SRD II: Shareholders and EU Regulated Markets
The EU’s Shareholder Rights Directive II (SRD II) came into effect in the UK on 10 June 2019, impacting companies registered in EU member states whose shares are traded on the EU’s regulated markets.
SRD II (superseding SRD I which took force in 2007) on related party transactions strengthens shareholders’ position in the company, and aims to improve corporate governance of companies, in particular, to improve transparency and accountability and ensure corporate decisions are made for the long-term stability of the company.
It is also intended to end the culture of short-term investment by imposing new obligations for companies and other parties such as intermediaries, investors and proxy advisors.
What are the requirements?
SRD II is aimed at driving effective stewardship and imposes specific requirements on companies particularly in relation to the identification of shareholders and facilitates the exercise of their rights; the transmission of information; costs transparency; the public disclosure; and director remuneration. The requirements impact individual parties including intermediaries, proxy advisers, institutional investors, asset managers and issuers.
Shareholders are now entitled to the right to vote on a company’s remuneration policy and on the remuneration report at the company AGM. The intention is that a better link is created between pay and the directors’ performance.
Additional goals include enhancing transparency and shareholder oversight on related party transactions, ensuring reliability and quality of advice of proxy advisors and to facilitate the transmission of cross-border information across the investment chain (particularly through shareholder identification).
In the context of directors’ remuneration, listed companies and unquoted traded companies are now required to publish a remuneration policy - and this must be made the subject of a shareholders’ vote.
Also, new obligations are placed on asset managers and institutional investors to develop and publicly disclose their shareholder engagement policies and investment strategies, for example, how the key elements of their investment strategy contribute to the mid to long-term performance of their assets.
What does this mean?
Listed companies in particular will need to review their procedures to ensure they remain compliant given that more robust obligations have now been implemented.
However, the Financial Conduct Authority (FCA) says it will not be too prescriptive and it will allow for different approaches to stewardship to develop over time. In its recent policy statement, Proposals to promote shareholder engagement: Feedback to CP19/7 and final rules, the FCA says: “We recognise that firms should not be expected to exercise stewardship in an identical way, or to the same intensity. Each firm will have a clear and stated purpose, which shapes its offering to clients and beneficiaries.”
The FCA says this will drive investment objectives and investment strategy, flowing through to how the firm prioritises its engagements with issuers, how it exercises oversight and challenge - and how it holds issuers to account.
Firms who are concerned about their level of compliance with the new rules should take specialist legal advice.
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