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Your Ultimate Guide to the Shareholder Rights Directive II

From 2019, SRD II (Shareholder Rights Directive II) will have a far-reaching impact on the investment industry. And yet, however noble or necessary its aims are, many companies are still uncertain about what SRD II is, let alone what they can do to ensure they comply with – even thrive in the wake of – the new laws it’ll bring into force.
So you can better understand SRD II – particularly the implications for issuers, investors, intermediaries and other parties – we’ve put together a fairly thorough, if plainly worded, guide to get you started.

Here’s what SRD II is all about . . .

So SRD II, which is also known as the EU Shareholder Rights Directive 2017 (or Shareholder Rights Directive 2017), amends a number of provisions made by the earlier Shareholder Rights Directive of 2007 (let’s call that SRD I). SRD II aims to improve SRD I.
The European Commission (EC) drafted SRD II, but the final version is a result of negotiations and consultations between member states and the European Parliament. Each member state will transpose SRD II into local law and companies (e.g. issuers) and other institutions (e.g. intermediaries and institutional investors) will be required to fully comply by September 2020 at the very latest.

Though SRD II captures all EU member states, at this point some of SRD II’s requirements will be implemented earlier than others – which means there’s no single blanket implementation date – so it’s important to know what needs implementing when. That said, the aim of the directive, at least in general terms, seems pretty clear enough.

SRD II aims to make it easier for shareholders to exercise their rights, especially across different markets or countries, encouraging the use of modern technology to aid communication between companies, their shareholders and the intermediaries between them.

But even at the highest level – and without going into too much detail – it’s also clear the requirements will put more pressure on existing processes – including associated systems and procedures – many that haven’t been updated for years. This suggests new platforms and technologies may not only help upgrade existing processes to meet new SRD II demands, but could also be the most efficient and effective means of complying with them.

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Some cut-out-and-keep takeaways

Before we go into more depth, it’s worth noting a few salient points, if only to ensure you have some handy (and actionable) things to take away when you consider your options. Let’s count them down for you.

FOUR key talking points . . .

  1. SRD II will largely impact three groups . . .
    • Companies with registered offices, and shares admitted to trading, in the EU.
    • All intermediaries in such companies’ custody chain (even if based outside the EU).
    • And institutional investors/asset managers investing in shares traded in a regulated market.
  2. SRD II overcomes some SRD I shortcomings like . . .
    • A lack of long-term focus when investing.
    • Ineffective company-shareholder communication (esp. cross-border).
    • No transparency or opportunity to vote on directors’ pay.
    • Lack of oversight of a company’s transactions with directors, senior management, etc.
    • And SRD I’s openness to interpretation and lack of measures to monitor.
  3. In-scope companies can ID shareholders holding min. 0.5% of share capital.1
  4. And penalties for not complying with SRD II are to be set by each member state.

THREE steps to get ready . . .

  1. Make sure you understand how you and your company will be impacted by SRD II. This is important as issuers will be affected differently than intermediaries, who will in turn be affected in a different manner than institutional investors. If you aren’t the best person in your company, make sure this article reaches that person or team and ensure that they’re aware of SRD II and the requirements on your company.
  2. Ensure that you understand the interpretation and impact of each EU member state that you operate in. The interpretations of SRD II, as well as the penalties imposed, are likely to differ in each member state. Make sure you understand how each of the states that you operate in differs.
  3. Start to prepare a workable action plan, documentation and training for your company, and seek external advice if the knowledge is not available.

TWO dates to remember . . .

  1. The basic SRD II deadline is 10 June 2019. At this point, each EU member state is required to have interpreted and implemented the majority of the requirements under SRD II.
  2. Three articles require implementing by 4 September 2020. They deal with shareholder identification (Article 3a), transmission of information (Article 3b) and facilitating the exercise of shareholder rights (Article 3c).

ONE last thing to note…

Don’t be complacent! Many SRD II obligations may require considerable manual resources or technologies or software to manage. The timeline might seem distant and the dates
abstract, but they’ll come soon enough. So don’t wait till the last minute or after the deadline to start understanding what you need to do. With these takeaways in mind, let’s go into some of the details now!

If you aren’t the best person in your company to understand the impact of SRD II, make sure this article reaches the right person or team so they can make themselves aware of the requirements for your company.

Key dates on the SRD II timeline

The general timeline for SRD II features five key dates (figure 1). When an EU directive or regulation comes into force, those affected have two years to apply them. During that time, a few big milestones will come to pass. But even before any of this, it’s worth reminding ourselves what the purpose of SRD I was to begin with . . .

 

Figure 1: Key SRD II dates and big milestones

What was SRD I for?

SRD I sought to improve shareholder information and shareholder participation in company meetings. Officially called the Shareholder Rights Directive (2007/36/EC), it was formalised on 11 July 2007 and gave EU member states two years to incorporate it into local law. 2

In the UK, SRD I was transposed (implemented) into the Companies (Shareholders’ Rights) Regulations 2009 (SI 2009/1632) (2009 Regulations).3
Anyway, SRD I tried to improve the transparency of shareholder information so companies could identify their owners, including those with borrowed voting rights, short-term interest, and incentives for long-term investment.

SRD I improved participation rights in company meetings like annual, ordinary and extraordinary general meetings (AGMs, OGMs, and EGMs, respectively). It advocated for “timely” access to all relevant information and the ability (for shareholders) to exercise their international voting rights by proxy. Among other hurdles to voting, this removed share blocking at a market level (often cited as an obstacle to voting by proxy, as shareholders who wanted to vote were’t able to sell shares in the weeks coming up to a meeting), and it gave shareholders the right to ask questions at GMs.

Proxy voting is essential, not least because it’s difficult for investors with shares in hundreds or thousands of companies to physically attend all meetings. So proxy voting enables investors to vote on meeting items or minutes remotely and ahead of time.

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What challenges are there?

Though proxy voting does mean shareholders needn’t physically attend meetings, it disadvantages them in other ways. One example is time: proxy voting severely limits the amount of time investors get to research the meeting agenda and cast their vote. Once a listed company or issuer announces a meeting, say, meeting details are digested and interpreted through a variety of financial intermediaries before reaching the shareholder.

But once the shareholder receives that information, they’ve only got a limited amount of time to absorb it, give their opinion and finally cast a vote, which then has to travel back through the same intermediary chain before it reaches the issuing company. This takes time, of course, so intermediaries set artificial voting deadlines, sometimes up to 6 days before the issuer deadline, to make sure voting can be completed.

So let’s say an AGM is set for 7 March. This means investors have to cast their votes to an artificial deadline of, say, 1 March. Now, SRD II says the last intermediary in the chain must offer a deadline of no later than three days before market. But the infrastructure change required to meet this is likely to come at a cost for intermediaries, which could be passed on to shareholders. That’s just one major challenge. Which begs a major question…

SRD II aims to improve the flow of information across the whole proxy chain, from issuer to investor and back: a better flow of information offers greater transparency during voting and across the custody chain.

Why do we need Shareholder Rights Directive II?

Well, SRD I was a positive step-change for shareholders and companies alike. At best, it secured minimum rights for investors, ensuring they had some access and time to process meeting and corporate event information. SRD I also promoted proxy voting so investors could vote remotely, across borders and in different markets (within the EU).

But there were a number of persistent high-level issues that needed addressing like…

 

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