Explanatory Memorandum to COM(2005)685 - Exercise of voting rights by shareholders of companies having their registered office in a Member State and whose shares are admitted to trading on a regulated market - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2005)685 - Exercise of voting rights by shareholders of companies having their registered office in a Member State and whose shares are ... |
|---|---|
| source | COM(2005)685  |
| date | 05-01-2006 |
Contents
Shareholder participation is an essential precondition for effective corporate governance. However, EU-citizens holding shares in a listed company situated in another Member State often face severe problems when they wish to exercise the voting rights attaching to these shares and sometimes even encounter obstacles that make voting practically impossible. Nowadays, investors typically hold their shares through accounts opened with securities intermediaries, who, in turn, hold accounts with other securities intermediaries and central securities depositories in other jurisdictions. The legal constructs from which shareholders’ rights emanate in the Member States are not always fully adapted to this modern form of intermediated holdings. The cross-border chains of intermediaries, therefore, make not only the communication process between issuers and shareholders, but also the voting process, more difficult.
The scope of this problem has broadened significantly in recent years and continues to grow as the cross-border nature of equity investment increases, which is further stimulated by the drive towards creating integrated financial markets in Europe and beyond. The growing proportion of share ownership by foreign investors is already posing the threat of EU listed companies being owned by a passive shareholder base. Moreover, existing legal obstacles to cross-border voting prevent small individual cross-border shareholders who are willing to exercise their voting rights from using means that would allow them to do so cheaply and simply.
In its “ Action Plan on Modernising Company Law and Enhancing Corporate Governance in the European Union ”, the Commission considered, therefore, that there is a need to facilitate the cross-border exercise of shareholders’ rights. It was recognised not only that access to general meetings and other rights related to general meetings should be open to shareholders independently of their country of residence in the EU, but also that a number of specific problems relating to cross-border voting would need to be solved.
The existing rules at EU level are not sufficient to attain this objective. Article 17 of the Transparency Directive i requires issuers to make available certain information and documents which are relevant to general meetings. However, such information and documents are to be made available in the issuer’s home Member State, and Article 17 does not mention when and how these are to be made available. As a result, the general provision in Article 17 of the Transparency Directive does not address the specific difficulties of non-resident shareholders in obtaining access to information prior to the general meeting. Furthermore, the Transparency Directive focuses on the information which issuers have to disclose to the market and thus does not deal with the shareholder voting process itself.
From September to December 2004 and from May to July 2005 the Directorate-General for Internal Market and Services carried out two public consultations on the enhancement of shareholders’ rights, especially in a cross-border context. The aim of these consultations was to elicit the views of interested parties on the main obstacles to cross-border voting and on possible minimum standards which the Commission could propose in this field. Both consultations solicited a considerable number of replies from market participants across all interest groups, who showed significant support for the measures that had been put forward for discussion.
From empirical evidence and the responses to the public consultations, it appears that the main obstacles to cross-border voting for investors are the following, in order of importance: the requirement to block shares before a general meeting (even where it does not affect the trading of the shares during this period), difficult and late access to information that is relevant to the general meeting and the complexity of cross-border voting, in particular proxy voting. Share blocking and the complexity of proxy voting also have a considerable impact on the costs of cross-border voting.
Abolishing existing constraints which hamper the voting process requires amendments to the relevant national legislations. A directive seeking to remove the key obstacles to the cross-border voting process and focusing on selected rights of shareholders in the general meeting seems the most appropriate type of instrument, if effective simplification of the cross-border voting process is to be achieved and the disparities between Member States reduced. Other topics covered in the public consultations, which are indirectly related to the exercise of voting rights, such as stock lending, depositary receipts or the rules governing languages, could form part of a Commission recommendation.
The current proposal for a Directive therefore pursues the following objectives:
1. Ensure that all general meetings are convened sufficiently in advance and that all documents to be submitted to the general meeting are available in time to allow all shareholders, no matter where they reside, to take a reasoned decision and to cast their votes in time.
2. Abolish all forms of share blocking. These should be replaced by a record date system to determine the entitlement of a shareholder to participate and vote in a general meeting.
3. Remove all legal obstacles to electronic participation in general meetings . Where the issuer decides to make electronic means available to its shareholders, these make it much easier for the active shareholders to participate actively in the meeting. However, technology is not advanced enough to permit active electronic participation in all cases with a sufficient guarantee of security, and such facilities are costly to introduce. Therefore, there should not be an obligation for issuers to offer such a possibility to their shareholders.
4. Offer non-resident shareholders simple means of voting without attending the meeting (voting by proxy, in absentia and by giving instructions).
Chapter I: General provisions
Article 1 – Subject matter and scope
The scope is limited to issuers of shares, taking account of the objective of the Directive to facilitate the exercise of voting rights of shareholders in general meetings. The definition includes also European Companies (SEs) which, according to Article 10 of the Statute for a European Company i, are treated like public limited companies that have been founded under the law of the Member State where the SE has its seat.
