Europe agrees new directive to introduce say on pay, govern shareholder intermediaries and establish rules for related party transactions
The Council of the European Union has announced that political agreement has been reached on a new directive to establish requirements to encourage shareholder engagement in the long term and increase transparency. Most of the proposed measures will have limited impact on UK listed companies, as they are similar to existing UK measures.
Who will the rules apply to?
The directive will amend the existing EU Shareholder Rights Directive (Directive 2007/36/EC). The Shareholder Rights Directive applies to companies which have their registered office in a Member State and whose shares are admitted to trading on a regulated market situated or operating within a Member State. Accordingly, companies incorporated outside the EU with shares listed on an EU regulated market will not be subject to the rules (although equivalent rules may be applied by the listing rules in the country of listing). Similarly, companies incorporated in a Member State with shares listed on a market which is not an EU regulated market will not have to comply with the rules.
The measures included in the new directive include:
Shareholders will have the right to vote on the directors’ remuneration policy. The policy should contribute to the overall business strategy, long-term interests and sustainability of the company and should not be linked to short-term objectives. The remuneration policy will also have to be publicly disclosed without delay after it is voted on by shareholders at the general meeting.
Identification of shareholders
The new directive will ensure that companies are able to identify their shareholders and to obtain information on shareholder identity from any intermediary who holds that information. Member states may choose to implement a threshold of a minimum holding of 0.5% of shares or voting rights before a company can request shareholder identification.
Facilitation of exercise of shareholder rights
Member States will have to ensure that the exercise of shareholders’ rights, including the right to participate and vote in general meetings, are facilitated by intermediaries.
Related party transactions
The requirements for related party transactions are less onerous than those in Listing Rule 11 for premium listed companies, but will impact standard listed companies (who are not subject to LR 11 but will be subject to these European rules). Premium-listed companies will also need to consider whether the different definition of related party (by reference to accounting standards) means that more transactions are within scope.
For any material transaction (to be defined by each Member State) between a listed company and a related party:
the transaction must be announced;
Member States may require the announcement to be accompanied by a report from an independent third party, the board or a committee of independent directors that the transaction is fair and reasonable from the perspective of the company and the non-related shareholders;
the transaction must be approved by shareholders or the board. If approved by the board, Member States may require that shareholder approval is needed as well.
Transparency for institutional investors, asset managers and proxy advisers
Under the new directive, institutional investors and asset managers must either develop and publicly disclose a policy on shareholder engagement, or explain why they have chosen not to do so. Proxy advisers will be subject to transparency requirements and will be subject to a code of conduct.
The final text will need to be endorsed by the European Parliament and then by the Council of the EU. It will then be published in the Official Journal of the EU and Member States will have to transpose it into national law two years after that. Although the UK may not be part of the EU by the time of that deadline, we do not yet know whether the UK will continue to apply this and other European legislation.