Shareholders’ rights directive on the home straight

The legislative procedure for the shareholders’ rights directive is moving towards its close. A trilogue compromise was reached in December 2016 and this was then confirmed by the Committee of Permanent Representatives for the EU Member States and by the European Parliament’s Legal Affairs Committee. The plenary is expected to vote in March 2017. The directive is intended above all to encourage shareholders to make a long-term commitment and to enhance corporate governance and transparency in companies and in exchange with all stakeholders.

The negotiations came to a halt for several months because the European Parliament was insisting on implementation of the so-called “country-by-country reporting” it called for in its report (a disclosure and auditing obligation for large companies and companies of public interest in relation to tax-relevant aspects vis-à-vis the Member States).

Surprising agreement

Surprisingly, an agreement was reached rapidly under the Slovak Council Presidency. The European Parliament finally dropped its demand for the reporting in the negotiations, in part because the European Commission had presented its own proposal with regard to the disclosure of corporate tax information by certain companies and branch establishments in April 2016, a proposal designed to implement the OECD “base erosion and profit shifting" (BEPS) project. In view of sometimes sharply criticised stipulations of the Commission’s proposal, Council, European Parliament and European Commission finally agreed provisions which respect more comprehensively the two-tier system established in particular in Germany and continental Europe. In a two-tier corporate order, a company’s management consists of two elected bodies: the executive board and the supervisory board whose tasks are finely balanced in German company law.

Improvement of Commission’s proposal

BDI contributed intensively to the legislative procedure and above all the European Commission’s stipulations on transactions with related companies and persons (article 9c), on remuneration policy (article 9a), on the remuneration report (article 9b) which it criticised as going much too far.

According to article 9c, substantial transactions with related parties will have to be approved by the company’s shareholders or its administrative or supervisory body in order to protect interests appropriately. Companies will in future have to notify substantial transactions with third parties publicly at the latest when they are concluded and supplement the notification with all information needed to evaluate the fairness of the transaction. The Member States can provide that the publication is accompanies by a so-called “fairness opinion” which can be drawn up by the supervisory board, a third party or the audit committee. Derogations will apply for fully owned group subsidiaries as well as for transactions concluded in the normal course of business and under market conditions. It was originally also foreseen that the consent of the general meeting should be obtained before such transactions are cleared, a proposal which could in practice have paralysed day-to-day business.

According to article 9a, shareholders will in future broadly be able to hold a binding vote on the management’s remuneration policy. It is welcome that Member States have an option to provide that the shareholders’ vote may be advisory. The performance of the company’s management should be assessed both on financial criteria but also on non-financial criteria – also taking ecological and social factors as well as the corporate governance aspect into account, as and when appropriate, a demand which the European Parliament managed to push through in the trilogue. In addition, the remuneration policy is to be published as soon as shareholders have endorsed it in the general meeting.

In accordance with Art. 9b, companies must also draw up a remuneration report for the preceding financial year. Wherever possible, this report should also contain information on the individual remuneration of an executive board member as well as changes in annual executive board remuneration over the last five financial years as a function of developments in the company’s performance and the wage progression of the average full-time employee. The remuneration report should be submitted to the general meeting for an advisory vote. A new element is the exemption clause for small and medium-sized enterprises within the meaning of article 3 paragraphs 2 and 3 of directive 2013/34/EU which can also provide that, instead of a vote, the report is only discussed at the general meeting.

Next steps

Following definitive approval by the European Parliament and the Council, the revised directive will be published in the EU’s Official Journal. That will bring an end to a legislative procedure at EU level which has lasted a total of three years. The Member States will then have two years to transpose the new provisions into their national law.