Shareholders' Rights Directive II – implications for Listed Companies

By Nicholas Heap


The revised Shareholders' Rights Directive (EU) 2017/828 ("SRD II") was implemented on 10th June 2019. The key areas of note for listed companies concern the Directors' Remuneration Reporting Regime and Related Party Transactions, further details of which are considered below.

Directors’ remuneration regime

Most of the provisions relating to the directors' remuneration reporting regime under SRD II, such as the requirement to produce a Directors' Remuneration Report and Directors' Remuneration Policy and which must be subject to a binding shareholder vote already apply to Main Market listed companies. However, certain additional changes to a company's Directors' Remuneration Policy and Directors' Remuneration Reports under SRD II are being implemented which include:

Directors' Remuneration Policy

  • The date and results of the shareholder vote on the company's remuneration policy must be placed on the company’s website as soon as reasonably practicable following the vote and remain there for the life of the policy.

  • There is now a requirement to provide details on vesting, deferral and holdings periods for any share-based remuneration.

  • The policy must give an indication of the duration of directors’ service contracts.

  • The decision-making process used for determining, reviewing and implementing directors' remuneration should be outlined in the policy, together with an explanation of all significant changes compared to the previous policy.

Directors' Remuneration Report

  • The remuneration report must be available free of charge on the company’s website for ten years.

  • The annual change in directors' remuneration (salary, benefits and bonus) compared to average employee pay (or a suitable comparator group) is being replaced. Instead, companies will need to show the annual change in each director’s pay compared to the average change in employees’ pay (excluding directors), over a five year rolling period.

  • The report should show the split of fixed and variable remuneration awarded to each director for each year and specify any changes to the exercise price and date for the exercise of shares or share options by directors. 

Related party Transactions (RPTs)

SRD II has brought in certain changes to the Disclosure Guidance and Transparency Rules (DTRs).

The new RPT rules apply to:

  • UK incorporated companies; and

  • non-EEA issuers comprising: a) overseas incorporated premium and standard listed share issuers (other than open-ended investment companies); and (b) premium listed GDR issuers, in each case unless they are subject to corresponding requirements imposed by another EEA State (together comprising Rest of the World or "RoW issuers").

Premium listed issuers are already subject to RPT requirements in Listing Rule 11 (LR11). However, the new rules brought in under SRD II will operate as a parallel regime and, accordingly, such issuer now need to consider how best to comply with two sets of similar, but different, RPT requirements. DTR7.3 states that issuers that have met the disclosure and approval requirements in LR11, will also have complied with the disclosure and approval requirements in the new DTRs. However, LR11 and DTR7.3 are entirely separate regimes and in some instances DTR7.3 will apply but LR11 will not (see below).

It is important to note that issuers whose securities are admitted to trading on the Standard Segment will also be subject to RPT requirements for the first time.

Scope of Related Party Transactions under DTR 7.3

The definition of RPTs in DTR 7.3 incorporates the definition used for accounting purposes in international accounting standards (IAS 24) which is wider than the definition in LR11. So, for example, the definition includes entities, or any member of a group, which provide key management personnel services to the company in question. Likewise, any transactions or arrangements with related parties entered into on non-market terms are also caught, rather than this just being a factor to have regard to when assessing whether a transaction is in the ordinary course of business. As a result, there may be some instances in which DTR7.3 may apply, but LR11 would not.

RoW issuers benefit from a slightly less onerous regime. They are permitted to use definition of "related party" in an equivalent accounting standards that they use to prepare their consolidated annual financial reports and they also do not need to obtain board approval for the RPT (see below).

Materiality Threshold for RPTs

A "material" RPT is an RPT where any percentage ratio (calculated in accordance with tests set out in a new DTR7 Annex 1 which mirror the class tests set out in LR10 Annex 1, as far as possible) is 5% or more. The FCA consultation had initially suggested that this figure would be 25% but, based on feedback, a threshold of 5% was eventually adopted.

Issuers subject to RPT rules

The new RPT rules require a relevant issuer to:

  • make an announcement of the terms of the RPT no later than the time when the RPT is agreed;

  • obtain board approval for the RPT before it is entered into; and

  • ensure that any director or associate who is the related party, or who is a director of the related party, does not participate or vote when the Board considers the RPT.

RoW issuers are only subject to the announcement requirement.

All issuers are also required to:

  • establish and maintain adequate procedures, systems and controls to enable them to assess whether a transaction with a related party is in the ordinary course of business and has been concluded on normal market terms; and

  • ensure that the related party does not take part in the assessment above.

RPTs with the same related party (and any of its associates) in any 12 month period must be aggregated for these purposes and, once the 5% materiality threshold is reached, both the board approval and disclosure requirements apply to all of the aggregated transactions, and not just the one that results in the materiality threshold being reached.

Application of new RPT rules

Issuers are required to comply with the new requirements from the start of their first financial year beginning on or after 10 June 2019. For 31 December year-end companies, that means that they will need to comply from 1 January 2020 onwards.