Revision of the Shareholders Rights Directive: it’s a long way home
The Calvary of the Commission’s proposal for the revision of the shareholders’ rights directive continues. On May 7, 2015, a divided European Parliament JURI Committee approved an amended text of the Commission’s proposal by a 13-10 majority. The EP plenary voted the proposal on July 8, with amendments to the text approved by JURI.
Previous episodes: the Commission’s proposal.
The proposal for a revision of the Shareholders Rights Directive (2007/36/CE) dates back to April 2014, when the Commission proposed, to the European Parliament and the Council, an amendment to the Directive in order to overcome certain shortcomings in the corporate governance of European listed companies. More specifically, and in the Commission’s own words, the object of the proposal is “to contribute to the long-term sustainability of EU companies, to create an attractive environment for shareholders and to enhance cross-border voting by improving the efficiency of the equity investment chain in order to contribute to growth, jobs creation and EU competitiveness”. Furthermore, the proposal also “contributes to a more long-term perspective of shareholders which ensures better operating conditions for listed companies”. With this in mind, the proposal focuses on five specific goals:
- increase the level and quality of engagement of asset owners and asset managers with their investee companies;
- create a better link between pay and performance of company directors;
- enhance transparency and shareholder oversight on related party transactions;
- ensure reliability and quality of advice of proxy advisors;
- facilitate transmission of cross-border information (including voting) across the investment chain in particular through shareholder identification.
On this basis, the Commission advances, inter alia, the following proposals for amendment:
- Institutional investors and asset managers should be required to develop and disclose to the general public a policy on shareholder engagement and, on the basis of the idea of comply or explain, disclose how it has been implemented and the results achieved. They should also disclose how their investment strategy as to equity investments aligns with the long-term valorisation of the assets in which they are invested;
- Listed companies should publish a remuneration policy and a remuneration report and submit them to a shareholder vote. The decision as to the actual remuneration to be paid would stay, on the basis of the remuneration policy, with the board;
- Member States should introduce specific regulation of related party transactions for listed companies. The rules should provide that for major transactions the board of directors has to seek shareholder consent in order to proceed;
- Proxy advisors should implement measures as to guarantee the accuracy and reliability of their voting recommendations, and should disclose key information related to their recommendation. They should also disclose to their clients and to the issuer concerned any conflict of interest or business relationship that may influence their voting recommendations;
- Listed companies should be able to identify their shareholders. Intermediaries should facilitate the exercise of shareholders’ rights, including the participation to the general meeting.
The JURI’s position
Upon referral by the Parliament, the Committee on Legal Affairs (JURI) adopted a draft report on the proposal on May 7, 2015, with 13 votes in favour and 10 votes against. EPP, ECR and ALDE groups have voted against the report and advanced a request to the Council of Presidents to suspend the mandate for trilateral negotiations with the Council and the Commission. Rapporteur for the proposal is Sergio Cofferati of S&D. Mr Cofferati has been a key exponent of the Italian left-centre Partito Democratico and long-time Chief Secretary of the major Italian Union, CGIL.
Compared to the original Commission’s proposal, the text adopted by the JURI Committee is innovative in a number of respects.
First, the Committee’s proposal is to apply the Directive not only to listed issuers, but also to large companies and large groups whose shares are not listed in regulated markets, given the impact that these companies have on the economy.
Second, while acknowledging the importance of shareholders’ involvement in companies’ governance, the Committee’s proposal fosters measures to ensure greater engagement of all stakeholders, and particularly employees, local authorities and civil society.
Third, the amended proposal takes strengthens the favouring of long-term shareholding, as a way to provide more stability to companies and encourage them to focus on long-term financial and non-financial performance. To this end, mechanisms for long-term engagement of shareholders are expressly endorsed.
Specific amendment proposals include the following:
Proxy advisors’ engagement. Proxy advisors should be requested to adopt a code of conduct which they should follow on a comply or explain basis. They should also report on the application of the code on a yearly basis.
Shareholder identity’s disclosure. The identity of shareholders should not only be available to the company, but also to its shareholders, and the company must provide, at the request of the shareholders and if necessary on the payment of a reasonable fee (if any), the list of all shareholders holding more than 0.5% of the shares.
Remuneration policy of listed companies. Other than the Commission’s original proposals, the amended text addresses two main new issues. First, it is expressly stated that remuneration of directors should contribute to the long-term growth of the company and, to this end, should not be uniquely or largely linked to short-term performance and should include the consideration of CSR programmes, if they exist. Second, the remuneration policy should not only be presented to shareholders, but also to employees, who should be given the opportunity to express their view prior to any shareholder vote.
Related party transactions. Major related-party transactions (i.e. transactions which represent more than 5% of the company’s assets) should be approved by shareholders or by the administrative or supervisory body of listed companies, by way of procedures that prevent related parties from taking advantage of their position to the detriment of the company and of minority shareholders. However, different from the Commission’s proposal, only major transactions not concluded on standard terms are submitted to a shareholder vote.
Support for long-term shareholding. Member States should be required to introduce at least one of the following incentivising mechanisms to foster long-term commitment of shareholders: additional voting rights; tax incentives; loyalty dividends; or loyalty shares.
Tax rulings. Finally, the proposal includes an amendment of Accounting Directive 2013/34/EU that would mandate large undertakings to disclose, in the notes to the financial statements, essential elements of, and information regarding, tax rulings broken down by country. A similar requirement would apply to listed issuers, by way of an amendment to the Transparency Directive 2004/109/EU.
The EP’s plenary vote and next steps
The proposal, as amended by the JURI , has been voted at the plenary session of the EP on July 8, 2015. The plenary approved the proposal but rejected some of the JURI’s amendments to the original text of the Commission. Most notably:
- “large companies and large groups” have been carved out from the title and from the scope of the proposal;
- emphasis on long-term shareholding has been repealed as well;
- employees’ “say on pay” is no longer envisaged;
- Member States are left free to provide that shareholders’ vote on the remuneration policy is merely advisory.
In relation to the Parliament’s co-legislator, the Council, no agreement has been yet agreed. It is understood that Luxembourg hopes to make progress on this issue during its 6 month presidency of the Council from July to December 2015.
If, as seem likely, there will be differences in the texts approved by the Parliament and the Council, these two institutions along with the Commission will sit down to work out a compromise in what is known as the Trilogue process. The earliest that any agreed text will emerge is the end of 2015 if not early 2016.