On 3 April 2017, the European Council has adopted the revised Shareholders’ Rights Directive which will encourage active and transparent participation by shareholders of listed companies. The original shareholders’ rights directive entered into force in 2007 (‘SRD’). The SRD and the revised Shareholders’ Rights directive (‘SRD II’) form part of the European Commission’s 2012 Action Plan on company law and corporate governance.

The SRD II will enter into force on the 20th day following the publication in the EU’s Official Journal and Member States have up to two years to implement the SRD II into national law.

Background

The SRD II is a result of the financial crisis which highlighted certain specific shortcomings in corporate governance of European listed companies.

The lack of engagement by institutions investors and the lack of monitoring of investee companies has led to suboptimal corporate governance and performance of listed companies. In many cases shareholders supported managers’ excessive short-term risk taking and excessive directors’ pay seemed not be justified by their performance.

The main goal of the SRD II is to contribute to the long-term sustainability of EU companies. At the same time it delivers on the European Commission’s commitment to enhance longterm financing of the European economy.

Main changes

The SRD II will impact both shareholders and listed companies as follows:

• Shareholder identification and facilitation of the exercise of shareholders’ rights. Upon the request of the listed company, intermediaries must without undue delay communicate the name and contact details of the shareholders. For legal entities, also their unique identifier should be transmitted. To protect the personal data of shareholders, intermediaries shall inform shareholders of this disclosure obligation and of the purposes which is nothing other than to facilitate the exercise of shareholders’ rights and increase shareholder participation in and voting at general meetings.
• Improving long-term engagement of institutional investors and asset managers. Investors will be required to develop a policy on shareholder engagement and to disclose their equity investment strategy. Through increase transparency requirements the aim is to enhance the investors’ medium to long term focus. These new rules are based on a ‘comply or explain’ approach, so investors decide not to comply they will have to give a clear and reasoned explanation as to why this is the case.
• Transparency of proxy advisors. The new rules shall require proxy advisors to adopt a code of conduct to guarantee that their voting recommendations are accurate and reliable and they shall be required to disclose key information about the preparation of their voting recommendations.
• Shareholders’ binding ‘say on pay’ vote. The new rules impose increased transparency obligations on remuneration through the adoption of (i) a remuneration policy for directors, which must contribute to the long-term interests and sustainability of the company and (ii) an annual remuneration report providing a comprehensive overview of the remunerations in whatever form granted to individual directors. Every three years, the shareholders shall vote on the remuneration policy and without their approval no remuneration shall be paid.
• Stricter rules for related party transactions. The new rules will require shareholder approval for related party transactions representing more than 5% of the companies’ assets or for transaction which can have a significant impact on profits or turnover. For smaller related party transactions representing more than 1% of their assets, listed companies must publicly announce such transactions at the time of conclusion, including an independent third party report to assess whether the transaction is on market terms and fair and reasonable from a shareholders’ perspective.

Industry impact

Over 8,000 listed EU companies will be impacted by the SRD II. Whilst the SRD II may indeed result in a better relationship between investors and listed companies, increase accountability of the management and facilitate cross-border investments, a lot of new policy and reporting obligations have been introduced. Although the increased number of obligations may increase the European economy, it may just prove to be quite burdensome for the companies themselves and accompanied by far-reaching transparency obligations compliance will most likely be a balancing exercise.