The Shareholder Rights Directive II: Behind the veil of the Share Register

The law of public limited companies is on the verge of some fundamental changes brought to the Slovenian Companies Act by the implementation of the Shareholder Rights Directive II (Directive (EU) 2017/828 of the European Parliament and of the Council of 17 May 2017 amending Directive 2007/36 / EC to encourage long-term shareholder participation).

Member States were required to implement the Directive by 10 June 2019, but the amendment to the Companies Act (ZGD-1K) is currently in the legislative process. The Ministry of Economic Development and Technology closed the public reading of the draft law in June. The adoption of the amendment in the National Assembly is expected in the autumn.

The main goal of the Directive is to encourage more active and direct involvement of shareholders in company matters, which should also ensure the long-term stability of companies. The Directive seeks to achieve the goal through four sets of rules in the following areas: (i) the identification of shareholders, transmission of information and facilitation of exercise of shareholder rights; (ii) transparency of institutional investors, asset managers and proxy advisors; (iii) shareholder rights in relation to remuneration policy; (iv) transparency and approval of the company’s related party transactions.

The first chapter sets up the principle of knowing the shareholders, or the “know your shareholder” principle, which should serve as a basis for more intensive participation of shareholders in company matters. According to the Directive, all EU Member States must ensure that public limited companies whose shares are admitted to trading on a regulated market have the right to identify their shareholders and may also request information on the shareholder’s identity from intermediaries, such as investment firms, credit institutions or central securities depositories, solely providing services of safekeeping, administration of shares or maintenance of securities accounts to their clients. If there is a chain of intermediaries, each intermediary is obliged to transmit such request from the company to the next intermediary until the request reaches the final intermediary. The intermediary who holds the shareholder information must transmit it directly to the company (or back up the chain of intermediaries). This ensures that the company can share important information directly with shareholders or use the chain to provide that information to shareholders (e.g. information related to voting at the general meeting) while allowing the shareholder to directly exercise the rights arising out of shares against the company or to use the chain for this purpose.

According to Slovenian law there is a presumption that the person in whose account with the central registry the shares are registered is the shareholder. Although in many cases in practice it is clear that this is only a fiduciary account of a bank or investment firm that holds the shares for its unnamed client, the rights arising from those shares can only be exercised directly by the person in whose account the shares are registered with the central securities depository. However, the company is not necessarily aware whose behalf the bank or investment firm is acting on. In connection with public limited companies whose shares are admitted to trading on a regulated market and in connection with companies that are subject to the Takeovers Act, there is a duty of shareholders exceeding a certain threshold of a substantial share (the initial threshold is set at 5% of voting rights) to notify the company and the Securities Market Agency about substantial shareholding, whereby they must also take into account the different options for indirect shareholding. However, the companies themselves have so far not had the leverage to enable them to unravel the chain of ownership for each shareholder, even if there are indications that the holder who is registered as a shareholder at the central securities depository only holds the shares for someone else. The proposed amendment ZGD-1K would give companies the right to look through the central registry and find out who their actual shareholder is, while the actual shareholders could directly exercise their rights against the company.

The basic assumption with the proposed amendment ZGD-1K remains the same. The holder of the rights and obligations against the company remains primarily the person who is registered as the holder in the share register kept by the central securities depository (KDD). However, due to the requirements of the Directive, the company is able to ask that person whether the shares held in his account also belong to him. The proposed amendment thus establishes a new category of an “actual” shareholder who is potentially not the same person as the one registered in the share register or the one who holds the shares in his account with the central securities depository. The proposed amendment ZGD-1K goes further than the Directive. The provisions apply not only to publicly limited companies whose shares are traded on a regulated market, but to all joint stock companies. Furthermore, the amendment gives the company the right to request shareholder information from any person identified as a holder with the central securities depository, not only from intermediaries who provide services to the shareholders as a professional activity. Finally, the amendment also establishes a sanction — if the company requests the information and does not receive the requested information within the deadline, voting rights arising from the respective shares are suspended until the request is fulfilled.

As the Directive seeks to encourage the direct involvement of the so-identified shareholders, it is necessary for the Member States to implement mechanisms to facilitate this. The proposed amendment ZGD-1K thus stipulates that an intermediary is entitled to exercise the voting rights for shares that do not belong to him only if he is authorised to do so in writing (even if he is registered as a holder and is primarily considered a shareholder). In order for the shareholder to exercise the voting right at the general meeting directly, the final intermediary is obliged to present to him the proof of the actual ownership of the shares on a given day in text form and to inform the company thereof. The actual shareholder may request a confirmation from the company, within one month from the date of voting at the general meeting, about whether and how his vote was counted.

As the above-mentioned procedures take time to process, the proposed amendment ZGD-1K also changes the cut-off day applicable to voting at the general meeting. According to the proposed amendment, only those shareholders who are registered as holders in the central registry of dematerialised securities at the end of the fourteenth day before the general meeting may attend and exercise their rights at the general meeting.

It is expected that the amendment will undergo further changes throughout the legislative procedure, especially regarding the ambiguities opened by the new category of actual shareholder to whom the shares belong. The amendment does not contain a definition of an actual shareholder, nor does it explain what it means for the shares to belong to the shareholder. It is also unclear whether a person who is registered as a shareholder with the central securities depository and is not an intermediary professionally engaged in the activity of share safekeeping must use the same standardised forms as the professional intermediaries for transmission of the information to the company. These are prescribed by Commission Implementing Regulation (EU) 2018/1212, which at the EU level refers only to professional intermediaries. An additional ambiguity in the amendment is the definition of the term intermediary, which refers to shares traded on a regulated market. According to that definition, intermediaries have a duty to provide information only in the case of public limited companies whose shares are admitted to trading on a regulated market, while at a general level, the amendment gives the right to know its shareholders to all joint stock companies.