The European Parliament has adopted the Shareholder Rights Directive, amending the current Shareholders’ Rights Directive 2007/36/EC (“SRD”), which is meant to sharpen big EU firms’ focus on their long-run performance by fostering their shareholders’ transparent and active engagement. The new rules aim to contribute to the sustainability of the EU companies and shall foster the efficiency of the chain of intermediaries. The SRD shall apply for companies with registered office in a member state and listed on a regulated market situated or operating in a member state. These are more than 8000 listed companies on the EU regulated markets, whatever their sector of activity, capitalising around EUR 8 trillion. The revision of the SRD is part of the European Commission’s 2012 Action Plan on company law and corporate governance. It is a result of the numerous shortcomings in corporate governance of listed companies observed during the financial crisis.

The new directive establishes specific requirements which apply to:

• Remuneration of directors:

Shareholders shall have the right to vote at the general meeting on the remuneration policy of the directors of their company. Member states shall decide whether this vote shall be binding or just advisory. If the vote is binding and a new policy fails to gain approval, the company should continue to pay in accordance with the previously approved policy and submit a revised policy for approval at the next meeting.

Under the new rules, remuneration policy should contribute to the business strategy, long-term interests and sustainability of the company and should not be linked to short-term objectives. Member states might allow companies to derogate from specific elements of the remuneration policy in exceptional circumstances.

Directors’ performance should be assessed using both financial and non-financial performance criteria, including where appropriate environmental, social and governance factors.

The remuneration policy should be put to a vote at every material change and at least every four years. The policy shall also have to be publicly disclosed without delay after the vote by the shareholders at the general meeting.

• Identification of shareholders:

The new directive shall ensure that companies are able to identify their shareholders and obtain information regarding shareholder identity from intermediaries in order to communicate directly with them to facilitate the exercise of shareholder rights and shareholder engagement. Intermediaries (investment firms, credit institutions, central securities depositories, that provide services of safekeeping of shares, administration of shares or maintenance of securities accounts on behalf of shareholders or other persons) shall have the obligation to cooperate with this identification. The purpose is to facilitate the exercise of shareholders’ rights and their engagement with the corporate governance.

Member States may decide that the request for identification only relates to shareholders who own more than a certain percentage of the shares or voting rights. This percentage may not exceed 0,5%.

• Facilitation of exercise of shareholders rights:

Intermediaries shall have to facilitate the exercise of the rights by the shareholder, including the right to participate and vote in general meetings. They shall also have the obligation to deliver to shareholders, in a standardized and timely manner, all information from the company that will enable the appropriate exercise of their rights. The new rules shall make it easier for shareholders to exercise their rights, nationally as well as internationally.

• Transparency for institutional investors, asset managers and proxy advisors:

The Directive requires investors to either develop and publicly disclose a policy on shareholder engagement, or to give a clear and reasonable explanation as to why they have chosen not to do so. They shall have either to develop and publicly disclose a policy on shareholder engagement or explain why they have chosen not to do so. This engagement policy shall describe how they integrate shareholder engagement in their investment strategy and the engagement activities they carry out. The policy should include the conduct of dialogue with the company, the exercise of voting rights, and the management of actual or potential conflicts of interest. The policy should also describe how the investor or asset manager monitors the company invested in.

In view of their importance, proxy advisors shall also be subject to transparency requirements and shall be subject to a code of conduct, in view of the important role they play.

• Related party transactions:

The new directive provides that material related party transactions (“related party transactions”) should be approved by the shareholders or the administrative or supervisory body to provide adequate protection for the interests of the company. Member states shall define what is meant by material transactions, taking into account the impact that the information about the transaction will have on the economic decisions of the shareholders, and the risk posed by the transaction for the company and its unrelated (minority) shareholders.

Companies shall have to announce publicly material transactions at the time of their conclusion with all the necessary information for assessing the fairness and accuracy of the transaction from a shareholder’s perspective.

Next steps

The European Commission has 15 months to issue a standardized guidance for the implementation of the Directive. Member states will have 24 months to transpose the new rules into the national legal frameworks.