BRUXELLES - Last week, the European Parliament approved the new directive for shareholder rights the the EU Commission presented in April 2014. Thus only the Council of Ministers needs to review the directive before it takes effect.

The Commission decided to update the directive for shareholder rights as part of the legislation that the EU has introduced after the financial crisis. The purpose has been to make sure that shareholders support sustainable development in the companies that they invest in.

"We have learned our lessons from the past. For a stable European economy, it is essential to look beyond fast profits and focus on long-term success. The European economy and companies will benefit from the revised shareholders' rights directive. The new European rules will prevent short-term excessive risk-taking," says Vera Jourová, commissioner for legal affairs, consumer policy, and equality, in a press reease.

Stronger shareholder rights

According to a document form the European Commission, there are five primary changes in the directive. First and foremost, it will become easier for shareholders to influence a company. This means, among other things, that if banks act as intermediaries, they are under an obligation to send relevant information about the company to the ultimate owners. It will also become easier for owners who live in a different EU country from the one the company resides in to influence the company. 

Furthermore, the new rules set a number of requirements to institutional investors and asset managers. They have to compile annual accounts that contain three main ponits. The first point is a report of the company's investment strategy, and how it is connected to the influence that the company has on its investment. The second point is the the company has to describe what considerations there have been regarding social and environmental consequences, and the third point is that they have to provide information about any potential conflicts of interest.

More influence on salary

The new shareholder directive also aims to give shareholders more influence on management’s salary. That will happen by giving the shareholders the right to know how much managers are paid and the right to vote on the matter. They will get to vote on the guidelines for salary for the coming year, and they get the opportunity to vote for the salary that has been paid in the past year.

Proxy consultants will also have more requirements to meet with the new rules. The consultants are companies that specialize in analyzing companies’ suggestions and providing counseling on how e.g. institutional consultants  should vote at general assembly. Henceforward, they are required to report how they are improving the counseling that they provide.

Finally, the new rules are also putting more focus on so-called transactions with connected parties. That is to say, if a company enters an agreement with someone who has a prior connection to the company, then the transactions that carry the biggest risk for minority shareholders must be published. Furthermore, transactions have to be approved by management or the general assembly.

When the Council of Ministers has processed the directive, two years will pass before it takes effect. The rules in question are a directive, and not legislation to be incorporated directly in Danish law. It is a legal act that establishes a number of guidelines, and then it is up to member states individually to formulate the legislation that ensures that the guidelines are kept. 

English Edit: Marie Honoré