shareholders rights directive what does eu expect from listed companies? dr. markus kaum sofia, 25...

Shareholders Rights Directive What does EU expect from listed companies?

Dr. Markus Kaum Sofia, 25 September 2015

Shareholders Rights Directive (SRD) 2007

A. Shareholders Rights Directive

I. SRD 2007

1. Main provisions

2. Main issues not included in 2007

II. Revision draft

1. No continuation of Securities Law Legislation

2. Text published by European Commission April 2014

3. Discussion in European Council until March 2015

4. Discussion in European Parliament

2Shareholders’ Rights Directive, Dr. Markus Kaum, 25.09.2015

Shareholders Rights Directive 2015

B. Contents of the current version

I. Enlargement of focus

II. Contents of SRD Revised

1.Shareholder identification

2.Exercise of shareholders rights

3. Cost of shareholder identification and exercise of shareholders rights

4. Vote on remuneration policy

5. Remuneration report and vote of shareholders

6. Country by country reporting (CBCR)

7. Related party transactions

8. Engagement policy of investors, asset managers and proxy advisors

9. Investment strategy of institutional investors and arrangements with asset

managers

10. Long term investments and engagement

C. TimelineI. Trilogue September 2015 - ?

II. Entry into force


SRD 2007

4

A. I. 1. Main provisions

a) Equal treatment of shareholders regarding

- participation in general meetings

- voting rights

b) Information on general meeting

- Meeting notice

- GM: when and where will it take place

- Description of procedures for participation and voting

- Record date, if any

- Agenda items / Resolutions to be taken

Shareholders’ Rights Directive, Dr. Markus Kaum, 25.09.2015

SRD 2007

c) Shareholders rights and companies´ obligations

- Put items on agenda of GM

- Propose resolutions to be taken

- Ask questions

- Proxy voting

- Voting by correspondence

- Publishing voting results

d) No share blocking

e) Disclosure of identity of „shareholder“ is possible under national law


SRD 2007

A. II. 2. Main issues not included

a) Definition of shareholder

„shareholder“ means the natural or legal person that is recognised

as shareholder under the applicable law

Problem: in UK, Germany with registered shares only the person entered into

share register is considered a shareholder, often a nominee

not the end investor, i.e. the person having invested money on

own account directly into the shares

Sometimes 75% of entries in share register are nominees


Custody Chain Cross Border


BankIssuer/Registry

Nominee

Nominee 2

Nominee 3

Beneficial owner 2

Nominee 4

Nominee 5

Beneficial owner 3

Beneficial owner 4

Nominee 6Beneficial owner 5

Beneficial owner 1

Registered

Unknown

Custody Chain

SRD 2007

b) No rule on shareholder identification = end investor identification

aa) Registered shares or bearer shares = ideally company knows all or knows

none

bb) Opacity is suboptimal for companies

Dialogue between company and owner is very difficult

Exercise of shareholders rights very difficult, often impossible

Intermediary needed for contact which causes challenges

Þ Cost of intermediation

Þ Alleged confidentiality obligations in member states

Þ Lack of service offers in some markets and for some types of investors

Þ Timeline and deadlines imposed by intermediaries may limit options


SRD 2007

c) Information of shareholders about general meeting

aa) Sending out meeting notice/convocation

According to national law

Þ Official gazette

Þ Website of company

Art. 5 para 2 SRD

Þ Non-discriminatory manner

Þ Use media for „effective dissemination“ to the public in the EU

bb) Information on general meeting must include

Procedures for participation and voting

Proxy voting rules

Date and place of meeting


SRD 2007

d) Exercise of sharholders rights cross border

Very cumbersome for retail investors

Þ Less than 1% non-domestic shareholders participate in general meeting

Þ appr. 15 - 20% of domestic shareholders participate

Institutional investors

Þ almost 100% of domestic institutional shareholders participate

Þ appr. 45% of non-domestic institutional shareholders participate

e) Proof of being a shareholder

Necessary to be accepted by issuer as shareholder

No harmonisation across Europe

Institutional investors do not face severe problems but need intermediaries

Retail investors face severe problems cross border


SRD 2015

A. II. Revision draft 2014

1. No continuation of Securities Law Legislation

2. Commission proposal April 2014: Com (2014) 2013 final

3. Council Proposal/ Joint position March 2015: 2014/0121(COD)

http://data.consilium.europa.eu/doc/document/ST-7315-2015-INIT/en/pdf

4. Discussions in European Parliament

a) JURI first draft of report May 2015

b) Plenary vote on 7 July 2015: P8_TA-PROV(2015)0257

http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//TEXT+TA+P8-TA-2015-0257+0+DOC+XML+V0//

EN&language=EN11Shareholders’ Rights Directive, Dr. Markus Kaum, 25.09.2015



http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//TEXT+TA+P8-TA-2015-0257+0+DOC+XML+V0//EN&language=EN



SRD 2015

B. I. Enlargement of focus

B. II. Contents of SRD Revised

1) Shareholder Identification: All institutions want it

a) European Commission: Service of intermediaries

“Article 3a

Identification of shareholders

1. Member States shall ensure that intermediaries offer to companies the possibility

to have their shareholders identified. “

Problem: => Shareholder identification is part of corporate law and thus essence of

a registered share and not at discretion of an intermediary

=> if a service, can one refuse to service in certain cases ?

