Shareholder Rights Directive II aims to enhance transparency between companies and investors

Shareholder Rights Directive (SHRD II) aims to strengthen the position of shareholders to have an effective say on related party transactions and directors’ renumeration as well as to encourage the flow of information between a listed company and its shareholders. The directive also aims to encourage transparency regarding big institutional investors and voting rules.

The amending directive is a part of European effort to create a capital markets union. As a harmonization directive, the amending directive allows further regulation on a national level. Key amendments to the Finnish regulation concern Securities Markets Act, Limited Liability Companies Act and Act on Investment Services. Additionally, other acts are proposed to be amended, where appropriate. The EU member states shall implement the amending directive by 10 June 2019. Thus, the amendments to the national legislation are intended to enter into force on 1 April 2019. The government proposal was published on December 2018. This article aims to present the key amendments in the Finnish legislation due to the amending directive.

Directors’ remuneration

The amending directive seeks to strengthen shareholders’ ability to influence over directors’ remuneration by obligating the companies to follow a remuneration policy when remunerating the directors.  The remuneration policy will be determined at a general meeting of shareholders and it shall be approved by board of directors. The member states have a possibility to establish the decision of the general meeting on remuneration policy to be either binding or advisory. In Finland, the decision on remuneration policy is proposed to be advisory, so the policy may be used as grounds for remuneration, even if the general meeting voted against it. The general meeting shall decide on remuneration of the board of directors and the supervisory board. In general, the board of directors shall decide on remuneration of the chief executive officer.

The directors shall mean at least the board of directors and the chief executive officer. The member states may include persons performing similar tasks, such as the executive team, in the definition.

A company shall publish a remuneration report, which shall disclose remuneration of directors in accordance with remuneration policy during the most recent financial year. The remuneration report shall be publicly disclosed no later than three weeks before the general meeting where the remuneration report is to be discussed.

Related party transactions

The regulation concerning related party transactions aims to prohibit directing value belonging to the company at the related parties. New regulation concerning related party transactions replaces partly the current regulation concerning disqualification clarifying it from listed companies’ and investors’ viewpoint. The listed companies are subject to a broad definition of related party, whereas other companies are subject to a partly more restrictive definition. Related party transaction shall mean any transaction between related parties and the company or its subsidiaries beyond company’s normal business operations or an arrangement executed otherwise than on commercial terms.

Any materially important transaction with related parties shall be publicly announced at the time of the conclusion of the transaction at the latest, in other words not only in connection with the company’s common obligation to provide information. The board of directors is competent to decide on related party transaction, unless it is otherwise provided in the articles of association.

Identification of shareholders and flow of information

The company shall have a right to obtain information on its shareholders, so the custodian, investment service provider and any other safekeeper shall be obliged to provide the information in question for the company. The information concerning domestic investors is already available for the listed company on the shareholder’s register in the central securities depository. The aim is to enable direct communication between the company and its shareholders passing by the chains of custody. This would render a quick identification of shareholder possible. Long chains of custody require well-timed disclosing of information from a safekeeper to another, if a shareholder wishes to exercise their rights, such as voting.

The amending directive allows the member states to provide for companies having a registered office in their territory to be only allowed to request the identification of shareholders holding more than a certain percentage of shares or voting rights. Such a percentage shall not exceed 0,5 %. The Finnish proposal does not include this limit. However, when an investment firm in Finland receives a request from a foreign listed company including the limit, the investment firm in Finland shall provide the information in accordance with the request.

Amendments to the rules governing proxy advisors

The Finnish proposal includes regulation concerning proxy advisors aiming to clarify the preparation of their advice and recommendations. Proxy advisors play an important role especially in foreign investors’ views in general meetings, so their operations shall be organized in a reliable manner. Proxy advisors shall provide their clients with information regarding preparation of their research, advice and voting recommendations on an annual basis at the very least. Additionally, any situation in relation to conflict of interest shall be paid special attention to.

Obligation for investment firms to publish principles of corporate governance

Investment firm investing client funds in stocks shall prepare and publish principles of corporate governance, which should describe, how the corporate governance is connected to the investment strategy, and how the listed companies are monitored in relation to relevant matters from the fund manager’s point of view. The principles shall cover procedures for voting and exercising other shareholder’s rights as well as procedures for communication between the fund manager and listed company, its shareholders as well as stakeholder groups.