Shareholder Rights Directive (SRD)

Shareholder’s rights include the right to share income profitability and assets, but most importantly the right to influence company decisions. Under SRD shareholders must have the right to put items on a company’s general meeting agenda and propose resolutions (if they have a with a 5% holding) ask questions which a company must answer, participate and vote without limitations other than the qualifying date set by the company for owning shares. They have a right to vote on director pay policy.

In order to make it easier for shareholders to participate in general meeting and vote, intermediaries (such as custodians) who safekeep or administer shares or maintain securities account on behalf of shareholder, must give shareholders all the information from a company that allows them to properly exercise their rights, and must transmit voting instructions received from shareholders without delay. Proxy advisors, who provide research, advice and recommendation on how to vote, are subject to transparency requirements and report on compliance with their code of conduct.

Asset managers (including AIFMs, UCITS management companies), Solvency II insurers, and occupational pension schemes, who invest in shares traded on an EEA regulated market, must publish a policy on shareholder engagement and must disclose how it has voted at significant votes. They must also disclose (insurer must publicly disclose) how its investment strategy is consistent with the profile and duration of its liabilities and how it contributes to the medium and long term performance of its assets.

Companies which have their registered office in a member state and whose shares are admitted to trading on a regulated market in a member state can request information from intermediaries so that they can identify their shareholders (but less than 0.5% shareholders can be excluded) Where the shares are held in a chain of intermediaries, the request must be transmitted between the intermediaries.

A key aspect of enabling shareholders rights is facilitating voting rights on behalf of an underlying investor. Shares of listed companies are often held through complex chains of intermediaries which can act as an obstacle to shareholder engagement. In addition, where securities have been lent to a borrower under a securities lending agreement, this involves the transfer to the borrower of the securities together with the rights pertaining to the securities, including voting rights. This means that lenders wishing to exercise voting rights have to recall their lent securities from the market in order to vote them, unless voting can be fulfilled through the use of proxy voting. Although securities lending results in the transfer of securities from lender to borrower, it is not considered acceptable practice to borrow securities for the sole purpose of exercising a vote (known as empty voting), and this is clearly stated in several global codes of conduct and master securities lending agreements. Similarly, intermediaries holding collateral securities transferred by borrowers to lenders should not be expected to exercise any associated voting rights.

Greater transparency around stewardship and shareholder engagement introduced under SRD II including engagement policies concerning voting rights and investment strategies as well as voting disclosure and post-meeting vote confirmation should result in greater alignment of securities lending programmes with governance strategies and increase active ownership for investors.

Securities lending and borrowing plays an important role in today’s global markets, facilitating market efficiency and liquid capital markets. To support responsible securities lending in these markets, ISLA has been working with a broad range of securities lending market participants to drive best practice and the integration of corporate governance policies around voting and stewardship under securities lending arrangements. In Nov 2021, in conjunction with other regional securities lending associations, ISLA published a guide on Voting Practices and Shareholder Engagement. ISLA also supports the Bank of England Money Markets Code, which replaced the previous Securities Lending Code of Guidance, and which covers out practices for voting rights in Chapter 4. In 2020 ISLA produced an SRD II Q&A which provides analysis of the shareholder in relation to the GMSLA, the Pledge GMSLA and the MSLA.