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The Shareholder Rights Directive II (SRD II) is an influential piece of European Union legislation that will change a number of matters, including say-on-pay at AGMs and identifying shareholders.
The law is being implemented in two phases, with the first phase going into effect in June 2019, and the second phase coming into effect in September 2020. The part of the legislation that will change shareholder ID – colloquially known as the know your shareholder rule – was included in the second deadline, meaning it will need to be implemented by September 3, 2020.
Article 3 of SRD II gives companies the right to identify their shareholders, and requires that shareholders are updated on company events and actions. This means intermediaries between issuers and shareholders have to make the identity of shareholders available to the issuers.
Viviane Joynes is managing director of EQS Group’s London office. She says that in the UK, there already exists a good deal of transparency about who an issuer’s investors are. ‘What SRD II does is put the European companies on more of a level playing field,’ she says. ‘If IR teams know more about who is and isn’t in their shareholder base, this will result in better engagement and targeting efforts.’
Shining a light on bearer shares
The extent of the change is greater in some EU member nations than others. For Markus Becker, director of stock surveillance and corporate access at EQS Group, the impact of SRD II – and its translation into German law ARUG II – will have a massive effect on most public companies in Germany.
Becker explains that this is due to the prevalence of bearer shares in Germany. Unlike registered shares, bearer shares are issued anonymously through an intermediary and haven’t previously had anything close to the level of transparency focused on their ownership that they will now. According to Becker, ‘only 50 percent of the DAX companies have registered shares. If you go down the indices to look at smaller companies, it goes down to 30 percent registered shares and 70 percent bearer shares.’
Becker says German issuers would often conduct shareholder ID efforts in the build-up to their AGMs, but that the missing legal basis reduced the effectiveness of such projects for those companies with bearer shares. ‘Now with SRD II and ARUG II this is changing in a very meaningful way,’ he says.
Joynes agrees that the rule change will mean a transformation for many German companies. ‘Many companies currently have a shareholder ID report done once every six months or once a year and it is limited in terms of the information they get,’ she says. ‘As a result of ARUG II more frequent IDs with more transparency and at a lower cost should be possible, therefore enhancing IR programs. The process of putting a shareholder ID together will definitely become more of a science.’
How to identify shareholders
Theoretically, issuers should be able to navigate the change themselves, by contacting different intermediaries – such as banks and transfer agents – to help them identify their shareholders. Becker explains, however, that this can very quickly become an overwhelming task.
SRD II applies to shareholders with more than a 0.5 percent ownership threshold, and that ruling has been applied in countries like Austria. In Germany, however, ARUG II leaves out such a threshold, imposing the mandate of transparency on all shareholders down to a single share. Becker says this would require many IR teams to tackle, manage and consolidate the feedback of hundreds of intermediaries in order to track thousands of shareholders.
As a result, he says, it’s recommended to work with a service provider. While the service providers themselves come up with workable solutions of how to manage this wholesale change to shareholder ID, Becker says it’s important for IR teams to do their due diligence.
‘You need to have a little bit of an understanding of the process in order to ask the right questions,’ he says. ‘To what extent is the process going to be fully automated, compared with having quality checks and background knowledge to root out any inconsistencies? If the information doesn’t seem correct, will the service provider reach out to the intermediaries to get updated results?’
For issuers of bearer shares, Becker recommends a wholesale shareholder ID audit first time around but, once the information has been gathered, perhaps consider a half-yearly or yearly audit of a proportion of the shareholder base – depending on which threshold makes most sense for the IR team. It’s worth noting that in the UK the majority of companies receive monthly or quarterly shareholder ID reports (also called register analysis reports).
Both Becker and Joynes are optimistic about the effect SRD II and ARUG II will have on the quality and effectiveness of IR programs moving forward, and encourage IR teams to start asking questions of their service providers about how they’re responding to the rule change.
