subject to its provisions, think about what adjustments you need to ensure your business complies with the requirements.
Aspects of your business that may be affected by the SRD II
The changes made by the Shareholder Rights Directive II may affect your business if you are operating in Europe and you are:
- An EU company: for the purposes of the SRD II, this is a company that is listed in a member state of the EU or whose shares are traded on an EU regulated market and that has its registered office in a member state of the EU. If you fall into this category, you have obligations as to how long your shareholders’ information is retained, the transmission of information that shareholders are entitled to, and the implementation of a clear voting process at general meetings. There are also requirements that you need to comply with relating to directors’ remuneration and transactions with related parties.
- An institutional investor: for the purposes of the SRD II, these are entities that carry out life assurance activities and reinsurance (provided that those activities cover life-insurance obligations), and institutions for occupational retirement provision/pension schemes, whether they invest directly or through an asset manager, in shares traded on an EU regulated market. If you fall into this category, you have obligations to put in place a publicly available engagement policy and to publicly disclose your investment strategy.
- An intermediary company: for the purposes of the SRD II, this is an entity that provides services to shareholders or other intermediary companies on behalf of shareholders, with shares in EU companies that are admitted to trading on an EU regulated market. In this context, an intermediary can be an investment firm, a credit institution or a central securities depository which provides services relating to the safekeeping, administration or maintenance of shares and securities accounts on behalf of shareholders or other persons. If you fall into this category, you have obligations regarding the movement and distribution of information between the shareholder that you act on behalf of and the company that the shareholder invests in.
- An asset manager: for the purposes of the SRD II, this is an entity that invests in shares traded on an EU regulated market on behalf of investors. In this context, an asset manager can be a specific type of investment firm that provides portfolio management services to investors, or a certain type of alternative investment fund manager, management company or investment company.
- A proxy advisor: for the purposes of the SRD II, this is an entity that provides services to shareholders of EU companies and those shares are traded on a regulated market situated or operating within the EU. A proxy advisor is a legal person that analyses the corporate information of listed companies so that it can advise its investor clients how best to vote by providing research advice or recommendations that relate to the exercise of voting rights. If you fall into this category, you have obligations regarding your policies on voting and general code of conduct in transactions, including how you approach conflicts of interest.
What do organisations need to do under the SRD II?
The Shareholder Rights Directive II contains specific requirements in relation to:
- the identification of shareholders by companies;
- the transmission of information by intermediary companies between their shareholder clients and the companies that they invest in;
- imposing obligations on intermediary entities to make it easier for shareholders to exercise their rights;
- the transparency of institutional investors, asset managers and proxy advisors;
- shareholders’ influence over the money paid to directors; and
- obligations surrounding related party transactions.
It is important to first make yourself aware of the changes required by your business to be compliant with the SRD II and if necessary, seek further advice from a legal professional. You will then need to work out what documentation to review, amend and make publicly available. For example, a lot of institutional investors should have already updated their Statement of Investment Principle to reflect the changes brought about by the SRD II. There may also be practical considerations about how best to collect and share information in practice and how to effectively manage the voting process for shareholders.
Additional disclosure rights under the SRD II
Chapter 1b of the SRD II sets out requirements for transparency of institutional investors, asset managers and proxy advisors. If you are an institutional investor or an asset manager you are required to either comply with, or publicly disclose and explain why you have chosen not to comply with, the following:
- Engagement policy – you need to have a shareholder engagement policy on your website (that can be viewed free of charge) describing how you integrate shareholder engagement into your investment strategy. The policy should include: the ways in which you monitor the companies that you invest in, including their strategy, financial and non-financial performance and risk, capital structure, social and environmental impact and corporate governance; how you communicate with such companies, how you approach the exercising of voting rights and other rights attached to shares, how you approach co-operation with other shareholders, and how you plan to communicate with relevant stakeholders of the companies that you invest in, including how you plan to manage conflicts of interests.
- Annually publish and disclose how your engagement policy has been implemented, including a description of voting behaviour (including how votes have been cast at general meetings), an explanation of the most significant votes cast and the use of the services of proxy advisors.
If you are an institutional investor using an asset manager and the asset manager has published an engagement policy on your behalf, you need to make sure you refer on your website to where this information has been published by the asset manager.
Requirements for asset managers and investors under the SRD II
As an asset manager, under the SRD II you have to provide your client with information to enable them to assess to what extent you are acting in their best long-term interests and are working to promote meaningful shareholder engagement. This philosophy can be good for your business as the additional disclosure obligations can help to build trust with your clients.
On a yearly basis, you also have to report to your institutional investor clients that you comply with the arrangements in place with your clients and that you are helping to contribute to the medium to long-term performance of the assets that they have invested in. At the same time, you need to highlight any key risks associated with the medium to long-term investment in those assets.
