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Act to Transpose the Second Shareholder Rights Directive – Strengthening shareholder rights

The Act to Transpose the Second Shareholder Rights Directive (Gesetz zur Umsetzung der zweiten Aktionärsrechterichtlinie, ARUG II) came into force at the start of the year. Its particular aim is to improve shareholder involvement in quoted companies as well as to facilitate the provision of cross-border information and the exercise of shareholder rights. Besides shareholder information, the key issues are remuneration policies, related party transactions and transparency obligations.

Remuneration for the management board and supervisory board (“say on pay”)

System and levels of remuneration

The passing of resolutions on management board remuneration was a critical issue in the discussions about the new regulations. Ultimately, it was stipulated in law that the supervisory board has to decide on a remuneration system for the management board that is in accordance with the new detailed requirements and that has to include, among other things, the maximum levels of remuneration for the members of the management board. From now on, it will be mandatory to bring about a resolution of the annual general meeting (AGM) on the system and, in particular, when there are any significant changes to it, although a resolution has to be put forward at least every four years. While the supervisory board may disregard a negative decision by the shareholders, nevertheless, it would have to present a revised remuneration system at the subsequent AGM, at the very latest. With regard to the maximum levels of remuneration, the AGM has a legally binding right to reduce these.

These regulations generally apply by analogy for the supervisory board remuneration, however, the competence for setting this has, in any case, been assigned to the AGM. Moreover, many of the potentially possible remuneration components are, in any case, not envisaged for the supervisory boards of German companies.

Remuneration report

The management board and supervisory board have to prepare a detailed remuneration report annually where the remuneration awarded, in the last financial year, to each individual member of the boards is clearly and comprehensibly shown. The remuneration report has to be examined by the auditor of the annual accounts and made available on the company’s website for a period of ten years.

“Related party transactions”

The new rules define a threshold value for related party transactions above which supervisory board approval would be required and the transaction would have to be disclosed. The obligations will apply if the commercial value, alone or together with the transactions effected with the same party in the course of the current financial year, exceeds a threshold value of 1.5% of the sum of the fixed and current assets.

Please note: Extensive exemptions are however envisaged, e.g. for transactions in the ordinary course of business at standard market conditions or for transactions with wholly-owned subsidiary companies.

Shareholder information and identification (“Know your shareholder”)

In future, quoted companies will be obliged to transmit information about corporate events for forwarding to shareholders. Corporate events are such measures that could affect exercising rights linked to shares and the underlying shares. Commissioned third parties can be involved in this information chain so that overarching internet platforms would also be possible.

Under the new rules, companies are now themselves entitled to obtain information about the identity of their shareholders. This entitlement is directed towards the so-called intermediaries that are custodians of a company‘s shares. Requests have to be forwarded by each intermediary to the next one in each case. The ultimate intermediary has to forward the company’s information.

Transparency obligations for institutional investors, asset managers and proxy advisers

From now on, this group of persons will be subject to special transparency obligations. For example, institutional investors and asset managers have to adopt an “engagement policy” for themselves and, e.g., report on the exercise of shareholder rights or an exchange of views with the officers of companies. The investment strategy will also have to be disclosed.

Proxy advisers who provide voting recommendations for large investors will basically have to set up a code of conduct for themselves and report on their compliance with it on an annual basis. Moreover, among other things, the voting policy that is followed by a proxy adviser has to be disclosed.

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