The Directive launched by the European Parliament and the Council on 17 May 2017 aims to improve the participation of shareholders in stock-listed companies and to facilitate exchange of cross-border information and the exercise of shareholders’ rights.
For this purpose, the Directive and accordingly the draft bill govern four areas of stock corporation law: the shareholders’ right of co-determination in the remuneration of the supervisory board and the management board (“say-on-pay”), transactions of the company with related companies and persons (“related-party transactions”), better identification and information of shareholders (“know-your-shareholder”) as well as the improvement of transparency among institutional investors, asset managers and consultants on share voting rights.
II. New regulations foreseen in the governmental draft bill
1. Shareholder identification
In order to promote shareholder participation, the communication possibilities between a company and its shareholders are to be improved. This communication is partly hampered by a chain of intermediaries, especially those across borders. Listed stock corporations are now supposed to be granted a right of information towards intermediaries. If several intermediaries are interconnected, they are obliged to forward requests. Correspondingly, it is intended that shareholders have the right to request confirmation that their votes have been received and taken into account in electronic voting.
2. Transparency of institutional investors, asset managers and consultants on share voting rights
In future, investors and final beneficiaries will be better informed about the exercise of their shareholder rights and the participation of asset managers and institutional investors in corporate governance in companies in which investments have been made, in order to be able to check whether this behavior is in line with their interests.
For this purpose, institutional investors and asset managers will have to draw up a participation policy, which particularly includes descriptions of the exercise of shareholder rights as part of the investment strategy, cooperation with other investors and dealing with conflicts of interest. In accordance with the “comply or explain” principle, the participation policy must be published on the website of the institutional investor or an explanation must be given as to why this is not the case. If one of these obligations is breached, a fine of up to EUR 50,000 will be imposed.
In companies with more than just insignificant shareholdings, the voting behavior must be disclosed. If an asset manager is entrusted with the management of the assets for the institutional investor, the main elements of the agreement with the asset manager must be made public, whereby the “comply or explain” principle also applies in this case.
Consultants on voting rights also have extended transparency obligations and will in future be required to declare whether and to what extent they comply with the requirements of a code of conduct.
3. Remuneration of the management board
With the newly introduced obligation to develop an abstract remuneration system for members of the management board, further innovations will be introduced for listed stock corporations. However, although still no substantive provisions are being drawn up, so that the content of the remuneration must continue to be measured against the previously applicable law, the determination of the remuneration is now to remain within the framework of the remuneration system. The supervisory board entrusted with this task has to draw up a remuneration system for the management board. The approving resolution of the annual general meeting regarding the system is merely of an advisory and recommendatory nature; it is not possible to propose changes. In this legislative area, the German legislator has made use of the option provided for in the Directive. A recommending resolution would merge more effectively into the dualistic system of a German stock corporation. If the supervisory board wishes to deviate from a predefined remuneration policy, this must be submitted again to the annual general meeting even if justified objections of the annual general meeting are implemented with the amendment. A temporary deviation from the defined remuneration system is possible in the interest of the long-term well-being of the company.
The remuneration system should include, among other things, details of the contribution of the remuneration to the promotion of the business strategy and the long-term development of the company as well as all fixed and variable remuneration components with its respective share in the total remuneration. The individual minimum disclosures can be found in section 87a Stock Corporation Act Draft [AktG-E] of the governmental draft bill. The system should be “clear and comprehensible” and, according to the draft, the point of view of an “averagely informed shareholder who is reasonably observant and circumspect” is decisive in this regard. Explicitly mentioning the possibility of reclaiming variable remuneration components is a new feature in this context.
A resolution on the remuneration of the supervisory board must be passed by the annual general meeting at least every four years; in addition to an abstract remuneration system, the specific remuneration must also be disclosed.
In the new remuneration report, the management board and supervisory board are required to disclose on an annual basis the remuneration granted and owed to the members of the management board and supervisory board in the last financial year. The individual requirements to be included in the report are listed in the newly to be introduced section 162 AktG-E. The annual general meeting votes on the remuneration report for the previous financial year, which has been formally audited by the auditor. This resolution does not create any rights or obligations and is not contestable. The audit report and audit opinion shall be made publicly available for ten years.
The supervisory board continues to be liable for breaches of duty that occur in connection with remuneration decisions.
4. Transactions with related parties
The last and fourth area to be changed are the Related Party Transactions (RPT) regulations. The aim is to prevent persons such as members of the board or supervising shareholders from using their influence in transactions with the company and from appropriating assets at the expense of the company and its outside shareholders (so-called “tunneling”). Like the initial draft bill, the governmental bill provides for a minimum implementation of the Directive in order to supplement the existing protection regulations. It essentially concentrates on the following three corner points: the establishment of a narrow scope of application with a high materiality threshold, a reservation of approval by the supervisory board or a decision-making committee, and an immediate publication obligation for RPT.
The threshold of intervention for the approval and publication requirement is deemed to have been exceeded if the economic value of RPT or of several of such transactions in the same fiscal year exceeds 2.5 % of the sum of fixed and current assets in the most recently adopted annual financial statements of a company. This excludes normal market transactions that take place in the ordinary course of business, i.e. typical, repetitive everyday transactions whose terms and conditions stand up to comparison with those of third parties. Other exceptions include transactions with subsidiaries or transactions requiring the approval of the annual general meeting.
The approval procedure in the supervisory board has seen the largest change compared to the initial draft bill. A preparatory committee was initially to be set up in addition to a plenum, and the supervisory board as a whole had to deal with its proposal for approval. This has now been replaced by the possibility of setting up a decision-making committee. The majority of the members of the committee shall be members of the supervisory board for whom there is no concern whatsoever regarding a potential conflict of interest. If approval is refused by the supervisory board or by the committee replacing it, the management board may demand a substitutional resolution by the general meeting on the transaction with a simple majority, excluding the voting rights of related parties. If approval is not obtained, the effectiveness of the transaction in the external relationship shall remain unaffected. However, obligations to pay damages according to the general principles come into consideration.
The publication requirement applies to all RPTs subject to the consent requirement mentioned above.
III. Conclusion and further procedure
The ARUG II draft of the Federal Government can largely be described as a successful implementation of the Directive, which takes into account the special features of German stock corporation law. Nevertheless (and irrespective of the fact that the deadline for implementing the Directive already expired on 10 June 2019), the draft bill has meanwhile stalled in the legislative process due to controversies regarding the “say-on-pay” principle and detailed provisions of the RPT and could no longer be passed as planned before the parliamentary summer break. There are plans to start a new attempt this autumn, expecting certain changes in these areas. The exact date on which the law will come into force has not yet been set.