08/01/2019

Government Proposal: Shareholders Disqualification at General Meetings to be Expanded and Voice to be Amplified

The Government proposes amendments to the remuneration of the directors of listed companies, to the definition of the concept of related parties and to disqualification in decision-making. These amendments derive from the European Union Directive known as the Shareholders’ Rights Directive II (SHRD II), which the Member States must bring into force by next summer. 

In May 2017, the European Union adopted the SHRD II Directive [1] amending the previous Shareholders’ Rights Directive [2]. The Member States shall bring into force the national legislation necessary to comply with the SHRD II by 10 June 2019.

On 13 December 2018, the Government submitted a proposal to Parliament for the implementation of the SHRD II (Government Bill HE 305/2018). The Government hopes that the current parliament will swiftly adopt the amendments proposed by the Government—not least because otherwise Finland, ever the EU’s model pupil, might oversleep the implementation of the Directive.

 

What Is the Goal of These Amendments?

One of the expressly stated goals of the SHRD II is to contribute to shareholders’ possibilities to have a say on the remuneration policy of listed companies and to enhance transparency between companies and investors by increasing the shareholders’ involvement in corporate governance systems. 

In accordance with the reasoning of the SHRD II, institutional investors and asset managers often do not engage with companies in which they hold shares; in addition, capital markets often exert pressure on companies to maximise their performance in the short term, which may jeopardise the long-term performance. These are the issues that EU legislation is seeking to tackle.

What Is Actually Going to Change?

The main changes brought about by the government proposal concern the remuneration of the directors of listed companies, the definition of the concept of related parties and disqualification in decision-making. We will have a look at each of these topics below.  

Remuneration of Directors in Listed Companies

In accordance with the government proposal, starting from 2020, the general meetings of listed companies shall discuss the company’s remuneration policy, and starting from 2021, the company’s remuneration report. The remuneration policy must be put on the agenda at least every four years and will provide the long-term guidelines for remunerating the board of directors and the managing director of the company. The remuneration report must be discussed annually, and it will summarise the actual remuneration measures in light of the remuneration policy.

During the bill’s drafting, the most controversial issue was whether the general meeting’s stand on the remuneration report and policy should be binding or advisory. The final legislative proposal adopted an advisory vote. In view of the consistency of the Finnish system and our governance culture, we feel that this was the right choice.

To date, the general meeting has decided (and will continue to decide) on the remuneration of the board of directors, which in turn decides on the remuneration of the managing director. In the future, the general meeting will also take an advisory stand on the company’s remuneration policy. In practice, apart from the board of directors, this stand only regards the remuneration of the managing director and their deputy as well as the company’s supervisory board, if any. The recent remuneration debate in public may have given the wrong impression that the remuneration policy should concern the company’s directors to a larger extent, such as other executive management.

A More Detailed Definition of Related Parties

The Government proposes that the Limited Liability Companies Act would include a two-level definition of the concept of ‘related parties’: on the one hand, a new definition of related parties would be introduced to the Limited Liability Companies Act for unlisted limited liability companies, and on the other, the new definition of related parties regarding listed companies would be further defined. The definition of the related parties of a listed company will continue to be based on international financial reporting standards (IAS 24) that listed companies have already been applying before.

In the future, the concept of related parties will be defined in more detail for unlisted companies as well. In accordance with the government proposal, in future the related parties of all companies will include, e.g. the parent company, shareholders holding more than 50% of the votes represented by the shares or, in the absence of such shareholder, shareholders holding at least 20%, and the members of the advisory board and the board of directors, the managing director and his/her deputy. The related parties also usually include the entity whose management said person belongs to or which they hold a significant share in.

Disqualification to be Expanded

In accordance with the government proposal, provisions that would expand the scope of disqualification with regard to decision-making in both the board of directors and the general meeting of a listed company would be introduced into the Limited Liability Companies Act.

Currently, disqualification at a general meeting is limited mainly to issues that relate to an action against the shareholder itself. In the future, at a listed company’s general meeting a related party would be disqualified from deciding on a transaction that does not fall within the normal course of the company’s business nor occur on market terms, if said party or a related party of said party is involved in the transaction.

However, as a significant derogation from this rule, a related party could still participate in decisions within the competence of a general meeting (e.g., distribution of assets, share issue and issue of options, including the relevant authorisations to the board). Despite seeming considerable at first glance, the change will probably only have a minor effect in practice, because of this substantive derogation.

In accordance with the proposal, a member of the board of a listed company would be disqualified in the board of the company or a subsidiary thereof from deciding on a legal transaction that does not occur on market terms, if said member of the board or a related party of said member is involved in the transaction. The proposed legislation largely corresponds to current practice. It is proposed that similar provisions on disqualification would be applied to managing directors and their deputies, too.

Are the Goals Realistic?

It is justified to ask whether the goals set for the reform—to promote the long-term financial performance of companies and to enhance transparency—can realistically be met through the changes introduced by the Directive. In the Finnish context, the need for such changes can also be questioned. This, of course, is sometimes the nature of the EU’s harmonisation projects in which the objectives are not limited only to national needs.

What we see as a positive development in the reform is that listed companies will have to consider more closely than before how justified the remuneration practices of the company are in the light of the objectives of the company and, thus, how they will hold up under public scrutiny. We believe that in the future, general meetings will receive better-justified remuneration policies, but it remains to be seen whether this change will have an impact on the level of remuneration.

A more detailed definition of the concept of related party and the extension of disqualification to related-party transactions that do not fall within the normal course of the company’s business or occur on market terms are both welcome reforms, though in practice the outcome is not likely to differ much from the current situation.

Finally, it should be born in mind that the reform is currently just a proposal and Parliament may choose to amend it.


[1] Directive (EU) 2017/828
[2] Directive 2007/36/EC