Shareholder Rights Directive II

New requirements for the encouragement of long-term shareholder engagement bring new challenges for financial institutions – is your institution ready for the SRD II?

Background

Designed to encourage long-term shareholder engagement in EU/EEA publicly listed companies, the second Shareholder Rights Directive (SRD II) sets out new requirements on a wide group of institutions in the financial sector including financial intermediaries, asset managers, institutional investors and proxy advisory firms.

On Monday 10 June 2019, the amended Directive has entered into force and Member States were supposed to transpose its provisions into the national law so far.

In Germany, Federal Government has published on 20 March 2019 the draft implementation bill (Regierungsentwurf eines Gesetzes zur Umsetzung der zweiten Aktionärsrechterichtlinie, ARUG II) whose provisions have been recently discussed in the German Parliament. However, the final text of the German national implementation bill remains to be published.

Scope of application

  • Intermediaries providing safekeeping or administration services with respect to shares of EU/EEA publicly listed companies
  • Asset managers (AIFMs, UCITS management companies, self-managed investment companies and portfolio managers under MiFID II) investing in shares of EU/EEA publicly listed companies
  • Institutional investors (Life insurance and reinsurance undertakings under Solvency II and pension funds pursuant to IORP framework)
  • Proxy advisory firms

Communication with Shareholders

  • Shareholder identification – listed companies will be entitled to identify their shareholders by requesting the relevant information about their identity from any intermediary in the chain. Information requests have to be transmitted along the whole chain of intermediaries until the last intermediary is reached.
  • Transmission of information – intermediaries are required to transmit relevant information about corporate events (general meetings, profit distributions etc.) along the chain of intermediaries to company’s shareholders. Implementing Regulation (EU) 2018/1212 stipulates detailed requirements on strict deadlines and standardized formats for the transmission of relevant information between companies and their shareholders the intermediaries need to comply with.
  • Facilitation of the exercise of shareholders’ rights – when it comes to exercise of shareholders’ rights, SRD II stipulates some additional requirements for intermediaries standing between companies and their shareholders. To that end, intermediaries will be required to transmit relevant information regarding the exercise of shareholder rights (confirmations of entitlement, voting receipts etc.).

Transparency and reporting obligations

  • Engagement Policy – asset managers and institutional investors will be required to develop and publicly disclose an engagement policy describing how they integrate the shareholder engagement in their investment strategy. Institutions that decide not to publish an engagement policy will need to publicly disclose clear and reasoned explanation for that decision.
  • Transparency of asset managers – asset managers investing on behalf of institutional investors by way of an arrangement, will be required to disclose to their investors on an annual basis how their investment strategy complies with the provisions of the arrangement and how it contributes to the medium to long-term performance of the assets of institutional investor.
  • Investment strategy and arrangements with asset managers – institutional investors that have entered into arrangement with an asset manager investing on their behalf, will need to publicly disclose certain elements of that arrangement and to explain how the main elements of their investment strategy is consistent with their liabilities.
  • New requirements on proxy advisors – SRD II regulates for the first time at the EU level activities of proxy advisors by requiring them to develop and publish a code of conduct and to report on an annual basis on its implementation. Where proxy advisor does not apply a code of conduct at all it will need to explain why this is the case.

Impact on the annual audit of safe-custody accounts (Depotprüfung)

Beside the predominant amendments of the German Stock Corporation Act (Aktiengesetzes AktG) German draft implementation bill contains also certain amendments of the German audit regulations (Prüfungsberichtsverordnung PrüfbV und Wertpapierdienstleistungs-prüfungsverordnung WpDPV).

To that end, German implementation bill expands the scope of the annual audit of safe-custody accounts (Depotprüfung) also with respect to review of compliance with minimum requirements arising from Implementing Regulation (EU) 2018/1212 on standardized formats, deadlines and minimum security standards for the transmission of relevant information through financial intermediaries.

Timeline

The SRD II provisions on shareholders identification, transmission of information and facilitation of the exercise of shareholders rights will be fully applicable as from 3 September 2020 when the Implementing Regulation (EU) 2018/1212, which sets out minimum requirements the financial intermediaries need to comply with, will enter into force.

On the other hand, requirements on asset managers, institutional investors and proxy advisors are going to be directly applicable as soon as national implementation bills are published, provided that no interim period or grandfathering provisions are stipulated by national law.

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