Update on Shareholder Rights Directive II: FCA feedback and final rules on RPTs

Since our note on 23 May, the FCA published its final rules implementing SRD II (on 31 May), ten days before the 10 June 2019 deadline for transposition.

Following feedback to its consultation (CP/7), there are some significant changes to the related party transaction (RPT) rules from those first proposed.

Materiality threshold is 5% for all RPTs

This means that the same threshold that applying to RPTs under LR11 for premium listed issuers is now imposed on all in scope RPTs, but, as originally proposed, the distinction between premium listing and the DTR rules in what is required of issuers in terms of approvals and associated shareholder rights is maintained.  Under the revised DTR 7.3, only board approval will be required as well as disclosure, but not shareholder approval and a third party “fair and reasonable” report. 

Rest of World (ROW) issuers

ROW (i.e. non-EEA) issuers will have a slightly modified regime.  There will be no exemption on the basis that it will in practice not be possible to show that a non-EEA regime provides similar protections in respect of RPTs.  But, in order to reduce the compliance burden, ROW issuers will not be subject to the specific board approval rules but will instead be required to announce their material RPTs no later than the date when the terms of the transaction are agreed.  ROW issuers will be able to use the definition of “related party” from IFRS or from the alternative accounting standards used in their consolidated annual financial statements, where those accounting standards are deemed “equivalent” for the purposes of the Transparency Directive.  This will allow US issuers with a standard listing to use the alternative definition of related party in US GAAP.  ROW issuers with a standard or premium listing of equity shares will need to consider whether disclosure of directors’ remuneration is required under the new RPT rules.  Remuneration paid to directors may be disclosable if the director is a related party and the transaction is not in the ordinary course of business and concluded on normal market terms.  In that case, the ROW issuer will be required to assess the materiality of the transaction and disclose it where the 5% threshold test is met.

Aggregation

Under SRD II, issuers are required to aggregate transactions with the same related party over the previous 12 months.  Where the aggregated transactions meet the materiality threshold, board approval and disclosure requirements apply to all of the transactions included in the aggregation and not just the one that triggers the materiality threshold.  Unlike LR11, which provides for approval and disclosure of the transaction that triggers the materiality threshold and disclosure of the earlier aggregated transactions, SRD II provides that approval as well as disclosure obligations apply once the materiality threshold is reached.  The FCA recognises the challenge for issuers in complying with the provisions for completed transactions including in the aggregation.  They note that issuers that are proposing to enter into a sequence of smaller transactions with the same related party will need to take into account and plan for how they will be able to meet their future obligations for those individual transactions under the aggregation rules.

No change to transitional provisions

An issuer is only required to comply with DTR 7.3 and DTR 7 Annex 1 from the start of the financial year beginning on or after 10 June 2019 and only transactions or arrangements entered into on or after the start of the financial year beginning on or after 10 June 2019 must be aggregated.  The transitional provision will expire on 31 December 2020.

For more information, please contact Victoria Younghusband.