Implementation of the Shareholder Rights Directive II

The Shareholder Rights Directive II (SRD II) took effect in the UK from 10 June 2019.

What is happening?

It amends the original Shareholder Rights Directive, which was implemented in the UK in 2009 with the aim of improving corporate governance in EU companies whose shares are traded on EU regulated markets.

Why does it matter?

The amendments implemented by SRD II have the ultimate aim of encouraging long-term shareholder investment and engagement in listed companies – and ending the “short-termism” investment culture - by prescribing new obligations for companies, intermediaries, investors, asset managers and proxy advisers. The new regime sets out rules around transparency, accountability, investment strategies and remuneration structures (some of which will already be familiar to retailers with a premium listing). The key elements of these changes are as follows:

• Related party transactions: SRD II imposes new requirements around the disclosure and approval requirements for material related party transactions for listed companies. For premium-listed retailers, the rules are broadly equivalent to those set out in Listing Rule 11 (albeit with a slightly wider scope as SRD II employs a different definition of related party). However, the rules are entirely new for standard-listed retailers (to whom Listing Rule 11 does not currently apply),
  
  
• Directors’ remuneration: listed companies must publish a remuneration policy which must be subject to a shareholders’ vote. This is not a new requirement for UK-listed companies, which have been subject to a binding vote on remuneration for several years, but SRD II applies certain minor modifications to the existing rules and also extends the requirement to unquoted traded companies, and
  
  
• Institutional investors and asset managers: SRD II imposes additional obligations on asset managers and institutional investors to develop and publicly disclose a policy on shareholder engagement (or explain why they have chosen not to do so) and disclose how the main elements of their investment strategy contribute to the medium- to long-term performance of their assets. These regulatory obligations are supplemented by the voluntary provisions of the Stewardship Code which also seek to ensure responsibility and accountability for stewardship by investors and which is also being revised at present (see page 8).

What action should you take?

1. Main market listed retailers will need to ensure they have procedures in place to identify material related party transactions and comply with the related approval/announcement obligations when they enter into certain types of transaction in financial years starting on or after 10 June 2019. For premium listed retailers, the impact of these changes should be relatively minor.
   
   
2. Listed retailers should ensure they are aware of the modified rules on directors’ remuneration policies which (in general) will apply to policies adopted from 10 June 2019.
   
   
3. As with the proposed changes to the Stewardship Code, retailers may see greater engagement from institutional investors in the future on topics such as long term business strategy, board composition, sustainability, environmental issues and executive remuneration.