You have these obligations whether you act for clients on an individual basis or whether you act for multiple clients collectively.
If you are an institutional investor, under the SRD II you have to make public (free of charge) the key aspects of your investment strategy and reconcile them to the nature and length of your investment commitments (particularly long-term commitments). You also have to demonstrate how you influence the medium to long-term performance of the assets that you invest in.
On top of this, if you use an asset manager you have to demonstrate how the arrangement with your asset manager incentivises the asset manager to:
- Invest in accordance with your principles on the medium to long-term financial performance of the asset you are investing in.
- Engage with these companies to help them to perform better in the long term.
- Justify how the asset manager’s performance is evaluated and remunerated, taking into account your commitments to your investments as well as the length of the arrangements in place with that asset manager.
- Demonstrate that you monitor the investment portfolio turnover costs incurred by your asset manager and illustrate the ways in which you do this.
If you do not disclose all or part of the information above, you have to be able to give a clear explanation of why you have not done so.
The information should be published on your website and you should update this information yearly unless there have been no major changes.
If you are a proxy advisor, under the SRD II you have to publicly refer to your code of conduct on your website (which has to be accessible free of charge) and set out how you apply it to your service provision.
If you do not apply a code of conduct or if you do not follow the code of conduct you need to publicly explain why and what alternative measures you have put in place. You also have to make sure that you update this information on an annual basis and keep it available for at least three years from the date of publication.
You also need to set out on your website, as a minimum, information on how you research, advise and make recommendations to clients and update this information on an annual basis. In this information you should set out your methods, models and sources of information (including the extent that you take national market, legal, regulatory and company-specific conditions into account and whether you discuss your research with other companies).
You need to be able to demonstrate that the processes you have in place ensure the quality of your services and should provide information on the qualifications of the personnel you use. Finally, you need to have a policy that deals with preventing and managing conflicts of interests or business relationships that may influence the provision of your services to your clients.
Shareholder identification under the SRD II
Chapter 1a of the SRD II sets out requirements for better shareholder identification. These requirements may affect your business in a number of ways.
|Requirement||What this means for your business|
|Companies have the right to identify their shareholders||A company must request from the shareholder or an intermediary company the identification of a shareholder unless that shareholder holds a small percentage of shares (the SRD II suggests not more than 0.5 %). This also means that an intermediary company has to communicate to the company without delay the details of the next intermediary in the chain of intermediaries if there is more than one intermediary company.|
|Information regarding shareholder identity|| If the company (or its nominee) asks, an intermediary company must provide information about a shareholder’s identity without delay. This means information that can identify a shareholder and includes: |
(i) name and contact details (including full address and, where available, email address);
(ii) company registration number, or, if no registration number is available, its unique identifier, such as legal entity identifier;
(iii) the number of shares held;
(iv) and only if the company requests: the categories or classes of the shares held or the date from which the shares have been held.
|Shareholders’ personal data should be processed according to EU law||Unless otherwise required by law, companies and intermediaries should not store the personal data of shareholders transmitted to them for identification purposes for longer than 12 months after they have become aware that the person has stopped being a shareholder.|
|Transmission of information||Intermediary companies are required to pass any information which the company is required to provide to the shareholder or to a third party nominated by the shareholder, to enable the shareholder to exercise its rights (both as a shareholder or as a member of a certain class of shareholders). Alternatively, where this information can be accessed on the company’s website, intermediary companies can simply issue a notice indicating where on the website that information can be found. Intermediary companies are also required to pass information related to the exercise of shareholder rights from the shareholder or from a third party nominated by the shareholder to the company either directly or through the chain of other intermediary companies (if applicable).|
of the exercise of shareholder rights
companies are required to make the necessary arrangements for the
shareholder, or a third party nominated by the shareholder to be
able to exercise their rights (either themselves or through the
intermediary company or by the explicit authorisation and
instruction of the shareholder) and this includes their rights to
vote at and participate in general meetings.
When votes are cast electronically a company has to make sure that an electronic confirmation of receipt of the votes is sent to the person that casts the vote. After a general meeting the shareholder or a third party nominated by the shareholder has to be able to obtain, upon request, confirmation that their votes have been validly recorded and counted by the company, unless that information is already available to them.
|Transparent costs||Intermediary companies are required to disclose publicly any applicable charges for any transmission or facilitation services, providing separate disclosure for each service item. Any charges issued by an intermediary on shareholders, companies and other intermediaries has to be proportionate to the actual costs incurred for delivering the services. Any differences between domestic and cross-border charges for the exercise of shareholder rights are permitted if justified and where they reflect the variation in actual costs incurred for delivering the services.|
It is worth pointing out that the Companies Act 2006 already addresses these requirements in Part 22, so you are already required to comply with these obligations under English law.
