Shareholder Rights Directive II – New Governance Requirements for Irish Public Companies

The second Shareholders’ Rights Directive (SRD II) put a new focus on encouraging long-term shareholder engagement in listed companies, in particular by addressing new obligations to investors and advisors.

The Irish regulations implementing SRD II were adopted in March 2020. They introduce three new chapters into Part 17 of the Companies Act 2014, covering the three principal subjects of SRD II:

• Chapter 8A (Rights of Shareholders) – which covers the identification of underlying shareholders and information flows between underlying shareholders and companies

• Chapter 8B (Transparency of institutional investors, asset managers and proxy advisors) – which provides new transparency obligations for these sectors with the objective of encouraging shareholder engagement and the development of long term investment strategies, and

• Chapter 8C (Remuneration Policy, remuneration report and transparency and approval of related party transactions) – which covers shareholder approval of directors’ remuneration and related party transactions

Chapter 8B, which is addressed to institutional investors, asset managers and proxy advisors, takes immediate effect. Read our article on this Chapter here.

Chapter 8A, which contains provisions relevant to issuers, is principally addressed to shareholder intermediaries, and takes effect from 3 September 2020. Read our article on this Chapter here.

For issuers, the obligations in Chapter 8C are predominantly matters that will not be relevant until the 2021 AGM season at the earliest. As for SRD I, the issuers in question are Irish PLCs listed on regulated markets, such as the regulated market of Euronext Dublin or the Main Market of the LSE. In Ireland, however, the obligations specifically exclude UCITS and AIFs (traded PLCs).

For traded PLCs, many of the new obligations are either not new in practice, e.g. shareholder approval of remuneration reports and policies, or already apply to them via the applicable Listing Rules, e.g. related party transactions.

Shareholder approval of remuneration policies and reports

The Regulations require traded PLCs to prepare a remuneration report and remuneration policy on directors’ remuneration, both which must be voted on at general meetings:

• In the case of the remuneration report, every year, and

• In the case of the remuneration policy, every 4 years

By default, resolutions on a remuneration policy or report are advisory only, unless the traded PLC provides for such resolutions to be binding via its constitution.

However, an advisory vote on a remuneration policy can still have implications under the Regulations, since where a remuneration policy is not approved at a general meeting, the traded PLC must prepare a revised remuneration policy and hold a remuneration vote on it at the following general meeting.

While these requirements are new in Irish law, it has been the practice of almost all Irish traded PLCs to follow the example of UK PLCs, which have long been required by the UK Companies Act 2006 to hold votes on directors’ remuneration reports and remuneration policies. As a result, the new SRD II requirements do not require any substantive change in existing practice for Irish traded PLCs.

However, certain additional information requirements are required by SRD II that must be reflected in the remuneration policy and report. Some of the principal new obligations (compared to existing Irish/UK practice) can be summarised as follows:

• Additional information required in the remuneration policy:

  • An explanation of how, if at all, the pay and employment conditions of employees of the traded PLC were taken into account when establishing the remuneration policy

  • Detail on deferral periods and clawbacks of variable remuneration

  • Additional detail on the vesting of share awards and options

  • A summary of the decision-making process through which the policy was determined, and key changes compared to the previous policy

  • An indication of the methods applied to determine the extent to which the performance criteria have been fulfilled, and

  • Website publication of the date and results of the shareholder vote, which must remain available for as long as the policy applies

• Additional information required in the remuneration report:

  • A comparison of the annual change of each director’s pay to the annual change in average employee pay, on a full-time equivalent basis, over a rolling five year period

  • A statement of the relative proportion of fixed and variable remuneration

  • A statement of changes to share options granted or offered and the main conditions for the exercise rights, including exercise price and date

  • The remuneration report must not include any personal data in the special categories of personal data which are restricted under the GDPR, and

  • Website publication of the report, which must be available for ten years

For most traded PLCs, these “new” requirements will only impact annual general meetings from 2021 onwards, on the basis that:

• The obligations relating to remuneration reports and policies only apply to financial years commencing on or after 10 June 2019 – for most companies, the 2021 AGM is the first time that a vote on the remuneration policy will be a statutory requirement; and

• Where a company has prepared a remuneration policy and had it approved in general meeting,whether or not the policy complies with the full requirements of the Regulations, then the company will not be required to hold a vote on a remuneration policy until 4 years has elapsed from the date of approval. Companies may be entitled to delay the holding of a vote on a remuneration policy until 2024 at the latest.

Transparency and approval of related party transactions

The Regulations impose new statutory restrictions on traded PLCs for the disclosure and approval of related party transactions. The requirements in this area mirror to the existing Listing Rule requirements for a company with a listing on the regulated market of Euronext Dublin or the LSE.

The criteria for a “material related party transaction” to which the new restrictions apply are drawn directly from the class tests in the Listing Rules, details of which are included as a new Schedule 21 to the Companies Act 2014 (the Class Tests). The threshold for a material related party transaction is 5% under any of the Class Tests. These are transactions that fall below 5% on each of the Class Tests, but above 0.25% on at least one Class Test do not require shareholder approval, but are still notifiable under the Listing Rules.

There are a number of differences between the lists of exceptions to the related party transaction requirements under the Regulations and the Listing Rules. These mean that a traded PLC will now have to take care to assess a potential related party transaction against both sets of criteria.

Similarly, there are minor differences between the Listing Rules and the Regulations with respect to the announcement to be made in the case of a related party transaction:

• The Listing Rules requirement is that the announcement is made via a RIS, while the requirement under the Regulations is simply to “publicly announce” the transaction;

• The timing of the announcement under the Listing Rules is as soon as possible after terms are agreed, while the timing under the Regulations is “no later than at the conclusion of the transaction”; and

• The contents of the announcements under the Regulations and Listing Rules are slightly different.

Again, traded PLCs must check that any announcement satisfies both requirements.

Despite the differences identified above, in general terms, the requirements for the notification and approval of related party transactions will not be surprising for traded PLCs and broadly mirror their existing obligations under the Euronext Dublin or UKLA Listing Rules.

Conclusion

For Irish PLCs, the new governance obligations under SRD II are predominantly matters that will not be relevant until the 2021 AGM season at the earliest. As noted, the Regulations impose relatively few new obligations on PLCs, and in many cases, the new obligations are already widely practiced by or already applicable to Irish PLCs. However, PLCs should be mindful of their new statutory obligations and, in particular, of the slightly different requirements of the Listing Rules and the Regulations in this regard.