1. Introduction
On 20 May 2017, the Directive 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 was published in the Official Journal of the European Union. It rules several issues that can be clustered in three groups: the improvement of the long-term engagement of the shareholders, the remuneration of directors and the transactions with related parties.
As the title implies, Directive 2017/828 amends Directive 2007/36/EC. In particular, it modifies paragraphs 1, 2 and 3 of Article 1 and point a) of Article 2. It adds paragraphs 3a, 5, 6 and 7 to Article 1; points d) to j) to Article 2; Chapter Ia (Articles 3a to 3f); Chapter Ib (Articles 3g to 3k); Articles 9a, 9b and 9c inside Chapter II; and Chapter IIa (Articles 14a and 14b). Obviously, both Directives share the scope. They apply to “…companies which have their registered office in a Member State and the shares of which are admitted to trading on a regulated market situated or operating within a Member State” (Article 1, paragraph 1). The reason is that they are aimed to improve corporate governance and cross-border transactions.
There would be other European Union legislative acts that would be applied to the same companies; for instance, sector-specific rules regulating some types of enterprises. These laws should be considered lex specialis and, thus, should prevail over the Directive 2017/828. Nonetheless, whether the last one contains more specific provisions or imposes additional requirements, it should be applied in conjunction with the sector-specific rules, according to Article 1.7.
Although it should not be necessary to explain it, it is worth commenting that the Directive does not impose obligations on companies, directors or shareholders, but on Member States. The reason is the type of legislative act: Directives are not self-executing, but they need implementing provisions adopted by Member States.
2. Aim and content
The title of the Directive refers to the long-term shareholders’ engagement. It could be considered that it is its goal, but I humbly think that it is more a mean than an end in itself. The final aim of the European Institutions is improving the competitiveness and sustainability of the European firms. To achieve it, it is essential to have an effective corporate governance legal framework. One of the key elements is the medium- and long-term engagement of shareholders. Recital 14 of the Directive evidences the reason: “Effective and sustainable shareholder engagement is one of the cornerstones of the corporate governance model of listed companies, which depends on checks and balances between the different organs and different stakeholders. Greater involvement of shareholders in corporate governance is one of the levers that can help improve the financial and non-financial performance of companies …”
It is not a new idea. We can already find it in the Action Plan 2012, which constitutes the legal background of the Directive. It explains that the financial crisis revealed some shortcomings of listed companies outside the financial sector. Two of the most important were the lack of shareholder interest in holding directors accountable for their decisions and the defective application of the corporate governance rules. Hence, the Action Plan announces some initiatives to improve the competitiveness and sustainability of companies that are grouped in three lines of action: enhancing transparency[1], engaging shareholders[2] and fostering the firms’ growth and effectiveness.
Regarding the content of the Directive, three issues are ruled: engagement of shareholders, remuneration of directors and transactions with related parties. They are all closely related, as a strong commitment of the shareholders is an irreplaceable weapon to fight against these two high-risk practices that can be very detrimental for the health of the company, as the past financial crisis evidences. The key points are information and approval. It is necessary that the company informs shareholders about the remuneration of the directors and the transactions with related parties and that they approve both of them in order to be valid and enforceable.
3. Long-term engagement
The Directive lays down some obligations on intermediaries, institutional investors, asset managers and proxy advisors in order to improve the engagement of shareholders. These obligations consist mainly in identifying the shareholders, disclosing information and easing the exercise of shareholders’ rights. They are inextricably linked. On the one hand, the company needs to know who their shareholders are to facilitate their participation in the corporative life. On the other hand, information regarding the intermediary charges, investment policy and advice’ criteria is essential to increase the awareness of the shareholders and beneficiaries of institutional investors and asset managers, as well as to boost their interest on the companies in which they have invested.
Intermediaries can represent a barrier between the company and the shareholders that hinders the engagement, because the last ones do not receive the suitable information, they have difficulties to exercise the corporate rights and they are not motivated to get engaged in the company. The difficulties increase when there is a chain of intermediaries. Hence, the Directive imposes several duties on them. Firstly, they must help the company to identify the shareholders, by submitting the data that can be required by the enterprise[3]. Secondly, they must publicly disclose information regarding the remuneration of their services. It is especially outstanding in relation to the cross-border exercise of rights. Whether the charges are unjustifiably different, they can be deterrent to cross-border investment and obstruct the efficient functioning of the internal market. Grounded on this reason, the Directive forbids discrimination: Member States shall ensure that the charges are non-discriminatory and proportional to actual costs. And thirdly, intermediaries must facilitate the exercise of the shareholders’ rights. The Directive refers particularly to the vote in the general meeting. Intermediaries should give shareholders the possibility to check that the votes have been validly recorded and counted by the company.
