Revised Shareholders’ Rights Directive Transposed into Irish Law: Update for Asset Managers
The revised Shareholders’ Rights Directive 2017/828 (“SRD II”) has been transposed into Irish law by the European Union (Shareholders’ Rights) Regulations 2020 (the “Regulations”). Among other things, the Regulations impose new transparency and disclosure requirements on certain asset managers, including UCITS Managers and Alternative Investment Fund Managers (“AIFMs”). These new requirements will start to apply from 30 March 2020.
Background and Overview
As set out in our previous briefing (here), in 2017, the EU adopted SRD II, which amends the Shareholders’ Rights Directive 2007/36 (“SRD”) in several respects and Member States were required to transpose SRD II into domestic law by 10 June 2019.
SRD established rules promoting the exercise of shareholder rights at general meetings of companies with their registered office in the EU and the shares of which are admitted to trading on an EU regulated market. The provisions of SRD were replicated in the Companies Act 2014 (the “Act”) and the Regulations will further amend and supplement the relevant provisions in the Act.
SRD II amends the earlier directive with the aim of promoting greater shareholder involvement in the corporate governance of public companies to ensure that decisions are made for the long-term stability of a company and take into account environmental and social issues. SRD II seeks to:
- facilitate shareholder identification and the information flows between the shareholders and the company;
- introduce greater transparency for institutional investors, asset managers and proxy advisers;
- improve the oversight of directors’ remuneration;
- regulate related party transactions; and
- encourage shareholder engagement, in particular for the long term.
The Regulations transpose SRD II into Irish law by amending the Act. In particular, the Regulations introduce three new chapters into the Act, namely Chapter 8A - Rights of Shareholders; Chapter 8B – Transparency of institutional investors, asset managers and proxy advisors; and Chapter 8C – Remuneration Policy, remuneration report and transparency and approval of related party transactions.
The rest of this briefing focuses on the new transparency requirements applicable to asset managers. For further information on Chapters 8A and 8C, see our briefing here.
New Requirements for Asset Managers
Chapter 8B of the Act imposes additional transparency requirements on certain asset managers and institutional investors, which it refers to as a “relevant asset manager” and a “relevant institutional investor”, respectively. The aim of these new requirements is to promote the development of longer-term investment strategies and commit the asset manager to act in the best medium-to-long-term interest of the institutional investor and its final beneficiaries.
Pursuant to these additional requirements, a relevant asset manager must:
- develop and publicly disclose an engagement policy; and
- make certain disclosures to an institutional investor with which the relevant asset manager has entered into an investment agreement.
The term “asset manager” refers to:
- an investment firm authorised under the Markets in Financial Instruments Directive 2014/65 to provide portfolio management;
- an AIFM;
- a UCITS Manager or a self-managed UCITS.
A “relevant asset manager” is an asset manager that:
- invests in shares traded on an EU regulated market on behalf of investors, and
- in respect of which Ireland is the competent Member State as defined in applicable sector specific EU legislation.
A third country asset manager is not a “relevant asset manager” (an "Asset Manager") for the purposes of the new requirements.
An Asset Manager must develop an engagement policy, which includes certain specified information, and make that policy available free of charge on its website. It must similarly make available, on an annual basis, information on how that engagement policy has been implemented. This information includes, in particular, information on how the Asset Manager voted at significant votes, but not information regarding votes that are insignificant due to the subject matter or the size of the holding in the company in question.
Each of these disclosure obligations applies on a ‘comply or explain’ basis. However if an Asset Manager fails to make the relevant disclosures, it must publicly disclose a clear and reasoned explanation for this failure.
An Asset Manager must also comply with conflicts of interest requirements set out in applicable sectoral legislation regarding its engagement activities.
Investment Strategy Disclosure
Where an Asset Manager enters into an arrangement to invest on behalf of a relevant institutional investor (an “Investor”), such as an insurance company or a pension fund, it must disclose annually to the Investor how its investment strategy and its implementation of that strategy:
- complies with that arrangement; and
- contributes to the medium to long-term performance of the institutional investor’s assets or a fund managed by the institutional investor.
The disclosure must include specified information. Where the disclosure is publicly available, the Asset Manager need not provide it directly to the Investor.
SRD II also requires an Investor to disclose certain information regarding its arrangements with Asset Managers.
Each Asset Manager will need to review its policies and procedures to ensure that they comply with the requirements set out in Chapter 8b of the Act, and, where necessary:
- update its shareholder engagement policies;
- making any consequential changes to its shareholder engagement practices; and
- make arrangements to collate and publish the information needed for annual reporting requirements.
As the Regulations do not specify any transitional period, it would appear that an Asset Manager must have freely available on its website by 30 March 2020, either a Chapter 8b compliant engagement policy or a clear and reasoned explanation as to why it has failed to adopt such a policy. In other words, an Asset Manager that is in the process of developing its engagement policy but has not finalised that policy by 30 March 2020, would appear to be required to explain why it has failed to adopt a policy.
UK asset managers faced a similar problem when SRD II was transposed into UK law. However, the Financial Conduct Authority announced that for an initial period a firm could comply with the relevant disclosure rule by explaining what it was doing to develop an engagement policy. While this appears to be a logical approach, the Central Bank of Ireland has to date not made any similar announcement.
The new requirements may prove particularly challenging for self-managed investment companies, (“SMICs”) which may not have an existing engagement policy or a website on which to make the required disclosures. In this regard, on the assumption that the SMIC’s investment manager has already adopted an engagement policy, it may make sense for the SMIC to use that policy as a starting point for its own policy. We can assist in adapting such existing policy or preparing a new policy as may be required.
This document has been prepared by McCann FitzGerald LLP for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.