On 4 October 2019, a Belgian legislative proposal implementing the Shareholders' Rights Directive II (SRDII)1, was submitted to the Chamber of Representatives. This EU directive aims to encourage long term shareholder engagement in companies and amends the previous Shareholders' Rights Directive (SRD) which came into force in June 2007.
This newsletter outlines the scope of and the new rules introduced by the SRDII, as well as the Belgian legislative proposal implementing it.
The Scope and key dates
The SRDII's main objectives are to encourage the long-term engagement of shareholders in listed companies, reinforce shareholders' rights and increase the transparency of institutional investors, asset managers and proxy advisors.
The SRDII came into force in September 2018 and should have been implemented by the Member States by June 2019. Further rules relating to shareholder identification, transmission of information and voting are due to be implemented by 3 September 2020 at the latest.
With a rather extensive scope, the SRDII applies to:
- companies with registered office in the EU and admitted to trading on a regulated market in the EU;
- all shareholders of such companies regardless of location (including outside the EU);
- all intermediaries, institutional investors, asset managers and proxy advisors in the custody chain of such companies (including those outside the EU).
As a consequence, the SRDII may have an extra-territorial impact on shareholders and intermediaries, including those beyond the European Union and the European Economic Area.
Changes to SRDI
The SRDII introduces changes to the first SRD (Directive 2007/36/EC) which entered into force in June 2007, which can be grouped in four sets of rules:
- Identify shareholders and promote shareholders' rights – the SRDII enables listed companies to identify their shareholders in order to make direct communication with them when possible. This chapter also covers transmission of shareholders' meeting and voting information through the custody chain and to promote the exercise of shareholders' rights.
- Enforce more shareholder involvement – the SRDII imposes certain transparency obligations on the institutional investors' and asset managers' engagement policy and investment strategy. Proxy advisors are also targeted and will be obliged to publish a code of conduct.
- "Say-on-pay" or the influence of the shareholders' meeting on the remuneration of directors in listed companies.
- New rules on related party transactions are also introduced.
Let's take a closer look at how the Belgian proposal intends to implement these four sets of rules in the existing Belgian legislation.
Belgian legislative proposal
The proposal opts for a faithful implementation of the SRDII rules into the existing Belgian legislation. In situations where the SRDII leaves room for freedom of choice, consistency with previous choices of the legislator has been sought.
The proposal seeks to amend the following legislation:
- the new Belgian Companies and Associations Code (the BCAC);
- the Act of 2 May 2007 on the disclosure of major shareholdings in issuers whose shares are admitted to trading on a regulated market and laying down miscellaneous provisions;
- a number of financial sector regulations.
Implementation of the four sets of new rules
1. Shareholders' identification and transmission of information
The SRDII empowers the listed companies to identify their shareholders and requires intermediaries to play a role in that identification process. The Belgian legislative proposal limits the identification obligation to shareholders holding more than 0.5% of the voting rights of the company.
Intermediaries (investment firms, credit institutions and central securities depositories who provide services of safekeeping and administration of shares or maintenance of securities accounts on behalf of shareholders or other persons) may be requested by listed companies to collect information on shareholders' identity. They are also obliged to transmit this information to the company. It should be noted that it is the sole responsibility of the company to ensure that the use of the information collected is limited to information relating to shareholders holding a certain percentage of the shares or voting rights. Intermediaries may therefore respond to a request for identification without verifying whether the relevant shareholders have a holding that exceeds the 0.5% threshold.
The Belgian legislative proposal is also aiming at improving the listed companies' communication to their shareholders, particularly the transmission of information along the chain of intermediaries. Moreover, the intermediaries will be required to facilitate the exercise of shareholder's rights. Those rights include the right to participate and vote in general meetings, financial rights such as the right to receive the distributions of profits, or the right to participate in other corporate events initiated by the issuer or by third parties.
It should be noted that the Commission has approved the Implementing Regulation (EU) 2018/1212 of 3 September 2018 (the "Implementing Regulation") that provides standardized formats of data and message structures in transmissions and further regulates the identification process and information flow through the custody chain. The Implementing Regulation sets out the minimum requirements on implementing the provisions of Directive 2007/36/EC of the European Parliament and of the Council regarding shareholder identification, transmitting information and facilitating the exercise of shareholders rights.
To give those affected some time to conform to the new rules – which will be an elaborate exercise – the deadline for implementing these rules is 3 September 2020. That is three years after the Implementing Regulation was approved.
2. Transparency and shareholder's involvement of institutional investors, asset managers and proxy advisors
These rules apply to institutional investors, asset managers and proxy advisors and will be inserted in various financial sector regulations. The SRDII defines:
- "institutional investors" as
(i) insurance and reinsurance undertakings carrying out activities relating to life insurance, and
(ii) institutions for occupational retirement, to the extent that they invest directly or through an asset manager in shares traded on a regulated market.
