Danish implementation of the amended Shareholder Rights Directive
Companies to experience significant changes.
For those who may not remember, the revised Shareholder Rights Directive is the result of the legislative reaction to the financial crisis and was adopted by the European Council in April 2017, with a two-year implementation period in the individual EU member states. Its aim is to stimulate shareholders’ long-term engagement, increase transparency in the voting process both in relation to proxy voting and shareholder identification, and to improve the issuer-investor dialogue.
Content of the legislative package – four main areas
The legislative package published by the Danish Business Authority (Erhvervsstyrelsen) at the end of October 2018 and implementing the amendments to the Shareholder Rights Directive covers four main areas:
- Identification of shareholders
Listed companies gain better opportunities to identify their shareholders. This is expected to support active ownership because companies’ communication with their shareholders will become easier.
- Remuneration policy and remuneration report
Listed companies must prepare and publish a remuneration policy for members of the Board of Directors and the Management Board, laying down the rules for fixed and variable remuneration, and also prepare and publish a remuneration report in accordance with the approved remuneration policy.
- Material transactions between listed companies and their related parties
At listed companies, material transactions between a public limited company and its related parties must be approved by the Board of Directors before the transactions may be completed. The public limited company must publish an announcement regarding material transactions with a related party. The purpose of the rules is to ensure control and transparency regarding such transactions.
- Active ownership policy for institutional investors and asset managers
Institutional investors and asset managers must, among other things, publish an active ownership policy or explain why they choose not to publish one.
Zooming in on the remuneration policy and the remuneration report – there is much to keep an attentive eye on!
In the following description of the content of the legislative package and the challenges faced by the listed companies, we focus on the new rules regarding the remuneration policy and the remuneration report. Please note that the following refers to the content of the legislative package, which is currently still subject to consultation. Some changes may take place following the consultation process.
“It’s my impression that many listed companies are not fully aware of the impact and extent of the new rules regarding the remuneration policy and the remuneration report. So far, we’ve not seen much debate on the proposed changes and the quite wide-ranging new demands regarding management remuneration, which entail that nearly all listed companies will have to publish much more and far more detailed information than before. It’s also important to note that the amendments to Danish legislation implementing the changes to the Shareholder Rights Directive are not soft law like the Recommendations for Corporate Governance – this is hard law that has a binding effect and the regulations are more far-reaching than the Recommendations,” says Niels Kornerup, partner and lawyer at Bech-Bruun.
The remuneration policy must be formulated in a clear and understandable way, and contribute to the company’s business strategy, long-term interests and sustainability, and it must include:
- An explanation of how the remuneration policy complies with the business strategy, long-term interests and sustainability.
- A description of the different components of the fixed and variable remuneration, including all bonuses and other significant benefits, that may be granted to management members, including an indication of the relative proportions of the components.
- An explanation of how the company’s employees’ salaries and terms of employment have been taken into account in connection with the preparation of the remuneration policy.
- The duration of contracts or arrangements with members of the management and the notice of termination periods, the main elements of supplementary pension plans or early retirement schemes, termination terms and related payments in connection with termination.
- A description of the decision-making process applied to the preparation, revision and implementation of the remuneration policy, including measures to avoid or handle conflicts of interest.
If the company grants the management variable remuneration, the remuneration policy must contain clear, broad and variable criteria for the allocation, including financial and non-financial KPIs and potential “claw-back” clauses.
In addition, if the company grants share-based remuneration to the management, the maturity or ”vesting” period, and the potential period during which the granted shares are not at the management’s disposal, must be stated in the remuneration policy.
The remuneration policy must be approved by the general meeting at least every four years and in the event of any significant changes in the policy, such as the introduction of new remuneration components. The vote is binding.
The Board of Directors must prepare a clear and understandable remuneration report that gives a comprehensive overview of the total remuneration received by each member of the Board of Directors and the Management Board during the previous financial year. The report must include the remuneration of both existing and former members of the management in the relevant financial year and must, for example, include any previous management member’s severance pay.
According to the legislative package, the remuneration report must include:
- The total remuneration divided into remuneration components, the fixed and variable remuneration ratios, and an explanation of how the total remuneration accords with the approved remuneration policy, including how the total remuneration contributes to the company's long-term results, as well as information on how the performance criteria are applied.
- Five-year comparable figures for the annual change in remuneration, in the company's results and in the average employee remuneration.
- Information on the application of financial and non-financial KPIs.
- The number of shares and allotted or offered stock options, as well as the conditions for the exercising of the rights, including the prices at the date of granting and the date of exercise, and any changes therein.
- Information about using the option to claw back variable remuneration.
- Information on any deviations from the remuneration policy.
There must also be a vote at the general meeting on the remuneration report. However, this vote will only be guiding and if the general meeting does not approve the remuneration report, in the following financial year the company must explain how it has taken the result of the vote into account. The vote concerns the overall report and not the remuneration of the individual members of the management.
Content and control
“When preparing the remuneration policy, companies should be aware that the policy must include all remuneration components and that the management must not be granted any form of remuneration not included in the remuneration policy. Furthermore, the legislative requirements regarding the remuneration report are quite specific and detailed, and the external auditor must check that the content of the report complies with the regulations. De facto, I expect the remuneration report to be part of the audit process going forward,” says Niels Kornerup.
Shareholders Rights Directive vs. Recommendations for Corporate Governance – decision to be made before the 2019 Annual General Meeting
“The new legislative package will enter into force on 10 June 2019 and the remuneration policy must be presented and approved at the first annual general meeting convened after that date, while the first remuneration report must be presented at the Annual General Meeting the year after. However, the wording of the explanatory notes to these provisions is not quite clear. Consequently, the companies concerned should note that the updated Recommendations for Corporate Governance regarding remuneration policy and remuneration report on the one hand, and the amendments implementing the changes to the Shareholder Rights Directive on the other, do not enter into force at the same time. The updated Recommendations for Corporate Governance will enter into force for financial years commencing on 1 January 2018 or later. The updated Recommendations will therefore apply for the first time at the Annual General Meeting that considers the Annual Report for 2018,” says Niels Kornerup.
He concludes: “Consequently, at the Annual General Meeting which considers the 2018 Annual Report companies will have to decide whether they draw up the remuneration policy according to the Recommendations, or according to the new rules implementing the Directive – which will not have entered into force before the 2019 Annual General Meeting high season. If they decide to word the remuneration policy according to the updated Recommendations, at the Annual General Meeting in 2020 they will have to present an updated remuneration policy worded in accordance with the new legislative package. This is rather messy, and I hope that the lawmakers will address these issues and specify how companies are recommended to handle the challenges.”
- The consultation deadline is 30 November 2018.
- The legislative package implementing the amendments to the Shareholder Rights Directive is expected to be adopted in the spring of 2017 and the legislative package will enter into force on 10 June 2018 (the general implementation deadline).
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