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Revision of the Shareholders’ Rights Directive (SRD II) - regulation memo
Revision of the Shareholders’ Rights Directive (SRD II) - regulation memo
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Revision of the Shareholders’ Rights Directive (SRD II) - regulation memo

10/04/2019

The Shareholders’ Rights Directive (SRD I) entered into force in 2007. The original directive and its revision (SRD II) form part of the European Commission’s (EC) Corporate Governance Action Plan 2012. The Directive 2017/282 on Long Term Shareholder Engagement, the new denomination of the Shareholders’ Rights Directive, was published on 17 May 2017.

About the revised Shareholders’ Rights Directive (SRD II)

The Shareholders’ Rights Directive should be read in combination with the market standards for General Meetings as well as the Commission Implementing Regulation of 3 September 2018 which introduces transmission deadlines for issuers and intermediaries in corporate events and in the shareholder identification processes.

SRD II aims to stimulate shareholders’ long-term engagement, increase transparency in the voting process both in relation to proxy voting and shareholder identification; and improve issuer-investor dialogue.

  • Shareholder identification: issuers have the right to obtain shareholder identification with the objective of engaging directly with the investor
  • Say on pay:  issuers must draw up an annual remuneration report, providing a comprehensive overview of the remuneration, including all benefits in whatever form, awarded or due during the most recent financial year to individual directors. Voting on remuneration must take place during the General Meeting of shareholders
  • Some transactions, including intragroup transactions – between a company and its affiliates or between two affiliates of the same holding company- must be approved at the General Meeting
  • Investment strategy: institutional investors, such as asset managers, pension funds or insurance companies, must establish an investment strategy and publish associated reports in a timely fashion
  • Transparency of proxy advisors: proxy advisors should establish accurate and reliable voting recommendations. Proxy advisors will have to publish a report on their compliance with the code of conduct of proxy advisors

Scope

SRD II focuses on investors and shareholders. In a nutshell, their identities will be disclosed when they hold more than a threshold share of issued capital. By default, this threshold is set at 0.5% of an issuers’ capital but Member states may opt out of this threshold. Investors and shareholders will have increased rights in General Meetings, as well as access to investment strategy information (when they are institutional investors) and have far better visibility into proxy advisors and how they establish voting instructions.

Through these provisions, other constituencies will be impacted:

  • Issuers of listed companies will be able to obtain shareholder identification
  • Shareholders will have greater powers at General Meetings
  • Custodians and other intermediaries will have to cooperate in the identification process
  • Proxy advisors will be subject to increased transparency obligations

Industry implications

Increased transparency at all levels (identification, voting decisions, and investment policy) could lead to more dialogue between issuers and their shareholders.

Institutional investors will need to establish an investment strategy, asset managers will be subject to transparency and disclosure requirements on a half-yearly basis and issuers will have to comply to stricter rules like the 0.5% threshold, the provision of information relating to the exercise of rights to intermediaries and the obligation to confirm the votes cast in general meetings by or on behalf of shareholders.

Combined with other initiatives of the Capital Market Union initiative, and in particular the Sustainable Action Plan, the revision of the Shareholders’ Rights Directive should lead to longer-term engagement and investment in issuing companies.

BNP Paribas Securities Services’ view

We warmly welcome this initiative.

Whilst increased transparency is beneficial to the overall objectives of the European Commission, we think that a balance should be reached regarding the efficiency of General Meetings. Thus, “say on pay” provisions should be realistic and the increased approval powers of related transactions should not be an unnecessary burden on the conclusion of such transactions.

In relation to shareholder identification, we think that a regime without exceptions and subject to effective sanctions against failure of identification is the only efficient approach. Procedures could otherwise become an excessive burden for intermediaries. From an issuers’ perspective, it could lead to a paradox where shareholder rights are increased but opacity in the shareholder base is introduced.

Key dates

April 2014 - Publication by the EC of its proposal for the revision of SRD

April 2017 - Adoption by the EU Council of the Directive on Shareholder’s rights in EU companies

May 2017 - Publication in the Official Journal of the Directive with regard to the encouragement of long-term shareholder engagement

September 2018 - Publication by the EC of the Commission Implementing Regulation (EU) 2018/1212

June 2019 - Member States must inform ESMA on whether they opted out of the 0,5% threshold

Q2 2019 - The European Commission will publish its guidelines on the remuneration report

July 2019 - Entry into force of SRD II

September 2020 - Deadline for implementation of shareholder identification, transmission of information and voting

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