Shareholder Rights Directive II (SRD II)

Shareholder Rights Directive II (SRD II)

October 2, 2019

Background

The Shareholder Rights Directive II (SRD II) is a European Union (EU) directive, which sets out to strengthen the position of shareholders and to ensure that decisions are made for the long-term stability of a company. It amends the original SRD, which came into effect in 2007, with the objective of improving corporate governance in companies which have their registered office in an EU Member State and whose securities are traded on the EU’s regulated markets.

SRD II, as an amending Directive, will require transposition into each Member State’s national law.

Overview

SRD II establishes requirements in relation to enabling issuer company identification of its shareholders and the exercise of certain shareholder rights attached to voting shares in general meetings of companies.

It also establishes specific requirements to encourage shareholder engagement, in particular for the long-term. The requirements apply in relation to the:

  • Identification of shareholders
  • Transmission of information between Issuers, intermediaries and shareholders
  • Facilitation of the exercise of shareholders rights
  • Transparency of costs
  • Public disclosure of information by institutional investors, asset managers, life insurers and proxy advisors
  • Remuneration of directors and related party transactions

Scope

The SRD II requirements impact:

  • Intermediaries
  • Proxy advisers
  • Institutional investors
  • Asset managers
  • Issuers

Intermediaries

The obligations applicable to intermediaries include the facilitation of a company’s right to identify its shareholders and to facilitate the exercise of shareholder rights. This is achieved by communicating the necessary arrangements to the shareholder without ‘undue delay’ (i.e. provide voting forms to shareholders and/or registering votes with issuers, or putting a shareholder in touch with an issuer) so the shareholder can exercise their rights. The scope has also been extended to third country intermediaries (Non-EU firms holding EU shares for shareholders).

Requirements for Asset Managers and Institutional Investors

SRD II also requires member states to ensure that institutional investors disclose to the public how their equity investment strategy is aligned with the profile, the duration of their liabilities, and how it contributes to the medium to long-term performance of their assets. Asset managers will be subject to transparency and disclosure requirements on a half-yearly basis.

Remuneration

SRD II mandates that shareholders must be given the right to vote on the company’s remuneration policy and on the remuneration report at a firm’s annual general meeting (AGM). The aim of this requirement is to try and create a better link between pay and the performance of company directors.

Core Objectives

  • To increase the level and quality of engagement of asset owners and asset managers with their investee companies
  • To create a better link between pay and the performance of company directors
  • To enhance transparency and shareholder oversight on related party transactions
  • To ensure reliability and quality of advice of proxy advisors
  • To facilitate transmission of cross-border information (including voting) across the investment chain in particular through shareholder identification

Key Deadlines

10 June 2019—Member states were required to transpose the majority of SRD II’s requirements into national law (except Articles 3a, 3b and 3c of SRD II).

September 2020—Member states have until September 2020 to transpose into national law measures relating to the identification of shareholders, transmission of information and facilitation of the exercise of shareholders rights (Articles 3a, 3b and 3c of SRD II).

It should be noted that the proposals only apply if the UK leaves the EU with a transition period. In the event there is no transition period, SRD II may still be relevant and the FCA will revise proposals at a later date.

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