Introduction
The Shareholder Rights Directive 2017/828 (SRD II) amends the Shareholder Rights Directive 2007/36 (SRD I) and aims to encourage long-term shareholder engagement and enhance transparency between companies and investors. It came into force on June 9, 2017 and the majority of provisions needed to be transposed into Member State law by June 9, 2019.
SRD II is supplemented by Commission Implementing Regulation 2018/1212 (the “Implementing Regulation”), which establishes minimum requirements in relation to shareholder identification, the transmission of information and the facilitation of the exercise of shareholder rights. The Implementing Regulation will apply from September 3, 2020.
SRD II main themes
SRD II comprises a number of key themes
a. Provisions to assist companies in identifying their shareholders
b. Requirements regarding the transmission of information between companies and their shareholders, through intermediaries
c. Obligations on intermediaries to facilitate the exercise of rights by shareholders, including the right to participate and vote at general meetings
d. Provisions on the transparency of engagement policies of institutional investors (e.g. life insurers, reinsurers and pension fund trustees) and asset managers, as well as their investment strategies
e. Disclosure obligations for proxy advisers in relation to their code of conduct, research, advice and voting recommendations
f. Rights of shareholders to vote on directors’ remuneration policies and reports
g. Obligations in relation to related party transactions
The obligations listed under d) – g) above, came into force in early June 2019. However, obligations a) – c) come into force in September 2020.
Application of SRD II
SRD II applies to various categories of firms as follows
- Application to companies. SRD II applies to companies that have their registered office in a Member State and the shares of which are admitted to trading on an EU regulated market.
- Application to intermediaries. The provisions on identification of shareholders, transmission of information and facilitating the exercise of shareholder rights apply to intermediaries insofar as they provide services to shareholders or other intermediaries in respect of companies that have their registered office in a Member State and the shares of which are admitted to trading on an EU regulated market. This includes third country intermediaries with neither a registered office nor head office in the EU.
- Application to institutional investors, asset managers and proxy advisers. The provisions on transparency of institutional investors, asset managers and proxy advisers apply to each of the following
- Institutional investors to the extent that they invest in shares traded on an EU regulated market (either directly or through an asset manager)
- Asset managers to the extent that they invest in shares traded on an EU regulated market on behalf of investors
- Proxy advisers to the extent that they provide services to shareholders with respect to shares of companies to which the SRD II applies
- Application to related parties. The provisions on transparency and approval of related-party transactions apply to certain transactions between a traded company and a related party.
Status of UK implementation
Shareholder identification
- In the UK, Part 22 (Information about interests in a company's shares) of the Companies Act 2006 already has provisions to allow a public company to investigate who has an interest in its issued share capital.
- There has, to date, been no clear indication of whether the UK intends to amend these provisions in light of SRD II.
- To some extent, the implementation of these provisions is dependent on the outcome of Brexit - the FCA has indicated that it would look to reconsider its position in the event of a “hard” Brexit.
Provisions relating to asset managers and institutional investors
- The Shareholder Rights Directive (Asset Managers and Insurers) Instrument 2019 came into force on June 10, 2019.
- The FCA has also updated the Handbook (notably SYSC 3 and COBS) to take account of the new rules.
Proxy advisors
- The Proxy Advisors (Shareholders’ Rights) Regulations 2019 (the PA Regulations) came into force on June 10, 2019. The PA Regulations aim to encourage greater transparency in the way in which proxy advisors carry out their work and provide services.
- On June 26, 2019, the FCA opened a consultation on changes to the Decision Procedure and Penalties Manual and the Enforcement Guide. A policy statement and final rules are expected in Autumn 2019. Through this, the FCA is proposing decision-making procedures to
- Remove an advisor from the public list of proxy advisors if they stop providing services but have not given the FCA notice to be removed from the list
- Investigate and discipline proxy advisors that must meet the PA Regulations but are not authorised by the FCA or the PRA under the Financial Services and Markets Act 2000.
Practical challenges
Data protection
- Custodians and sub-custodians are generally data controllers in respect of the personal data they hold about shareholders (i.e. in respect of their use of that personal data for know-your-customer or anti-money-laundering purposes).
- Under the General Data Protection Regulation (GDPR) each controller is required to give a notice setting out who they are and how they process personal data (a privacy notice or policy) to anyone whose personal data they process (a data subject). When a controller does not collect the personal data directly from the data subject, an exemption is available if it is impossible or involves disproportionate effort to provide this notice. However, the level of effort for the exemption to apply is very high.
- Sub-custodians might contractually require custodians to provide their privacy notice to shareholders whose details are passed to them. However, not all custodians will agree to this and very few of them will actually pass the privacy notice on to the shareholder.
- This issue has gained little attention in GDPR implementations to date as the potential harm to data subjects has not been high.
- However, Recital 52 of SRD II expressly requires “the data subject to be duly informed about the processing in accordance with the SRD II” and to be given an opportunity to exercise his/her data subject rights to rectification or erasure.
- This raises the relatively minor issue of whether more effort should be made to bring to shareholders’ attention (a) that SRD II requires disclosures to the company about the identity of the shareholder; and (b) the identity of the sub-custodian who might hold or distribute that data The first point can easily be dealt with through a minor change to custodians’ privacy notices. The second point requires a mechanism for notifying shareholders who the sub-custodian is and to provide the sub-custodian’s privacy policy. A potential solution would be to agree an industry standard of personal data uses that custodians would process personal data within. Provided the sub-custodian’s processing was within this standard, the custodian could help the sub-custodian comply by providing its name to the shareholder and stating that its processing was within the standard. It could also or alternatively provide a link to the sub-custodian’s privacy policy.
- As this is relatively low-risk, it may well be that the industry continues to deal with this through contractual obligations that are not generally fulfilled (i.e. where the identity of the sub-custodian and its privacy policy is never provided to the shareholder but where it is made clear that shareholder details will be provided to the company and to any sub-custodian under SRD II) and little data protection enforcement activity ensues.
Use of distributed ledger technologies to satisfy requirements
- We understand that several institutions are considering the extent to which distributed ledger technology might be used to help intermediaries to satisfy the relevant obligations.
- Whilst there are some advantages to having a decentralised database that is verifiable and immutable and which enables firms to ensure the security and confidentiality of data, there are also challenges associated with relying on such technology solutions.
Extra-territorial impact
- SRD II has broad territorial impact and third country intermediaries with neither a registered office nor head office in the EU are within scope, where they provide services with respect to shares of companies that have their registered office in the EU and the shares of which are admitted to trading on a regulated market situated or operating within the EU.
- The policy reason for this is that activities carried out by third-country intermediaries could have effects on the long-term sustainability of EU companies and on corporate governance in the EU. Moreover, in order to achieve the objectives pursued by SRD II, it is necessary to ensure that information is transmitted throughout the chain of intermediaries. If third country intermediaries were not subject to SRD II and did not have the same obligations relating to the transmission of information as EU intermediaries, the flow of information would risk being interrupted.
Brexit
- As the UK was still an EU Member State on June 10, 2019, it was required to transpose those provisions of SRD II that came into force at that time, into national law.
- There is an open question over how the UK will implement the requirements that come into force in September 2020, but broadly the expectation is as follows:
- SRD II will apply if the UK leaves the EU with a transition period.
- In a no-deal scenario (i.e. if there is no transition period), SRD II may still be relevant but the FCA expects to put forward revised proposals once there is greater clarity on the outcome of the political discussions.
