Amendment laws implementing the Shareholders’ Rights Directive: Action Points for Boards of Austrian listed companies

On 23 July 2019, amendments of the Stock Corporation Act and Stock Exchange Act implementing the Shareholder Rights Directive II (2017/828) entered into force. Directive 2017/628/EU to encourage long-term shareholder engagement was implemented with the aim to minimize the administrative burden on listed companies by avoiding any “gold plating”. When implementing the rules on the identification of shareholders, the Austrian legislator utilized the scope provided by the Directive, requiring listed companies to obtain information from intermediaries (banks) only on such stockholders which own more than 0.5 percent. As to “say on pay” the implementation again opts for a board friendly implementation by giving the shareholders an advisory, non-contestable advisory vote on the remuneration policy and the remuneration report. On material related party transactions the amendment law makes extensive use of the exceptions provided by the Directive, subjecting disclosure only of certain material related party transactions and leaving approval of relevant transactions with the supervisory board rather than subjecting such transaction to a vote in the shareholders meeting. The new disclosure rules on board recommendation and relevant third-party transactions and the requirement for boards to regularly put board remuneration (policy) on the agenda of shareholders meeting will allow activists to increase pressure on the management without having to request specific agenda items on these topics in shareholders meetings.

Know Your Shareholder

An amendment to the Stock Exchange Act allows companies to request intermediaries, regularly banks, to disclose stockholder information to allow listed companies to identify their stockholders. This shall facilitate better direct communication and cooperation with stockholders. When implementing the rules on the identification of shareholders, the Austrian legislator utilized the scope provided by the Directive, requiring listed companies to obtain information from intermediaries, regularly banks, only on such stockholders which own more than 0.5 percent. As to stockholder information provided by financial institutions to companies upon their request, such passing on of information will not qualify as a violation of banking secrecy.

Moreover, institutional investors and asset managers are required to provide more transparency. Depositaries need to take measures to fulfill the new identification and information duties. Institutional investors and asset managers will inter alia need to publish how they will integrate stockholder involvement in their investment strategy and how the stockholder input has been implemented. Proxy advisers need to disclose which code of conduct they will apply and report on compliance with such code. Moreover, they will have to annually report on information gathering and processing and on potential conflicts of interests.

Say on Pay

Austrian law already provides for certain rules on the content of the remuneration of management board in the Stock Corporation Act and under the Code of Corporate Governance. Under Section 78 of the Stock Corporation Act, supervisory boards must ensure that the total remuneration of management board members is in reasonable proportion to the duties and benefits of individual board members, a company’s position and overall remuneration levels. The remuneration shall include long-term incentives for the sustainable development of the company. Rules on executive compensation are further specified in Rule C-27 of the Corporate Governance Code.

As allowed by the terms of the EC Directive, even after implementation of the Directive into Austrian law and under Austria´s two tier system, competence for the remuneration of Management Board compensation will continue to lie primarily with the supervisory board. However, although the new rules do not require a binding vote in the shareholders meeting, remuneration questions will in the future be a regular topic at shareholders meetings and decisions of the supervisory board on remuneration will scrutinized more extensively in the future.

The amendments newly require the boards to put on the agenda of general meetings (i) a vote by the shareholders on the general remuneration policy at least every four years; and (ii) an annual vote by the shareholders on the remuneration report.

The vote by the shareholders on these two agenda items will not be contestable. However, the shareholders could decide not to agree and in such case the boards need to re-submit in the following AGM.

Mandatory publication of these documents on a company’s website seeks to enhance the transparency of executive compensation across companies.

The new requirements will apply also to the remuneration granted to supervisory board members.

Ad Remuneration policy

Pursuant to the Directive the remuneration policy must promote the business strategy and long-term development of a company and explain how it does so. Further, it must be clear and comprehensible and describe the various fixed and variable components of the remuneration that may be granted to management board members.

In terms of its scope, the new remuneration policy is comparable, but more detailed than the guidelines currently provided under Austrian law and practice. In fulfilling the website publishing requirement companies will have to be careful. The remuneration policy must be specific enough to comply with Section 78a of the Stock Corporation Act. At the same time the publication should not reveal any data that contains sensitive information or puts the company at a competitive disadvantage. Further, as companies are allowed to temporarily derogate from the policy only in exceptional circumstances, it must contain any financial benefits that may form part of the directors’ remuneration package in the future. The policy must therefore be drafted carefully to reflect various legal and commercial considerations.