Paragraph 2 contains a Member State option for an exemption for undertakings for collective investment in transferable securities, taking account of the fact that specific requirements are laid down elsewhere i. Where this option is used the proposed wording excludes the possibility of treating UCITS as issuers for the purposes of this Directive but does not prevent them from benefiting from the provisions in their role as shareholders of other companies.
Article 2 – Definitions
The definition of shareholders in point (c) only takes up the wording of points (i) and (ii) of Article 2 i (e) of the Transparency Directive and thus excludes holders of depositary receipts from its scope. Although investors in depositary receipts should in principle also be entitled to determine how underlying shares are to be voted, the inclusion of receipt holders in the definition would not, of itself, necessarily lead to this result as the receipts, in practice, are often held by custodians and not by the investors themselves. Furthermore, the contents of issuing agreements on depositary receipts vary as far as voting rights are concerned and these differences usually also have an impact on the price of the receipts. Therefore, it seems more appropriate to deal with this issue in the context of a separate recommendation which will be able to take account of the specificities of this instrument.
Point (e) contains a definition of the term “proxy” which currently does not have an identical meaning in all Member States. In some Member States, a proxy is limited to the exercise of the voting right and so, for more comprehensive empowerments, a power of attorney is used. In others the proxy may potentially cover all rights of the shareholder in the general meeting. The proposal opts in favour of the latter alternative. The person empowered by proxy (who, in practice, is often also called “the proxy”) is referred to in the text of the Directive as “proxy holder” (see proposed Article 10).
Article 3 – More stringent national requirements
The Directive is a minimum harmonisation directive. It introduces minimum standards which ensure that shareholders have a timely access to complete information in relation to general meetings and have simplified ways of voting without attending the general meeting. Member States are left free to maintain or introduce provisions which are more favourable to shareholders.
Article 4 – Equal treatment of shareholders
The article takes up the general principle contained in Article 17 i of the Transparency Directive and applies it to the rights of shareholders covered by this proposal for a Directive.
Article 5 – General meeting notice
Article 5 imposes on the issuer the obligation to send out to the addressee the meeting notice announcing that the meeting will take place and containing the basic information relating to the meeting. Under the mechanisms currently in use, in the case of bearer shares, the addressee would normally be the CSD, and in the case of registered shares, the registered shareholder. The addressees and the investor situated further down the chain will then be able to obtain the additional information set out in paragraph 3 from the sources indicated in the meeting notice.
Article 6 – Right to add items to the agenda of general meetings and to table draft resolutions
The right to add items to the agenda and to table draft resolutions enables shareholders to decisively influence general meetings. This right is usually reserved to shareholders holding a minimum proportion or number of shares. Some of the existing thresholds are unduly high. This article therefore confirms the right to add items to the agenda and to table draft resolutions as a matter of principle (paragraph 1), and introduces maximum thresholds at EU level. These thresholds have been determined with a view to lowering those currently applying in some Member States. However, where the thresholds in other national laws, are already lower than those proposed here, Article 6 - being a minimum harmonisation provision - is obviously not to be understood as encouraging these Member States to raise their thresholds. Furthermore, the article provides that the amended agenda and the new resolutions should be circulated to shareholders. This requires that items be added to the agenda and draft resolutions be tabled sufficiently in advance of the general meeting. The determination of the relevant deadline, however, is left to Member States.
Article 7 – Access to the general meeting
Paragraph 1 provides for the prohibition of all forms of share blocking. Share blocking deters investors from voting because it prevents them from selling their shares for several days before any general meeting. The financial risk associated with such a blocking period is very high, due to possible market fluctuations during the blocking period. Evidence also shows that share blocking arrangements which allow the disposal of shares during the blocking period, subject to a subsequent reconciliation of shares and votes, are not a satisfactory solution. One of the reasons is that the system is not understood by investors, who are often unaware of the possibility of disposing of their shares during the blocking period. Furthermore, the reconciliation procedure, which is cumbersome, carries the risk of mistakes, as a result of which votes may be disregarded.
Paragraph 2 allows Member States to introduce a record date system as a requirement upon which access to the general meeting may be made conditional. The different processes for preparing general meetings and the ensuing needs in terms of timing differ considerably from one Member State to another; therefore, it does not seem appropriate to introduce a uniform record date at EU level. Paragraph 3 of the proposal therefore leaves it to national law to determine any such date, within a maximum period of 30 calendar days preceding the general meeting, and also to lay down the details of the procedure. However, in order to avoid certain shareholders being prevented in practice from participating and voting, it is made clear that no excessive formal requirements for the proof of ownership may be imposed in national law or in the articles of association.
Article 8 – Participation in the general meeting by electronic means
The article provides that all obstacles to electronic participation are to be removed. However, requirements relating to the identification of shareholders and the security of the electronic communication cannot be considered as barriers to electronic participation, as long as they are proportional to their objective.
