Update on the last part of SRD II
– practical implementation is taking shape
The general implementation deadline for the amended Shareholder Rights Directive (SRD II) was 10 June 2019, but some parts of it, including the provisions on shareholder identification, transmission of information and facilitation of the exercising of shareholder rights, will not come into force until 3 September 2020. In this article, we focus on the implementation of these provisions.
SRD II creates a framework for shareholders to have easier access to exercise their shareholder rights, for example by voting at general meetings, and also establishes rights enabling issuers to identify their shareholders and to inform shareholders proactively. This is supported by corresponding obligations for intermediaries in the custody chain to facilitate those rights. The Directive thus impacts the existing responsibilities, procedures and processes, and also the systems that support them.
The design of the necessary technical solutions, with the development of new processes relating to the identification of shareholders, information about corporate events and the exercising of shareholder rights, is well underway. VP plays an important role in this respect and cooperates closely with banks, intermediaries and authorities to get the infrastructure in place before the implementation deadline. The following outline of the practical implementation of the remaining parts of SRD II reflects how VP and market participants have designed the solutions involving VP.
The European legal framework
SRD II, with the official title “Directive (EU) 2017/828 of the European Parliament and of the Council of 17 May 2017 amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement” entered into force on 9 June 2017. SRD II can be found here.
As a supplement to SRD II, the European Commission adopted an implementing regulation (Commission Implementing Regulation (EU) 2018/1212) on 3 September 2018 laying down minimum requirements for the implementation of the provisions of articles 3a, 3b and 3c of SRD II (the “Implementing Regulation”). The Implementing Regulation will apply directly in all EU member states as of 3 September 2020 and can be found here.
The Danish legal framework
SRD II has been transposed into Danish law by implementation bill L157 ”Forslag til Lov om ændring af selskabsloven, lov om kapitalmarkeder, lov om finansiel virksomhed og forskellige andre love” (“the Danish Implementation Bill”), which was adopted by the Danish Parliament on 4 April 2019. Most of the provisions of the Danish Implementation Bill came into force on 10 June 2019, and the remainder will come into force on 3 September 2020. The Danish Implementation Bill can be found here.
Companies’ right to identify their shareholders
SRD II gives companies the right to identify all of their shareholders, regardless of whether the shareholders are registered by name or not. The intention of SRD II is to enhance and strengthen the relationship between issuers and their shareholders. Operationally, the end-investor will not be involved in the identification process, and the work will take place between the issuers and the intermediaries in the chain.
The identification of shareholders may also be a supporting tool for IR departments’ efforts in relation to investor targeting.
Current facts about the practical implementation:
- Disclosure requests can be initiated by issuers via their issuing agent.
- All intermediaries who hold the share in question, either on their own account or on an account on behalf of someone else, are required to respond to the issuer’s request.
- The request must be forwarded to the next intermediary in the chain within the deadlines set out in the Implementing Regulation.
- As a starting point, the Danish Implementation Bill stipulates a right for the issuer to request any intermediary to collect the shareholder information from other intermediaries in the chain and submit this to the issuer.
- The information will be sent via ISO 20022 messages from the CSD to the intermediaries.
- As it currently stands, issuers will be informed of the names and addresses of shareholders and their email addresses, if such information is available.
- Danish market stakeholders are currently considering the market practice for the collector role. An option which is under investigation is for VP to step into the collector role in order to ensure a harmonised communication flow.
Shareholders’ right to be informed about corporate events
As part of SRD II, issuers are required to transmit all relevant information about corporate events to all end-investors, ensuring that the end-investors are proactively informed about specific company events. The greatest impact of this is that all end-investors will receive information about general meetings directly from their bank, instead of having to check for themselves whether any general meeting announcements have been published. With regard to other corporate events encompassed by SRDII, the end-investors will now receive notifications on all upcoming events.
With regard to the extent of the information about which the company is obliged to inform its shareholders, and which the intermediaries are required to transmit, SRD II and the Danish Implementation Bill specify: “the information which the company is required to provide to the shareholder, to enable the shareholder to exercise rights flowing from its shares…”. At present there is uncertainty about what constitutes a corporate event which the company is obligated to inform its end-investors of.
