Regularly labelled as one the most important regulatory developments that nobody has ever heard about, the Shareholders’ Rights framework set up by the European legislator should be a high priority for issuers, investors and intermediaries – banks, brokers and wealth managers – on a global basis.
A look back in time in this context is particularly worth to grasp where we come from and where we are heading. The original Shareholder Rights Directive (SRD1) was implemented in 2007 and sought merely to regularise basic corporate governance in companies which have their registered office in the EU and whose shares are admitted to trading on EU regulated markets. Not unlike its second version, SRD1 focused on the exercise of voting rights and the cross-border availability of corporate governance information to shareholders. SRD1 dealt with high level and foundational principles, and these fundamentals remain in place. The original directive established:
- standards for provision of information before a general shareholders meeting,
- the principle of equal treatment of all shareholders, and
- basic rules applicable to general meetings of shareholders.
However, in the wake of the 2008 financial crisis, public authorities concluded more needed to be done based on a view that:
- Shareholders’ inaction or inattention seemed to encourage excessive short-term risk-taking by investment managers
- Complex chains of intermediaries made the exercise of shareholder rights more difficult, which could obstruct shareholder engagement
- Companies were unable to adequately identify their shareholders
In amidst these technical and operational considerations, the efforts surrounding the Capital Markets Union and the political realisation of the importance of so-called ESG concerns further pushed the agenda leading up to the final draft of Directive 2017/828 as regards the encouragement of long-term shareholder engagement.
This leaves us now with a piece of European legislation that certainly focuses on shareholder rights, but also shareholder responsibilities. The SRD2 encourages active engagement of shareholders in corporate governance, and imposes much more specific rules on intermediaries and issuers to facilitate and record the content and processing of instructions and information relative to shareholders and the exercise of shareholder rights. Additionally, SRD II could also be called in part the “Corporate Rights Directive” in that it establishes the right of corporations to request information as to ultimate shareholding of intermediaries that hold shares for their underlying clients.
The Luxembourg transposition of the SRD2, which amends and supplements the Luxembourg law of 24 May 2011 on the exercise of certain rights of shareholders at general meetings of listed companies, the Luxembourg law of 10 May 2016 on the transparency obligations of issuers as well as the X Principles of Corporate Governance of the Luxembourg Stock Exchange, is a faithful application of the main principles set out in the directive.
In that regard, stakeholders should especially note that SRD II is a directive, rather than a regulation, meaning that the EU Member States have some (limited) discretion in the way they transpose the rules into their respective national laws. This creates the potential for different interpretations at national level, which will have to be managed by the intermediaries in particular.
Another question mark is whether end-investors will be able to choose not to receive general meeting information. While Luxembourg has elected not to include an “opt out” in its national transposition, other EU Member States may well decide to grant shareholders this right. If so, intermediaries would need to filter information and customise reports based on what each investor wants to do, which would be an administrative headache.
Finally, stakeholders should also be aware of the extraterritorial scope that SRD2 has. Its provisions apply to third-country intermediaries if they provide services for shares of companies whose registered office is in the EU, and the shares are admitted to trading on a regulated market in the Union. Third-country proxy advisors would also be subject to the directive as soon as they carry out their activities through an establishment in the Union, regardless of their form.
Conclusively, banks together with the other stakeholders in the intermediaries’ chain (namely CSDs) have been actively preparing over the course of the last months to comply with the new rules.
The ABBL continuously tries to support its members with specific working groups, events (such as notably the SRD2 event organised together with Deloitte) and by facilitating an exchange of information on the provisions enacted in different Member States. Nevertheless, it has been challenging as, to the ABBL’s knowledge, many country-specific nuances are still not yet known, and therefore will be hard to comply with ahead of the deadline. A publication of all national laws and specific country provisions in one central place (e.g. website of the European Commission) would be highly appreciated and would help all relevant markets participants to comply with the new rules.
By Gilles Walers, Legal Adviser, ABBL