The government has published draft regulations (the Companies (Directors' Remuneration Policy and Directors' Remuneration Report) Regulations 2019) which will, if implemented, make changes to the directors' remuneration regime for quoted companies in order to comply with the new EU Shareholder Rights Directive ("SRDII").
The majority of the SRDII provisions on directors' remuneration are already in force under the existing regime. The new provisions are being implemented to ensure full compliance with the directive.
When are the changes coming into force?
If implemented, these changes will apply from 10 June 2019 in accordance with the transitional provisions set out below.
Which companies will be affected?
Companies already subject to the regime
UK "Quoted companies", i.e. those listed on the FCA's Official List, on another EU Regulated Market, or on the New York Stock Exchange or Nasdaq, are already subject to the regime and so will be in scope.
Expansion to unquoted traded companies
Under the regulations, the regime will be expanded to cover "unquoted traded companies", that is UK
companies which are not "listed" but which are traded on an EEA regulated market, such as companies on the High Growth Segment of the London Stock Exchange. Note that AIM is not in scope. Where such companies are not already complying with the provisions of the regime, they will be allowed to make payments in accordance with existing practices until the first approved remuneration policy takes effect. A remuneration policy will need to be put to shareholders in the first financial year beginning on or after 1 January 2020.
What is changing?
Change in scope of "directors" covered
- A company's remuneration policy and report will cover any person not on the board of directors who carries out the function of chief executive officer or deputy chief executive officer (regardless of title).
Takes effect: in relation to any remuneration policy approved on or after 10 June 2019 and any
remuneration report for a financial year of a company beginning on or after 10 June 2019.
Approval of inconsistent payments
- The provisions that previously allowed a payment which was inconsistent with the remuneration policy to be made pursuant to an ordinary resolution of the company will now require an amendment to the remuneration policy (also an ordinary resolution).
Takes effect: from the first date on or after 10th June 2019 on which a relevant directors’ remuneration policy for the company takes effect.
Requirement to put forward a new policy
- Where a remuneration policy is put forward at a general meeting but is not approved, the company must put forward a new policy at the next general meeting. The last approved policy will remain in place until a new one is approved.
Takes effect: from 10 June 2019
Remuneration policy content requirements
- The remuneration policy will be required to include:
- details of any deferral periods in relation to any element of a remuneration package;
- details of any vesting periods and any holding periods in relation to share-based remuneration;
- the duration of contracts or arrangements with directors;
- an explanation of the decision-making process for its determination, review and implementation and measures to avoid or manage conflicts of interest.; and
- an explanation and description of all significant changes compared to the previous policy.
Takes effect: in relation to any remuneration policy approved on or after 10 June 2019.
Remuneration report content requirements
- The directors' remuneration report will be required to include:
- the total fixed and variable remuneration for each director (in the "single total figure" table);
- any change to the exercise price or date of any options;
- the annual percentage change in remuneration over the five financial years preceding the relevant financial year in respect of each director, compared with the average annual percentage change for employees of the company on a full time equivalent basis (currently the regulations require a comparison of the CEO's remuneration against average employee remuneration since the previous year with the option to use a comparator group); and
- any deviation there may have been from the procedure set out in the company’s remuneration policy for determining directors' remuneration.
- Remuneration reports must not contain certain types of sensitive personal data (such as racial or ethnic origin or sexual orientation).
Takes effect: in relation to any remuneration report for a financial year of a company beginning on or after 10 June 2019.
Availability of reports
- Remuneration reports will need to be retained on a company's website for 10 years (and may be retained for longer if they do not include personal data). The date and results of the vote on a remuneration policy will need to be retained on the website for as long as it is applicable.
Takes effect: in relation to a directors’ remuneration report or directors’ remuneration policy of a quoted company first required to be made available on or after 10th June 2019.
Are there other SRDII changes coming?
Other changes will be made in order to implement SRDII, notably the following:
Related party transactions
SRDII contains provisions on related party transactions. Certain changes are required to bring English law in line with SDRII as the scope of companies affected, and the definition of "related party" under SRDII, are broader than under Listing Rule 11. The FCA consulted on its proposed changes to the Listing Rules in January and we await the final rules.
The FCA has proposed a new, parallel related party transaction regime which will be set out in the Disclosure Guidance and Transparency Rules.
If implemented, the new rules as set out in the consultation will:
- apply to a wider range of companies (including premium and standard listed companies and those on the High Growth and Specialist Funds Segments);
- require board approval for "material related party transactions" (i.e. transactions where the percentage ratio is 25% or more under the class tests with "related parties" as defined in IFRS); and
- require announcement of such material related party transactions.
Companies complying with the announcement and approval requirements for related party transactions under LR11.1.7R in relation to a transaction will be deemed to satisfy the new requirements. However, as the scope of the SRDII provisions is wider, listed company transactions may occasionally be subject to the new DTR requirements even though exempt from LR11.
The new rules will apply from the start of the first financial year after 10 June 2019.
Further changes to the Companies Act 2006 to facilitate the exercise of shareholder rights
Further changes will be required to be made to the Companies Act 2006 before September 2019, in order to implement provisions of SRDII. These will set out requirements for intermediaries to facilitate voting and participation in general meetings by shareholders.
Disclosure by asset managers and institutional investors of their stewardship activities
Requirements relating to stewardship are being implemented by the FCA. See our recent alert on the proposed FCA rules on shareholder engagement here.