Current facts about the practical implementation:
- Information about general meetings and dividend are specifically mentioned in the Implementation Regulation and is the definite minimum requirement to inform about.
- The information will be sent via ISO 20022 messages.
- The issuer must provide intermediaries with information about the corporate event on the same business day as the issuer is obliged to announce the corporate event in accordance with applicable law. For example, the first intermediary must receive information about an upcoming general meeting on the same day as the general meeting is announced on the stock exchange. The corporate event notice must be forwarded to the next intermediary in the chain without delay and within the deadlines set out in the Implementing Regulation.
- The intermediaries have an obligation to transmit the information to any new shareholders registered in their books at end-of-day on each business day, until the record date.
- End-investors will receive the information electronically if possible.
- The term “corporate events” and the extent of the information about which issuers are obliged to inform their shareholders is not clearly defined at present. VP expects that all corporate actions handled in VP´s systems will be part of the SRDII requirements, but it is not clear whether direct issues and tenders offers handled outside of VP´s systems will be included in VP´s solution.
- The framework for the payment of costs relating to issuers’ information to end-investors has not yet been defined – it is thus not clear how and how much should be paid.
Shareholders’ right to participate and vote
An important aspect of SRD II concerns facilitating the exercising of shareholder rights. SRD II defines the framework for intermediaries and issuers to help end-investors, to make it easy to grant access to and vote at a general meeting, and additionally to obtain confirmation that a vote was registered and accounted for at the general meeting.
In Denmark, we already have an electronic flow for exercising shareholder rights. This flow will be further streamlined, but most issuers and domestic end-investors will probably not experience any significant differences from the existing regime. For Danish and foreign end-investors with cross-border holdings, however, it is expected that it will be easier to exercise shareholder rights going forward.
Current facts about the practical implementation:
- In accordance with the Danish Companies Act, a shareholder can cast his or her votes at a general meeting for the shareholding registered by name in the company’s shareholder register on the record date, or for any shareholding position of which the company has been notified before record date with the intent of registration in the shareholder register.
- In addition, the Danish rules stipulate that a shareholder can only cast his or her votes for the entire shareholding position, i.e. it is not possible for a shareholder to conduct split-voting. A voting instruction received by the issuer will thus be registered for the shareholder’s entire shareholding position registered on the record date, irrespective of the shareholding position stated in the notice of participation from the shareholder.
- A shareholder can communicate his or her intention to participate in and vote at the general meeting directly to the issuer or agent, or the notice of participation can be transmitted through the chain of intermediaries, together with a possible power of attorney.
- If the shareholder is registered by name in the shareholder register, the shareholder potentially has two alternative ways of exercising their right to participate or vote. The shareholder can continue to use the InvestorPortal as today (primarily retail shareholders), or can use the streamlined and standardised ISO message for these purposes initiated with the shareholder´s bank (primarily foreign institutional investors with cross-border holdings).
- Immediately upon receipt, issuers must send confirmation of receipt of the votes to the shareholder or third party who cast the votes on behalf of the shareholder.
- At the request of the shareholder, issuers must send confirmation of the recording and counting of the shareholder’s votes no later than 15 days after the request was received or the general meeting, whichever occurs last.
- The shareholder can request the confirmation up to four weeks after the date of the general meeting. The issuer is, however, not obliged to accommodate the shareholder’s request if the information in question is already available to the shareholder.
- The cross-border solutions supporting the connection of the individual EU member states have not yet been established, which implies that the existing solutions will probably have to be used in the short term.
- Pricing issues have not yet been resolved.
There are still unresolved issues to be handled
As can be seen from the above, many practical issues relating to the implementation of the remaining part of SRD II are currently being resolved, and processes and solutions – both at national and EU level – are beginning to take shape. Yet there are still essential issues that remain to be decided, in particular economic issues – who is paying for what and how much?
SRD II clearly states that costs relating to services rendered by the respective parties in accordance with the Directive may be covered, but no framework has been established in terms of how much should be paid. It will be an important next step to establish such a framework providing transparency of implied costs for issuers and intermediaries.
We will keep you updated
VP is proactively participating in and following the implementation of SRD II and we will keep you updated on the progress towards the next important deadline in September 2020.