On 9 April 2014, the European Commission published a proposal for the revision of the Shareholder Rights Directive, a recommendation on corporate governance reporting and a proposal for a Directive on single-member private limited liability companies. These proposals implement key actions identified in the Commission's communication on long-term financing of the European economy (also covered in this newsletter).

The proposed revisions to the Shareholder Rights Directive are aimed at enhancing long-term sustainability of listed companies in the EU and creating an attractive environment for shareholders. Key revisions include:

  • A "say on pay" policy requiring each listed company in the EU to put its remuneration policy to a binding shareholder vote at least every three years. Once the remuneration policy has been approved by shareholders, a company will not be permitted to pay remuneration to directors other than in accordance with that approved policy. Shareholders will also have the right to vote on a company's remuneration report, which describes how the remuneration policy has been applied in the last year. The vote on the remuneration report will be an advisory-only vote and not binding.
    • While no binding cap on executive remuneration at an EU level is proposed, the remuneration policy will need to set a maximum level for executive pay. Companies will also need to explain how their remuneration policy contributes to their long-term interests and sustainability, and how the pay and employment conditions of employees were taken into account when setting the policy including explaining the ratio between average pay of full-time employees and that of executives. The policy may in exceptional circumstances not refer to such a ratio but shall in that case explain why no such ratio has been included and what equivalent measures have been implemented. This proposal for new "say on pay" requirements would, at first sight, appear to be quite closely modelled on the UK's existing system of binding shareholder votes on director remuneration.
  • Stronger transparency requirements for institutional investors and asset managers on their investment and engagement policies. In particular, they will be required to develop a policy on shareholder engagement and publicly disclose its implementation and outcome.
  • Requiring shareholder approval of related party transactions representing more than 5% of the company's assets or transactions which can have a significant impact on profits or turnover.
  • Enhancing transparency of proxy advisors by requiring them to disclose certain key information related to the preparation of their voting recommendations and their management of conflicts of interest.
  • Imposing obligations on intermediaries to facilitate identification of shareholders and the exercise of their rights, especially in cross-border situations (44% of shareholders of EU listed companies are from another EU Member State or outside of the EU).

The recommendation on corporate governance reporting provides guidance to listed companies, investors and other interested parties, aimed at improving the overall quality of corporate governance statements published by companies.

Finally, the proposed Directive on single-member private limited liability companies introduces a new company law form, Societas Unius Personae (SUP), for the standardised creation of companies with a single shareholder across the EU. Member States will be required to provide for this in their national legislation. The Directive prescribes various requirements for SUPs, such as: they must be capable of being incorporated online; they can only ever have one member with one share (minimum value of €1) which cannot be split and they must pass solvency and balance sheet tests before making distributions.

The Commission's proposals are available at:

http://ec.europa.eu/internal_market/company/modern/index_en.htm

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.