SRD II – Shareholder ‘Say on Pay’ Now Mandatory in Ireland
The Shareholder Rights Directive 2017/828 (“SRD II”), which amends the Shareholder Rights Directive 2007/36 (“SRD I”), has finally been transposed into Irish law by the long awaited EU (Shareholders’ Rights) Regulations 2020 (the “SRD II Regulations”).
The SRD II Regulations, which had a transposition deadline of 10 June 2019, came into effect on 30 March 2020 with a number of transitional provisions. The provisions of the SRD II Regulations amend and supplement the Companies Act 2014 (the “Act”).1
The SRD II Regulations provide clarity to Irish public limited companies (“PLCs”) on, among other things, the contents of their remuneration policies and remuneration reports and the nature of remuneration votes that should be put to shareholders in general meeting going forward as a consequence of SRD II. This briefing considers the key remuneration aspects of the SRD II Regulations transposing SRD II into Irish law.
The effect of SRD II reaches beyond shareholder ‘say on pay’ with other measures designed to encourage long-term shareholder engagement and transparency between traded companies and investors. See here for a summary of the key points listed companies should be aware of in this regard.
1. Which companies are covered by the SRD II Regulations?
The changes introduced by the SRD II Regulations apply to PLCs incorporated and registered in Ireland whose shares are admitted to trading on a regulated market in an EU member state (“Member State”), (a “traded PLC”). This means any Irish PLC whose shares are admitted to trading on Euronext Dublin or, for example, the main market of the London Stock Exchange.
For the avoidance of doubt, the SRD II Regulations do not apply to (i) PLCs listed on Euronext Growth which is not a regulated market within the meaning of SRD II (ii) PLCs incorporated and registered elsewhere in the European Union (even if listed on Euronext Dublin) who fall within the remit of the Member State of its incorporation. Further, the remuneration policy and reporting requirements set out in this briefing do not apply to either corporate UCITS or AIFs which are expressly excluded from the definition of a “traded PLC” for these purposes.
2. What’s new?
While many Irish companies listed on Euronext Dublin, and particularly those with a dual listing on the main market of the London Stock Exchange, already hold an annual vote on the company’s remuneration report and a vote (normally every three years) on the company’s remuneration policy, the SRD II Regulations now make it mandatory for traded PLCs to give shareholders a ‘say on pay’ under Irish law. The SRD II Regulations require traded PLCs to prepare (i) a remuneration policy regarding the basis of remuneration to be paid to directors and (ii) a remuneration report reporting on how this remuneration policy has been applied in practice. The SRD II Regulations prescribe clear content requirements for both the policy and report. Shareholders must then be given the opportunity to directly engage with directors’ remuneration through voting on the policy and the report at general meeting.
3. Who falls within scope?
The new requirements address any remuneration to be paid to ‘directors’, which definition includes newly recruited and former directors. In line with SRD II, the SRD II Regulations extend the definition of ‘director’ further for the purpose of remuneration reporting to persons carrying out the functions of chief executive officer and, if the function exists, deputy chief executive officer (whatever their respective titles) and regardless of whether such individuals sit on the board of the traded PLC. No other senior management functions are covered by the SRD II Regulations.
4. Right to vote on Remuneration Policy
The SRD II Regulations provide that traded PLCs must submit their remuneration policy to a shareholder vote at least once every four years and otherwise when a material change to the approved policy is proposed. Importantly, the SRD II Regulations contain a grandfathering provision whereby a traded PLC that has put a remuneration policy to its shareholders which has been approved on or before 30 March 2020, will not be required to put another remuneration policy to its shareholders for four years from the date the existing remuneration policy was approved. This will apply whether or not the existing remuneration policy complies with the content requirements prescribed by the SRD II Regulations (discussed below).
Under SRD II, Member States were given discretion as to whether the vote to be put to shareholders would be binding or advisory. Ireland, taking a different approach to the UK, has adopted a minimalist approach in requiring an advisory vote on the remuneration policy, save where the company’s constitution requires the vote to be binding.
Following an advisory vote on a remuneration policy:
(a) regardless of the voting outcome, the traded PLC must pay its directors in accordance with either the remuneration policy to which that remuneration vote related or a remuneration policy that was previously approved by a remuneration vote; and
(b) where a remuneration policy is not approved, the traded PLC must prepare a revised remuneration policy and hold a remuneration vote on the revised policy at the next general meeting.
Following a binding vote, where the remuneration policy is not approved at general meeting:
(a) and the traded PLC does not have a previously approved remuneration policy, it must prepare a revised policy for approval at the following general meeting and in the meantime pay its directors in accordance with its existing practices; or
(b) where an approved remuneration policy exists, the traded PLC must continue to pay its directors in accordance with the existing approved remuneration policy and must submit a revised policy for approval at the following general meeting.
Traded PLCs may temporarily derogate from the remuneration policy in exceptional circumstances where such derogation is in accordance with the procedural conditions and other provisions on derogation contemplated by the remuneration policy. The term ‘exceptional circumstances’ extends only to circumstances where the derogation is necessary to serve the long-term interests and sustainability of the company as a whole or to assure its viability.
5. Right to vote on the Remuneration Report
The remuneration report of a traded PLC must now be put to shareholder vote at general meeting each year. The SRD II Regulations do not describe the nature of the vote as being either advisory or binding. However, SRD II provides that the shareholder vote on the remuneration report is of an advisory nature. The nature of this vote allows shareholders to express their potential dissatisfaction at the implementation of the remuneration policy (as outlined in the relevant remuneration report) by voting against the remuneration report. Companies are required to explain in subsequent remuneration reports how the previous year’s vote has been taken into account in formulating director remuneration for the subsequent financial year.
