Revised Shareholders' Rights Directive: Changes introduced for Traded PLCs
New rules to encourage long-term shareholder engagement and increase transparency in traded companies.

 

The European Union (Shareholders' Rights) Regulations 2020 came into operation on 30 March 2020.  These regulations transpose into Irish law a revised Shareholders' Rights Directive (Amending Directive), which amends, rather than replaces, the existing Shareholders' Rights Directive (2007 Directive).  The 2007 Directive sought to improve corporate governance in companies traded on an EU regulated market by ensuring that shareholders could exercise their voting rights and rights to information across borders.

The Amending Directive applies to the following entities:

  • public limited companies whose share are traded on an EU regulated market (Traded PLCs) with the exception of UCITS and AIFs;
  • intermediaries that provide services, in relation to a Traded PLC, of safekeeping of shares, administration of shares or maintenance of securities accounts;
  • asset managers that invest in shares traded on a regulated market on behalf of investors;
  • institutional investors that invest in shares traded on an EU regulated market (either directly or through an asset manager); and
  • proxy advisors that provide services to shareholders with respect to shares traded on an EU regulated market.

The Amending Directive was considered necessary to tackle perceived corporate governance shortcomings in listed companies in the EU and to further encourage transparency and long-term shareholder engagement.

Key Provisions of Amending Directive

Key aspects of the Amending Directive include:

  • Directors' remuneration: A "say on pay" is being introduced.  This means that shareholders will have a right to vote on the remuneration policy of the directors of the company. This vote shall be advisory unless the constitution of the company provides that it is binding. The remuneration policy must contribute to the business strategy, long-term interests and sustainability of the company and must set out the criteria by which any variable remuneration is awarded. There is also a requirement to publicly disclose the remuneration policy of the directors. Measures concerning the remuneration policy will apply to financial years commencing on or after 10 June 2019.
  • Remuneration report: A remuneration report must be prepared providing a comprehensive overview of the remuneration awarded or due, during the most recent financial year, to directors. The report must include, among other things, the total remuneration split out by component, the relative proportion of fixed and variable remuneration, and an explanation of how the total remuneration complies with the adopted remuneration policy. A vote on the remuneration report must be held in general meeting and afterwards the remuneration report must be publicly available on the company's website for ten years. The measures applying to the remuneration report will apply to financial years commencing on or after 10 June 2019.
  • Obligations on intermediaries: Intermediaries will be obliged, with effect from 3 September 2020, to facilitate the exercise of rights by shareholders, including the right to participate and vote in general meetings.  Intermediaries will also be obliged to deliver to shareholders all information from the company that will enable them to exercise their rights. 
  • Shareholder identification: New measures will help companies to identify their shareholders by obtaining information about shareholder identity from any intermediary holding that information. These provisions will also come into force on 3 September 2020.
  • Transparency: Institutional investors and asset managers will be obliged to put in place and publish a policy on shareholder engagement or explain why they have not done so. The policy must describe how shareholder engagement is integrated in the investment strategy and must highlight the engagement activities that take place. How conflicts of interest are managed must be dealt with in the policy. Proxy advisors will also be subject to transparency requirements and will be obliged to comply with a code of conduct or explain why they have failed to do so. These measures take effect immediately.
  • Related party transactions: There is a new requirement for material related party transactions to be approved by the shareholders and announced publicly. This provision comes into operation immediately. 

Next Steps

The Amending Directive will enhance the engagement of shareholders and provide greater transparency on remuneration that may strengthen the link between the pay and performance of directors. 

For Traded PLCs, it is noteworthy that the measures concerning the remuneration report and policy apply to financial years commencing on or after 10 June 2019 while the requirements for material related party transactions take effect immediately. 
There is no transposition period for institutional investors and asset managers who will need to prepare a policy on shareholder engagement or explain why they have not done so. 

Failure to comply with the regulations means that the person or company shall be guilty of a summary offence attracting a term of imprisonment of up to six months or a fine not exceeding €5,000 or both.       

For more information on the impact of the Amending Directive on asset managers and their obligations arising from the Amending Directive, click our briefing Shareholders' Rights Directive II becomes Irish Law

For more information on corporate governance and the Revised Shareholders' Rights Directive, please contact Barbara Kenny, Mark Talbot or your usual William Fry contact,


Contributed by: Caroline Corcoran