Shareholder Rights Directive II: effective from 10 June 2019
The Shareholder Rights Directive II (SRD II) came into force on 9 June 2017 and must be transposed in EEA Member States by 10 June 2019. Unless a “no-deal” Brexit occurs before that date (in which case there is no commitment to transpose), the Government is set to transpose SRD II into UK legislation.
SRD II amends the original 2007 Shareholder Rights Directive primarily with the objective of increasing long term shareholder engagement and transparency between traded companies and investors. It applies only to companies which have their registered office in a Member State and whose shares are admitted to trading on a regulated market situated or operating within a Member State but the FCA proposes a broader application. If a company has its registered office in one Member State and is admitted to trading on an EU regulated market in another Member State, it is the law of the Member State of the company’s registered office that regulates it in matters covered in SRD II.
While much of SRD II focuses on transparency requirements for institutional investors, asset managers and proxy advisers and requirements for intermediaries to facilitate the exercise of shareholder rights, there are two areas which affect companies admitted to listing on the Official List (standard as well as premium segments) or to the Specialist Fund Segment or High Growth Segment of the London Stock Exchange.
Related Party Transactions
The FCA has not yet published final rules and feedback on CP19/7. On the basis that the proposals in the CP are unchanged, the FCA will implement SRD II in a way that leaves the existing listing regime intact, but with some limited additional disclosure requirements for premium listed companies, as there are a small number of instances in which the existing premium listing requirements will not cover SRD II requirements. This is because SRD II uses the definition of related party in International Accounting Standards (IAS 24).
Although SRD II only applies to issuers incorporated in an EEA Member State, the FCA propose to apply the rules to all companies with a listing on the Official List on the basis that the Listing Rules should apply in the same way to all companies in the same listing category, irrespective of the jurisdiction in which they are incorporated. The new requirements will apply from the start of an issuer’s financial year beginning on or after 10 June 2019. A new DTR 7.3 is proposed, which copies out so far as practicable the equivalent provisions in SRD II.
SRD II requires that material transactions of related parties are approved by shareholders in general meeting or by the supervisory body only. The FCA’s draft rules provides for board approval only for related party transactions that are outside the ambit of LR 11 and that the public announcement of a material related party transaction is not required to include a report prepared by a third party assessing whether the transaction is fair and reasonable. The FCA’s threshold for materiality under DTR 7.3 is 25% of any one of profits, assets, market capitalisation or gross capital tests, which mirror the class tests in Annex 1 to LR 10 so far as possible. Under DTR 7.3.1 R(1), a transaction by an issuer includes a transaction by its subsidiary undertaking.
DTR 7.3 includes exemptions, which cover:
- transactions entered into in the ordinary course of business on normal market terms;
- certain transactions between the issuer and its subsidiary undertakings;
- transactions offered to all shareholders on the same terms;
- transactions in relation to remuneration that are awarded in line with the Company’s (Directors’ Remuneration Policy and Directors’ Remuneration Report) Regulations 2019 (see below).
A new rule LR 14.3.25 will require overseas issuers with a standard listing to comply unless they are subject to similar regimes outside the EU. Companies listed on the High Growth Market or the Specialist Fund Segment must also comply with DTR 7.3., as must UK incorporated issuers whose shares are admitted to trading on an EU regulated market other than the UK.
Draft Companies (Directors’ Remuneration Policy and Directors’ Remuneration Report) Regulations 2019
These Regulations amend the Companies Act 2006 and the Large and Medium-Sized Companies and Groups (Accounts and Reports) Regulations 2008 to implement SRD II Articles 9A (Directors’ Remuneration Policy) and 9B (Directors’ Remuneration Report) to the extent that the SRD II requirements go beyond existing UK law. Most of the requirements on directors’ remuneration reporting contained in SRD II are already implemented in UK law so far as UK companies with an Official List listing are concerned, including the requirement on UK issuers to produce a Directors’ Remuneration Report and a Directors’ Remuneration Policy, each subject to a shareholder vote. The draft Regulations transpose additional requirements which include:
Directors’ Remuneration Policy
- in respect of share-based remuneration, must provide details on vesting periods and any deferral on the holding period, and give an indication of the duration of directors’ service contracts;
- the date and results of the shareholder vote must be put on the company’s website as soon as reasonably practicable and remain there for the life of the policy.
Directors’ Remuneration Report
- must be available free of charge on the company’s website for ten years;
- must show the split of fixed and variable remuneration and what is due to each director each year;
- must compare the annual change in directors’ remuneration to the annual change in pay of the company’s employees and the company’s performance (measured in terms of total shareholder return) over a five year rolling period.