Article 9 – Right to ask questions
Shareholders should be able to question management at general meetings, which are the main forum in which shareholders can exercise their rights and speak out. Furthermore, the right to ask questions would be devoid of any actual content if there were no corresponding obligation on the part of the issuer to reply to questions, subject to measures needed to ensure the good order of the meeting, confidentiality or the protection of business interests. A response is not necessary if the shareholder can obtain the relevant information easily because the issuer has made it available in the form of “frequently asked questions”, e.g. on its website. In a cross-border context, it should be possible to ask questions remotely, e.g . at least by post, and there should be no obstacle to the use of electronic means. All replies to questions should be made easily available to all shareholders, irrespective of their residence, and this can be achieved in particular by publishing them on the issuer’s website.
Article 10 – Proxy voting
The purpose of Paragraph 1 is to remove all existing limitations on the persons who may be granted a proxy, other than the requirement that the person holding a proxy should have legal capacity. Member States which do not impose any such constraints have not experienced any adverse consequences at general meetings as a result. However, some limitations may be justified where the proxy holder is in a situation giving rise to a conflict of interest. In such cases, Member States may decide that the appointment of such proxy holders is to be made subject to the issuing of formal voting instructions.
For the good order of general meetings, paragraph 1 provides for that one shareholder may only grant one proxy in respect of his entire voting entitlement. However, one person acting as a proxy holder should be able to hold proxies from more than one shareholder. Consequently, proxy holders acting on behalf of several shareholders should be able to cast split votes in respect of any resolution, in accordance with the, possibly conflicting, voting instructions given to them by the shareholders.
Paragraph 3 makes it clear that proxy holders should in principle have the same rights as those which the shareholder would enjoy in relation to the general meeting. This should be limited, however, to proxy holders acting on behalf of one shareholder or of several shareholders with identical voting instructions. A proxy holder representing several shareholders with conflicting voting instructions should confine its role to voting.
Article 11 – Appointment of proxy holder
Article 11 prohibits unduly cumbersome formal requirements, proxy grants and the issue of proxy instructions. However, issuers need to be sufficiently certain as to the identity of the shareholder and the proxy holder. Member States, therefore, are given the possibility of imposing requirements or allowing issuers to impose requirements with regard to the identities of the shareholder and the proxy holder, subject to proportionality.
Where shareholders hold registered shares and are known to the company, the easiest and cheapest way to cast votes remains the postal vote. Such shareholders, therefore, should have this possibility. Issuers should remain free to offer in addition electronic voting facilities, whether by Internet or otherwise.
Article 13 – Voting according to instructions
Paragraph 1 establishes the right of those persons or entities that hold shares in the course of business on behalf of investors to hold such shares in individual or omnibus accounts. Individual accounts are more transparent and make the tracking of votes possible, but are more expensive to maintain than omnibus accounts, in which the shares of several clients are pooled. The choice between individual and omnibus accounts should exist because individual and collective accounts, for these reasons, do not appeal to the same kind of investors. In particular, collective accounts may be more attractive for individual investors for cost reasons.
Paragraph 2 explains that, in the case of omnibus accounts, the casting of votes may not be made subject to so-called re-registration requirements, i.e. the requirement that the intermediary temporarily segregate out each of its investors vis-à-vis the Central Depository ahead of the General Meeting in order to be able to exercise voting rights attaching to the relevant shares. This procedure, which exists in some Member States, is costly and time-consuming.
Paragraph 3 ensures that the persons or entities referred to in paragraph 1 have the possibility of exercising the voting rights attaching to the relevant shares if investors have given them voting instructions. This is currently not the case in all legal systems. Financial intermediaries have to keep evidence of such instructions for a minimum period, in case of disputes arising in relation to votes.
Paragraph 4 gives the right to such persons or entities, which hold shares of the same issuer in a collective account on behalf of several investors, to split the votes according to the voting instructions which investors have communicated to them.
Paragraph 5 provides that where the person or entity is registered as the shareholder for the account of different investors it should have the possibility of issuing proxies to each of these investors or to persons designated by them. This is a derogation from the general rule established in Article 10 i.
Article 1 4 – Counting of votes
This article provides that all votes cast in respect of any resolution must be taken into account when votes are counted. This is important in order to ensure that the voting results make the wishes of the shareholders fully transparent. It is also necessary for those investors who need assurance that their votes have actually been taken into account by the company.
Article 1 5 –Information after the general meeting
Results of votes are often given in the general meeting. However, those shareholders, especially non-resident shareholders, who did not attend the general meeting should also have access to these results. This can be achieved, at no specific cost for issuers, if voting results are published on the issuers’ websites.
Article 1 7 – Amendments
Article 17 provides for an adaptation of Article 17 of the Transparency Directive in order to avoid the duplication of provisions with the same subject. Therefore, those parts of the article that are also being dealt with in the current proposal (former paragraph 2 (a) and (b)) have been deleted in the new Article 17. The article, however, should not be repealed in its entirety as it deals not only with information to be provided in the context of General Meetings but also, more broadly, with all information to be made available to shareholders and persons referred to in Article 10 of the Transparency Directive.