On 20 May 2017, the text of Directive 2017/828, amending Directive 2007/36/EC, of the European Parliament and of the Council of 11 July 2007, as regards the encouragement of long-term shareholder engagement has been published. We analyse the main developments.
The European Institutions agreed to undertake the review of Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement and transparency in listed companies. Following the financial crisis, the inadequate follow-up and involvement of shareholders in listed companies were detected, as well as an excessive risk assumption encouraged by institutional investors, focused mostly on short-term returns.
As a result of this review, among other elements, Directive 2017/828 (the “Directive“) aims to eliminate the weaknesses of shareholders’ control of certain decision-making processes, to encourage their long-term engagement, and to improve their supervision of the management body. According to recital 14 of the Directive, Greater involvement of shareholders in corporate governance is one of the levers that can help improve the financial and non-financial performance of companies.
Among the measures contemplated by the Directive, those with a particular interest are those aimed to facilitate the identification of the shareholders and the exercise of their rights as such, in a field as complex as the relations between shareholders of different nationalities and the chains of intermediaries between these and listed companies. In order to know how these measures are going to be articulated in practice, we will have to wait a little longer, due to the requirements of the Directive to the Commission in order to adopt, by 10 September 2018, the implementing acts specifying the requirements for the transmission of information and voting rights exercise, format, timing, security and interoperability. From the date those acts where implemented, Member States will have 24 months to adjust their internal legislation.
It should be mentioned that the Directive also includes important measures that aim to strengthen the control and transparency of the remuneration of directors, and in transactions with related parties in the different Member States. However, these issues were already addressed in the reform of the Spanish Company Act, carried out by Law 31/2014 of 3 December, amending the Spanish Company Act for the improvement of corporate governance which is, in some aspects even more demanding than the Directive. Therefore, it is not foreseeable that its transposition will imply relevant modifications of the Spanish legislation in these matters.
Thus, the amendments to Directive 2007/36/EC have the ultimate objective of contributing to the long-term sustainability of European companies and to the proper functioning of the business network, the main ones in Spain being as follows:
1. Facilitation of the exercise of shareholders’ rights
It has been understood that shareholders of listed companies must be committed and participate in the company decisions to improve productivity and development. To that end, the Directive requires Member States to ensure that intermediaries facilitate the exercise of shareholder rights, including the right to participate and vote at general meetings, by taking the necessary steps to ensure that the shareholder, or a third party appointed by the shareholder, may exercise the rights themselves.
In addition, it is required that shareholders have the right to be informed that their vote has been taken into account and that it has been validly registered and accounted for by the company, so that it is actually valid and effective.
2. Transmission of information
The new Directive aims to improve the transmission of information through the chain of intermediaries, who are required to facilitate and expedite the transmission of information between companies and shareholders so that they can take decisions and cast votes in a reasoned manner, in order to promote their long-term engagement in the company’s operations, and to facilitate the exercise of their rights. This obligation also applies to third-country intermediaries who provide services in respect of shares in companies which have their registered office in the European Union and whose shares are admitted to trading on a regulated market situated or operating in the Union.
3. Identification of shareholders
In order to achieve the above objectives, Member States must ensure that listed companies have the right to identify their final shareholders in order to be able to carry out an effective and direct communication between those shareholders and the company itself. It is understood to be strictly necessary in situations of cross-border shareholders and in cases where electronic means are used. Also, intermediaries are obliged, at the request of companies, to provide information on the identity of the final shareholders.
However, the Directive regulates an exception in which Member States may exclude shareholders with a small number of shares in the company from the identification obligation, (never higher than 0.5%).
4. Transparency of institutional investors, asset managers and proxy advisors
Member States should ensure that institutional investors and asset managers develop and publish an engagement policy that describes how they integrate the shareholder’s engagement in their investment policy and disclose on an annual basis how the policy has been implemented. In addition, they must also give a reasonable explanation if they do not fulfil those requirements.
On the other hand, proxy advisors are required to publish a code of conduct and are subject to enhanced transparency requirements given the influence that their recommendations may have on investor behaviour.
The implementation deadline for transposition of the Directive expires on 10 June, 2019.
As an exception to the foregoing, as indicated at the beginning of this article, for the transposition of articles 3a (“Identification of shareholders”), 3b (“Transmission of information”) and 3c (“Facilitation of the exercise of shareholder rights”) of the Directive, Member States shall have a period of 24 months from the date of the adoption by the Commission (by 10 September 2018 at the latest) of the execution acts specifying the requirements regarding information transmission and voting rights, its format, deadlines, security and interoperability.