As SRD II requires all payments to directors to be made in accordance with an approved Remuneration Policy. Section 226 B(1)(b) Companies Act 2006 is amended to require shareholder approval for a payment by way of an amendment to the approved remuneration policy.. This is a subtle change from the current provision, which requires shareholder approval for any payments that are inconsistent with the remuneration policy.
Any person who is in the role of the chief executive officer and any deputy chief executive officer must have their remuneration reported on even if they are not a director on the main board of the company.
Unquoted traded companies are not within the existing statutory framework of directors’ remuneration requirements. These include UK companies with shares traded on a UK regulated market but not admitted to the Official List, such as Specialist Funds Segment and High Growth Segment companies. There are transitional provisions and to the extent an unquoted traded company already complies with the existing provisions that apply to quoted companies, it can continue with its policy approved before 10 June 2019 in the same way as a quoted company.
Please see our addendum on the (now final) FCA rules implementing SRD II and significant changes to the related party transaction (RPT) rules from those first proposed here.
For more information, please contact Victoria Younghusband.
Our thinking
Pei Li Kew
Pei Li Kew writes for Pharmacy Business on the link between pharmacy and IP
Pei Li Kew writes for Pharmacy Business on the link between pharmacy and IP
Mark Howard
Charles Russell Speechlys advises Acora on its acquisition of Secrutiny
Charles Russell Speechlys advises Acora on its acquisition of Secrutiny
Nick White
Charles Russell Speechlys advises Symphony Holdings Limited on the sale of its PONY trade mark portfolio for USD $28 million
Charles Russell Speechlys advises Symphony Holdings Limited on the sale of its PONY trade mark portfolio for USD $28 million.
Simon Ridpath
Simon Ridpath featured in the Lawyer’s Hot 100 list
Simon Ridpath features in The Lawyer’s Hot 100 list
Mark Howard
Charles Russell Speechlys advises Europa Oil & Gas (Holdings) plc on its £7m equity fundraising
Europa Oil and Gas is a renewable energy, oil and gas development and production company.
Simon Green
International Bar Association quote Simon Green on the future of the legal sector in Hong Kong
International Bar Association quote Simon Green on the future of Hong Kong's legal sector
Patrick Chan
Corporate Treasurer publishes Patrick Chan's comments regarding the No Consent Regime
Corporate Treasurer publishes Patrick Chan's comments on the No Consent Regime
Jamie Cartwright
Jamie Cartwright comments on the potential impact of the plastic packaging tax
Jamie Cartwright comments on the potential impact of the plastic packaging tax
Rebecca Burford
Charles Russell Speechlys partners with the Crafty Counsel community
Crafty Counsel brings together in-house legal professionals to share their experiences.
Jonathan Morley
International Business Reports reported on the firm’s involvement advising Battery Ventures on the sale of Forterro to Partners Group for €1 billion
The firm has advised global, technology-focused investment firm Battery Ventures on the sale of Forterro to Partners Group for €1 billion.
David Hicks
David Hicks quoted by FT Adviser on why Succession sold up to Aviva
David Hicks explains that private equity backers have a time horizon for their investments.
Sarah Wigington
How will the new Economic Crime Levy impact residential development joint ventures?
The Economic Crime (Transparency and Enforcement) Bill is being created through Parliament this month.
Jonathan Morley
Charles Russell Speechlys is advising Battery Ventures on the sale of Forterro to Partners Group for €1 billion.
Battery Ventures is a the global, technology-focused investment firm.
David Coates
Charles Russell Speechlys advises on the acquisition of the Douglas & Gordon property sales business
Foxtons is a London listed property sales business.
Adrian Mayer
Charles Russell Speechlys advises AgDevCo on $70m of DFI Funding
AgDevCo is a specialist impact investor in African agribusinesses.
Mark Howard
International Business Reports cover the firm's involvement advising the shareholders of Zenkraft on the sale of the company to Bringg
The team was led by corporate partner Mark Howard, along with Helen Coward on tax and Mark Bailey on commercial technology aspects,
David Hicks
David Hicks, Robert Birchall and Sophie Dworetzsky write for FT Adviser on what business owners need to know when selling a business
The things business owners need to know when selling a business.
Mark Howard
Charles Russell Speechlys advises the shareholders of Zenkraft on the sale of the company to Bringg
Zenkraft is an award-winning technology company with locations in London and the US.
Mark Howard
AIM Market Webinar
Our Capital Markets team held our annual AIM webinar on the significant legal and regulatory developments taking effect in 2022.
Mark Howard
Public Company Update: Winter 2021
Welcome to the Winter 2021 Public Company Update.