In April, the Council of the European Union adopted a Directive that updates the European Parliament and Council’s current Directive 2007/36/EC, on the rights of shareholders, the draft of which we analysed in Issue 4 of Progreso.

The new Directive aims to strengthen the active and transparent engagement of shareholders in companies that have their legal domicile in a member state and that are listed on a regulated stock market, located or operated in a member state.

In order to encourage shareholder participation and increase transparency in organisations, it sets new requirements, affecting:

• Shareholder identification
• Intermediaries
• Engagement policies
• The transparency of institutional investors, asset managers and proxy advisors
• The remuneration policy for directors
• The transparency and approval of related-party transactions

Shareholder identification

Companies will have the right to identify their shareholders in order to be able to communicate directly with them, although member states may exclude the requirements to identify shareholders where these hold less than 0.5% of the company.

Information about shareholders should include, at least:

• Name and contact details of the shareholder or their unique registration/identification number, in the case of shareholders who are legal persons;
• Number of shares held;
• If the company so requests it: categories/types of shares held or date on which these were acquired.

The shareholder’s personal information will be stored for 12 months at the most from the date when the person is known to have stopped holding shares.

Intermediaries

The aim of the new Directive is to improve information transfer between shareholders and intermediaries, so that the former may exercise their rights effectively, specifically the right to participate and vote at the Annual General Meetings.

It stipulates that member states should require intermediaries to transfer to shareholders in a timely manner all information that they need to exercise the rights deriving from their shares, or otherwise a notification that this information can be found on the company website.

In the case of online voting, shareholders will be able to get online confirmation that their vote has been received, and member states may set a time limit for requesting this information, no later than 3 months after the vote.

Continuing the commitment to transparency, intermediaries must publicly display their fees (including costs and fees) for each of the services they provide, and member states may forbid the charging of fees for these services when they transpose this directive into their national body of law.

The Directive will also be applicable to intermediaries who do not have their legal domicile or headquarters in the European Union.

Policy on shareholder engagement

The Directive aims to encourage shareholder engagement, as it helps to improve companies’ financial and non-financial performance.

It makes specific reference to the impact of institutional investors and asset managers on the long-term strategy and performance of companies. The Directive requires them to be more transparent in their attitude towards the involvement of their shareholders and to develop and make public their policy of engagement, which involves reporting on:

• How they monitor their investee companies: strategy, financial and non-financial performance, capital structure, social and environmental impact, corporate governance, etc;
• How they interact with their investee companies:
• How they exercise their voting rights and other rights that come with the shares;
• How they communicate with shareholders in their investee companies;
• How they handle conflicts of interest.

The policy of engagement must be publicly available on the company website.

Transparency

Institutional investors and asset managers will also have to post information on their websites about their investment strategies,which must be consistent with the profile and duration of their liabilities, and contribute to the medium and long term performance of their assets. This information should be updated annually.

If proxy advisors are involved, they will also be subject to a code of conduct and will have to publish their voting recommendations for the annual general meetings of the previous 3 years, so that institutional investors choose their services with knowledge of their previous track record.

Remuneration Policy

The Directive requires shareholders to approve their remuneration policy for their directors at least every 4 years, although member states have discretion to decide whether this opinion is binding or not.

The policy must be published immediately after the general meeting, and should contribute to the institution’s strategy, its interests and its long-term sustainability.

Furthermore, directors’ performance must be assessed using financial and non-financial criteria, including environmental, social and governance factors.

The complete description of directors’ remuneration may be outlined, if member states so decide, in a remuneration report, which should list all emoluments, monetary and in kind. The member states will ensure that this report is subject to an advisory vote at the next annual general meeting, explaining during the same how the vote has been taken into account. Once approved, it should be made available to the public on the company website, and should be free of charge for at least 10 years.

Related-party transactions

The member states must ensure when transposing the law that companies publicly disclose their related party transactions, including a minimum of information about the nature of the relationship, the parties involved and any other information deemed necessary. The disclosure may be accompanied by a report analysing whether the transaction is fair and reasonable from the point of view of the company and its shareholders, which must be drawn up by: i) an independent third party; ii) the institution’s board of directors or supervisory body, or iii) the audit or other committee, the majority of whose members must be independent.

These transactions will be submitted for the approval of shareholders or the company’s administrative or supervisory body.

Measures and sanctions

The Directive establishes penalties that are applicable in the event of non-compliance with the national provisions approved by virtue of the same, which should be effective, proportionate and dissuasive. Member states should communicate these to the European Commission within two years of the Directive coming into law, and also notify the Commission in the event of any subsequent modifications to the same.

Compliance and entry into law

Member states will have a maximum period of 2 years in which to transpose into their legislation the provisions of this new Directive, which came into effect 20 days after publication in the Official Journal of the European Union.