The financial crisis showed many shortcomings in corporate governance of listed companies contributed to the financial crisis. In this regard, the European Commission submitted a proposal for an amended shareholders’ rights directive (the Proposal) in 2014, which aimed to enhance effective and long-term shareholder engagement within listed companies.
Furthermore, it is envisaged that listed companies will benefit from identifiable shareholders who are engaged and who use their voting rights in a well-informed manner. Recently, the European Parliament has adopted the Proposal.
This short read will describe the key elements of the Proposal and will give a brief evaluation of those key elements especially their implications under Belgian law and in the practice of listed companies.
Firstly, the Proposal aims to enhance the shareholders’ rights and to facilitate cross-border voting. The Proposal therefore provides for in this respect, inter alia, a right for listed companies to identify its shareholders (with the possibility for member states to limit such right to shareholders holding more than a certain percentage which shall not exceed 0.5%). These provisions grant slightly more rights to listed companies than the rights currently granted to them under Belgian law, since the company’s articles of association at this time could only oblige shareholders to make a transparency declaration once their participation exceeds 1%. The Proposal would thus allow for that threshold to be lowered. However, it is uncertain whether the right for listed companies will be a statutory obligation or whether such right can only be granted by means of an amendment to the articles of association. Taking into account current Belgian practice, it can be expected that this will require a formal vote to amend the articles of association to that extent, resulting in it potentially being voted down by institutional shareholders.
The new provisions on shareholders rights should furthermore make it easier for shareholders to participate in the general meetings of the company. According to the Proposal, member states are obliged to put appropriate measures in place so that intermediaries (as defined by the Proposal, which refer to investment firms, credit institutions, and central securities depositories) will easily transfer the necessary information to the company’s shareholders. The implementation of the Proposal provisions will moreover simplify how an EU resident who is a shareholder of a company and resides in another EU member state can participate in the general meetings. Further to the provisions of the Proposal, member states will have to take appropriate measures so that intermediaries can facilitate that shareholder’s exercise of his or her rights, including the right to participate and vote in general meetings.
Implications for Belgian listed companies will be important, but they are less radical since the amendments will particularly influence intermediaries. The Belgian Companies Code already allows shareholders to participate in a general meeting electronically or in writing. Similarly, for participating in a general meeting in person, attendance is already organised based on the intermediaries’ issuance of certificates/confirmations attesting to the ownership of shares on the reference date. The implementation of the new directive can lead to a further simplification of the procedure for the shareholder to participate in the general meeting. It will furthermore be possible for the intermediary to participate in the meeting upon the instruction and for the benefit of the shareholder.
Secondly, the Proposal is dedicated to the long-term engagement of institutional investors and asset managers. The provisions of the Proposal will impose a transparency obligation on institutional investors and asset managers whereby they must disclose how they will invest and how they interact with the companies in which they acquired participation. They should furthermore publicly disclose how this policy has been implemented. Through this transparency obligation, the proposal aims to encourage investors to adopt a more long-term focus in investment strategies as well as to consider social and environmental issues. Similar to the already existing corporate-governance principles by which listed companies must abide, investors and managers will have to comply with the above transparency and disclosure obligations or publicly explain why they have chosen not to comply. The implications of these provisions will primarily have an effect on institutional investors and asset managers and should allow for listed companies to have more predictability on how shares will be voted in respect of particular matters that would be put to a shareholders’ vote.
Thirdly, the Proposal aims to obtain more transparency from proxy advisors. After member states implement the Proposal in their national law, proxy advisors will be obliged to disclose main pieces of information on how they prepared their recommendations and advice rendered. They will also be obliged to report which code of conduct they apply and, if they do not apply any code, explain why they don’t. Again, the direct implications for listed companies as a result of the implementation will be rather limited, but it should allow them to react more easily in a substantive manner against any negative advice. In combination with the elements described above in the second point, it will oblige the likes of Institutional Shareholder Services to be extremely thoughtful in how they set their guidance, which is typically followed by asset managers and other types of institutional shareholders.
Fourthly, shareholders will have a mandatory “say on pay” power. The new rules under the Proposal will enhance the transparency of and accountability for the director’s revenues. Shareholders will be informed about how much directors are being paid for their services. Additionally, shareholders will be able to influence the directors’ remuneration by exercising a binding voting right at the general meeting, which can be exercised with respect to the approval of the remuneration policy (ex ante remuneration) and of the remuneration report (ex post remuneration). This “say on pay” power should result in a better interconnection between directors’ pay and performance.
Belgian law currently already confers significant “say on pay” powers for shareholders of publicly listed companies. The Belgian Companies Code requires in this respect that a remuneration report be drawn up by the board of directors and that the remuneration of the board members be discussed. This remuneration policy and report should be approved by the shareholders at the general meeting. Although the Companies Code does not require an explicit ex ante approval of the remuneration policy, it is a generally accepted that no director may be remunerated without a prior decision of the shareholders’ meeting. Belgian law thus de facto already (implicitly) requires the ex ante approval of the remuneration policy. It is expected that when transposing the Proposal provisions into Belgian law, the national provisions on this point will only require minor substantive changes, and these changes should not be problematic for Belgian listed companies.
Finally, the Proposal contains specific provisions regarding the so-called Related Party Transactions. Pursuant to these provisions, listed companies will be obliged to publicly disclose related party transactions (which are to be defined by each member state when transposing the Proposal into its national law) that might be risky for minority shareholders at the time of their conclusion, at the latest. Member states can require that the announcement of material related party transactions be accompanied by a fairness opinion from an independent individual.
Listed companies will also be required to submit the related party transactions to the general meeting or to the board for their approval. Procedures must be put in place whereby it is possible to decide upon such transaction without the possibility for related parties of taking advantage of their position, but knowing that there will be adequate protection of the interests of the company and (minority) shareholders (who are not related parties). An exception can be provided for transactions that are entered into under normal market terms. Where the related party transaction involves a director or a shareholder, this director or shareholder shall not take part in the approval or the vote.
Since there is no obligation for the member states to provide for a mandatory submission of the related party transactions to the general meeting, the Belgian Companies Code currently already provides for a sufficient protection. Further to the general rules on conflict of interests (Articles 523 and 524 of the Companies Code, with their albeit limited scope) related party transactions always require the approval of the board of directors. It furthermore follows from the rules on conflict of interests that the director should not participate in the meeting when deciding upon the approval of related party transactions.
The main question will be whether the legislator will take the opportunity to require the approval of the general meeting in addition to or as a substitute for the approval by the board of directors. The debate on this implementation will also be of importance for the current debate on the increased rights to be granted to a reference shareholder, including via the implementation of multiple-voting rights for reference-shareholders. Increasing the limits on the right of reference shareholders to “control” the company by adding the requirement for shareholder approval (without the reference shareholder being allowed to participate in such vote) would go against the current legislative tendency.
It is interesting to note in this respect that the Belgian Financial Services and Markets Authorities (FSMA) recently published a best practices document on mergers and demergers and comparable transactions with respect to entities with the same reference shareholder(s). From these guidelines, it is considered advisable to apply the provisions on conflicts of interests (Article 523 of the Companies Code) and on transactions with affiliated companies (Article 524 of the Companies Code) even beyond their formal scope (because, e.g., the board’s action is only a preparatory step for a decision to be taken by the shareholders) as a result of which directors who can be linked to such reference shareholders are (even absent a formal conflict of interest decision) no longer able to fully participate in the preparation of such transactions and such transactions are de facto shifted towards a decision that are to be taken by the independent directors. According to the FSMA’s best practices, the drawing up of an independent fairness opinion in respect of such transactions even though this is not legally required should also be considered an indication of good governance. Belgian practice thus already provides for various formalities for related party transactions that intend to ensure protection of minority shareholders’ interests. Subject to some fine-tuning, the current article 523-524 Companies Code procedures would seem sufficient for purposes of implementation of the directive without need to impose a requirement for shareholder approval for related party transactions.
The final step in the development process of this new shareholders’ rights directive is to be taken by the Council, which is seen as a mere formality. Once the Council has agreed upon and adopted the final text, the directive will be published in the Official Journal and will enter into force two years later (from the publication date).