The companies listed on the main list of the Helsinki Stock Exchange should take note of the new regulation concerning director remuneration, related party transactions and right to identify shareholders as well as the facilitation of shareholder engagement that enters into force as from today 10 June 2019.
Certain requirements will be effective as from a later date (notably the remuneration policy that is to be presented to the annual general meetings in 2020 and the remuneration report that is to be presented as from 2021), but they will require listed companies to prepare for the changes during the autumn 2019.
Institutional investors, asset managers and proxy advisors will also face new and additional governance and reporting requirements.
The key changes cover:
- new rules to define related parties and related party transactions and related expansion of the disqualification rules affecting the decision-making of the board of directors, managing director, supervisory board and the shareholders’ meeting of listed companies – implemented as from 10 June 2019;
- new requirements on listed companies to present a remuneration policy and a remuneration report as well as related say-on-pay rules concerning shareholder input on the policy and report – to be implemented as from 1 January 2020 (the first remuneration report to be presented to annual general meetings in 2021);
- new rights for listed companies to identify their shareholders and new obligations for intermediaries to facilitate information flow and the use of shareholders’ rights – to be implemented as from 24 September 2020; and
- additional requirements on institutional investors, asset managers and proxy advisors to prepare and disclose engagement policies and code of conducts – to be implemented as from 10 January 2020.
In addition to the regulatory changes, the Finnish Corporate Governance Code (CG Code) is being revised to take into account the changes and the new regulation introduced by the SRD II and the implementing legislation. The revised code has been circulated for comments and is planned to take effect as from 1 January 2020.
EU regulation implemented by the new rules
The European Parliament and Council adopted the first Shareholder Rights Directive (SRD) in 2007 to ensure a better protection of the exercise of rights of shareholders in listed companies.
In 2017, a revised Shareholder Rights Directive (SRD II) was adopted to amend the SRD. The SRD II aims at encouraging long-term engagement of EU listed companies’ shareholders as a means of addressing systemic shortcomings and risks identified by the European regulators in the aftermath of the financial crisis.
The legislation implementing the SRD II in Finland amends and introduces a new regulation to e.g. the Companies Act, the Securities Markets Act, and the Act on Investment Services as from 10 June 2019.
Related party transactions and expansion of disqualification rules
The related party transactions rules of the SRD II aim at protecting companies and shareholders from the opportunities of the related parties to appropriate value belonging to the company by disqualifying directors or shareholders involved in a related party transaction and by the public disclosure requirement for such transactions.
The Finnish implementing legislation has opted not to define the relevant material transactions by referencing specific thresholds (e.g. a specific share of the company’s total assets or operating profit/loss). Under the new rules, qualifying transactions are those that are concluded outside the company’s ordinary course of business or on other than normal market terms.
A related party to a listed company who is involved in a qualifying transaction, whether as a board member or a shareholder, is disqualified from taking part in the decision-making concerning the transaction.
In addition, listed companies are required to disclose publicly the details of any related party transactions that are material to the shareholders by issuing a stock exchange release when the transaction is binding for the company.
In practise, the affected related party transactions may in many cases also constitute insider information. The new disclosure requirement may oblige the company to disclose the transaction before the basis for deferring the disclosure under MAR rules would otherwise end, as the disclosure of the related party transaction cannot be deferred on the basis that the implementation is pending.
The implementing rules introduce a new definition, based on the international financial reporting standards 24 (IAS 24), as to what constitutes a related party to a listed company.
The new rules significantly expand on the existing rules covering the fairly rare situations where shareholders are considered disqualified, i.e. voting on matters pertaining to actions against the shareholder (or third parties, if the shareholder can expect a material benefit contrary to the interests of the company) or discharging the shareholder (or aforementioned third parties) from liability towards the company. The existing disqualification rules for shareholders will continue to apply to listed companies in parallel to the new related party transaction regulation.
However, the exclusion of certain common transactions and corporate resolutions will mitigate the impact of the new related party transactions.
Transactions between a listed company and its subsidiaries, as well as e.g. issues of shares or option rights, distribution of funds, acquisitions or redemptions of own shares and authorisations to the board of directors to resolve upon these are excluded from the related party disqualification rules for shareholders. Resolutions concerning remuneration policies and reports are also excluded.
The new rules concerning related party transactions will not affect the current Finnish governance rules concerning the allocation of tasks to the managing director, board of directors, supervisory board or general meeting of shareholders. Consequently, no new requirements are introduced for e.g. the board of directors to submit matters to the general meeting for approval or confirmation.
