The last elements of the amended Shareholder Rights Directive (SRD II) come into force today, 3 September 2020. Consequently, shareholders will have easier access to exercise their shareholder rights going forward. However, the process towards establishing the technical solutions needed to implement the remaining parts of SRD II – both national and cross-border solutions – has been complex. Therefore, work still remains to be done after 3 September, to achieve harmonisation across the EU member states and make processes more efficient. In this article, we present the status of the implementation process.

The implementation of the remaining elements of SRD II includes the following:

• Companies’ right to identify their shareholders
• Shareholders’ right to be informed about general meetings and other corporate events
• Shareholders’ right to participate and vote

The shareholder rights are supported by equivalent obligations for intermediaries in the custodian chain to facilitate those rights. SRD II thereby impacts the existing responsibilities, procedures and processes, and also the systems that support them – involving changes at both the national and EU level.

A challenging implementation deadline results in interim solutions

“As we moved closer to the implementation deadline, market participants across the EU gradually realised that the development of the technical solutions and shared practices was a more complex and time-consuming process than expected – and that the implementation efforts were challenged,” says Morten Skanning, Senior Product Manager at VP Securities.

As a consequence, in April 2020, 11 industry associations sent a letter to the European Commission, requesting another year’s notice to implement the remaining elements of SRD II, in order to give the European financial industry a more realistic timeline to fully comply with SRD II and the national implementation acts – and thereby achieve a higher degree of convergence of practices. “Yet the request for postponement was not accepted by the European Commission, and the implementation of the remaining elements of SRD II is therefore taking place today, in accordance with the original time schedule. But due to the rejection of the request for postponement, a number of market participants, including VP, will need to go ahead with interim solutions for a period of time until the development of a full message flow via ISO 20022* is implemented and operational in all markets,” says Morten Skanning, Senior Product Manager at VP Securities.

VP’s interim solutions are in accordance with the functionalities in SRD II, and they will not affect shareholders that have been using the VP investor portal, as the new SRD II services will be integrated in the portal.

”We have experienced a constructive cooperation among market participants in the Danish market, but even though it might have seemed manageable to implement the final elements of SRD II, this has turned out to be a very comprehensive and complex task, since it involves many stakeholders and solutions that need to embrace the diversity created across the EU, due to the implementation of SRD II in local legislation. Consequently, many market participants across the EU are struggling to have all relevant solutions related to SRD II in place by 3 September. The work on the full implementation of SRD II will thus not be finalised by September 2020 and there will be a need for further harmonisation and alignment in the coming period,” Nikolaj Pilgaard, Head of Department at FinansDanmark, concludes.

* ISO 20022 is a multi-part International Standard prepared by ISO Technical Committee TC68 Financial Services. It describes a common platform for the development of messages using:

• a modelling methodology for syntax-independent capture of financial business areas, business transactions and associated message flows;
• a central dictionary of business items used in financial communication; and
• a set of XML and ASN.1 design rules to convert the message models into XML or ASN.1 schemas, whenever the use of the ISO 20022 XML or ASN.1-based syntax is preferred.

Practical aspects of the SRD II implementation – how will issuers and shareholders be affected?

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. Operationally, the end-investor is not involved in the identification process, and the work takes place between the issuers and the intermediaries in the chain.
The disclosure requests will be initiated by issuers via their issuing agent. The issuing agent starts the identification process, and it is then up to all intermediaries holding the share in question, either on their own account or on an account held on behalf of another party, to respond to the issuer’s request. Issuers will be informed of the names and addresses of shareholders and their email addresses, if this information is available.

Shareholders’ right to be informed about general meetings and other 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 of specific company events.

Unfortunately, the directive does not fully specify the ‘corporate events’ term, so that there are different interpretations of the term. However, it is certain that information about general meetings will be pushed to shareholders, and that VP will send all corporate actions handled by the VP system to its customers, so that they have the option to transmit all of these corporate actions to their clients.

For end-investors, the greatest impact is that they will receive information about general meetings directly from their bank, instead of having to check themselves whether any general meeting announcements have been published.

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, so as 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 counted 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.

If a shareholder is registered by name in the shareholder register, the shareholder will potentially have two alternative ways of exercising their right to participate or vote going forward (the Danish solution). The shareholder can continue to use the InvestorPortal as today (primarily retail shareholders) or may use the ISO message solution for these purposes, initiated with the shareholder’s bank (primarily foreign institutional investors with cross-border holdings). However, the development of the ISO message solution is not expected to be finalised until after the 2021 annual general meeting season at the end of Q2 2021. Until then, an interim solution will be in place.

According to SRD II, issuers must send confirmation of receipt of the votes to the shareholder, or the third party who cast the votes on behalf of the shareholder, immediately upon receipt. The development of an automatic solution for receipts has not yet been finalised, and the Danish market will continue to use the existing solutions for the time being, but new manual processes will be added, to ensure that the obligations according to SRD II are fulfilled.

Furthermore, according to SRD II, issuers must send confirmation of the counting of the shareholder’s votes at the request of the shareholder. Shareholders voting via the VP InvestorPortal will request and receive confirmation in that environment, while shareholders using the interim solution will receive a manual confirmation through the chain of intermediaries.