Implementation of EU’s Second Shareholder Rights Directive in Finland

D&I Quarterly Q1/2019

Posted on

29 Mar

2019

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Dittmar & Indrenius > Insight > Implementation of EU’s Second Shareholder Rights Directive in Finland

The EU’s Second Shareholder Rights Directive ((EU) 2017/828, “SHRD II” or “the Directive”) is expected to be implemented in Finland on 10 June 2019. New provisions amending the Securities Markets Act, the Companies Act and the Act on Investment Services will concern publicly listed companies, institutional investors, asset managers and proxy advisors. The following highlights the key changes brought into Finnish legislation. In addition, publicly listed companies are recommended to keep an eye on the Finnish Corporate Governance Code (“CG Code”) that will also be amended during 2019.

What’s the proposal about?

SHRD II amends the contents of EU’s First Shareholder Rights Directive 2007/36/EC, which was released a few months before the financial crisis of 2007 began to unleash. Like other directives based on EU’s Financial Services Action Plan, the Directive is designed to address systemic risks identified by European regulatory authorities in the aftermath of the financial crisis. These issues included, among others, excessive short-term risk-taking by corporate managers and an inadequate level of monitoring by institutional investors and asset managers. The Directive attempts to address these risks by introducing new rules meant to encourage long-term shareholder engagement and to enhance transparency between companies and investors.

The subject matter of the proposal is divisible into four main themes: director remuneration, related party transactions, identification of shareholders and transmission of information and transparency requirements for institutional investors, asset managers and proxy advisors. This Article describes and analyses the contents of the proposed changes under these themes and concludes with our recommendations.

Implementation of SHRD II in Finland

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 provisions are meant to promote transparency by providing a new means of expression of shareholder voice on executive remuneration, and hence to improve corporate governance efficiency.

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 by the shareholders’ meeting at the time of every material change and in any case at least every four years. A temporary derogation from the remuneration policy will be possible if necessary to serve the long-term interests and sustainability of the company.

Listed companies will also need to draw up a remuneration report that provides a comprehensive overview of realised 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 by the shareholders’ meeting.

The remuneration policy and report will need to be publicly disclosed no later than three weeks before they are 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.

We believe that the new rules will promote transparency as intended and may lead to increased consideration of shareholders’ interests. Increased expenses will admittedly be the flip side of the new, heavier compliance requirements.

Say-on-pay is not a complete novelty in Finland. Under the CG Code, listed companies have been required to publicly disclose a remuneration statement that describes how directors, the managing director and other executives are remunerated. However, the idea that the company’s remuneration system in its entirety would be put to a shareholder vote is a new one. For now, only the chosen level of director remuneration has been on the agenda of shareholder meetings. Amendments to the CG Code have been planned to ensure compliance with the new statutory reporting requirements.

We believe that the new rules will promote transparency as intended and may lead to increased consideration of shareholders’ interests. Increased expenses will admittedly be the flip side of the new, heavier compliance requirements.

2. Related party transactions

The Companies Act will be supplemented by new rules that regulate decision-making in publicly listed companies. The proposed changes will affect the decision-making of the board of directors, managing director, supervisory board and the shareholders’ meeting of publicly listed companies. Similar provisions have been formulated in earlier corporate practice and the CG Code.

Under the new rules, an interested director or shareholder of a publicly listed company shall be disqualified from participating in decision-making regarding a transaction which is concluded either outside the company’s ordinary course of business or on other than normal market terms. A valid decision on an interested transaction must be approved by a qualified majority of disinterested directors or shareholders.

As a notable exception to the above, an interested shareholder will be able to participate in decision-making of the general meeting as forth under the Companies Act. This includes decision-making regarding, for example, share and option issuances as well as distribution of dividends.

The definition of a related party with respect to a publicly listed company will be the same as in international accounting standards (IAS 24). Generally, a related party means a contracting party in which the director has a financial, intrafamilial or other interest.

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 and obligations therein will be applicable from 24 September 2020 onwards.

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.

We believe that the right may prove to be useful in situations where target company management is suspecting a takeover attempt by a prospective bidder.

Listed companies are likely to exercise this right sparingly due to high costs associated with its use and only with regard to nominee-registered shares. The latter is because up-to-date information regarding the direct ownership of listed companies is publicly available through the national central securities depository, Euroclear Finland. That being said, we believe that the right may prove to be useful in situations where target company management is suspecting a takeover attempt by a prospective bidder and wants to know whether the prospective bidder has bought any shares of the target company in a toehold acquisition.

Intermediaries will have corresponding obligations to communicate information regarding shareholder identity to listed companies. Communication must take place without delay and notwithstanding confidentiality provisions. Moreover, intermediaries must carry out arrangements and provide information necessary for exercise of shareholder rights.

The proposal introduces time limitations on 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 that describes how they integrate shareholder engagement with their investment strategy. In practice, the requirement will apply to 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.

The activities of proxy advisors, such as ISS and Glass, Lewis & Co, will also be regulated correspondingly by 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 are required to prevent and manage any actual or potential conflicts of interests and disclose them to clients without delay. This is of large practical importance because the recommendations of proxy advisors significantly impact the decision-making of foreign shareholders, who owned approximately 43 per cent of the market capitalisation of all Finnish listed companies (12/2017).

Common denominators of the transparency requirements are public disclosure, the comply or explain principle, and the applicable sanctions regime. Institutional investors, asset managers and proxy advisors respectively must publicly disclose the above-mentioned documents free of charge on their websites and update them annually. Non-compliance with one or more of the requirements is permitted only for good cause and the reasons for non-compliance must be publicly disclosed. If the rules are violated, an administrative fee may apply as a sanction.

Key insights

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 the temporal limitations regarding the storage of information on shareholder identity.

Moreover, institutional investors, asset managers and proxy advisors operating in Finland should:

  • Develop an engagement policy and/or code of conduct; and
  • Comply with related disclosure requirements.

We are pleased to discuss the proposed changes with you. For more information and guidance, please contact the Head of our Corporate Advisory, Compliance & CSR practice group, Hanna-Mari Manninen.

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