The remuneration policy must be set up by the supervisory board and submitted to a shareholder vote at least every four years or earlier in case of significant changes. Such vote will be advisory only and cannot be contested in court. Notwithstanding its non-binding nature, the right to vote on the remuneration policy could still have an impact. In the two-tier system, supervisory board members are elected by shareholders for certain terms and can be reelected. For that and reputational reasons supervisory board members will be careful not to risk a negative vote by the shareholders meeting.

The remuneration policy submitted to the general meeting and the result of the vote in the general meeting must subsequently be published on the company’s website.

Ad Remuneration report

In addition to the remuneration policy, the management and supervisory boards must also prepare a remuneration report each year. The report must provide a comprehensive overview detailed as to individual board members of the remuneration granted to members of the management board in the course of the previous financial year. The report must also be submitted to the annual general meeting for a vote and subsequently published on the company’s website.

Related party transactions

The Stock Corporation Act is amended and now requires that certain material third party transactions need to be approved and published by the supervisory board; if a particular member of the supervisory board is a related party to the specific transaction, such member cannot vote. Materiality thresholds as to approval and publication requirement differ, it is 5 percent for approval and 10 percent for publication, in each case of the balance sheet total.   Listed companies must thus approve and disclose material transactions with related parties that cross a materiality threshold of 5 percent (approval) and 10 percent (publication) respectively, in each case of the balance sheet total of the company under the annual accounts of the previous year, as to publication no later than upon conclusion of the transaction. If several transactions are concluded with the same related party within a financial year, the values of such transactions need to be aggregated to determine materiality.

The term ‘related party’ has the same meaning as under the international accounting standard (currently) IAS 24.9.

The amendment law makes extensive use of the exceptions under the Directive. A material transaction with a related party will thus inter alia not be subject to the provisions on related party transactions if it is concluded in the ordinary course of business and on arm’s length terms, between a listed company and its subsidiary or with a credit institution  based on measures aimed at safeguarding stability which have been approved by the competent regulatory authority.

Given the materiality thresholds are at 5 percent and 10 percent of the balance sheet total respectively, as to large listed companies this will require an extremely sizeable transaction to be relevant. The new publication requirement will thus apply only exceptionally. Moreover, most by-laws of listed companies will already subject related party transactions, often below the requirements of the now changed rules, to supervisory board approval. Thus, the practical impact of the new rules on related party transactions is likely to be small.

Confirmation on vote

Upon request of a stockholder, listed companies must confirm to the stockholder a record on their casting of a vote in the shareholders meeting.

Action points for boards of Austrian listed companies

Boards of listed companies incorporated in Austria need to check which of the amendments to the law will have consequences for them in the 2020 AGM season (and for companies with business years different to the calendar year even still in 2019).

1. Know your shareholder

Boards of listed companies are not mandatorily required to ask intermediary for the data on shareholders owning 0.5% or more of stock; if they decide to obtain such information, it could soon become an issue whether and to what extent such information could be inspected by other shareholders.

2. Submission of a remuneration report

The obligations relating to the remuneration report will apply as from entry into force of the new legislation. This means that a remuneration report must be prepared for the first full financial year that starts after the amendment becomes effective and submitted to the AGM in the subsequent year (thus for most companies in 2021) for an advisory vote.

3. Evaluation of remuneration processes and policy

The supervisory board must assess whether remuneration processes and policy require adjustments as a result of the new rules.

It must be analyzed whether the remuneration policy meets the new – more detailed and stringent – rules. There is, however, no need to implement before the regular AGM season in 2020 (and for companies with business years different to the calendar year starting after the effectiveness of the amendment even still in 2019).

The remuneration policy must be put to an advisory vote by the AGM at least every four years and earlier in case of changes.

The requirement of approval every four years by the AGM will apply as from entry into force of the new legislation. This means that a remuneration policy which does not comply with the new rules must be aligned to them as soon as possible and thus in practical terms submitted to the 2020 AGM for approval.

4. Related Party Transactions

The supervisory board, or the board of directors for companies with a one-tier management structure in an SE, will have the right to approve material transactions with related parties (materiality threshold is 5% of the balance sheet total) . Shareholders will have no right to vote on approved material transactions. Listed companies must disclose material transactions with related parties if and when they cross a materiality threshold of 10 percent of the balance sheet total no later than conclusion of the transaction.

Activist Shareholders

For activists the new rules could provide more transparency on other stockholders with whom they could potentially seek alliance.

Moreover, the new requirement for boards to regularly put board remuneration (policy) on the agenda of shareholders meeting and additional disclosure rules on board remuneration and relevant related party transactions will allow activists to increase pressure on the management without having to request specific agenda items on these topics in shareholders meetings.