The new related party transactions rules apply as from 10 June 2019. Listed companies should also take note that the draft CG Code recommendation concerning related party transactions requires the board of directors to define and disclose the principles for monitoring and evaluating related party transactions.
The amended CG Code is expected to apply as from 1 January 2020. However, listed companies should already now review and update their internal policies concerning related party transactions to reflect the updated additional tasks allocated to the board of directors of a listed company (set out in the Finnish Companies Act) to monitor and assess the application of the disqualification rules concerning related party transactions.
Listed companies should also take note that the amended CG Code and the related party transactions regulation require companies to maintain registers of related parties. Companies will need to review and assess the need to update their current registers of related parties as the IAS 24 based definition of related parties differs from both the current definition under the FCA and the MAR related parties definition.
Listed companies will also need to elect whether to apply the IAS 24 related party definition applicable to listed companies or the definition applicable to private companies under the Finnish Companies Act (FCA) in relation to their subsidiaries.
A key objective of the SRD II is to ensure that shareholders have an effective say on a remuneration policy that will contribute to the business strategy, long-term interests and sustainability of the company.
The companies listed in Finland have been subjected to extensive transparency requirements regarding remuneration principles and reporting requirements concerning remuneration under the CG Code. The remuneration policy and reports required by the implementing regulation will replace the remuneration principles and reporting requirements under the amended CG Code.
Under the Finnish corporate governance scheme, the appointing body is also entrusted to decide on the remuneration of the appointee. Hence, the general meeting of shareholders resolves on the remuneration payable to the board members and the board of directors decides on the remuneration of the managing director.
The Finnish rules implementing the SRD II will require the board of directors (or its committee) to prepare a remuneration policy and to present the policy to the general meeting of shareholders at least every four years or when material changes are made to the policy. The general meeting may take an advisory vote on the policy, but may not amend it. If rejected, the board is required to present a revised policy at the next annual general meeting.
The remuneration policy shall, among other things, reflect the comments made by shareholders in terms of the remuneration reports published after the date of presenting the latest remuneration policy to the general meeting. The requirement will oblige the companies to record the shareholder comments and positions in more detail in the minutes, compared to the current practise of recording mainly the decisions made by the meeting.
Listed companies are obliged to present the first remuneration policy to the annual general meeting convening after 1 January 2020. This also applies to listed companies that do not apply an accounting year end-date on 31 December, but hold their annual general meeting after 1 January 2020.
Although the shareholder vote on the proposed policy is not binding, the remuneration payable to the members of the board of directors, supervisory board and managing director (and the deputy managing director) must be based on the latest remuneration policy presented to the general meeting.
Hence, the remuneration policy will set the limits for remuneration irrespective of whether the general meeting has supported the policy or not. If the policy reserves the possibility to derogate from the policy in certain circumstances, it is possible to temporarily deviate from the policy.
In addition, the board of directors (or its committee) must prepare an annual remuneration report that sets out the remuneration paid (or payable) to the members of the board of directors, supervisory board and managing director (and the deputy managing director) in relation to the previous accounting year.
The obligation to prepare and present a remuneration report will take effect as from 1 January 2020, i.e. the first remuneration reports must be presented to the annual general meeting of shareholders convening in 2021.
The listed company shall publicly disclose the remuneration report no later than three weeks before the annual general meeting addressing the report. The general meeting may take an advisory vote on the report.
The Finnish Ministry of Finance has issued a Decree (608/2019) detailing the content requirements and disposition of the remuneration policy and report. The proposed amendments to the CG Code concerning the suggested reporting structure and content reflect the requirements set out in the decree.
While the remuneration report largely contains the same information as disclosed in remuneration reports in accordance with the current CG Code, information on the remuneration to the management team will not be included in the report.
As a new requirement, the remuneration report shall include details on the annual change in remuneration compared to the change in remuneration paid to employees and changes in the financial situation of the company for the past five years. The Ministry of Finance published a memorandum accompanying its Decree suggesting that the obligation to publish comparative data not be applied retrospectively, i.e. the historical comparison would only extend back to the effective date of the directive.
Companies listed in Finland should take note of the new requirements and begin preparing their remuneration policy in anticipation of the upcoming general meeting in 2020.
Right to identify shareholders
The SRD II notes that identification of shareholders is a prerequisite for direct communication between the shareholders and the company and essential to facilitating the exercise of shareholder rights and shareholder engagement.
