New EU directive to introduce say on pay, govern shareholder intermediaries and establish rules for related party transactions to take effect in 2019

A new directive to establish requirements to encourage shareholder engagement in the long term and increase transparency has completed the EU legislative process and will need to be implemented in Member States by 10 June 2019. Most of the proposed measures will have limited impact on UK listed companies, as they are mostly similar to existing UK measures.

Background and application

The directive amends the existing EU Shareholder Rights Directive (Directive 2007/36/EC). The Shareholder Rights Directive applies 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. Accordingly, companies incorporated outside the EU with shares listed on an EU regulated market will not be subject to the rules (although equivalent rules may be applied by the listing rules in the country of listing). Similarly, companies incorporated in a Member State with shares listed on a market which is not an EU regulated market will not have to comply with the rules.

The measures included in the new directive include:

Directors' remuneration

Shareholders will have the right to vote on the directors' remuneration policy at least every four years. The vote may be binding or advisory, at the choice of the member state implementing the directive. The policy should support the company’s strategy, should state whether clawback applies, deferral and holding periods. Directors' performance should be assessed on the basis of both financial and non-financial performance criteria, including environmental, social and governance factors. The remuneration policy will also have to be publicly disclosed without delay after it is voted on by shareholders at the general meeting and remain on the website while the policy applies.

Shareholders will also have a right to vote on the annual report on pay (implementation report), but this vote will only be advisory. In addition, member states may allow smaller companies to replace this voting requirement with a discussion on the implementation report at the general meeting. 

There is no express requirement to include a CEO:employee pay ratio, but, where appropriate, the implementation report will have to include a statement on the annual change of each director’s pay over at least five years, the evolution of the company and the average pay of full time equivalent employees (of the listed company only, so this may have no teeth if this is just a holding company). Assuming member states consider it appropriate to transpose this provision into domestic law, it may well end up as a ratio of change disclosure.

Identification of shareholders

The new directive will ensure that companies are able to identify their shareholders and to obtain information on shareholder identity from any intermediary who holds that information. Member states may choose to implement a threshold of a minimum holding of 0.5% of shares or voting rights before a company can request shareholder identification.

Facilitation of exercise of shareholder rights

Member states will have to ensure that the exercise of shareholders' rights, including the right to participate and vote in general meetings, are facilitated by intermediaries. Intermediaries will also have an obligation to deliver to shareholders all the information from the company that will enable shareholders to properly exercise their rights.

Related party transactions

The requirements for related party transactions are less onerous than those in Listing Rule 11 for premium listed companies, but will impact EU-incorporated standard listed companies (who are not currently subject to LR 11).

Premium-listed companies will also need to consider whether the different definition of related party (by reference to accounting standards) means that more transactions are within scope.

For any material transaction (to be defined by each member state) between a listed company and a related party:

• the transaction must be announced;
• member states may require the announcement to be accompanied by a report from an independent third party, the board or a committee of independent directors that the transaction is fair and reasonable from the perspective of the company and the non-related shareholders;
• the transaction must be approved by shareholders or the board. If approved by the board, member states may require that shareholder approval is needed as well.

Transparency for institutional investors, asset managers and proxy advisers

Institutional investors and asset managers must either develop and publicly disclose a policy on shareholder engagement, or explain why they have chosen not to do so. Proxy advisers will be subject to transparency requirements and will be subject to a code of conduct.

Next steps

Now that the directive has been published in the Official Journal of the EU, member states will have to transpose it into national law within two years. Although the UK may not be part of the EU by the time of that deadline, we do not yet know whether the UK will continue to apply this and other European legislation.

Click here for the Directive (EU) 2017/828 of the European Parliament and of the council of 17 May 2017 amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement.