In 2009, the Shareholder Rights Directive (“SRD I“) was implemented to impose minimum standards on the exercise of voting rights of shareholders attaching to shares of companies with registered offices in the EU which were also listed on EU regulated markets.
The second Shareholders’ Rights Directive 2017/828 (“SRD II“) was transcribed into Irish Law on 20 March 2020 following the publication of the EU (Shareholders’ Rights) Regulations 2020 (the “Rights Regulations“) and amended the SRD I.
The Rights Regulations came into force on 30 March 2020 and applies to all companies who have their registered office in a Member State and whose shares are traded and listed on a regulated market in or operating in a Member State (“Listed PLC’s“). The Rights Regulations also apply to asset managers being MiFID investment firms, AIFMs, UCITS management companies, intermediaries to Listed PLC’s that facilitate and manage their shares, institutional investors and proxy advisors.
UCITS and AIF PLC’s listed on a regulated market are specifically excluded from the Rights Regulations. However, fund managers of UCITS and AIF PLC’s are accountable for new transparency requirements under the Rights Regulations.
The Rights Regulations aims to enhance the long-term governance of companies listed on regulated markets under the following headings:
- Information exchange between Shareholders and Listed PLC’s
- Remuneration Policies and Annual Reports
- Publication of Material Related Party Transactions
- Transparency of Shareholder Engagement Policies
1. Information exchange between Shareholders and Listed PLC’s
The Rights Regulations allows for the exchange of information between listed companies and shareholders by intermediaries to allow shareholders to exercise rights including voting rights at annual general meetings. Listed PLC’s also have the right to obtain information of their shareholders at the company’s request to the intermediary that hold and maintain the shares.
2. Remuneration Policies and Annual Reports
Listed PLC’s are required to prepare and maintain a policy regarding remuneration of their directors. The policy must be published on the company’s website for public viewing and allows shareholders to vote on the company’s remuneration policy at an annual general meeting at least once every four years.
Listed PLC’s must also prepare annual reports on the remuneration awarded to each director in line with the remuneration policy.
3. Publication of Material Related Party Transactions
Listed PLC’s must publicise all material related party transactions before any such transaction can be complete. A “material transaction” in such circumstances, is defined as one in which any percentage ratio, calculated in accordance with one or more class tests (as provided for in Schedule 21 of the Companies Act 2014) is 5% or greater. There is also a requirement to aggregate prior transactions when calculating the requisite threshold.
4. Transparency of Shareholder Engagement Policies
The Rights Regulations transferred provisions of SRD II into Irish law by amending the Companies Act 2014 (the “Act”). The Rights Regulations have introduced three new chapters into the Act:
- Chapter 8A – Rights of Shareholders;
- Chapter 8B – Transparency of institutional investors, asset managers and proxy advisors; and
- Chapter 8C – Remuneration Policy, remuneration report, transparency, and approval of related party transactions.
The Rights Regulations impose revised transparency and disclosure requirements on certain asset managers, including UCITS Managers and Alternative Investment Fund Managers (“Asset Managers”).
The transparency provisions contained in Chapter 8B of the Act oblige in-scope entities to facilitate the creation of a policy in respect of shareholder engagement on a “comply or explain” basis. The shareholder engagement policy should describe how it monitors the companies it invests in on matters such as strategy, financial and non-financial performance, risk, exercise of voting, other rights attached to shares and conflicts.
Asset Managers are required to publicly disclose such policy on their website, including how the policy has been implemented within their company, a general description of voting behaviour and how votes were cast (excluding insignificant votes due to size of holding or subject matter).
Should an Asset Manager choose not to comply with the above policy publication, the Act requires them to publicly disclose on their website, a clear and reasoned explanation as to their failure to do so.
An Asset Manager who fails to comply with these publication requirements will be guilty of a category 3 offence and liable, on summary conviction to a class ‘A’ fine or imprisonment for a term exceeding 6 months or both.
Asset Managers should now assess whether their companies fall within the scope of the new requirements and if so, determine whether they will either:
- Comply with the requirements and implement a shareholder engagement policy and subsequently consider annual reporting obligations; or
- Opt-out and publish a non-compliance statement on their website.
In light of the enactment of the Rights Regulations, Asset Managers and institutional investors will now have to revise their policies and procedures to ensure that they comply with the requirements under Chapter 8B of the Act. The Rights Regulations contain no transitional provisions and therefore Asset Managers and institutional investors must be mindful of the new requirements which came into effect on 30 March 2020.