EU Shareholders’ Rights Directive & Prospectus Regulation: How will the changes affect public companies and their shareholders?

By Caitlyn Buchanan, 19th Sept 2017

The European Council have adopted amendments to the existing Shareholder Rights Directive to improve shareholder engagement and transparency of small publicly traded companies. The changes will give shareholders more say in the way a company is run, creating a system of checks and balances between those with a vested interest in the organisation. Additionally, changes to the EU Prospectus Regulation aim to improve access for small businesses looking to gain access to more diversified funding across the EU. The main points of each are summarised below, all changes are to be implemented within the next couple of years.

New EU Shareholders’ Rights Directive: EU/2017/828

As of 9 June 2017, the European Parliament have adopted the revised Shareholder’s Rights Directive EU/2017/828, which applies to companies that have a registered office in an EU Member State and whose shares are actively trading in a regulated EU market. The Directive has been revised to enhance shareholder engagement in listed companies, to increase transparency and address concerns raised about the short-term nature of investment strategies. The directive lays out the regulatory rules that will impact equity securities issuers, their investors and professional advisers. The EU Member States will have a two-year transposition period to implement the changes into domestic law, with completion no later than 10 June 2019.

The key changes are as follows:

  • Shareholder identification: Listed company shares are frequently held through a complex chain of intermediaries obstructing shareholder rights and engagement, especially in cross-border situations. Listed companies have the right to identify who their shareholders are and to communicate with them directly. Intermediaries will be required to communicate shareholder identity when requested by the company as well as pass on necessary information directly from issuers to shareholders and vice versa.
  • Transparency of proxy advisors: Institutional investors and asset managers often use proxy advisors to provide advice, research, and recommendations on how to vote in general meetings. Investors with diverse portfolios and foreign shareholdings rely more heavily on proxy recommendations. Proxy advisors will be required to be forthright and disclose key information about the preparation used when giving advice and recommendations. They will also be expected to report the code of conduct they applied.
  • Long-term engagement of institutional investors and asset managers: Institutional investors will need to annually disclose information to the public; explaining the main elements of their equity investment strategy. If they use asset managers, they should also disclose key elements of the arrangement between them, including the manager’s remuneration and incentives. In the case of non-compliance, an explanation must be provided.
  • Shareholders vote on compensation: Shareholders will have the right to hold a vote (binding or advisory) on the Director’s remuneration policy every four years. The policy should lay out all the components and range of pay and is to be publicly disclosed immediately following the vote held at the general meeting.
  • Transparency of party transactions: Transactions of a material nature may create risk or impact decisions of minority shareholders. These transactions must be to be submitted for shareholder’s approval and publicly disclosed to prevent a third party from taking advantage of its position and to protect the interests of the company and shareholders.

New EU Prospectus Regulation: EU/2017/1129

A prospectus is a legal document that companies issue to potential investors, it contains detailed information about the business, the securities they are issuing, the finances and shareholding structure. The revised Prospectus Regulation, EU/2017/1129, introduced 20 July 2017, aims to help businesses gain access to more diversified sources of funding across the EU. The new rules will lower regulatory hurdles that SMEs (Small and medium-sized enterprises) face when making public offers, making it easier and less costly to raise funds.

The following terms apply from 21 July 2018:

  • Exempt small capital raisingsPreviously, security offerings of less than €100,000 were exempt to regulation, however, the new rules will increase the limit to €1 million. Additionally, small obligation issuers in domestic markets are exempt from the obligation to publish a prospectus by up to €8 million in raised capital.

The following terms apply from 21 July 2019:

  • Lighter requirements for small companiesSmall companies looking to enter the European markets are subjected to less complex requirements. A new ‘EU growth prospectus’ will be available for SME and companies with less than 500 employees.
  • Shorter and specific investor information: There will be a shorter and clearer prospectus where the amount of required information is more clearly specified.
  • Simplifying secondary issues for listed firms: Simplified regime for certain companies who are already listed for public trading.
  • Fast track regime for frequent issuers: This process will allow frequent issuers to Companies that frequently tap into capital markets will also be able to use an annual “Universal Registration Document” that will contain information that can be used as a constituent part of their base prospectus and faster prospectus approval times will apply; and
  • Single access point for EU: Free, searchable online access for approved prospectuses will be provided by the ESMA (European Securities and Markets Authority)