The second Shareholders’ Rights Directive[1] (SRD II) put a new focus on encouraging long-term shareholder engagement in listed companies, in particular by addressing new obligations on investors and intermediaries.

The Irish regulations implementing SRD II (the Regulations), which were adopted in March 2020, introduced three new chapters into Part 17 of the Companies Act 2014:

• Chapter 8A (Rights of Shareholders) – which covers the identification of underlying shareholders and information flows between underlying shareholders and companies

• Chapter 8B (Transparency of institutional investors, asset managers and proxy advisors) – which provides new transparency obligations for these sectors with the objective of encouraging shareholder engagement and the development of long term investment strategies. Read our article on this Chapter here, and

• Chapter 8C (Remuneration Policy, remuneration report and transparency and approval of related party transactions) – which covers shareholder approval of directors’ remuneration and related party transactions. Read our article on this Chapter here

This article looks at Chapter 8A (Rights of Shareholders), which is principally addressed to shareholding intermediaries. The obligations in this chapter require these intermediaries, including asset managers, credit institutions and central securities depositories, to transmit information about share ownership and to facilitate the exercise of rights attached to shares. The obligations in Chapter 8A take effect from 3 September 2020.

We also examines serious concerns that have been raised by the Irish implementation of SRD II. These concerns arise from the fact that SRD II relies on the definition of the term “shareholder” in the law of each company’s incorporation. This is a source of ambiguity in the case of Ireland since there is no statutory definition of the term “shareholder” in Irish law. Recognising this defect, the EU-appointed High Level Forum on the Capital Markets Union recommended on 10 June that the Commission provide a harmonised definition of the term “shareholder” for the purposes of shareholder rights’ legislation. In the meantime, how Chapter 8A will apply and operate in practice remains unclear.

Rights of shareholders

SRD II recognises that shares in listed companies are often held through complex chains of intermediaries, which make it more difficult for shareholder rights to be exercised and which act as obstacles to shareholder engagement.

In Ireland, the SRD II obligations are implemented in respect of Irish PLCs listed on regulated markets, such as the regulated market of Euronext Dublin or the Main Market of the LSE. In Ireland, however, the scope of the obligations specifically exclude UCITS and AIFs (traded PLCs).

In order to address the problem of shareholder engagement, the following requirements are implemented via the Regulations:

• Provisions to enable traded PLCs to identify the underlying holders of their shares

• Obligations on intermediaries to transmit information received from traded PLCs (or other intermediaries in a chain) to the underlying holders

• Obligations on intermediaries to facilitate the exercise of shareholder rights, including voting rights, by underlying holders, and

• Cost transparency requirements on intermediaries with respect to fees charged in relation to the foregoing

Identification of shareholders

The Regulations give traded PLCs the power to request information on the identity of underlying shareholders from any intermediary, such as an asset manager, bank or central securities depositary that provides services with respect to these shares.

There is a corresponding obligation on an intermediary that receives a valid request to identify a shareholder to either:

• Provide that information to the requester, if the requested information is in the intermediary’s possession or control, or

• Take each of the following actions, if the requested information is not in the intermediary’s possession or control:

  • Inform the requester

  • Transmit the request to each other intermediary in the chain that is known to it, and

  • Provide details of each such intermediary to the requester

Facilitation of exercise of shareholder rights

Since holding shares via chain of intermediaries can make it difficult to exercise share rights, particularly voting rights, intermediaries have new obligations to facilitate the exercise of rights by either:

• Making the necessary arrangements for the underlying shareholder to exercise the rights attaching to the shares, or

• Exercising the rights attaching to the shares upon the shareholder’s explicit authorisation and instruction.

Intermediaries are also obliged to transmit information related to the exercise of share rights to underlying shareholders. If this is not possible, the information must be transmitted to the other intermediaries in the chain. Intermediaries must likewise transmit instructions received from underlying holders in connection with the exercise of share rights to the issuer, or the other intermediaries in the chain.

Standardised communications

The Commission has published standardised formats for each of the following communications via an implementing regulation[2]. The Implementing Regulation covers the format, transmission and required elements of each of the following communications, and the deadlines that must be complied with.

Issuers must use standardised formats set out in the Implementing Regulation for the exchange of the following communications:

• Request to disclose information to identify shareholders

• Notices of general meetings

• Voting receipts

• Confirmation of recording and counting of votes, and

• Notification of corporate events other than general meetings.

Intermediaries are required to use standardised formats set out in the Implementing Regulation for the exchange of the following communications:

• Responses to requests to disclose information to identify shareholders

• Confirmations of entitlement to exercise rights in a general meeting, and

• Notices of participation in a general meeting

The Implementing Regulation imposes tight deadlines for these communications, which include the following:

• For transmission of responses to requests by intermediaries, the close of the business day immediately following receipt of the request, and

• For onward transmission of requests by intermediaries to other intermediaries in the chain, the close of the same business day as the receipt of the request.For instances in which the request is received after 4pm on a business day, the deadline is 10am on the following business day

The existence of these obligations and deadlines makes the new shareholder investigation procedure more effective in practice than the existing power under Section 1062 of the Companies Act for companies to investigate interests in shares. This is due to the fact that the latter provision does not include any obligation on recipients to respond.

Language issues

As noted above, serious concerns that have been raised by the Irish implementation of SRD II. Certain drafting choices in the Regulations have generated uncertainty as to how the Regulations may be interpreted in the Irish market. The term “shareholder” is used throughout the Regulations, which is consistent with both the English language text of SRD II and the Implementing Regulation. SRD II relies on the definition of the term “shareholder” in the law of each company’s incorporation. However, this term does not have a single statutory definition in Irish company law. The Regulations employ the term “shareholder” to refer equally to the ultimate beneficial owner of shares and the registered holder of shares (a “member” under the Companies Act). As a result, an intermediary that is the registered holder of shares in a traded company may consider that it is the “shareholder” for all purposes and that, as result, it is not obliged to make further enquiries or transmit information in connection with the underlying holder. In our view, such an interpretation as this is not consistent with the purpose SRD II (see in particular Recital 4) and we await official clarification on this point. In the meantime, how Chapter 8A will apply and operate in practice remains unclear.

Conclusion

From 3 September 2020, shareholding intermediaries such as investment firms, credit institutions and central securities depositories will be obliged to introduce new processes for the transmission of information, requests and instructions with respect to shareholdings and share rights.

For more information on the implications SRD II will have on the governance of your company, contact a member of our Corporate team.