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.

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For more information, please contact Victoria Younghusband.