The New EU Shareholder Rights Directive 2017/828 EC (the “Directive”) was adopted by the European Parliament on the 14 March 2017 and was further adopted by the European Council on the 3 April 2017. The Directive has been provided as an amendment to Directive 2007/36 EC, the Shareholder Rights Directive which was enacted on the 11 July 2007 and which set out rules on the exercise of certain rights of shareholders in their respective listed companies.
The Financial crisis of 2008 has revealed significant deficiencies in corporate governance, partly due to insufficient shareholder engagement. To this day individual investors continue to face many obstacles in exercising their voting rights and actively engage in the governance of the companies they invest in, especially cross border. Therefore, there was a need for Directive 2007/36 EC to be amended to improve shareholder engagement depending on key delegated acts to be adopted by the European Council. All countries which are part of the EU are expected to transpose this Directive by June 2019.
Main aim of the Directive
A significant part of transferable shares in companies are managed through intermediaries due to legal or technical reasons and direct interaction between shareholders and the investee company is often costly, ineffective or impossible, particularly cross border.
A revision of the Shareholder Rights Directive has been in the making for some time now. On 9 December 2016 the EU Presidency which Malta held at the time, and the EU Parliament agreed on the final version of the Directive.
The Financial crisis revealed that shareholders in many cases supported managers’ excessive short-term risk taking. The Directive has been enacted so as to address these circumstances and encourage long term engagement and increase transparency by shareholders of listed companies.
The Directive has been also enacted to address the following main shortcomings:
(i) Short-termism in the investment universe;
(ii) Insufficient oversight of Directors’ remuneration;
(iii) Related Party Transactions;
(iv) Identification of Shareholders;
(v) Facilitation exercise of shareholders’ Rights;
(vi) Transmission of information; and
(vii) Transparency for institutional investors, asset managers and proxy advisors who consult to investors on how they should vote on the range of matters that require shareholder approval.
Short-termism within the investment universe played a fundamental role which brought about the revision of Directive 2007/36 EC. Long term engagement is required for the investment universe to operate. The long term investment of shareholders within their listed companies is of utmost importance. Hence the Directive provides for further protection of the shareholder within a listed company, through the enforcement and safeguard of their rights as shareholders.
Insufficient oversight of Directors’ remuneration
Through the Directive, Shareholders will now be entitled to the right to vote on the Remuneration Policy (the “Remuneration Policy”) of the directors of the Company, at the general meeting of the Company. Therefore, a company shall adopt a Remuneration Policy which has to contribute to the business strategy, include long term interests and the sustainability of the company. The Remuneration Policy shall also include an assessment of the Directors’ performance, through both financial and non-financial performance criteria.
Importantly, the Remuneration Policy shall include a Remuneration report which shall include all benefits of all kinds on an individual basis and the way forward of remuneration within the company.
Related Party Transactions
This provision has been added to the Directive because related party transactions may result in prejudice to companies as well as shareholders of the companies. A related party transaction is a business deal or arrangement between two parties who are joined by a special relationship prior to the deal. Such related party transactions could benefit related parties at the expenses of the companies in relation.
Therefore the Directive holds that any related party transactions are subject to the approval of either the shareholders, by the administrative board or by the supervisory board of the company to provide the adequate protection to the company.
The shareholders, administrative or supervisory board shall approve material in relation to any related party transaction. The Directive imposes an obligation in order to ensure transparency, to announce publicly material transactions at the time of conclusion of the transaction, with all the information needed to assess the fairness of the transaction.
Identification of Shareholders
With the implementation of the Directive, Companies will be able to identify their shareholders and to obtain information on shareholder identity from any intermediary in the chain that holds the information.
Member States may decide that companies within their borders are only allowed to request identification with respect to shareholders holding more than a certain percentage of shares or voting rights which will not exceed 0.5%. If such a high threshold of 0.5% is set by Member States, only a very small minority of shareholders of EU companies will be identified.
Facilitation exercise of shareholders’ rights
The Directive provides for the obligation of intermediaries to exercise and emphasise shareholders rights. The Directive further holds that there should be a facilitation of the connection between the shareholder and the listed company. The shareholders’ right to exercise his rights through an intermediary by means of a proxy shall also be safeguarded.
Transmission of information
This provision within the Directive obliges companies to disclose clear, comparable and comprehensive information on the fundamental changes within a company. Should anything fundamental is needed to be changed within a listed company, then the shareholders of that listed company should be presented with as much information as possible, immediately.
On the other hand, the Company then has a right to access all information it requires on the shareholder.
Therefore this provision acts as a two-partite, whereby there is full disclosure from both the Company towards the shareholder and vice versa.
Transparency for institutional investors, asset managers and proxy advisors
In this Directive institutional investors and asset managers are under the obligation to disclose the shareholder Engagement Policy (the “Policy”), as well as provide a description of such Policy.
Should they decide not to publicly disclose such Policy, they should provide a valid reason as to why such information has not been disclosed.
This Policy shall include details as to how shareholder engagement is integrated in their investment strategy and the engagement activities that they shall carry out.
The current Maltese context already holds shareholder empowerment within listed companies. There are a lot of similarities between the Companies Act, CAP 386 of the Laws of Malta and the Directive, and therefore the impact of this Directive in Malta has not been much, as it was already founded within our Corporate Law.
Malta shall include the following within the Maltese legislation following the implementation of the Directive:
(i) Cross-border voting;
(ii) Notice and information to be given prior to each and every general meeting, giving the shareholder sufficient time, a minimum of twenty one (21) days prior to the holding of such meeting;
(iii) Providing the shareholder the right to put items on the agenda and to table draft resolution, which shall not be limited to general meetings;
(iv) Topics brought up for discussion should be accompanied by a justification or a draft resolution to be adapted;
(v) Approve the mandatory remuneration policy and report, giving the shareholder a right to ‘say on pay’; and
(vi) Ask any questions in relation to the agenda and overall questions having the same context.
The Directive shall bring about more formality in Malta and shall bind listed companies to abide by the listed duties and obligations. Hence, the Directive has formalised what the Maltese system has been following in principle.
In Malta we follow a Code of principles of Good Corporate Governance which gives a clear and comprehensive picture to the Directive.
The Directive shall provide for a more harmonious mechanism within the investment universe, whereby the shareholders play a fundamental part within a listed company. Shareholders shall now be protected by this binding directive, as well shall enjoy further inclusion in the running of the company.