As part of the SRD II implementing legislation, the Securities Markets Act is amended, obliging nominee registration custodians and certain other custodians to provide information concerning the shareholders of an issuer to that issuer company. The right for listed companies to obtain information on their shareholders will take effect as from 24 September 2020 (the backstop date for implementing the right prescribed in the SRD II).
The Finnish implementing legislation has opted not to impose any de minimis threshold for ownership and consequently the right to identify shareholders applies irrespective of the number of shares owned. As direct shareholding in Finnish listed companies is public information under current rules, the new regulation will in practise apply to nominee registered shareholders.
The Act on Investment Services requires intermediaries to furnish information concerning the shareholder to issuers (or third parties named by the issuer) without delay. If the Investment Services Company acting as custodian is acting for another custodian, the information request to identify the shareholder shall be forwarded to the next custodian in the chain. The Act on Investment Services empowers the Finnish Financial Supervisory Agency to impose penalties on intermediaries failing to observe the regulation.
It can be noted that the Finnish implementing legislation does not define shareholders. The preparatory works note that there is not a need for a definition of what constitutes a “shareholder” for the purpose of the regulation, as the established Finnish practise considers a “shareholder” to mean the ultimate owner of the shares (the Finnish term used in the preparatory works is “loppusijoittaja” and the Swedish “slutinvesterare”).
The issuer/listed company requesting to identify its shareholders will be liable for the costs arising from the information request. As the custodian chain may have several layers not evident beforehand, the total costs may be difficult to predict. While the possibility to identify shareholders may be useful in a potential takeover situation to identify possible toehold purchasers below the disclosure thresholds, the cost risk will likely limit the desire for identifying shareholders on a day-to-day basis.
In addition to the identification of shareholders, intermediaries are required to pass information from the company to shareholders and from the shareholders to the company as needed to exercise shareholder rights. Finnish listed companies typically publish invitations to general meetings and proposals to the shareholders on their websites (in addition to the stock exchange releases). The implementing legislation helpfully notes that where information is available on the company’s website, it is sufficient to forward a notice guiding the shareholder to the webpage for additional information.
The implementing regulation notes that while the shareholders can be identified by the issuer, the regulation does not affect shareholder rights, i.e. nominee registered shareholders will still need to register their shareholding to exercise e.g. voting rights at general meetings of shareholders.
The effective identification of shareholders will require custodians and intermediaries to develop practises to harmonise request and information formats. It remains to be seen to what extent intermediaries within and outside the EEA will be able to facilitate the information flow and the exercise of shareholder rights envisaged by the SRD II.
Listed companies should take note of the new tools made available to identify their shareholders and to enable the information exchange between the company and its shareholders.
Requirements on institutional investors, asset managers and proxy advisors
The SRD II notes that institutional investors and managers are often important shareholders of listed companies and play an important role in the corporate governance and long-term performance of the companies. To increase transparency as regards their shareholder engagement, institutional investors and managers are required to develop and disclose a policy on shareholder engagement on a comply-or-explain basis.
The implementing legislation requires fund managers, certain credit institutions and institutional investors (the act defines e.g. life and pensions insurance companies investing in listed securities as institutional investors) to prepare ownership steering policies setting out their relationship to the investment strategy as well as disclosure obligations, among others.
The Security Markets Act is amended to include new rules on proxy advisors, imposing reporting and disclosure obligations. The new rules implementing the SRD II apply to proxy advisors domiciled in Finland or proxy advisors domiciled in third countries and offering services in Finland. The amendments to legislation are effective as from 10 June 2019, but the parties have up to six months grandfathering period to apply the changes in their operations.
The SRD II seeks to harmonize governance regulation and transparency in the EU in order to strengthen shareholder rights and long-term investments. Generally, it is desirable for the functioning of common capital markets to lower the threshold for shareholder engagement and to have common standards for information flow.
Certain parts of the regulation seek to address issues that have not been considered problematic in the Finnish governance system. Further, the new regulation introduces concepts that can be said to run contrary to the governance tradition in Finland (e.g. say on pay for the managing director and the board’s role in defining the remuneration policy concerning the board compensation potentially setting limits to the general meeting’s remuneration decisions).
The new rules will require listed companies to review and update existing internal policies, e.g. on related party transactions, as well as to prepare new policies, such as a remuneration policy. The extended implementation timetable will help companies to prepare, but companies should not delay the preparations to meet the new requirements.
Borenius’ lawyers are available to assist in addressing any questions you may have regarding this legal alert. Please feel free to contact any of the Borenius’ attorneys listed in this alert or those with whom you usually work.