24th July 2020
On 3 September 2020 amendments to the European Union (EU) Shareholder Rights Directive contained in “SRD II” will come into force.
This article considers some of the key obligations on intermediaries – firms that provide services of safekeeping of shares, administration of shares or maintenance of securities accounts on behalf of shareholders or other persons – in relation to companies whose registered office is in the EU and whose shares are admitted to trading on a regulated market in the EU. In particular, from 3 September intermediaries must pass on information that may affect the shareholder, and which they have a right to vote on, to shareholder clients very quickly.
The amendment to the Directive is aimed at increasing shareholder engagement and transforming a discretionary system into one that is transparent and mandatory. The Directive is silent on the permissible methods of meeting the obligations.
Whenever an intermediary receives information from an EU registered and listed issuer (or another intermediary) that will enable a shareholder to exercise rights flowing from their shares, it will have to transmit that information, without delay, to the shareholder or to a third party nominated by the shareholder.
This new requirement for intermediaries appears to be compulsory and does not depend on the shareholder’s choice to participate and vote in general meetings. Intermediaries must send the relevant information to shareholders irrespective of whether the shareholder has chosen to receive it, unless the shareholder nominates a third party to receive it on their behalf. However, some intermediaries seem to be willing to offer opt-outs where the shareholder has made an informed decision.
The only exception is where the relevant information is published on the issuer’s website, the intermediary will not have to pass the relevant information to the shareholder and may instead inform the shareholder where on the website the information can be found, for example by providing a link to the relevant place on the issuer’s website.
Intermediaries will have additional obligations under SRD II, including:
Operationally, this has the potential to immediately complicate the usual workflow of intermediaries. The technical requirements in relation to the information flows in both directions between issuers and intermediaries and some of the timings outlined are strict; for example, the information about a corporate event must be given to the shareholder (or the next intermediary, if there is one) without delay and in any event by the close of business on the same day it was received (or by 10am the following business day where the intermediary receives the information after 4pm).
Regarding shareholder disclosure, there is likely to be an increase in the number of disclosure requests that issuers would make so firms in scope need to able to respond to an increase in those requests within these very strict timelines.
Although intermediaries can choose how this information is shared with issuers, other intermediaries, and shareholders, as long as it is passed on by close of business on the same day it was received, it is likely firms will need to implement sophisticated electronic machine reading capabilities or at least strong methods of other electronic communication to meet these obligations, if they have not done so already.
This will be key to the entire process, so that actions are automated, nothing ‘slips through the net’ and so that strict deadlines are met.
Firms must act now to ensure they have the systems in place to meet the demands of the new regulations coming into force in September 2020.
Yes. Where the agent is not itself an intermediary (that is, it is not a firm that provides services of safekeeping of shares, administration of shares or maintenance of securities accounts on behalf of shareholders or other persons), the underlying client must have nominated the agent for that purpose.
In all cases, the transmission of information to an investor or agent (and the transmission back up the chain of instructions or other information received from the investor or agent) must be done without delay and in any event by the end of the business day on which it was received. Where the issuer or intermediary receives the information after 4pm, it must transmit the information without delay and by no later than 10am on the next business day.
EU law will only continue in the UK after 31 December 2020 if UK law specifically provides for it to do so. Unfortunately, it is not currently possible to say with certainty what will happen as regards SRD II from 1 January 2021.
However, even if the UK has not agreed a deal with the EU by 31 December 2020 and will therefore be a third-country from 1 January, SRD II will apply to third-country intermediaries who provide the relevant services. As such, intermediaries would need to continue complying with SRD II in relation to shares in EU companies which are admitted to trading on a regulated market in the EU.
With the above in mind, our current understanding is that, once the transition period has ended, the UK will have equivalent provisions will that apply to shares in UK companies which are admitted to trading on a regulated market in the UK.
While the language in the Directive seems clear, there may be scope for a client to elect to appoint their discretionary investment manager to exercise SRD II rights on their behalf.
An intermediary that wishes to take that approach should set out all matters clearly, so the client is able to make an informed decision on whether to appoint the investment manager. It should be documented as part of the discretionary mandate and the manager should report to the client periodically on actions taken, votes cast etc.