Directors’ remuneration under the SRD II
Article 9a of the SRD II states that EU companies with shares admitted to trading on an EU regulated market should put in place a policy dealing with the remuneration of directors and that shareholders should either have a right to a binding vote to approve the policy or have a right to provide advice on the policy at a general meeting. If a policy has not been approved at a general meeting, a company has to submit a revised policy for shareholder approval at the next general meeting.
The SRD II indicates that in exceptional circumstances, a company can temporarily depart from its remuneration policy if it is in the long-term interests and sustainability of the company, provided that the policy sets out that the kind of deviations that can be made and sets out the process for deviating.
The SRD II states that the remuneration policy should be put to a vote at the general meeting at least once every four years, and if it changes materially in the meantime. After any vote on the remuneration policy, the policy and the date and result of the vote should be published on the company’s website for as long as the remuneration policy is in force.
The remuneration policy itself should include details on:
- How the policy was created and reviewed and the motivations behind its creation.
- The different components of fixed and variable remuneration, including bonuses and other benefits awarded or due during the most recent financial year to individual directors.
- How the pay and employment conditions of the company have been taken into account.
- The different performance criteria and the methods applied to work out if the criteria have been fulfilled.
- Share-based remuneration including vesting periods and any retention of shares after vesting.
- The length of the contracts with the company’s directors and any applicable notice periods.
- The characteristics of the pension or early retirement schemes and any payment linked to termination.
- Measures in place to avoid or manage conflicts of interests.
Companies are also required to produce a remuneration report that sets out an overview of the remuneration awarded or due during the most recent financial year to individual directors. The report should be published on the company website free of charge for a period of 10 years. For each director, the report should state:
- Their total remuneration broken down into fixed and variable parts.
- An explanation of how the remuneration is in accordance with the remuneration policy, including how the performance criteria was applied.
- How the company and the rate of remuneration has changed year-on-year.
- The number of shares and share options granted or offered and the main conditions attached to those grants or offerings.
- How any applicable vote or discussion of the shareholders about general remuneration has been taken into account.
- Deviations from the remuneration policy and the reasons for those deviations.
Companies need to make sure that their shareholders have the right to an advisory vote on the remuneration report for the most recent financial year at the annual general meeting. For some small and medium-sized companies, the report can be submitted on the agenda for discussion (and not a vote) at the company’s annual general meeting.
Companies should be careful of any personal data contained in the remuneration report and should seek guidance if they are unsure as to what can and cannot be included in the report, so that they do not inadvertently breach any data protection laws. The SRD II states that any personal data contained in the remuneration report should not be made publicly available after 10 years after the report is published. The Shareholder Rights Directive II also requires that a company’s statutory auditors should check that all of the information required by the SRD II is incorporated into the report.
The directors of a company are directly responsible for making sure that the remuneration report is produced and published. If they do not, they will be liable to the company for breach of their duties. For the purposes of the SRD II, you are considered to be a director even if you are a CEO or deputy CEO (and not a statutory director).
Related party transactions under the SRD II
The SRD II sets out the requirements for EU incorporated companies with shares admitted to trading on an EU regulated market in relation to related party transactions and intends to make these transactions more visible to shareholders.
For the purposes of the SRD II, material transactions of a company are those transactions that influence the economic decisions of shareholders and that create risk for the company and its shareholders that are not involved in the transaction. Transactions that occur in the ordinary course of business and that are agreed on standard market terms are not considered to be material transactions.
Companies are required to publicly announce material transactions with related parties (whether the transaction is with the company or its subsidiaries) by the time that the transaction has finished, stating the name of the related party and the value of the transaction, among other details.
This requirement is something to be mindful of when agreeing to the terms of any confidentiality undertakings entered into by parties, as you will need to allow for these types of disclosures in your non-disclosure agreements. A company entering into a material related party transaction has to demonstrate and report that it has assessed whether the transaction is fair and reasonable from the perspectives of the company and the non-related shareholders. If a report is prepared, it must be produced by an independent third party, the board of the company, the audit committee or a committee of mainly independent directors.
Material related party transactions have to be approved at a general meeting or by the board of the company and where shareholders or directors are involved in the proposed transaction, they can’t take part in the voting or approval process unless an exemption has been given to them. The SRD II suggests that the following can be considered as exemptions:
- Transactions between the company and its wholly owned subsidiaries or the company and its subsidiaries and no other related party of the company has an interest in that subsidiary or where English law provides protections for the company and the shareholders not involved in the transaction.
- Transactions that require shareholder approval under English law.
- Transactions regarding remuneration of directors, or certain elements of remuneration of directors, in accordance with the company’s remuneration policy.
- Transactions by credit institutions on the basis of legal or regulatory measures.
- Transactions offered to all shareholders on the same terms.