=> if a service, what is its price and conditions?


SRD 2015

b) Position of Council of March 2015

“Article 3a

Identification of shareholders

1. Member States shall ensure that companies have the right to identify their

shareholders. Member States may provide that companies having registered office on

their territory can only request identification with respect to shareholders holding more

than 0.5% of shares or voting rights.“

Problem: 0,5% threshold is too high

Large German companies: only 5-20 shareholders out of several

thousands or even millions are covered, i.e. no shareholder

identification when such threshold is set

No difference between registered and bearer shares made


SRD 2015

c) European Parliament:

“Article 3aIdentification of shareholders

1. Member States shall ensure that companies have the right to identify their shareholders, taking

account of existing national systems .

2. Member States shall ensure that, on the request of the company, the intermediary communicates

without undue delay to the company the information regarding shareholder identity. Where there is

more than one intermediary in a holding chain, the request of the company shall be transmitted

between intermediaries without undue delay. The intermediary having the information regarding

shareholder identity shall transmit it directly to the company. Member States may provide that central

security depositories (CSDs) are the intermediaries to be responsible for collecting the information

regarding shareholder identity and for providing it directly to the company.

Best proposal, because it accepts applicable corporate laws Shareholder identification is possible across Europe if possible under national law Intermediaries across Europe have to acknowledge it without claiming confidentiality But: no new monopolies should be established with CSDs as central point and direct

information should be allowed


Disclosure Process OptionsAlong the Chain or Hub Model


BankIssuer/Registry

Nominee

Nominee 2

Nominee 3

Beneficial owner 2

Nominee 4

Nominee 5

Beneficial owner 3

Beneficial owner 4

Nominee 6Beneficial owner 5

Beneficial owner 1

Registered

Unknown

Service ProviderBeneficial owner 1

Beneficial owner 2

Beneficial owner 3

Beneficial owner 4

Beneficial owner 5

Disclosure

SRD 2015

B. II. 2. Exercise of shareholders rights

a) Transmission of information: only informed shareholders can exercise rights

aa) All information relating to shares General meeting Corporate actions

Dividends, rights issuer, distributions, mergers, etc.

bb) By company to its shareholders or Intermediaries = maintaining securities accounts

= with a presence in the European Unioncc) Deliver

timely In standardised form Down the custody chain to end investor

dd) Implementing acts by Commission

Inspiration should be taken from - General Meeting Standards and - Corporate Action Standards of 2009


SRD 2015

b) Facilitation of exercise of shareholders rights

aa) Participate in general meeting by

attendance

vote

send proxy

bb) Intermediaries and Companies must offer and undertake

Necessary arrangements for

- shareholder or

- third person is exercise right directly and attend or vote or

- appoint a proxy

cc) Problem: Proof of entitlement

Not standardised in Europe

Is IT of intermediaries capable to deliver such proof of entitlement ?

dd) Implementing acts by Commission (Art. 3b para 5)


SRD 2015

B. II. 3. Cost of shareholder identification and exercise of shareholders

rights

Who pays ?

a) Three options:

- Intermediary, i.e. a bank

- Company

- Shareholder

Art. 3d:

b) Intermediaries may charge prices/fees for service

c) Level II measure: implementing acts by Commission


SRD 2015

d) Task/Service of intermediaries

Current IT systems are not well equipped for that

Broadridge main service provider for intermediaries = monopoly ?

Cost are opaque

e) Commission will adopt implementing acts

f) Cost should be

non – discriminatory and proportional

as low as possible

using state of the art technology and economies of scale

Companies should have right to propose alternatives


SRD 2015

B. II. 4. Vote on remuneration policy

a) Remuneration of directors subject to shareholder vote

directors: One-or-two-tier board members and CEO, CFO

Policy subject to approval, not individual remuneration, and made public

b) Policy shall be clear, understandable, in line with business strategy, objectives, values and long-term interests of the company

c) Clear criteria for amount of fixed and variable compensation and setting of maximum compensation

Problems

Compulsory or advisory vote?

Effect of no-vote?

payments illegal?

only after 12 months?

payments to directors allowed until new policy adopted?20Shareholders’ Rights Directive, Dr. Markus Kaum, 25.09.2015

SRD 2015

B. II. 5. Remuneration report (Art. 9b) and vote of shareholders

a) Report to public on => remuneration system and

=> actual remuneration = exact figures of directors

b) Detailed report with

breakdown of components of payments for last financial year

link to long-term performance and application of performance criteria

change over last three years

ratio to/over average remuneration of employees of company

other remuneration from group companies paid to directors

shares and options granted

reclaim option of variable payment components

c) Vote is advisory, company must explain how taken into account

d) Implementing acts by Commission to structure of report and set special requirements


