Short-Termism, the EU Shareholder Rights Directive, and Their Relevance to Shareholder Disclosure

Recent consultative processes in Europe and the United States reflect the interest being shown by regulators around the world in the problem of “short-termism” in capital markets. Seen by concerned parties as the promotion of an unhealthy obsession with short-term gains, at the expense of long-term allocations that would ultimately provide greater benefits to companies, investors and society generally, short-termism is being met with a variety of regulatory responses.

On July 18, 2019 in the United States, the SEC held a short-termism roundtable which considered, among other things, the value of quarterly reporting for companies, which may place undue importance on short-term financial results.  In the EU, on July 29, ESMA closed its window for its consultation on “undue short-term pressure from the financial sector”, which sought input from market participants on topics such as investment horizons, disclosure of ESG (environmental, social and governance) factors, fair value accounting and credit default swaps. Similar initiatives are occurring elsewhere in the world, for example in Argentina where on May 29 the Ministry of Finance published its new Productive Financing Law, which endeavors to channel savings toward long-term investments and “the real economy” through capital markets.

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Such developments coincide with statements made by the International Organization of Securities Commissions (IOSCO), whose members regulate 95% of the world’s securities markets. Most recently, in June IOSCO’s Growth and Emerging Markets Committee issued guidance on ESG matters, recognizing the “increased emphasis recently on the need for longer-term investment for several reasons, including financial stability.”

We have already seen previously how short-termism concerns can affect shareholder disclosure obligations. In France for example, as we wrote in an article jointly published with the law firm Simmons & Simmons (here), as of 2016 the “Law Aiming to Reconquer the Real Economy” (aka the Loi Florange) triggered double-voting rights for registered shareholders that have held their shares for at least two years in listed companies. While the merits of the law can be debated (many have pointed out that instead of promoting a long-term view, it merely favors entrenched interests), and moreover issuers can vote to opt-out of the law and thus restore their uniform one-vote-per-share system (which many issuers have chosen to do), what is clear is that for shareholder disclosure purposes, investors on French markets need to pay close attention to the number of voting rights they hold and the number of issuer voting rights outstanding.

More recently, and more broadly across the EU, disclosure of both issuer and shareholder information is being affected by the amended Shareholder Rights Directive (“SRD II”). Addressing short-termism – its longer official title refers to “the encouragement of long-term shareholder engagement” — SRD II was in large part required to be implemented by EU countries by June 10, 2019. These provisions include requirements that asset managers and institutional investors create a “shareholder engagement policy” and publish it on their website annually, and that asset managers annually make available to their institutional investors a report on how their investments contribute to the medium-term and long-term performance of the institutional investor or of the fund.

Remaining portions of SRD II, which must be implemented by EU countries by September 3, 2020, will affect asset managers as well. To facilitate engagement between issuers and their shareholders, one such provision empowers issuers with the right of “shareholder identification.” Under this provision, each EU country must give issuers in its territory the right to identify their shareholders (such as asset managers), but retains the discretion to shield smaller shareholders from identification if it so chooses. Thus each EU country may set a threshold of shareholder ownership — but at no more than 0.5% — below which the issuer has no statutory right to identify the shareholder. What this effectively means for asset managers is that, depending on where the relevant issuer in which they invest is registered within the EU, they will be subject to identification when acquiring any shares at all, or when acquiring a certain threshold ownership level of at most 0.5%. Note also that the shareholder itself will not be required to submit a disclosure, but rather it’s the relevant intermediaries that will identify the shareholder (using the format set forth in “Table 2” of the relevant EU Commission Regulation here) upon the issuer’s request (made in the format set forth in “Table 1”).  As for disclosure deadlines, intermediaries will be required (i) to transmit such issuer requests “to the next intermediary in the chain” by the close of the same business day (or if it receives the request after 4pm, by 10am on the next business day), and (ii) if applicable, to send its disclosure to the issuer by close of the following business day (or the business day after the record date, whichever is later).

This post was excerpted from CSS’s monthly Regulatory Updates newsletter, which features news on substantial shareholding, short selling and position limits from around the globe.

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