The Complete Guide to SRD II For Listed Companies

The Shareholder Rights Directive II (SRD II) was adopted by the European Council on 9 June 2017 and implemented into national law in June 2019. The European Commission described the directive’s aim as being “to contribute to the long-term sustainability of the EU companies, enhance the efficiency of the chain of intermediaries and to encourage long-term shareholder engagement.”

SRD II updated the original Shareholder Rights Directive from 2007, which was introduced to create requirements relating to the “exercise of certain shareholder rights attached to voting shares in relation to general meetings of companies which have their registered office in a Member State and the shares of which are admitted to trading on a regulated market situated or operating within a Member State.”

What is the Shareholder Rights Directive II?

SRD II is intended to increase transparency in the relationship between issuers and investors (mainly institutional investors and asset managers), through obligations relating to the identification of shareholders. It also covers directors’ remuneration amongst other aspects, as well as it contributes to encouraging long-term shareholder engagement. The directive looks to improve the corporate governance and long-term stability of companies traded on regulated markets in the European Economic Area (EEA). 

The SRD and SRD II timeline

What are the main benefits of SRD II for issuers?

Deborah Janssens, a partner at international law firm Freshfields, recently said during a Euronext Corporate Services webinar that the increased transparency in listed companies and improved long-term engagement of shareholders following SRD II offered important tools to investors as well as a host of benefits to issuers. 

• Shareholders learn more about what informs director compensation, get insight into related party transactions and benefit from a standardised format for notice of meetings. In addition, they receive information about the receipt, recording and counting of votes and confirmation of the ability to exercise shareholder rights at a meeting. Institutional investors have a right to request information on how asset managers’ strategies contribute to the medium to long-term performance of their funds. 
• Issuers can now discover the identity of their investors, requesting a custody chain until the final beneficial owners, under the revised directive. They can also find out more about the equity investment strategies of institutional investors and the research and voting recommendations (voting behaviour) of proxy advisors. 
  
  

Main changes from SRD I to SRD II regulation

Shareholder identification

One of the key roles of SRD II is to allow companies to communicate more easily with shareholders, which has not always been possible due to intermediaries not releasing the identities of those who hold shares. It entitles issuers to request information on the identity of investors and intermediaries are required to provide it in an electronic format. The “know your shareholder” element of the directive allows issuers to find out the identities of those with a minimum of 0.5% of the entire shareholding. However, many EU member states allow them to identify even the smallest investors. 

To find the threshold in a particular EU nation, see the table below. 

Meeting announcements

The commission implementing regulation sets out the format required for passing important information between intermediaries and shareholders or issuers, such as meeting announcement notices and notices of participation. This aims to stock blockages in the flow of information between issuers and investors caused by an intermediary or chain of intermediaries. 

Vote confirmation

SRD II requires that issuers confirm the receipt of the vote in an electronic form to the person who casts it. In addition, shareholders and nominated third parties can request confirmation that the votes were recorded and counted at a general meeting. The issuer must either make this information publicly available or respond to individual requests as and when they are made. Shareholders have 30 days from the date of the meeting to make their request. 

Shareholder vote on remuneration report

Listed companies should publish their policy on directors’ remuneration, which investors can then vote on. Different member states have different rules on whether this vote is binding or not. But the legal entity must adhere to its approved policy whether that is shareholder approved or not. 

Related Party Transaction (RPT) reporting and approval

There should be a public announcement when a material related party transaction is undertaken. This is to prevent conflicts of interest from being pushed through by directors or controlling shareholders. Each member state has the power if it wishes to require a report on the transaction that is “fair and reasonable”. Each country must also decide what it considers to be material.

There should be a committee of three independent directors and experts assembled to assess the transaction, who send their report to an approval body for confirmation. This approval body will be different in different countries. For example, in Denmark, the board of directors approves the transaction but, in France, it goes to a general meeting and Latvia requires an audit committee.  

Who is impacted?

Which countries are affected?

The 27 EU member states are affected by the directive as well as the United Kingdom, Norway, Iceland and Liechtenstein.

Which markets and products are affected by the Shareholder Rights Directive II?

The directive relates to voting shares of companies based in the EEA and the UK that have been admitted to trading on a regulated market, including securities with multiple listings. 

Which companies are affected? 

Any company registered in one of the 30 affected countries with equities trading on regulated markets or operating in one or more of those countries is affected. Companies listed on Multilateral Trading Facilities (MTF) and “non-regulated” exchanges, do not benefit from the directive.

Intermediaries, such as investment firms and credit institutions, that offer services including management of securities for shareholders fall within the scope of the directive. 

The directive also affects investors and asset managers that purchase the securities of the relevant companies in the EEA and the UK. 

Shareholder identification thresholds

Within the terms of SRD II, there is a threshold for identifying shareholders that allows issuers to find out details on anyone who owns at least 0.5% of all shares. However, member states can lower this threshold if they wish to enable issuers to identify more investors. This table shows the current thresholds within the laws of the various nations. 

Penalties for non-compliance

Member states can implement their own punitive measures for non-compliance with the Shareholder Rights Directive II. The directive only states that they should be “sufficiently dissuasive and proportionate”. Below are two examples of fines currently imposed for contravening shareholder rights laws.

• Austria levies a €25,000 penalty for each breach of the directive
• Italy will fine companies between €30,000 and €5,000,000 for non-compliance with the procedures for shareholder identification and transmission of information. There is also a potential fine of between €30,000 and €150,000 for other breaches.
  
