The European Council of Ministers formally approved the text of the revised Shareholder Rights Directive in April 2017. The aim of the Directive is to tackle shortcomings in corporate governance related to listed companies and their boards, shareholders (both institutional investors and asset managers), intermediaries and proxy advisors. The Directive will also have an impact on the rights and responsibilities of European asset managers offering equity investment funds to retail investors. European Member States have until 10 June 2019 to implement the Directive into national legislation.
Shareholder Rights Directive: what is included?
One of the intended objectives of the Directive is that shareholders take a longer term horizon in their investment process, but it also aims to stimulate engagement between the asset manager and investee companies. Therefore among others a provision is included that asset managers should disclose information about their engagement policies and practices with investee companies as well as information about the investment policy. The Directive also provides additional rights to shareholders as a result of which they can hold boards of investee companies more effectively to account. The new rules establish rights and requirements for shareholders in the following ways:
Vote on executive remuneration
Asset managers of equity retail funds with exposure to European listed companies will be able to express their view twice on the executive remuneration of companies they are invested in. First they will vote ex ante on the remuneration policy, which lays down the framework within which remuneration can be awarded. The vote on the remuneration policy will in principle be binding, which means that companies are only able to pay remuneration on the basis of the policy as approved by shareholders. In order to ensure that the implementation of the remuneration policy is in line with the policy, shareholders are granted with an advisory vote on the company’s remuneration report.
Vote on related party transactions
Transactions with related parties may cause prejudice to companies and their shareholders as they may give the related party the opportunity to appropriate value belonging to the company. The Directive introduces enhanced protection in relation to related party transactions for shareholders at all European listed companies. Companies will be under an obligation to disclose the details of material related party transactions that are executed. Material related party transactions are also subject to a vote by the shareholders or the board of directors in order to protect the interests of the company as a whole.
Disclosure obligations for asset managers offering retail funds
Additional rights come with additional responsibilities in the case of this Directive. The European Commission has chosen for the disclosure tool to stimulate shareholders to have more engagement with investee companies and to stimulate a longer term investment horizon.
European asset managers offering retail funds will among others be required, on a comply or explain basis, to develop and disclose a policy on how they intend to engage with investee companies. The policy should among others describe how the asset manager integrates shareholder engagement in its investment strategy. Next to that the asset manager is expected to disclose information about the implementation of the engagement policy.
Another objective of the European Commission is to stimulate a longer term investment horizon. One of the provisions in the Directive is that asset managers should disclose information about portfolio turnover, portfolio turnover costs and their policy on securities lending.
Bram Hendriks is clients relation manager at Kessler Topaz Meltzer & Check LLP