SRD 2015

B. II. 6. Country by country reporting: CBCR

a) Idea of European Parliament, new Art. 18a and 3a of Directive 2004/109/EC (Accounting Directive)

b) New report on activities of big and medium size companies

more than 500 employees group wide

more than 86 million € balance sheet

more than 100 million € revenues

c) Report country by country on

activities

turnover = revenues

profit or loss before tax

number of full time employees

tax on profit or loss

public subsidies received

and for each issuer annually all tax ratings

d) Delegated acts by Commission


SRD 2015

B. II. 7. Related party transactions

a) Commission proposal

aa) Companies shall

announce transactions above 1% of assets and

submit to shareholder approval

transactions above 5% of assets or

transactions which may have a significant impact on profits or turnover with related

parties

bb) Related party => International accounting standards:

Group companies, joint ventures, associate companies (less than 50% participation),

controlled companies

Person or family members of that person which has (joint) control over a company or is a

member of key management

cc) Transaction: transfer of resources, services, obligations regardless of whether a price is

charged23Shareholders’ Rights Directive, Dr. Markus Kaum, 25.09.2015

SRD 2015

dd) Independent report whether transaction is

on market terms

fair and reasonable

ee) Announcement shall disclose

Name of counterparty/-ies

Nature of relationship

Announcement of transaction

Other information necessary to assess transaction

Examples:

Volkswagen AG enters into joint development contract for new Porsche Cayenne / VW Touareg with Porsche SE with profit potential of more than 20% profit of Porsche SE


SRD 2015

b) Problems

aa) Disclosure of commercially sensitive information to competitors

bb) Shareholder may have different plans and intentions than management

cc) Resolutions may be contested in court and thus the transaction upheld for years

dd) Disadvantage for European companies against non EU-competitors

ee) Group management will be more difficult

ff) Council proposes

review and approval by supervisory board possible

only material transactions should be subject to this procedure with “material” being flexible

gg) Parliament: Similar position as Council


SRD 2015

B. II. 8. Engagement policy of investors, asset managers and proxy advisors

a) Institutional investors and asset managers shall develop a policy on shareholder engagement

Commission believes better corporate governance needs more shareholder engagement

Big European issuers are held between 50% and 90% by institutional investors

Engagement and voting cross border is seen as suboptimal

b) Policy shall determine how to conduct

Integration of shareholder engagement in investment strategy

Monitoring of investee companies

Conduct dialogue with investee companies

Voting

Use service provides by proxy advisors

Corpoartion with other shareholder

Conflict of interest rules


SRD 2015

c) Disclosure of engagement policy

to the public

annually

how it has been implemented

BUT

d) Institutional investors and asset managers may decide

NOT to develop an engagement policy if they

disclose this fact and

explain why so


SRD 2015

B. II. 9. Investment strategy of institutional investors and arrangements with asset managers

a) Investors should

disclose to public investment strategy and

show it is aligned with profile and duration of liabilities and

contributes to medium and long-term performance of their assets

b) Investors should also disclose their arrangements with asset managers

with respect to alignment of incentives with profile and duration of liabilities

whether investment decisions are based on medium or long-term company performance

whether engagement with company is covered

Method/time horizon of asset manager performance evaluation, esp. long-term

how asset manager remuneration is aligned with investment decisions of institutional investor

targeted portfolio turnover or range28Shareholders’ Rights Directive, Dr. Markus Kaum, 25.09.2015

SRD 2015

c) Good proposal but, no such strategy needed if not

public disclosure

explain why no such policy or only some points are addressed

d) Transparency of asset managers (Art. 3h and proxy advisors Art.)

e) Council proposes less, Parliament more


SRD 2015

B. II. 10. Long term investments and engagements

a) Commission: Investors and asset managers should

Develop a “shareholder engagement policy” how to conduct

Integration of shareholder engagement in investment strategy

Conduct dialogue with companies

Exercise voting rights

Use services by proxy advisors and

Cooperate with other shareholders

b) Investor should publicly disclose annually such policy and conflicts of interest

c) BUT investors may decide not to adopt such policy or not to disclose

If they give a clear and reasoned explanation


Shareholders Rights Directive 2015

C. Timeline

I. Trilogue September 2015 - ?1. Lux presidency continues work on SRD

2. NL presidency has not yet made public its priorities for 2016

Expect results in first half 2016

II. Entry into force 1. Normally 18 months after votes by Council and Parliament

2. Probably End of 2017

3. National transposition and effect from 2018 probable


Shareholders Rights Directive 2015What to remember ?

1.Shareholder identification

2.Exercise of shareholders rights

a) Information relating to shares down to end investor

b) Voting

3.Cost of shareholder identification and exercise of shareholders

rights

4.Vote on remuneration policy

5.Remuneration report

6.Country by country reporting (CBCR)

7.Related party transactions

8.Investment strategy of institutional investors and asset managers

9.Engagement policy of institutional investors and asset managers

10.Long term investments and engagement


Thank you for your attention

shareholders rights directive what does eu expect from listed companies? dr. markus kaum sofia, 25...

Documents

c shareholders rights

vote of shareholders

beneficial owner

markus kaum sofia

main issues

share register

bearer shares

agenda items resolutions