Normally, institutional investors and asset managers are not heavily involved in the functioning of the companies in which they have invested. Besides, capital markets normally exert pressure on enterprises to perform in short term. Among other consequences it can lead to a suboptimal level of investment. According to the Commission, the solution is to increase the awareness of investors. To achieve this goal, it is important to augment transparency and to align the interests of the final beneficiaries, of the institutional investors, of the asset managers with the interests of the investee enterprises. According to the European Institutions, it will be useful to change the approach of institutional investors and asset managers: from the short term to the medium or long one.
The Directive focus on the information of their investment strategies, according to the principle comply or explain. Articles 3g to 3k order institutional investors and asset managers to develop and publicly disclose an engagement policy, where they should describe how they integrate shareholders’ engagement in their investment strategy[4]. They should make and disclose two yearly reports: one explaining the implementation of the engagement policy and another that describes the relationship between the elements of their investment equity with the profile and duration of their liabilities. Besides, they must give information about their arrangements with the asset manager. These materials shall be available free of costs in their websites. Also, asset managers shall disclose, on annual basis, to the institutional investor how their investment strategy and implementation thereof complies with their arrangements and contributes to the medium- and long-term performance of the assets of the institutional investor or the fund.
Proxy advisors provide research, advice and recommendations on how to vote in general meetings of listed companies. Due to their importance regarding the behavior of investors, the Directive subjects them to transparency requirements[5]. Particularly, they must disclose the code of conduct they follow, how they have applied it, the essential elements and criteria used to prepare the research and to give advice and voting recommendations, as well as their policy regarding the conflicts of interest[6]. Again, all this information should be available free of charge in their website.
4. Remuneration of directors
The remuneration of directors is another key issue of Company Law. As the past financial crisis has again demonstrated, inadequate salaries can deprive the firm of essential resources or even lead it to bankruptcy. Therefore, the European Institutions consider essential that companies have a suitable remuneration policy, agreed by the competent bodies, that aligns the medium- and long-term interests of the managers with the ones of the owners of the firm. Besides, it is indispensable that it is strictly followed.
Therefore, the Directive orders companies to have a remuneration policy regarding directors. It should be established by agreement of the general meeting and contribute to the firm business strategy, taking into consideration its long-term interests and sustainability. The policy shall explain how it fulfills these requirements. Obviously, it is binding; i.e., directors can only be paid according to its rules. Notwithstanding, some exceptions are allowed. In order to strengthen its efficiency, the Directive orders that the remuneration policy is applied not only to a single company but to the remuneration in all the undertakings of a group.
Secondly, shareholders shall have the possibility to express their views. They shall have the chance to take part in the general meeting that approves the remuneration policy and also to vote the yearly remuneration policy’s report. Thirdly, transparency is a core rule in this field. On the one hand, the remuneration policy shall be made public in the company’s website. On the other, a yearly report shall be worked out, approved and disclosed. Member States shall ensure that the it has the form and content established in Article 9b. It is worth underlining that it shall give information regarding the remuneration of each single director. Consequently, some problems can arise regarding privacy and data protection (see points 2 and 3 of Article 9b). Article 9b .3 expressly establishes that the yearly remuneration report shall be publicly available on the company’s website for a period of 10 years.
5. Transactions with related parties
Transactions with related parties are an extremely sensitive subject. The reason is that they may give the related parties the opportunity to usurp value belonging to the company and deprive it of business opportunities. Being aware of this risk, the Directive focuses on two remedies: transparency and agreement. First of all, it is worth commenting that it does not define or enumerate the ‘material transactions’. It orders Member State to do it. Nonetheless, point 1 of Article 9c establishes some guidelines and Article 2 .h defines ‘related party’ by remitting to the international accounting standards adopted in accordance with Regulation 1606/2002.
The first measure to neutralize the risk of these operations is transparency. It is important to allow stakeholders to be informed about the potential risks. The Directive asks companies to publicly announce these operations at the latest at the time of the conclusion of the transaction. It prescribes also the content of the announcement (Article 9c .2) and it orders the information to be complemented with a report assessing whether or not that business is fair and reasonable.
The second measure is the agreement of the firm’s owners –or of its representatives. The Directive requires the transactions with related parties to be approved by the general meeting or by the administrative (or supervisory) body. In order to prevent related parties to take advantage of their position, they are not allowed to participate in the voting or agreement, despite being directors or shareholders[7]. Besides, the interests of the company and of minority shareholders should be taken into consideration.