SRD II allowed Member States to exempt small and medium sized companies from holding a yearly vote on the remuneration report and instead to submit the remuneration report for discussion only at the general meeting. The SRD II Regulations have not availed of this exemption and, therefore, impose a uniform approach across all traded PLCs.
6. Content Requirements for Remuneration Policy and Remuneration Report
There are no surprises in the content requirements prescribed by the SRD II Regulations for a traded PLC’s remuneration policy and remuneration report which closely follow those prescribed by SRD II. These content requirements are summarised in the table below.
In addition to the requirement that the remuneration policy and remuneration report must be drafted in a manner which is clear and understandable, each must contain the following explanations and disclosures, as relevant:
|Content requirements - Remuneration Policy||Content requirements - Remuneration Report|
|- policy’s contribution to business strategy, long-term interests and sustainability and how this is achieved in practice||- total remuneration broken into its components|
|- fixed and variable remuneration (to include bonuses and other benefits) with indications of relative proportions||- relative proportion of fixed and variable remuneration|
|- how pay and employment conditions of employees were taken into account when establishing the policy||- how total remuneration complies with the remuneration policy, including how it contributes to long-term company performance|
|- clear, comprehensive and varied criteria for variable remuneration||- how performance criteria were applied|
|- any deferral periods and ability to reclaim variable remuneration||- annual change of:
|- financial and non-financial performance criteria, including criteria relating to corporate social responsibility and an explanation of its contribution to business strategy and long-term interests and sustainability||- remuneration from any undertaking belonging to the same group|
|- methods applied to determine extent to which performance criteria have been fulfilled||- number of shares and share options granted or offered, and main conditions for exercise of rights including exercise price and date and any change thereof|
|- vesting and holding periods for share awards and how such awards contribute to business strategy and long-term interests and sustainability||- information on ability to reclaim variable remuneration|
|- duration of contracts and notice periods, terms of pension or early retirement schemes and terms of termination and linked payments||- any deviations from procedure for the implementation of the remuneration policy|
|- decision-making process followed for determination, review and implementation, including measures to manage conflicts of interest and committee involvement (if any)||- any derogations from the remuneration policy, the exceptional circumstances in question and the specific elements derogated from|
|- any significant changes to previous policy|
|- how policy takes into account votes and views of shareholders and any remuneration reports since most recent vote|
|- where derogation is permitted and procedural conditions required for derogation|
Most Irish issuers will already be familiar with many of these disclosure and reporting requirements (or a variation thereof) as a result of similar requirements prescribed by the existing Irish framework for reporting on director’s remuneration under the Act, the Irish Listing Rules and the UK Corporate Governance Code. The key new changes introduced by the SRD II Regulations to the existing Irish framework include an increased emphasis on providing a qualitative analysis of remuneration over simply presenting quantitative metrics. When describing director pay in the remuneration report, a traded PLC will need to provide an explanation of how the remuneration package will contribute to the long-term performance of the traded PLC and how performance criteria (financial and non-financial) have been applied over the financial period under review. Further, to enable shareholders to clearly track director remuneration against company performance, the SRD II Regulations include a requirement for traded PLCs to present a table setting out the annual change in director remuneration against the performance of the traded PLC and the average remuneration of employees of the traded PLC over a rolling five year period.
Irish issuers will have to pay particular attention to these new and/or varied content requirements to ensure that each has been addressed in their remuneration policies and reports to be put to shareholders for approval under the new regime. To oversee this, the company’s statutory auditors are charged under the SRD II Regulations with ensuring that all information required under those regulations has been provided in the remuneration report and, in the case of any omissions, to state that fact in the auditors’ report forming part of the traded PLC’s annual report.
In 2019, the European Commission published draft non-binding guidance on standardised remuneration tables which are expected to be finalised in 2020. This guidance should also be consulted by traded PLCs in advance of drafting their policies and reports in line with the new requirements.
7. Website disclosures
The SRD II Regulations require a traded PLC to publish its remuneration policy, along with the date and result of the shareholder vote on the policy, on the traded PLC’s website as soon as practicable after the general meeting at which it was voted on and for as long as the policy remains applicable. The remuneration report should be made available on the website for a period of ten years following the general meeting at which it was voted on, and may be made available for longer if it does not contain personal details of any director.
8. Next steps - Implementation and Transitional Provisions
The provisions in relation to the remuneration policy and remuneration report apply for financial years beginning on or after 10 June 2019, which for most traded PLCs with a financial year end of 31 December, means for financial years beginning 1 January 2020.
This means that under the SRD II Regulations, a traded PLC that:
- does not have a shareholder approved remuneration policy already in place, will need to prepare a directors remuneration policy which satisfies the new content requirements and put this to shareholder vote as soon as possible, presumably at its 2020 AGM or a specially convened EGM;
- has a shareholder approved remuneration policy already in place, it can continue to rely on that remuneration policy until the end of the four year period from the date on which that policy was approved; and
- wishes to make any material amendment to its existing policy, or put a new policy in place, it must prepare the amended or new policy and put this to shareholder vote in general meeting in advance of adoption.
The requirement to put the remuneration report to shareholder vote at general meeting and satisfy the new content requirements for the report under the SRD II Regulations will need to be addressed by all traded PLCs at their respective AGMs and annual reports for the first time in 2021. The remuneration report to be published in that year will address the application of the remuneration policy in the prior financial year being, for most traded PLCs, the financial year beginning 1 January 2020.
Also contributed by Jack O'Reilly
- The SRD II Regulations amend the Act by the inclusion of new Chapters 8A, 8B, 8C and 8D in Part 17 of the Act and a new Schedule 21.
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.
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