On 13 December 2018, the Finnish Government submitted its proposal regarding the implementation of EU’s Second Shareholders’ Rights Directive ((EU) 2017/828, “SHRD II” or the “Directive”) to the Parliament. New provisions amending, among others, the Securities Markets Act, the Companies Act and the Act on Investment Services are scheduled to take effect on 1 April 2019.
SHRD II amends the contents of EU’s First Shareholders’ Rights Directive 36/2007/EC. The changes are meant to address certain systemic risks identified in the aftermath of the financial crisis, such as excessive short-term risk taking by corporate managers and inadequate level of monitoring by institutional investors and asset managers.
To this end, new compliance requirements related to director remuneration, related party transactions as well as identification of shareholders and transmission of information will be introduced. Moreover, institutional investors, asset managers and proxy advisors will be required to comply with new transparency requirements.
The following summarizes the key changes brought by the national implementation of the Directive into Finnish legislation.
Contents of the Proposal
1. Director Remuneration
New provisions governing decision-making on director remuneration and related reporting will be included in the Companies Act and the Securities Markets Act. The requirements will apply to publicly listed companies only, and their contents will be later specified in more detail by a governmental decree.
Listed companies will need to establish a remuneration policy as regards the members of the board of directors, managing director and the supervisory board (if applicable). The policy will need to be submitted to an advisory vote of the shareholders’ meeting at every material change and in any case at least every four years. Temporary derogation from the approved policy will be possible only under limited circumstances.
Listed companies will also need to draw up a remuneration report that provides a comprehensive overview of realized remuneration. The report will need to describe all benefits awarded or due to individual directors during the previous financial year, and must be submitted to an advisory vote at the shareholders’ meeting.
Both documents will need to be publicly disclosed no later than three weeks before submitted to the shareholders’ meeting for approval. If the remuneration policy is not approved, the company may continue to pay remuneration to its directors in accordance with its existing practices or approved existing policy, whichever is applicable. However, in this case, the company must submit a revised policy for approval at the following shareholders’ meeting.
2. Related Party Transactions
Current provisions of the Companies Act on disqualification will be supplemented by new provisions that regulate decision-making on related party transactions. The new rules will affect the decision-making of the board of directors, managing director, supervisory board and the shareholders’ meeting of publicly listed companies.
A related party transaction will be defined as a transaction between a company and a related party, which is concluded either outside the company’s ordinary course of business or on other than normal market terms. If a related party transaction is material, it must always be subjected to heightened scrutiny in the form of a special decision-making process as well as published. With regard to publicly listed companies, the definition of a related party will be the same as in international accounting standards (IAS 24). Generally, a related party means a contracting party, in which the company or its director has a financial, intrafamilial or other interest.
A majority or qualified majority of the votes of disinterested directors or shareholders will be required to approve related party transactions, depending on the matter in question. In most matters, the board of directors will continue to be the competent organ that approves such transactions. Interested directors will not be able to participate in decision-making.
3. Identification of Shareholders and Transmission of Information
The new rules will enable publicly listed companies to identify their shareholders through intermediaries, such as investment firms and nominee registration custodians, as well as facilitate the transmission of information between market participants. Relevant provisions will be included in the Securities Markets Act and the Act on Investment Services.
A listed company will have a right to know the identity of its shareholders by requesting information regarding shareholder identity from such investment firms and nominee registration custodians that provide safekeeping of shares in the EEA. Expenses arising from such requests would be borne by the requesting company and should reflect actual costs. This right is likely to be exercised sparingly and only with regard to nominee-registered shares because up-to-date information regarding the direct ownership of listed companies is publicly available through Euroclear Finland.
Intermediaries will have corresponding obligations to communicate information regarding shareholder identity to listed companies. The communication must take place without delay and notwithstanding confidentiality provisions.
The proposal introduces time limitations to the storage of the acquired or communicated information. According to the proposal, companies and intermediaries may not store information regarding shareholder identity for longer than 12 months.
4. Transparency Requirements for Institutional Investors, Asset Managers and Proxy Advisors
Institutional investors and asset managers will be required to develop and publicly disclose an engagement policy which describes how shareholder engagement is integrated with investment strategy. The requirement will concern Finnish life insurance companies as well as most pension and insurance funds.
The engagement policy shall describe how institutional investors and asset managers
- monitor investee companies on relevant matters, including strategy, financial and non-financial performance and risk, capital structure, social and environmental impact and corporate governance;
- conduct dialogues with investee companies;
- exercise voting rights and other rights attached to shares;
- cooperate with other shareholders;
- communicate with relevant stakeholders of the investee companies; and
- manage actual and potential conflicts of interests in relation to their engagement.
Proxy advisors (e.g. ISS and Glass, Lewis & Co) will be regulated correspondingly under the Securities Markets Act. Proxy advisors will be required to develop and publicly disclose a code of conduct. The code of conduct shall describe how proxy advisors prepare their research, advice, and voting recommendations. Further, proxy advisors will be required to prevent and manage conflicts of interests and disclose them to clients without delay. Non-compliance with the requirements is permitted only for good cause and the reasons for non-compliance must be publicly disclosed (comply or explain -principle).
In consideration of the proposed changes, Finnish publicly listed companies should:
- Justify the chosen form and level of director remuneration better than earlier at AGMs held from 1 January 2020 onwards;
- Ensure that all related party transactions are always well-documented and approved in compliance with the new decision-making rules; and
- Comply with disclosure requirements on director remuneration and time limitations regarding the storage of information on shareholder identity.
Moreover, institutional investors, asset managers and proxy advisors operating in Finland should from 24 September 2020 onwards:
- Disclose an engagement policy and/or code of conduct; and
- Comply with related disclosure requirements.
We are happy to discuss the proposed changes with you. For more information and guidance, please contact the Co-Heads of our Corporate Advisory & CSR practice group, Hanna-Mari Manninen and Kari Lautjärvi.
Special thanks to the co-author of this insight Oskari Paasikivi, D&I Trainee 2018.