Shareholder Rights Directive II (SRD II)

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 SRD1 which came into effect in 2007, with the objective of improving corporate governance in companies 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 and is expected to be implemented during Q2:2019.

Overview

SRD II establishes requirements in relation to the exercise of certain shareholder rights attached to voting shares in general meetings of companies. This applies where a company has their registered office in a Member State and the shares of which are admitted to trading on a regulated market situated or operating within a Member State.

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

Intermediaries

SRD II sets out obligations applicable to an intermediary. Intermediaries will be required to facilitate a company’s right to identify its shareholders and to also facilitate the exercise of shareholder rights. This is achieved by making 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 on 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.

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; and
• To facilitate transmission of cross-border information (including voting) across the investment chain in particular through shareholder identification.

FCA Sets Out Plans for SRD II

The FCA has published a Consultation Paper (CP19/7) on implementing requirements from SRD II, which apply directly to financial services firms that are regulated by the FCA, and to issuers in respect of related party transactions.

To implement SRD II, the FCA proposes to introduce rules that require:

• Asset managers and certain life insurers to develop and publicly disclose a policy on shareholder engagement on a ‘comply or explain’ basis;
• Certain asset managers and life insurers to publicly disclose, at least annually, how their investment strategy and decisions contribute to the medium to long-term performance of the assets they invest in;
• Life insurers to disclose the arrangements they have with asset managers investing on their behalf;
• The extension of the territorial scope beyond that envisaged in SRD II, capturing branches of non-EEA investment firms and investment in shares admitted to trading on an EEA regulated market or a comparable market outside the EEA;
• A limit to changes to the Listing Rules in relation to third-party transactions, reflecting that the Listing Rules already have extensive requirements for premium listed companies which are often more stringent than those in SRD II; and
• UK companies with shares admitted on a regulated market to disclose and seek board approval for related party transactions.

Crucially, 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.

The consultation ends on 27 March 2019.