The EU Shareholder Rights Directive II (2017/828) (SRD II), amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement, must be transposed into national law by 10 June 2019.
The directive aims to improve shareholder participation by addressing three major regulatory issues relating to the corporate governance of listed companies:
- the identification of shareholders and the role of intermediaries, such as institutional investors, asset managers and proxy advisers;
- shareholders' involvement in the remuneration of members of management (say on pay); and
- material transactions with related parties (related party transactions).
With the implementation deadline fast approaching, the government recently published a ministerial draft of the Stock Corporation Amendment Act 2019, which addresses the rules on say on pay and related party transactions. The provisions on the facilitated identification of shareholders and the transparency of intermediaries are addressed in another draft, which remains to be finalised.1
Following the general direction set by the government, the ministerial draft seeks to minimise the administrative burden on listed companies by avoiding any 'gold plating'. Further, it closely follows SRD II and takes advantage of the business-friendly options. The new rules will be implemented by amending:
- the Stock Corporation Act;
- the Stock Exchange Act; and
- the Act on the European Company.
Say on pay
The adequate level and the composition of the executive remuneration of managers remains a hotly debated topic. The structure of the remuneration package can be an important means to address the principal-agent conflict in public companies by aligning the economic interests of managers more closely with those of the company.
Therefore, Austrian law already provides for certain rules on the content of the remuneration of management board in the Stock Corporation Act and the Code of Corporate Governance. Under Section 78 of the Stock Corporation Act, supervisory boards must ensure that the total remuneration of management board members is in reasonable proportion to the duties and benefits of individual board members, a company's position and overall remuneration levels. The remuneration should provide long-term incentives for the sustainable development of the company. The desired arrangement of executive compensation is further specified in Rule C-27 of the Code of Corporate Governance.
While SRD II – and its envisaged implementation in the form of the ministerial draft – contains no requirements for the contents of remuneration, it supplements the existing law with numerous procedural requirements. For the first time, a general model for shareholders' participation in regard to the remuneration of directors of a listed company is introduced. It consists of two elements:
- a vote on the general remuneration policy at least every four years; and
- an annual vote on the remuneration report.
The mandatory publication of these documents on a company's website seeks to enhance the transparency of executive compensation across companies.
The ministerial draft implements the SRD II requirements cautiously by making use of the options granted and taking into account the special features of the Austrian two-tier board system. It succeeds in keeping the existing governance structures of the Austrian stock corporation largely unchanged, as the remuneration of the management board remains in the hands of the supervisory board. Shareholders are given only an advisory, non-contestable vote on the remuneration policy and the remuneration report.
In addition, the new requirements apply to the remuneration granted to supervisory board members.
The proposed rules designate the supervisory board as the body competent to set up a remuneration policy. Following the wording of SRD II, the remuneration policy must promote the business strategy and long-term development of a company and explain how it does so. Further, it must be clear and comprehensible and describe the various fixed and variable components of the remuneration that may be granted to management board members.
In terms of its scope, the new remuneration policy is comparable, but more detailed, than the guidelines currently provided under Austrian law. However, the website publishing requirement entails significant risks for any companies concerned. The remuneration policy must be specific enough to comply with Section 78a of the Stock Corporation Act, but at the same time it should not reveal any data that contains sensitive information or puts the company at a competitive disadvantage. Further, as companies are allowed to temporarily derogate from the policy only in exceptional circumstances, it must contain any financial benefits that may form part of the directors' remuneration package in the future. It must therefore be drafted carefully to reflect various legal and commercial considerations.
The remuneration policy must be submitted to a shareholder vote at least every four years or if any significant change occurs. Under the proposed legislation, the vote will be of a recommending nature only and not subject to appeal. Notwithstanding its non-binding nature, the right to vote on the remuneration policy could still have significant consequences, as supervisory board members are ultimately dependent on shareholders' favour and may be reluctant to ignore a negative vote.
The submitted remuneration policy and the result of the vote in the general meeting must subsequently be published on the company's website.
