The Shareholder Rights Directive II (SRD II) enters into force on the 3rd of September 2020 in all European Economic Area (EEA) member states. This will impact any financial services company holding a portfolio of European securities, whether located in or outside of Europe.
With this directive, issuers will have better knowledge of the identity of their shareholders, while intermediaries will have new obligations related to shareholder identification, meeting and voting. Furthermore, shareholders will benefit from improved information and easier participation in general meetings. This article explores the new rights and obligations of issuers and intermediaries, the advantages for market players and the key implementation challenges.
1. Issuers will have the right to request the identity of their shareholders and intermediaries the obligation to process it
Issuers of European securities will have the right to request that any intermediary in the custody chain disclose the identity of their shareholders, such as their name, email address and number of shares held in the company. This is ground-breaking, as in today’s market infrastructure, listed companies are often unable to identify their shareholders due to the complex holding chain, consisting of multiple layers of intermediaries between the company and the ultimate shareholders.
Intermediaries will have the obligation to transmit the shareholder identification request to the next intermediary in the chain. In addition, intermediaries will have to respond to the issuer (or to the third party appointed by the issuer) with the number of shares held and shareholder identity information.
The figure below illustrates the process:
2. Issuers and intermediaries will have new obligations on meeting & voting
Issuers will be obliged to transmit to intermediaries any information required for the exercise of shareholder rights, including meeting notifications. As above, intermediaries will be required to transmit this information to the next intermediary in the chain.
In addition, intermediaries will have to facilitate the exercise of shareholder rights, including the right to participate and vote in meetings. Issuers will have to provide post-meeting confirmation of counting of votes, if requested by the shareholder.
All financial services companies which hold a portfolio of European securities are impacted by SRD II, regardless of whether they are located in the EEA. Securities in scope are equity and fund shares, but each member state can exempt funds or include bonds.
3. SRD II will transform the relationship between issuers and shareholders
Thanks to SRD II, issuers will have a greater understanding of their shareholders, will be able to communicate with them more directly and expect an increased attendance to general meetings. Moreover, issuers will be able to use the information gained on the identity of their shareholders in many valuable ways. For example, they will be able to identify the origin of important stock movements, target the right markets for roadshows and investor communications, or even anticipate shareholder behaviour and voting at general meetings.
Shareholders on the other hand will benefit from improved communication and transparency from the company on information required for the exercise of their rights. SRD II also facilitates shareholder ability to participate and vote in general meetings. This will, as a result, increase their role in corporate governance.
Intermediaries may perceive SRD II as merely another regulatory burden, but we strongly believe it will create opportunities for forward-looking companies to develop new services and value, particularly in the field of shareholder identification and proxy voting. In the longer term, we expect SRD II to generate cost reduction by streamlining and harmonising flows related to shareholder identification, meeting and voting across the industry.
4. SRD II poses many implementation challenges
Implementation challenges for intermediaries are numerous. Based on our experience, we draw particular attention to the following:
- Adapt to the new messaging format ISO 20022
- Respect processing deadlines, generally within one business day
- Cater to different national law requirements, as the directive leaves some flexibility to member states on certain topics, such as the scope of instruments
- Cope with uncertainty on requirements, created by the fact that the transposition of SRD II into national laws has not occurred yet in all member states
- Verify the origin of the shareholder identification request and the eligibility of the security in order to be covered by the legal framework created by SRD II, notably on personal data
- Collect holding data from various internal databases
- Process votes on a continuous basis, and process confirmation of the counting of votes
- Cope with various operational impacts
- Be compliant by the regulatory deadline on the 3rd of September 2020
Projective can help you navigate the diverse challenges and opportunities presented by SRD II. If you have not yet started to assess the impacts of SRD II on your organisation, or implemented the required changes to be compliant by September 2020, it is urgent that you start to do so.
Through our vast experience gained on similar projects and programmes at leading market infrastructure players, we can help you assess the impact, become compliant and create value. Feel free to reach out to us if you want to know more.