EU Directive to protect shareholders rights and encourage transparency

The European Council (EC) recently adopted a directive aimed at reinforcing corporate governance through shareholders' engagement and proxy regulation in large European companies. 

“The directive will encourage transparent and active engagement by shareholders of listed companies by reviewing the current Shareholders' Rights Directive (2007/36/EC)”, the EC said. “The financial crisis revealed that shareholders in many cases supported managers' excessive short-term risk taking. The revised directive is intended to redress this situation and contribute to the sustainability of companies, which will result in growth and job creation”.

The new directive forms specific requirements in order to boost shareholder long-term engagement and intensify transparency. Member states will have up to two years to integrate the new provisions into their national legislations. The new requirements will be published in the EU's Official Journal. 

These requirements apply to: 

• oversight over directors’ remuneration
• shareholders identification and rights facilitation
• transmission of information
• transparency for institutional investors, asset managers and proxy advisors
• related party transactions

Directors' remuneration 

Shareholders will have the right to vote on the remuneration policy of the directors of their company based on financial and non-financial performance criteria, including environmental, social, and governance factors that should elaborate to a company’s long-term business strategy, long-term interests and sustainability and should not be associated to short-term goals, the EC said. “Remuneration policy will also have to be publicly disclosed without delay after the vote by the shareholders at the general meeting”. 

Shareholders identification and rights facilitation 

The directive also aims more transparency further to the identifications of direct and indirect shareholders obtaining information regarding their identity from any intermediary in the chain that holds the information. The purpose is to facilitate the exercise of shareholder rights, including participation and voting at a general meeting and their engagement with the company. Furthermore, intermediaries have the obligation to deliver to shareholders, in a standardized and timely manner; disclose all information required and any charges related to the new rules.

“Member states may provide that companies in their territory 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%”, the EC said. 

Transparency for institutional investors, asset managers and proxy advisors 

The new directive requires assist institutional investors and asset managers to be more transparent in their approach to shareholder engagement. They will have either to develop and make public a policy on shareholder engagement or explain why they have chosen not to do so. Moreover, institutional investors and asset managers, who are often in the role of proxy advisors, use the services to provide research, advice and recommendations on how to vote in general meetings of listed companies and influence on voting behavior of investors, the EC said. They also play an important role in corporate governance by contributing to a reduction in the costs of the analysis related to company information. Considering their importance, proxy advisors will be subject to transparency requirements and to a code of conduct. 

“This policy will describe how they integrate shareholder engagement in their investment strategy and the engagement activities they carry out”, the EC said. “It will also include policies to manage actual or potential conflicts of interests, in particular in a situation where the institutional investors or asset managers or their affiliated undertakings have significant business relationship with the investee company”. 

Related party transactions 

The new requirements provide for the approval of material transactions with related parties should be submitted to approval by the shareholders or the administrative or supervisory body to provide adequate safeguard for the interests of the company and so avoid giving the related party the opportunity to appropriate value belonging to the company, the EC said. “Companies will have to announce publicly material transactions at the time of the conclusion of the transaction at the latest, with all the information needed to assess the fairness of the transaction”.