- "asset managers" as
(i) credit institutions,
(ii) investment firms providing portfolio management services to investors,
(iii) AIFMs (alternative investment fund managers), and
(iv) UCITS managers, to the extent that they invest in shares traded on a regulated market on behalf of investors.
- "proxy advisors" as
- a legal person that analyses, on a professional and commercial basis, the corporate disclosure and, where relevant, other information concerning listed companies with a view to informing investors in relation to their voting decisions by providing research, advice or voting recommendations that relate to the exercise of voting rights.
The scheme to be implemented contains the following components:
- An engagement policy on a comply-or-explain basis. This policy must describe how asset managers and institutional investors integrate shareholders' engagement in their investment strategy.
The policy must describe
(i) how they monitor investee companies on relevant matters (including strategy, financial and non-financial performance and risk, capital structure, social and environmental impact, and corporate governance);
(ii) how they conduct dialogues with investee companies;
(iii) how they exercise voting rights and other rights attached to shares;
(iv) how they cooperate with other shareholders;
(v) how they communicate with relevant stakeholders of the investee companies; and
(vi) how they manage conflicts of interests in relation to their engagement.
- Disclose how engagement policy is implemented. Institutional investors and asset managers are each year required to publicly disclose how their engagement policy has been implemented, including a general description of voting behaviour, an explanation of the most significant votes and the use of the services of proxy advisors. They must publicly disclose how they have cast votes in the general meetings of companies in which they hold shares.
- Disclose investment strategy particulars. Institutional investors must publicly disclose how the main elements of their equity investment strategy are consistent with the profile and duration of their liabilities, in particular long-term liabilities, and how they contribute to the medium to long-term performance of their assets. Where an asset manager invests on behalf of an institutional investor, the institutional investor must also publicly disclose certain information regarding its arrangement with the asset manager (e.g., how the arrangement incentivises the asset manager to align its investment strategy and decisions with the profile and duration of the liabilities of the institutional investor, in particular long-term liabilities), or give a clear and reasonable explanation why the arrangement does not contain one or more of such elements (comply or explain). The information must be updated annually unless there is no material change.
- Asset managers' disclosure. Asset managers must disclose, on an annual basis, to the institutional investors - with whom they have entered into an arrangement - how their investment strategy and implementation complies with that arrangement and contributes to the medium to long-term performance of the assets of the institutional investor or of the fund.
- Proxy advisors' compliance. Proxy advisors are also required to comply with certain transparency obligations, in particular in relation to the code of conduct they abide by.
3. Information regarding remuneration
The third set of rules relates to the remuneration report. The BCAC already imposes the obligation on listed companies to draw up a remuneration report and submit the report to the general shareholders' meeting for approval. The SRDII states certain obligations as to the content of remuneration reports. In particular the information regarding remuneration will now have to be provided individually for directors, members of the management board and of the supervisory board, and persons in charge of day-to-day management. For other senior managers, the information must be published on an aggregate basis.
Another novelty is the fact that the remuneration policy, which must be outlined in the remuneration report, will be submitted to the general meeting for approval, as well as each time a material change is proposed and at least every four years. Deviations from this policy are only allowed in clearly defined circumstances. If the remuneration policy is not approved, a new proposal has to be submitted to the general meeting of shareholders. Fortunately, this procedure does not paralyse the operation of the company, as the persons in charge of the management of the company can be remunerated in accordance with the existing practice until the new remuneration policy is approved.
4. Related party transactions
The last set of rules concerns related party transactions which are similar to the existing rules in Articles 7:97 and 7:116 of the BCAC. However there are important changes, such as:
- the use of the definition of "related party" (IAS 24) instead of "related person" (which has a broader scope and also covers family, persons being part of the key management personnel and persons exercising a significant influence);
- introduction of the obligation to publicly announce related party transactions at the latest at the time of conclusion of the transaction (press release);
- the SRDII not only targets the transactions of the listed company itself but also those of its subsidiaries; and
- the unlisted subsidiaries of the listed company may not, without the prior approval of the board of directors of the listed company, make decisions or carry out transactions relating to their relations with a related party.
The Belgian legislative proposal was submitted to the Chamber of Representatives on 4 October 2019. In the meantime, the advice of the Council of State of 12 December 2019 was published which contains a number of technical comments and suggestions. It remains to be seen what the further process will look like and whether the legislative proposal will obtain the necessary majority.
It is anticipated that the rules on shareholder identification and transmission of information will come into effect on 3 September 2020, which is the deadline imposed on Member States for implementing the SRDII. The other sets of rules should normally come into effect ten days after publication of the implementing Act in the Belgian State Gazette.
1 Directive (EU) 2017/828 of the European Parliament and of the Council of 17 May 2017 amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement
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.