Shareholders Rights Directive II
The Shareholders’ Rights Directive 2017/828 (SRD II Directive) has now been transposed into Irish law by the European Union (Shareholders’ Rights) Regulations 2020 (Regulations). The SRD II Directive amends the previous EU Shareholders’ Rights Directive 2007/36/EC (2007 Directive). The Regulations will insert additional chapters into Part 17 of the Companies Act 2014. The Regulations came into effect from 30 March 2020, although the Regulations had a transposition date of 10 June 2019.
The Regulations introduce new rules on remuneration policies and remuneration reports for directors of listed companies. The definition of a “director” includes current directors, former directors, CEO and deputy CEO, regardless of whether such individuals sit on the board of the PLC.
Many Irish PLCs are already bound by listing rules and corporate governance codes which require directors’ remuneration disclosures, such as the Irish Corporate Governance Annex or the UK Corporate Governance Code for those listed on Euronext Dublin or London Stock Exchange respectively.
While some of the disclosure requirements are already met through the existing framework, the Regulations will now require a much more specific and comprehensive remuneration policy to be produced, as well as additional disclosure in remuneration reports.
Undertakings for collective investment in transferable securities (UCITS) and Alternative Investment Funds (AIFs) are explicitly exempt in the Regulations.
Below is a summary of the key aspects of the new rules:
- the Regulations apply to Irish PLCs who have their registered office in an EU Member State and whose shares are traded on a regulated market in or operating in an EU Member State;
- under the Regulations, a remuneration policy must be submitted for a shareholder vote at least every four years;
- this vote is advisory unless there is a provision in the PLC’s constitution requiring the remuneration vote to be binding;
- the remuneration policy and report must contain specific content outlined in the Regulations;
- for 2020 remuneration policies already approved by shareholders on or before 30 March 2020, the PLC is not required to put another remuneration policy to a shareholder vote until four years from the date the existing remuneration policy was approved and;
- a remuneration report must be prepared annually providing details of each director’s remuneration, put to a shareholder vote and must be made publicly available on the company website for 10 years after its publication.
Under the Regulations, a remuneration policy must be submitted for a shareholder vote at least every four years. The vote will be advisory unless there is a provision in the PLC’s constitution requiring the remuneration vote to be binding. If the remuneration policy is not approved by advisory vote, the company shall prepare a revised policy and hold another vote in respect of that revised policy at the following general meeting.
The results of the vote should also be disclosed on the company’s website.
For 2020, remuneration policies already approved by shareholders on or before 30 March 2020, the PLC is not required to put another remuneration policy to a shareholder vote until four years from the date the existing remuneration policy was approved. This applies even if the current policy does not comply with the content requirements under the Regulations.
To comply with SRD II, the remuneration policy should include the following:
- an explanation of how the remuneration policy contributes to the company's business strategy, the long-term interests and the sustainability of the company;
- clear and understandable explanations;
- a description of the different components of the fixed and variable remuneration, including all bonuses and other benefits in whatever form, and an indication of their relative proportion;
- an explanation of the pay and employment conditions of employees of the company were taken into account when setting the remuneration policy;
- if the company awards variable remuneration, set clear, comprehensive and varied criteria for the award of variable pay, indicating the applicable financial and non-financial criteria (including where appropriate corporate social responsibility criteria) and how they contribute to the company's strategy, long-term interests and sustainability;
- information on deferral periods and possibility for the company to reclaim variable pay;
- if the company awards share-based remuneration, specify the vesting periods, lock-up periods and the contribution to the company's strategy, long-term interests and sustainability;
- a description of the duration of the contracts or arrangements with directors and the applicable notice periods, the main characteristics of supplementary pension and early retirement schemes, and the conditions and payments linked to termination;
- an explanation of the decision-making process followed for determination, review and implementation of the policy, including measures to avoid conflicts of interest and role of the Remuneration Committee and other committees;
- set out policy and circumstances for derogation (if any), and procedural conditions under which it can be applied, as well as the elements of the policy from which a derogation is possible; and
- if the policy is revised, describe and explain all significant changes.
A firm may only temporarily derogate from its remuneration policy where doing so is necessary in exceptional circumstances, to serve the long-term interests and sustainability of the traded PLC as a whole or to assure its viability, and the derogation is in accordance with the procedural conditions and other provisions on derogation set out in the remuneration policy.
A remuneration report must be prepared annually providing details of each director’s remuneration as follows:
- total remuneration broken down into its various components, including the relative proportion of fixed and variable remuneration;
- an explanation of how total remuneration complies with the remuneration policy and how it contributes to long-term performance of the company;
- application of performance criteria;
- annual changes in remuneration over at least five financial years, as well as the performance of the company, and compared to the average remuneration of the company’s employees;
- any remuneration received from group companies;
- detailed information on share-based remuneration;
- details of the whole or partial reclaim of variable pay; and
- deviations of the decision process for the implementation of the remuneration policy and/or deviations of the remuneration policy, including an explanation of the circumstances and indication of the specific elements derogated from the policy.
The remuneration report must be put to a shareholder vote at the AGM. The Regulations do not outline if this vote should be binding or advisory. However, SRD II Directive states that the vote on the remuneration report should be advisory.
The remuneration report must be made available on the company website for 10 years after its publication.
For PLCs with upcoming AGMs this year, they will need to review their remuneration policies and directors’ remuneration report format to ensure they meet the requirements under the Regulations.
Reach out to Daryl Hanberry or Paula Ruane in Deloitte if you require assistance in meeting the new requirements or require any further information.