THE FULL DISCLOSURE OF EVERYTHING TO EVERYBODY DOCTRINE –
THE DECLINE OF THE MANAGEMENT AND CONTROL TEST and
THE EU DIRECTIVE 2017/828
The law as to Listed Companies will undergo significant changes upon the implementation of the European Union Directive 2017/828, (hereinafter to referred to as “the Directive”).
As per the Directive, the shareholders of Listed Companies, upon relevant request by the Listed Company they hold shares, will be fully disclosed and identified to the company. Transparency of certain acts of institutional investors, asset managers and proxy advisors are also regulated by the Directive.
At the same time, the shareholders of the Listed Company acquire certain rights related to its management.
The Directive applies to Listed Companies which have their registered office in a Member State and their shares are admitted to trading on a regulated market situated or operating within a Member State.
The Directive aims to encourage more active and direct involvement of the shareholders in company matters. At the same time, it looks to the smooth operation of the company, revolutionizing though the role of the shareholders in Listed Company matters. On the other hand, the involvement of the shareholders in the company decision making process, is shaking the notion of management and control lying so far on the hands of the Board of Directors!
It is also worth noting that the Directive was to be implemented into the national law of each Member State by June 10, 2019, except from the provisions in relation to the identification of shareholders, the transmission of information and the facilitation of shareholders’ rights, whose transposition is set to September 2020.
The Directive has not yet been implemented in the national law of the Republic of Cyprus. It remains to be seen how this important Directive will be implemented. The implementation of the Directive will affect drastically the operation of Listed Companies.
THE RULES ESTABLISHED BY THE DIRECTIVE
In order to achieve its objectives, the Directive establishes four sets of rules which need to be implemented accordingly by Member States.
i) The identification of shareholders,
ii) The shareholders’ rights in relation to the remuneration of directors,
iii) The transparency of institutional investors, asset managers and proxy advisors, and
iv) The transparency and approval of the company’s related party transactions.
DETAILS AS TO THE RULES ESTABLISHED
i) Identification of Shareholders
According to the Directive, Listed Companies, the shares of which are admitted to trading on a regulated market situated or operating within a Member State, will have the right to identify their shareholders.
In this respect, they may ask any intermediary in a chain of intermediaries, holding this information, to provide the information on the identity of their shareholders.
Intermediaries must also enable the shareholders to participate in and vote at general meetings either by themselves or by instructing intermediaries to do so on their behalf.
Listed Companies must upon request, confirm to their shareholders that their vote has been recorded and taken into account at the relevant general meeting.
Certain thresholds of minimum share percentage holding may be implemented. According to the Directive, Member States, may provide that the request for shareholders identification can be done only if the shareholders are holding more than 0.5% of the shares or voting rights. This threshold though is not mandatory and lower percentage may be the threshold or no threshold at all.
The Directive lays down provisions as to the length this information will be held by the company. Also, it provides that the disclosure of such sensitive information by the intermediaries to the company is done lawfully, in compliance with a particular law, so that they will not be faced with claims for unjustified disclosure of confidential information.
The Directive goes further to indicate that the minimum level of information on shareholder identity should include at least the name and contact details of the shareholder in the case of a physical person and the registration number, in the case of a legal person.
ii) Rights to remuneration of directors – “say on pay” right
The Directive, also establishes the shareholders’ right to vote on the remuneration policy of the directors of the company at least every four years and ensure that the directors are paid in accordance with the remuneration policy.
In addition, the Directive requires the companies to provide to the shareholders a report with clear information on the remuneration of their directors.
The Directive leaves up to the Member States the choice for the vote on the remuneration policy to be binding or merely advisory.
iii) Transparency of Institutional Investors, Asset Managers and Proxy Advisors
The Directive requires Member States to ensure that institutional investors and asset managers disclose to the public how the investment strategy they follow is aligned with the profile of the companies, how it contributes to the performance of their assets and the duration of their liabilities.
Further, the proxy advisors are obliged by the Directive, for the first time, to publish the code of conduct they apply along with a report on how this code is applied.
They are obliged to publish on their website the information relating to their advice, voting recommendations and researches carried out in this respect as well as to communicate to their clients of any conflict of interest that may influence the preparation of their research, advice or voting recommendations.
iv) Transparency and approval of the company’s related party transactions
Member States will need to secure that material transactions between the company and related parties are publicly announced, accompanied by a report indicating whether the transaction is fair and reasonable. The said transactions are required to be approved by the general meeting of the shareholders or by the administrative or supervisory body of the company, if such body is in place.
The law implementing the Directive must define what a material transaction is.
In this way shareholders are informed about related party transactions on material issues and take active part in approving same or not.
OBSERVATIONS – COMMENTS
It remains to be seen how Cyprus and the rest of EU Member States will implement the Directive.
The Directive will disturb drastically how Listed Companies will be operating in certain matters. The involvement of shareholders in company decision making processes, is a new concept coming though in direct conflict with the management and control test as this is identified so far as being the sole prerogative of the Board of Directors.
The full disclosure of the identity of the shareholders is in line with the current transparency principle in the business world: … “All is known and open and nothing is kept secret”.
With the Directive, the transparency principle is applied also to Listed Companies for their shareholders, institutional investors, asset managers, proxy managers and related party transactions.
Will this possibility through the Directive, giving the right to Listed Companies to know in detail the identity of their shareholders, extend to third bodies such as professionals, lawyers, accountants and banks, requesting to know in detail the identities of the shareholders of Listed Companies?
It remains to be seen whether such bodies, and especially the banks, will implement the idea of the Directive in a broad sense. We wouldn’t be surprised at some stage to see in full force such requirement imposed especially by the banks as to the identification of the shareholders of Listed Companies …!
One is certain: We move to a new era, … “The full disclosure of everything to everybody”!
Will this have a positive effect on business or not? Will this affect the investments negatively or not? Time will show.
The way the Directive will be implemented in each Member State will play its role too, as the Directive itself leaves considerable discretion on Member States national implementation. Wise approach is needed.
The moving sand …is still in full force!
Christos P. Kinanis
We are a Law Firm with offices in Cyprus and Malta and a representative office in Shanghai China comprising of more than 80 lawyers, accountants and other professionals who advise, international and local clients.
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