The ‘Encouragement of long-term shareholder engagement law’ (‘the Law’), which transposes Directive (EU) 2017/828 of the European Parliament and the Council of 17 May 2017 (‘the Shareholders’ Directive), was published in the Official Gazette of the Republic 12 May 2021. It takes effect from that date.
The Shareholder’s Directive was the response of the European Commission (‘the EC’) to the 2015-16 world financial crisis which saw global stock markets exhibit extreme volatility to the detriment of the companies listed on them. The crisis highlighted numerous shortcomings in corporate governance and the fact that in many instances such governance was being driven by short term strategies rather than by a desire to build long term sustainable businesses. Of specific concern were the following:
- Institutional investors such as pension and insurance funds own a majority of the shares of listed companies. Such funds even though often long term in outlook tend to use asset managers to manage their investments. This is problematic because the performance of asset managers tends to be assessed on a short-term basis – generally quarterly or even monthly. This pressures them to overlook long term company performance in favour of quick gains. The EC noted that the average shareholding period around that time was just 8 months with fund managers turning over their entire portfolios every 1.7 years.
- Deficiencies in the engagement of and control by shareholders impeded good decision making by companies.
- In some instances, there was complicated access to, and costly procedures associated with the exercise of shareholders rights.
- Mistrust on the part of shareholders and society in general existing -*-because of excessive payments to directors which were not justified by the performance of their companies.
The Shareholder’s Directive aimed to counter some of these issues by :
A. Introducing stronger shareholder’s rights and facilitating cross-border voting.
B. Introducing greater transparency on the part of institutional investors and asset managers as to how they invest and how they engage with investee companies with the hope that this will encourage long-term engagement.
C. Increasing transparency requirements for proxy advisors.
D. Involving shareholders in determining the pay of directors.
E. Introducing stricter rules on disclosure and approval of related party transactions.
The Law in Cyprus and the aims of the Shareholder’s Directive
The Law will affect the following:
Intermediaries providing custodian services, asset management services and safekeeping of shares on behalf of beneficial shareholders; Proxy advisors; Asset Managers; Institutional investors and, companies with a registered office in Cyprus issuing shares which are traded on a regulated market within the EU.
Main provisions of the Law as regards Shareholder Directive Objectives A-E
A. Introducing stronger shareholder’s rights and facilitating cross-border voting (Articles 4,5,6,7).
- A company can request identification of any shareholder which holds more than 0.5% of share capital or voting rights. Any intermediary which holds such information must, if requested by the company, disclose it immediately. This facilitates direct engagement between company and shareholder.
- An intermediary is obliged to transmit information, which the company must disclose to shareholders (to enable them to exercise their shareholder rights), to the shareholders. Where this necessarily involves a chain of intermediaries the transmission of information must take place without delay.
- Shareholders may now participate and vote in the AGM electronically rather than having to do so physically or via the use of a nominee.
- Intermediaries are required to facilitate the exercising of shareholder rights.
- A shareholder(or their nominee) may ,within 3 months of an AGM vote, obtain upon request, confirmation that their votes have been validly recorded and counted by the company. This excludes a situation where that information has already been made available to them.
- Intermediaries must publicly and separately disclose any charges they make in relation to the above.
B. Introducing greater transparency on the part of institutional investors and asset managers as to how they invest and how they engage with investee companies with the hope that this will encourage long-term engagement (Articles 8-10).
- Institutional shareholders and asset managers are required to publish a policy on shareholder engagement. They must also provide annual information on how they have implemented the policy including inter alia how they have voted at ‘significant votes’. If they choose not to publish a policy they must provide an explanation of why this decision has been taken.
- Institutional investors are required to explain how the main elements of their equity investment strategy are consistent with the profile and duration of their liabilities (for example a mature pension fund has a greater percentage of older members than new entrants and so liabilities are larger and more imminent than for a newly established fund). They must also explain how the elements of their strategy contribute to the medium to long term performance of their assets.
- Asset managers must disclose to institutional investors how their investment strategy and its implementation contribute to the medium to long term performance of the assets of the institutional investor or of the investment fund.
C. Increasing transparency requirements for proxy advisors (Article 11).
Proxy advisors who provide shareholders with company research, advice and voting guidance must explain which code of conduct they adhere to and how it has been applied. If they do not apply any such code they must provide an explanation to the public of why this is so.
D. Involving shareholders in determining the pay of directors(Articles 12-13).
The Law strengthens the existing legal framework in Cyprus governing remuneration reports via the introduction of a binding shareholder vote on remuneration policy and a requirement for enhanced disclosure in the remuneration report. Specifically:
- Companies must establish a remuneration policy for directors. The policy should complement the company strategy and detail both the fixed and variable elements of the remuneration package including pensions and contract termination payments.
- The shareholders will have the right to vote on the policy at the AGM and as a minimum every four years thereafter.
- The AGM has the right to hold an advisory vote on the previous year’s remuneration report.
- Shareholders have the right to vote on remuneration reports detailing payments to individual directors in the previous financial year. SME companies may hold a discussion rather than a vote at their AGM.
- The remuneration policy must be publicly disclosed without delay on the company website together with the date of the AGM vote and the result of the vote. It must remain freely accessible for so long as the policy is in action.
- Within one year of the closure of the balance sheet the remuneration report must also be made publicly and freely available on the company website for a period of ten years.
E. Introducing stricter rules on disclosure and approval of related party transactions(Articles 14 (3-5)).
Where a material transaction takes place between a listed company and a related party other than in the normal course of business at market rates the following applies:
- There must be a public announcement.
- A report on the transaction must be produced by either an independent third party, the administrative or supervisory body of the company or, the audit committee or any committee where independent directors form a majority. The report must assess the fairness and reasonableness of the transaction from the standpoint of the company and other shareholders.
- The transaction must be approved by the administrative/supervisory body of the company or by a general meeting of the company.
The original deadline for transposing the Shareholder Directive was 10 June 2019. Almost two years later Cyprus is one of the last EU Member States to have introduced the required legislation. Now that the Law has finally been implemented, the timetable for compliance on the part of the affected parties is tight. Of most immediate concern to companies are the provisions concerning related party transactions. An announcement from CySEC is awaited as regards the definition of ‘material transactions’, however, it would be prudent for companies to prioritise the examination and as appropriate, the amendment of their policies on related transactions. Thereafter they should have regard to revising their remuneration policy as appropriate since they will be required to present it at the AGM approving the annual accounts to be published in 2022. Whether the EC achieves its aim of helping to engage investors in building sustainable businesses remains to be seen. It will be several years before sufficient data is available to see if portfolio turnover has reduced or if any significant impact has been made on the payment of ‘excessive’ remuneration to directors. What it can be certain of is that there will be greater transparency concerning investor and company activities – even if it doesn’t always agree with them!
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