6. Penalties, implementing acts and data protection
The effectiveness of the Directive requires punishing the breach of the obligations it establishes. Article 14b orders Members States to lay down the suitable measures and penalties. They should be effective, proportionate and dissuasive. Besides, Member States shall report them to the Commission.
Directive gives relevance to the Commission. On the one hand, it is empowered to approve implementing acts regarding the information on shareholders’ identity, on the exercise of their rights and on the voting of the remuneration report. The idea is to achieve uniformity to avoid differences in domestic laws that could hinder cross-border operations. On the other hand, the Commission shall submit reports on the implementation of the rules on intermediaries[8], on the engagement policy, on the investment strategy of institutional investors and arrangements with asset managers, on transparency of asset managers, as well as on the transparency of proxy advisors[9].
Lastly, the Directive orders to collect, transfer and disclose information to enhance the shareholders’ engagement, to control directors’ remuneration and to neutralize the damages that business with related parties can rise. This application of the transparency principle is essential to achieve the pursued aims. Nonetheless, it might create problems regarding privacy; for instance, when sensible personal data should be made publicly available. It is the case, for instance, of the remuneration of directors: sometimes, the family situation of the director is taken into consideration when fixing the salary. In order to resolve the doubts that could appear, it is important to take into consideration recital 52: “This Directive should be applied in compliance with Union data protection law and the protection of privacy as enshrined in the Charter of Fundamental Rights of the European Union. Any processing of the personal data of natural persons under this Directive should be undertaken in accordance with Regulation (EU) 2016/679. In particular, data should be kept accurate and up to date, the data subject should be duly informed about the processing of personal data in accordance with this Directive and should have the right of rectification of incomplete or inaccurate data as well as right to erasure of personal data. Moreover, any transmission of information regarding shareholder identity to third-country intermediaries should comply with the requirements laid down in Regulation (EU) 2016/679”.
7. Transposition
The Directive has entered into force on the twentieth day following that of its publication in the Official Journal; i.e. the 9 June 2017. It must be transposed into the national legal systems by the 10 June 2019. The Member States have two years to approve the laws, regulations and administrative provisions necessary to comply with their obligations. It is possible that some of them have yet taken steps to fulfill this duty. It is the case of Spain: The Act 31/2014[10] ruled, among other issues, on the remuneration of directors and on the transactions with related parties and incorporated some of the rules established by the Directive into de Spanish Corporate Enterprises Act.
[1] “…companies should be allowed to know who their shareholders are and institutional investors should be more transparent about their voting policies so that a more fruitful dialogue on corporate governance matters can take place.”
[2] “…They [shareholders] should be offered more possibilities to oversee remuneration policy and related party transactions … In addition, a limited number of obligations will need to be imposed on institutional investors, asset managers and proxy advisors to bring about effective engagement.”
[3] The right of the company and the obligation of the intermediaries is excluded when the shareholders have a minimal participation (less than 0,5% of the capital).
[4] The Action Plan 2012 explains the reason: “Disclosure of such information could have a positive impact on investor awareness, enable ultimate investors to optimise investment decisions, facilitate the dialogue between investors and companies, encourage shareholder engagement and could strengthen companies’ accountability to civil society. Moreover, this information could be useful for investors before entering into a portfolio management contract or for beneficiaries of institutional investors acting on behalf of or for the benefit of others. In the light of its overall objective to engage shareholders, the Commission believes this to be the right step forward”.
[5] The Action Plan 2012 stresses three problems: their analytical methodology does not take into account company-specific characteristics or national rules, the conflicts of interest and the lack of competition in the sector.
[6] Id est, the essential features of the methodologies and models they apply; the main information sources they use; the procedures put in place to ensure quality of the research, advice and voting recommendations and qualifications of the staff involved; whether and, if so, how they take national market, legal, regulatory and company-specific conditions into account; the essential features of the voting policies they apply for each market; whether they have dialogues with the companies which are the object of their research, advice or voting recommendations and with the stakeholders of the company, and, if so, the extent and nature thereof; and the policy regarding the prevention and management of potential conflicts of interests.
[7] Nonetheless, see the special rules of Article 9c .4 subparagraph 2.
[8] Id est, on the identification of shareholders, transmission of information and facilitation of exercise of shareholders’ rights (Article 3f .2). The Commission shall prepare the report in cooperation with ESMA and the European Supervisory Authority.
[9] The last one, in cooperation with ESMA.
[10] Act 31/2014, 3 December, on modification of the Law on Corporate Enterprises for the improvement of corporate government.