Yesterday, 16 April 2020, the Belgian Chamber of Representatives voted the legislative proposal which implements the Shareholder Rights Directive II (Directive (EU) 2017/828) (“SRDII”) into law (the “Implementation Law”). The Implementation Law will enter into force once the King (i.e. the government) has ratified and published it in the Belgian Official Gazette.
Most provisions are immediately (or within ten days after publication) applicable. The provisions related to the identification of shareholders of listed companies become applicable as of 3 September 2020 (see 'Identification of shareholders' below). Belgium is a little late with the transposition, as SRDII required this to take place by 10 June 2019.
Apart from transposing SRDII, the Implementation Law also makes clarifications and technical reparations to the new Companies and Associations Code and a number of other acts which were impacted by the Code. In this newsletter, we only focus on the transposition of SRDII.
SRDII aims to encourage long-term shareholder engagement to ensure that decisions are made for the long-term stability of a company and take into account environmental and social issues. In that respect, several lines of measures have been taken by the European legislator and are now implemented into Belgian law.
Remuneration in listed companies
Belgian company law already has a number of policy and reporting requirements relating to the remuneration of the persons at the top of listed companies. SRDII and the Implementation Law further try to enhance this framework which takes place in Belgium through amendments to the Companies and Associations Code.
The Implementation Law imposes on listed companies the obligation to draw up and publicly disclose a remuneration policy in respect of directors, daily managers and other persons who are responsible for leading the company. Until now, remuneration policy was not much elaborated on in the Companies and Associations Code. The new rules require that the remuneration policy contributes to the company’s business strategy and long-term interests and sustainability and explain how it does. It must contain the following elements:
- a description of the different components of fixed and variable remuneration;
- a description of how the pay and employment conditions of employees of the company were taken into account when establishing the remuneration policy;
- if the company awards variable remuneration, clear, comprehensive and varied criteria for the award of the variable remuneration (which includes a.o. criteria relating to CSR, how it contributes to long-term value, how to defer or reclaim variable remuneration, etc.);
- indication of the duration of the contracts and the applicable notice periods, the main characteristics of supplementary pension or early retirement schemes and the terms of the termination and payments linked to termination;
- the decision-making process followed for the determination of the remuneration policy, review and implementation;
- when the remuneration policy is amended, an explanation of all significant changes and how it takes into account the votes and views of shareholders on the policy and reports since the most recent vote on the remuneration policy by the general meeting of shareholders.
At present, the shareholders cannot separately vote on the remuneration policy. However, as from application of the Implementation Law, the shareholders will have the right to vote on the remuneration policy and their vote is binding for the company. As such, in principle, directors, daily managers and other persons who are responsible for leading the company can only be paid in accordance with the remuneration policy. Exceptions are possible in case there is not yet a remuneration policy or in case of exceptional circumstances. Every time the remuneration policy is (materially) amended, and at least every four years, the shareholders must vote on the policy.
The “new” remuneration policy must be submitted for the first time to the shareholders for approval at the latest on the general shareholders’ meeting that deliberates on the annual accounts and the annual report of the first financial year starting after 30 June 2019.
The Implementation Law modifies the remuneration report, which must be voted by the general shareholders’ meeting and published in the annual accounts of listed companies, on several aspects. In short, the remuneration report must now contain with respect to the directors, members of the supervisory board, daily managers and other persons who are responsible for leading the company:
- (i) the total amount of remuneration paid by the group split out by component (fixed, variable, pension, insurances, etc.), (ii) how the total remuneration complies with the adopted remuneration policy and contributes to the long-term performance of the company, (iii) and information on how the performance criteria were applied;
- the number of shares and share options granted or offered and their conditions;
- information on severance pay;
- information on the use of the possibility to reclaim variable remuneration; and
- information on any deviations from the procedure for the implementation of the remuneration policy.
This information must be provided on an individual basis. As an exception to this rule, i., iv. and v. can be aggregated for persons who are responsible for leading the company but are not directors, members of the supervisory board or daily managers. This exception came through a last-minute amendment to the Implementation Law.
The remuneration report must also contain the annual change of remuneration of the directors/managers, of the performance of the company, and of average remuneration on a full-time equivalent basis of employees of the company over at least the five most recent financial years, presented together in a manner which permits comparison.
Finally, but from a PR perspective not unimportant disclosure, the remuneration report must contain the ratio between the highest remuneration of the highest paid director/manager and the lowest remuneration (in full-time equivalent) employee.
Related party transactions
The Implementation Law makes some rather technical amendments to special procedures in case of related party transactions in listed companies. Notable are:
- extension of the scope of the procedures from only the controlling shareholder (and its subsidiaries) to any related parties in the sense of IAS 24, which is much wider (and includes a.o. key management, persons with significant influence, family ties with such persons, etc.)
