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EU directive to protect shareholder rights, create more transparency

The European Council has adopted a directive aiming at improving corporate governance in major European companies by regulating proxies and giving shareholders more say.

“The directive will encourage transparent and active engagement by shareholders of listed companies by reviewing the current Shareholders’ Rights Directive (2007/36/EC),” the Council said in a statement on its website on Monday. “The financial crisis revealed that shareholders in many cases supported managers’ excessive short-term risk taking. The revised directive is intended to redress this situation and contribute to the sustainability of companies, which will result in growth and job creation”.

The new directive, which member states will have a deadline of two years to incorporate into their national legislation, will allow the assessment of the remuneration of a company’s directors by its shareholders based on financial and non-financial criteria, such as environmental, social, and governance criteria that facilitate a company’s long-term business strategy and sustainability, the Council said. “Remuneration policy will also have to be publicly disclosed without delay after the vote by the shareholders at the general meeting”.

The directive also provides for more transparency with respect to the identification of direct and indirect shareholders aiming at facilitating the exercise of their rights –including participating and voting at a general meeting, the standardised and timely disclosure all information required and of new rules— and engagement in the company.

“Member states may provide that companies in their territory are only allowed to request identification with respect to shareholders holding more than a certain percentage of shares or voting rights which will not exceed 0.5 per cent,” statement said.

It also requires institutional investors and asset managers, who often in the role of proxy advisers, provide research, advice and recommendations on how to vote to other shareholders at general meetings and so can influence their voting behaviour, to either develop and make public a policy on shareholder engagement or explain why they decide against it, the Council said.

“This policy will describe how they integrate shareholder engagement in their investment strategy and the engagement activities they carry out,” the Council said. “It will also include policies to manage actual or potential conflicts of interests, in particular in a situation where the institutional investors or asset managers or their affiliated undertakings have significant business relationship with the investee company”.

Last, the new directive provides for the approval of related party transactions by either the shareholders or an administrative or supervisory body in order to protect the interests of the company and so avoid cases of related parties appropriating company value, the Council said. “Companies will have to announce publicly material transactions at the time of the conclusion of the transaction at the latest, with all the information needed to assess the fairness of the transaction,” the statement said.

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