  

Beyond shareholder identification

Receiving a database with the identities of your shareholders is an important step in your investor relations strategy, but to gain really valuable insights you have to use the data in the right manner. The next phase is analysing your results, which will bring rich data for you to use in the future. 

1. Work out points of contact

You should find out the points of contact for each shareholder that you need to be able to engage most effectively. Your analysis reports will highlight the key contacts that you should reach out to when organising investor meetings. This ensures the right people get to hear your message, making these events more efficient and effective. 

2. Map the risk profile of your shareholder base

Once you have the identifying information, you can analyse it to understand what the split is between those investors looking for stable, long-term growth versus more volatile shareholders, such as highly invested hedge funds. This overview helps you adjust your investor targeting and investor engagement policies, managing risk and identifying gaps in your shareholding. 

3. Understand motivation

Delving deeper into the data is key for understanding the motivation of your shareholders. Why did they choose your stock above others? This answers many questions and can help inform your involvement with other investors. 

At this point, Shareholder Analysis can be extremely valuable because it enables you to gain an insight into your existing shareholder base. In turn, this gives you an idea about your future relationship with similar types of investors and their investment styles.

4. Compare previous investor interactions with the new data 

Once you know who your target investors are and who your shareholders are, you can track the success or otherwise of your previous interactions with investors. You can ask questions like:

How many institutions went on to make positive investment decisions following a roadshow or other shareholder engagement event? 

Cross-referencing your identification information with the data you already own in a CRM such as IR.Manager can help you hone your future investor relations activities. 

Why conduct a shareholder analysis?

Shareholder analysis brings a range of valuable insights which can provide you with a competitive edge over your peers. Here are some of the key drivers for performing such analysis:

Better visibility of the shareholder base

Shareholder analysis takes the knowledge you gain from identification and turns it into useful insights. Not just the names of the investors, but their motivations, styles and future plans. When engaging with your shareholder base, you need to know the capital structure in-depth so that you can tailor your communications accordingly. 

Better assessment of retail ownership

Understanding the scale of retail ownership is another benefit that shareholder analysis brings. Following volatility in the markets, the number of retail investors entering the picture has increased dramatically. If you find the number of shares owned by retail investors in your base growing, that requires a shift in approach from your IR strategy. 

Individual investors are less likely to understand how the market reacts to events, meaning IROs should act as educators to avoid impulsive reactions to news in the future. 

Better monitoring of top investors on a more frequent basis

Ownership intelligence is key to keeping control of your company and this is facilitated by better monitoring. If you can keep an eye on who is buying and selling and why they are doing so, you can understand whether they are acting based on their belief in the business or if there is another reason behind their actions. This helps guide strategy and positioning. This is why you should keep a keen eye on the activities of your top investors, something made much easier once you analyse your shareholding. 

Understand how you compare to your peers

A detailed shareholder analysis allows you to compare your shareholding with that of your peers and this is invaluable for your investor targeting efforts. The results will show you the quality of your shareholder base and help you identify opportunities to improve it. 

During the analysis, you will also gain a deeper understanding of investor types, geographical locations, concerns and motivation. This enables you to see how your shareholding stands up against your peers and where you need improvement. In the end, you will have a clear idea of where to focus your efforts and you will be able to finetune your targeting accordingly.

Improve your ESG Strategy

Non-financial performance has become an important factor in any investment decision. So, understanding the ESG profile and approach of your shareholders is critical. Such complementary analysis allows you to understand the needs of your investors and ensure that your sustainability policies and reporting are aligned with their growing constraints and areas of interest. ESG is a wide-ranging term and drilling down into the mentality of your current ESG investors ensures your targeting is effective. 

In addition, you can work out which ESG funds are underweight or absent from your shareholding, but which are invested in your peers. This helps inform your next moves to make sure that you are offering the right product for this evermore important area of business. 

Prepare for an AGM

When preparing for an AGM or another investor event, the analysis you make based on the shareholder identity information is key in formulating your approach. Being able to use data to understand potential reactions to events and issues allows you to create a more inclusive and engaging experience for investors, gaining their support more readily. 

Anticipate the future

Shareholder analysis helps you anticipate events such as activist behaviour or increasing ESG pressures. Instead, you can take steps to provide a measured approach to handling the issues on both sides. 

FAQ

Is there clarity on the definition of a ‘shareholder’ in the Shareholder Rights Directive II?

The European Securities and Markets Authority (ESMA) says in its analysis of the shareholder identification aspect of the directive: 

“As the SRD II does not introduce a common definition of shareholder, it remains challenging to introduce a fully converged system of shareholder identification.”

One of the issues is the divergence of definitions across the different member states, with each having its own threshold for understanding what a ‘shareholder is’, involving voting rights, economic rights or other elements. On this, ESMA says: 

“Some harmonisation of good or required practice at EU level could improve conduct in these regards.”

What is the expected flow of information for a shareholder ID request?

This is how a shareholder request occurs: 

1. Market participants or their nominated third party makes the request using ISO 20022 electronic messaging to the entire custody chain
2. Every intermediary receives a notification of the request
3. Each intermediary makes disclosures to the issuer or their nominated third party with all of the shareholding information above the threshold set in that country, if applicable.
   
    

References and further reading

• How to benefit from SRD II 
• Manage shareholder engagement from home
• How to talk about executive remuneration with investors
• Shareholding transparency 
• Scrutiny on remuneration policies after SRD II
• Improving shareholder engagement by the Financial Conduct Authority (FCA)
• Euronext Securities