- the new obligation to publicly announce transactions (above a threshold of 1% of the net assets on a consolidated basis and which are rather unusual for the company) with related parties at the latest at the time of the conclusion of the transaction. Until now, such publication could wait until the next annual report.
Transparency for institutional investors and asset managers
A second line of rules imposed by the Implementation Law wants to increase the transparency of certain large (intermediate) market players with respect to their investment and engagement strategy towards (listed) companies in which they hold share interests.
Shareholder engagement policy
Institutional investors (IORPS and life (re)insurers) and asset managers (investment firms, credit institutions and fund managers (UCITS and AIF) acting for institutional investors, investing in shares of listed companies are required to draft and publicly disclose their shareholder engagement policy which includes how they monitor their investments on matters such as (i) strategy, (ii) (non-financial and financial) performance, (iii) risk, (iv) capital structure, (v) social and environmental impact, (vi) corporate governance, (vii) communication with the company, (viii) exercise of voting rights, (ix) cooperation with other shareholders and stakeholders of the company (x) and conflicts of interest.
How this policy is implemented must be assessed and disclosed on a yearly basis, this report even includes disclosure of the voting behaviour of the investor in case of important votes.
However, the disclosure of the engagement policy is not mandatory. The institutional investor/asset manager can also decide to publicly disclose a clear and reasoned explanation why they have chosen not to comply with one or more of those requirements.
Consistency of investments with the liabilities of the investor
Institutional investors (IORPS and life (re)insurers) must publicly disclose how the main elements of their equity investment strategy are consistent with the profile and duration of their liabilities, in particular long-term liabilities, and how they contribute to the medium to long-term performance of their assets.
Arrangements between institutional investors and asset managers
When an asset manager (investment firms, credit institutions and fund managers (UCITS and AIF) invests for an institutional investor (IORPS and life (re)insurers) in shares of listed companies, the institutional investor must disclose annually specific information regarding the contractual relation with the asset manager such as: (i) how the asset manager is incentivised to align its strategy with that of the institutional investor, (ii) how the arrangement incentivises the asset manager to make long-term investment decisions, (iii) how the remuneration of the asset manager is in line with the duration of the (long-term) liabilities of the institutional investor, (iv) the monitoring of the turnover costs incurred by the asset manager, and (v) the duration of the arrangement with the asset manager.
Transparency by asset managers
Asset managers (investment firms, credit institutions and fund managers (UCITS and AIF) must annually disclose to institutional investors (IORPS and life (re)insurers), of whom they manage equity investments, how their investment strategy complies with their arrangements and how it contributes to the long-term performance of the companies in which is invested. Such report includes (i) the material long-term risks associated with the investments, (ii) portfolio composition, (iii) turnover (costs), (iv) use of proxy advisors, (v) policy on securities lending, (vi) how they make investment decisions based on long-term performance, and (vii) conflicts of interest.
The Implementation Law introduces rules on so-called proxy advisors. Proxy advisors provide research, advice and recommendations on how to vote in general meetings of listed companies. The more diversified a portfolio of an (institutional) investor is, the more they, in general, rely on such advisors.
Notable requirements imposed on proxy advisors active in Belgium by the Implementation Law are:
- a public disclosure of the code of conduct which they apply and disclosure of a report on the application of that code of conduct, or explain why they don’t use a code of conduct;
- publication on an annual basis of certain information in relation to the preparation of their research, advice and voting recommendations; and
- disclosure to their clients of conflicts of interest.
Identification of shareholders
Another goal of SRDII is to create a framework which allows listed companies to identify and communicate directly with its shareholders, something which is in practice difficult when shares are held through a chain of financial intermediaries (custodians).
The Implementation Law therefore amends the transparency law of 2 May 2007 and grants Belgian listed companies the right to identify their shareholders. Intermediaries (credit institutions, investment firms and central securities depositaries) who provide custody services must communicate without delay to the listed company information regarding shareholder identity including contact details and number of shares held. In case of a chain of companies, this information has to pass through the chain all the way down from the listed company and then back up to the company from the intermediary who has a direct relationship with the ultimate shareholder.
Furthermore, the intermediary is obliged to transmit through the chain, without delay, from the company to the shareholder the information which the company is required to provide to the shareholder, to enable the shareholder to exercise rights flowing from its shares (such as voting rights or financial rights). In the same vein, intermediaries are also obliged to transmit to the listed company the instructions received from the shareholders related to the exercise of the rights flowing from their shares.
Intermediaries can charge a cost for these services, but those have to be disclosed. They also must be non-discriminatory and proportionate in relation to the actual costs incurred for delivering the services.