The European Union (Shareholders' Rights) Regulations 2020 (the "Regulations") have transposed the second Shareholders' Rights Directive (EU) 2017/828 ("SRD II") into Irish law with effect from 30 March 2020. SRD II amends the earlier Shareholders Rights Directive 2007/36 the provisions of which were replicated in the Companies Act 2014 (the "Act") and the Regulations will further amend and supplement Part 17 of the Act.
SRD II aims to bolster shareholder involvement in the corporate governance of public companies which have a registered office in the EU and are listed on EU regulated markets ("investee companies"). This is achieved by:
- encouraging long-term shareholder engagement;
- enhancing transparency for institutional investors, asset managers and proxy advisers;
- improving oversight of directors' remuneration;
- regulating related party transactions; and
- facilitating shareholder identification.
The Regulations apply to (i) investee companies; (ii) intermediaries (entities situated in a Member State or elsewhere, that provide services, in relation to investee companies, of safekeeping of shares, administration of shares or maintenance of securities' accounts on behalf of shareholders or other persons); (iii) relevant institutional investors (including pension funds and life assurance companies) (iv) relevant asset managers (including MiFID firms providing portfolio management services, AIFMs, UCITS management companies and self-managed investment funds); and (v) relevant proxy advisors (entities that analyse, on a professional and commercial basis, the corporate disclosure and, where relevant, other information of listed companies with a view to informing investors' voting decisions by providing research, advice or voting recommendations that relate to the exercise of voting rights).
An investee company (other than a UCITS or alternative investment fund) may, in order to enable such company to identify its existing shareholders, do the following:
- communicate with the shareholders directly;
- facilitate the exercise of shareholder rights and shareholder engagement; and
- request from an intermediary information regarding shareholder identity that relates to shares held in it.
The investee company may also request the details of the next intermediary, if any, in the chain of intermediaries. An intermediary that discloses information regarding the identity of a shareholder in accordance with the Regulations will not be considered to be in breach of any restriction on disclosure of information imposed by contract or by any legislative, regulatory or administrative provision. This provision will not be effective until 3 September 2020.
To facilitate the exercise of shareholder rights, intermediaries which provide services in relation to shares held in an investee company must either make the necessary arrangements for the shareholder to exercise the rights attaching to such shares or exercise the rights attaching to such shares with the explicit authorisation and instruction of the shareholder and for the shareholder's benefit.
Where votes in a general meeting of the investee company are cast electronically, an investee company must send an electronic confirmation of receipt of the vote.
The Regulations require investee companies to establish a remuneration policy for directors with the shareholders having the right to vote on this policy at least once every four years. Subject to the investee company's constitution, this vote will be of an advisory nature only. Investee companies must also prepare a remuneration report which must be voted upon in general meeting.
Related party transactions
The Regulations also impose new rules in relation to the approval of related party transactions of investee companies. Further information can be provided upon request.
Relevant asset managers and institutional investors must develop and publicly disclose an engagement policy or explain why such policy has not been prepared. Relevant asset managers (on behalf of investors) and institutional investors (directly or through an asset manager) for the purposes of the Regulations are those that invest in shares traded on a regulated market. The engagement policy must describe how an asset manager / institutional investor:
- integrates shareholder engagement in its investment strategy;
- monitors investee companies on relevant matters, including strategy, financial and non-financial performance and risk, capital structure, social and environmental impact and corporate governance;
- conducts dialogues with investee companies;
- exercises voting rights and other rights attached to shares;
- cooperates with other shareholders;
- communicates with relevant stakeholders of the investee companies; and
- manages actual and potential conflicts of interest in relation to its engagement.
Relevant asset managers and institutional investors must also publicly disclose, on an annual basis, how its engagement policy has been implemented, and include in particular:
- a general description of voting behaviour;
- an explanation of the most significant votes taken;
- information on the use, if any, of the services of proxy advisors; and
- information on how it has cast votes in the general meetings of investee companies in which it holds shares.
Information regarding votes deemed insignificant due to the subject matter or the size of the holding in the Investee company in question can be excluded from this disclosure.
These disclosure obligations are applied on a 'comply-or-explain' basis whereby a clear and reasoned explanation as to why the disclosure obligation was not complied with can be provided instead.
Where an asset manager implements an engagement policy on behalf of a relevant institutional investor, and such implementation involves the casting of a vote by that asset manager on behalf of the relevant institutional investor, the relevant institutional investor must publicly disclose where the asset manager has published information regarding the casting of that vote.
Institutional investors and arrangements with asset managers
Relevant 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 include information detailing how such elements contribute to the medium to long-term performance of their assets.
Where an asset manager invests on behalf of a relevant institutional investor (whether on a discretionary client-by-client basis or through a collective investment undertaking) the relevant institutional investor must publicly disclose the specific information regarding its arrangement with the asset manager and if necessary, update this information annually. If any such information is not provided, the institutional investor must publically explain why such information has not been included in its disclosure.
Where an asset manager enters into an arrangement to invest on behalf an institutional investor, it must disclose annually to the institutional investor how its investment strategy and implementation of that strategy:
- complies with that arrangement; and
- contributes to the medium- to long-term performance of the assets of the institutional investor or of a fund managed by the institutional investor.
Where this information is publicly available, the asset manager shall not be required to provide that information to the institutional investor directly.
Relevant proxy advisors who apply a code of conduct must publicly disclose annually:
- a reference to the code of conduct; and
- a report on the code's application or explain why such disclosure has not been made and if a proxy advisor departs from certain aspects of such code this must also be disclosed.
Relevant proxy advisors must also disclose specific information in relation to the preparation of their research, advice and voting recommendations. Such information must be made publically available for at least a 3-year period from the date of publication. Relevant proxy advisors must also identify and disclose potential or actual conflicts of interest and the steps taken to eliminate, mitigate or manage such conflicts.
While the Regulations should be welcomed for providing for greater transparency and shareholder engagement, investee companies, intermediaries, relevant asset managers, institutional investors and proxy advisors will each need to review their policies and procedures to ensure compliance.
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.