In addition to the remuneration policy, the management and supervisory boards must also prepare a remuneration report each year, which must provide a comprehensive overview of the remuneration granted to members of the management board in the course of the previous financial year. The ministerial draft specifies in detail the information on the remuneration of individual members of a management board which the remuneration report must contain. The report must also be submitted to the annual general meeting for a vote and subsequently published on the company's website.
Related party transactions
Neither SRD II nor the ministerial draft aim to prevent related party transactions as such. However, the proposed regulations are intended to make certain transactions with related parties transparent and less susceptible to manipulation. In line with these objectives, SRD II and the ministerial draft provide for a two-stage model: material transactions with persons or companies which meet the definition of a 'related party' must:
- be made public to facilitate the control of these transactions for the (minority) shareholders; and
- be subject to the approval of another corporate body of the company.
In its proposed Section 95a of the Stock Corporation Act, the ministerial draft covers material transactions of a listed company with individuals or companies which meet the definition of a 'related party', unless one of the exceptions provided for applies.
According to the ministerial draft's legislative materials, a 'transaction' is any transfer of resources, services or obligations, regardless of whether a consideration is charged for it. A transaction qualifies as 'material' if its value exceeds 10% of the listed company's balance sheet sum. For a particular financial year, the balance sheet sum from the annual financial statements submitted to the general meeting of the previous year is relevant. If several transactions are concluded with the same related party within a financial year, the values of such transactions are to be summed up.
The term 'related party' will have the same meaning as under the international accounting standards adopted pursuant to EU Regulation 1606/2002 – currently IAS 24.9. Related parties are, on the one hand, all individuals (or their family members) who:
- control the company or are involved in its joint management;
- have a significant influence on the company; or
- hold a key position in the management of the company or a parent company.
On the other hand, another company is a related party if:
- both companies belong to the same group of companies;
- both companies are controlled by the same person; or
- a related party to the listed company has a significant influence on the other company.
The ministerial draft makes extensive use of the exceptions provided for by SRD II. A material transaction with a related party is not subject to the provisions on related party transactions if (among other things) it is concluded in the ordinary course of business and on arm's length terms, between a listed company and its subsidiary or with a credit institution on the basis of measures aimed at safeguarding stability which have been approved by the competent regulatory authority.
Management boards must disclose a material transaction with a related party to the public by the time it is concluded. In any case, the disclosure must contain:
- the names of the related parties;
- the date of the transaction; and
- a notice stating that more detailed information about the transaction is available on the listed company's website.
This more detailed information must include at least the nature of the relationship with the related party, their names, the date and value of the transaction and any other information necessary for assessing whether the transaction is appropriate and reasonable.
Supervisory board approval
A material transaction with a related party must be approved by the listed company's supervisory board. If a particular member of the supervisory board is a related party to the specific transaction, such member cannot vote.
With the present ministerial draft, the Austrian legislature has tried to achieve a business-friendly and minimal implementation of SRD II by incorporating certain options and exceptions it provides.
Notwithstanding the fact that shareholders' votes on remuneration policies and reports are non-binding, these votes could still have a significant impact on the composition of executive remuneration. Considering the fact that both documents, as well as the result of the vote, will have to be published on a company's website, it is essential that the policy and the report are drafted in a diligent manner.
The new provisions on related party transactions are not expected to have a serious material impact on the governance of listed companies. By setting a materiality threshold of 10% of a balance sheet sum, no new significant obstacles are likely to be created in the day-to-day business of listed companies. Most of the transactions that will fall under the definition of 'material transactions' are likely already included in the legal catalogue of transactions for which management boards must currently obtain supervisory board consent.
In addition, transactions amounting to 10% (or less) of the balance sheet sum are arguably already subject to supervisory board approval, as per the principle of adequate control over company management. Such requirement of consent is often stipulated in the rules of procedure of listed companies.
The current law also already provides for an obligation to disclose transactions with related parties in the annual financial statements of medium and large companies. However, in contrast to the new regulation, this is not ex ante information prior to the conclusion of the transaction. Therefore, new procedures will be required for companies to fulfil the disclosure obligation in a timely manner.
By Leon Scheicher, Associate and Christopher Junger, Associate Schoenherr