Irish SRD2 Regulations for asset managers and institutional investors

1. Introduction

The second Shareholders' Rights Directive (EU) 2017/828 (SRD2) has now been implemented into Irish law by way of the European Union (Shareholders' Rights) Regulations 2020 (S.I. No. 81 of 2020) (the SRD2 Regulations).  The SRD2 Regulations generally came into operation on 30 March 2020, with the provisions relating to identification of shareholders, transmission of information and facilitation of exercise of shareholder rights coming into operation on 3 September 2020.  The SRD2 Regulations are structured as a series of amendments and insertions to Part 17 of the Companies Act 2014, which sets out the rules applying to public limited companies.

The SRD2 aims to strengthen long-term shareholder engagement and increase transparency, introducing new requirements such as an obligation to have a shareholder engagement policy or to explain why such a policy is not needed.

As SRD2 is a Directive, Member States need to transpose SRD2 into national laws and have some discretion on how to do so.  Member States do not have discretion, however, to exempt UCITS or AIFs from the requirements listed in 4.1 and 4.2 below.  The regulations do exclude UCITS and AIFs from the definition of "Traded plc", which means they are exempt from the provisions on identification of shareholders, transmission of information, facilitation of exercise of shareholders' rights, remuneration of directors and related party transactions.

2. Second Shareholders' Rights Directive

• 2.1 The purpose of SRD2 is to address the perceived lack of shareholder engagement in the market by requiring asset managers and institutional investors to put in place a shareholder engagement policy and to increase the transparency of their investment strategies.

• 2.2 SRD2 amends the first Shareholder Rights' Directive in relation to the encouragement of long-term shareholder engagement.  The key changes include:

  • Directors' remuneration: to require listed companies to publish a remuneration policy and to give shareholders a vote on the remuneration policy.  Ireland has elected to make this an advisory rather than a binding vote;
  • Identification of shareholders: new requirements allow companies to request information from intermediaries so that they can identify their shareholders;
  • Related party transactions: material related party transactions will have to be publicly announced when concluded;
  • Intermediaries' obligations: intermediaries must offer companies the right to have their shareholders identified; transmit information without delay between companies and shareholders; facilitate the exercise of shareholder rights and publicly disclose any charges for providing these services;
  • Transparency of institutional investors and asset managers: institutional investors and asset managers must develop a policy on shareholder engagement; and
  • Proxy advisors: proxy advisors will have to disclose any code of conduct they comply with and explain any derogations from that code or explain why they do not comply with a code.

For further details on the background of SRD2, see: SRD2 - are you ready?.

3. SRD2 Transparency Provisions

SRD2 implements transparency provisions which are applicable specifically to authorised AIFMs, UCITS management companies and self-managed UCITS investment companies.  These provisions are set out in a new Chapter 8B within Part 17 of the Companies Act 2014.   

4. Engagement policy

• 4.1 Asset managers and institutional investors are required to adopt a shareholder engagement policy on a comply or explain basis.  The policy should describe how shareholder engagement is integrated into the investment strategy when they or the fund they manage are shareholders in EU investee companies (including listed UCITS and AIFs). SRD2 requirements apply to the extent asset managers invest on behalf of investors in shares of companies traded on a regulated market.  These are referred to as "relevant asset managers".

• 4.2 The shareholder engagement policy to be put in place must describe how the asset manager:

  • monitors EU investee companies on matters such as strategy, financial and non-financial performance and risk capital structure, social and environmental impact and corporate governance;
  • conducts dialogue with EU investee companies;
  • exercises voting rights and other rights attached to shares;
  • cooperates with shareholders;
  • communicates with relevant stakeholders of the EU investee companies; and
  • manages actual and potential conflicts of interests in relation to its engagement.

• 4.3 The annual disclosure of information relating to implementation of the shareholder engagement policy may be by way of annual reports or direct communication to institutional investors.

5. Investment Strategy and Arrangements with Asset Managers 

• 5.1 A further requirement, which applies to institutional investors, is to publicly disclose:

  • information relating to its equity investment strategy, including how the main elements of the strategy are consistent with the profile and duration of its liabilities, and contribute to the medium to long-term performance of its assets; and
  • where an asset manager invests on its behalf, information regarding its arrangement with the asset manager, such as how that arrangement incentivises the asset manager to align its investment strategy and decisions with the profile and duration of the liabilities of the institutional investor, in particular long-term liabilities.

6. Transparency of asset managers

• 6.1 Where a relevant asset manager invests on behalf of an institutional investor, whether on a discretionary client-by-client basis or through a collective investment undertaking, the asset manager shall disclose to the institutional investor on an annual basis how its investment strategy and implementation thereof:

  • complies with that arrangement; and
  • contributes to the medium to long-term performance of the assets of the institutional investor or of a fund managed by the institutional investor.

• 6.2 Such disclosure shall include reporting on:

  • the key material medium to long-term risks associated with the investments;
  • portfolio composition;
  • turnover and turnover costs;
  • the use of proxy advisors for the purpose of engagement activities; and
  • the asset manager's policy on securities lending and how it is applied to engagement activities, if applicable, particularly at the time of the general meeting of the EU investee companies.

7. Conclusion

Asset managers and institutional investors are now required to adopt a shareholder engagement policy meeting certain specific requirements or publicly disclose a clear and reasoned explanation as to why they have chosen not to comply with one or more of those requirements.

All the information regarding the engagement policy and its implementation should be made publicly available online and free of charge.

If you require assistance in connection with any issue arising from the Shareholders' Rights Directives, please contact us at Simmons & Simmons.