The legislative process to amend the Shareholder Rights Directive (2007/36/EC) (the Directive) is finally drawing to a close: it has been in progress formally and informally for almost five years.
On 9 December 2016, under the Slovak Presidency, the EU's Committee of Representatives endorsed the text of the revisions to the Directive, intended to strengthen shareholders' engagement in big European companies. The compromise that has been reached means that the Directive will be revised and put to the plenary vote in the European Parliament in March 2017. Despite its decision to leave the European Union, Britain is likely to still have to implement this Directive once it is in force as this will pre-date the timing of any UK exit.
Back in May 2014 we highlighted the impact the revisions to the Directive will have on companies and fund managers who control the voting rights for significant holdings in such companies. The comprise text, whilst less ambitious than the original, will nevertheless impact on corporate governance.
Remuneration of directors
Shareholders will have the right to vote on the remuneration policy of the directors in their company. Remuneration policy will also have to be publicly disclosed. The amendments to the Directive leave room for flexibility on this point as to implementation and are actually less substantial than existing national law in England and Wales set out in the Companies Act 2006 and the Enterprise and Regulatory Reform Act 2013, or, for instance, Loi Sapin 2 in France relating to listed companies' directors' remuneration . This demonstrates a move towards harmonisation of standards across EU member states.
The publication of the UK Government's Corporate Governance Reform Green Paper1 (the Green Paper) demonstrates that the UK has a legislative resolve to continue to tighten the UK regime and include proposals for annual binding votes on remuneration.
Identification of shareholders
The Directive will ensure that companies are better able to identify their shareholders and obtain information on shareholder identity with the aim of facilitating shareholder rights and engagement with the company. Listed companies will therefore have the right to identify their shareholders in order to directly communicate with them. Member States may, however, impose a minimum shareholding threshold under which shareholder anonymity is possible. We note that UK public companies are already subject to such disclosure obligations under Part 22 of the Companies Act 2006.
Facilitation of shareholder rights
Intermediaries will have to facilitate the exercise of rights by the ultimate investors. The final compromise text enables intermediaries to facilitate the exercise of rights by these people, whether they exercise the rights themselves or nominate a third person to do so.
Related party transactions
As noted in In Counsel way back in February 2013, the Commission wants to see stronger approval rights of related party transactions across the EU. The originally wide definition of 'related party' has been tempered slightly and now follows international accounting standards, which is helpful for consistency. Under the revised Directive related party transactions will be subject to a vote by the shareholders or the board of directors, however, the final compromise text allows Member States the freedom to define which transactions are subject to the proposed regime. Nonetheless, in the UK, material listed company transactions with related parties (as defined in the Listing Rules) already require shareholder approval under the Listing Rules and company law requires shareholder approval of material transactions in any event. Mandatory board approval of transactions with board directors adds little as that is the regular source of the conflict of interests.
How will this impact listed companies and corporate governance in the UK?
The UK Government's Green Paper, published on 26 November 2016, already proposes significant reforms to executive pay frameworks in quoted companies and envisages greater shareholder involvement. Britain remains ahead of the curve in terms of reforms to corporate governance and, in terms of how the Government will seek to transpose this Directive into domestic law. Whilst some technical amendments may need to be made to accommodate the proposals, it looks unlikely that any UK departure from the European Union will hamper the objectives of the Directive, given that the Green Paper embraces similar proposals to increase shareholder engagement and create greater transparency over directors' remuneration. Listed companies will, however, have to keep a watchful eye on the implementing law in order to satisfy the greater obligations to facilitate and protect shareholder rights and improve transparency that these reforms will ultimately entail.
What else should listed companies be aware of?
We noted in our Autumn 2016 In Counsel that the Commission is in the process of amending the Proposed Prospectus Regulation, which is intended to entirely replace the Prospectus Directive (2003/71). Since our last update, informal meetings have been held (8 December 2016) and the European Commission announced that the European Parliament, the Council and the Commission have reached an informal agreement on the text of the Proposed Prospectus Regulation which will make it easier for smaller companies to raise money on the capital markets.
1. For more information on the Corporate Governance Green Paper, please see "The future direction of corporate governance" by Edward Craft
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