Directive 2017/828 of May 17th, on encouragement of long-term shareholder engagement

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Directive 2017/828 of May 17th, 2017, amends the Directive 2007/36/EC, regarding encouragement of long-term shareholder engagement. The purpose of this regulation is, mainly, to promote a higher concern and monitoring by shareholders of listed companies and, especially by institutional investors.

This Directive attempts to reduce investors short-term focus, because this approach increase risks. This short-term focus is more relevant when the party taking the risk is a asset manager, as it manages third-party funds and, additionally, it can affect the management and performance of the participated company.

In terms of corporate governance, during the last years both the disengagement of shareholders regarding the management of the company, and the emergence of more and more intermediaries on the stock ownership, has led to an increase of the so-called empty vote problem and, even, to the ignorance of the company regarding who are its shareholders. This situation results on more absenteeism in general meetings and splitting of the politic and economic rights of the shareholders (causing conflicts of interest). A useful tool to deal this problem is remote means, something that has been promoted during the recent years.

All these problems explain the need to approve the Directive 2017/828, incorporating amendments to Directive 2007/36/EC, mainly regarding the following subjects:

-       Scope of the Directive.
-       Identification of shareholders.
-       Transmission of information regarding the shareholders.
-       Shareholder rights.
-       Transparency of institutional investors, asset managers and proxy advisors.
-       Directors remuneration policy.
-       Related party transactions.

Regarding the problem of the identification of the shareholders of listed companies, Member States shall approve mechanisms to ensure such companies can identify its shareholders. In this sense, the legislator of each Member State may decide whether this right of listed companies applies in all cases, or if it applies only when the shareholder’s percentage reaches certain minimum, which cannot exceed 0.5%. Although the duty to identify the shareholders is already contemplated in article 497 of the Spanish Companies Act and in the Royal Decree 878/2015, with this Directive its scope is expanded.

All members participating in the intermediaries’ chain with information related to the identification of shareholders, shall transfer such information between them, and can require any of them to provide the information. In addition, each Member State may contemplate that the right of the company to request the central securities depository such information.

To guarantee the exercise of vote by shareholders operating through intermediaries, it is contemplated an obligation on Member States to guarantee, at least, one the following two options:

a) that the intermediary allows the shareholder to exercise the rights by itself, and/or
b) that the intermediary exercises the rights of the shareholder with its authorization and following its instructions.

In addition, Member States shall ensure shareholders are informed regarding the exercise of the vote and its direction (in favour, against or abstention).

Member States shall ensure the implementation of these new measures and services do not lead to discriminatory or disproportionate charges for shareholder. Therefore, the Directive includes the requirement for Member States to monitor the tariffs applied and even allows Member States to prohibit intermediaries from charging fees for these services.

The Directive also promotes the development and publication of an engagement policy by institutional investors and asset managers. In this case, it is not regulated as an obligation but a recommendation. However, the principle of compliance or explanation is applied.

The period for Member States to transpose the Directive expires on June 10th, 2019. The transposition of Directive 2017/828 will be a step further to the amendments already introduced because of the previous Directive 2007/36/EC, which led to Law 25/2011, of August 1st, on Partial Amendment of the Spanish Companies Act.