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Lighting dark corners

The European Commission’s planned revisions to rules on shareholder rights aim to encourage a culture of long-term equity investment across the EU. The development follows Commissioner Michel Barnier’s policy paper of 2010, which pressed for clean-up of corporate governance. 

The proposed Shareholders’ Rights Directive intends to improve trust in equity investments, notably through high-profile measures on the remuneration of directors and on the quality of service by proxy advisers.

Another target is the transparency of related party transactions (RPTs). This section of the legislation covers business deals or arrangements between two parties joined by a special relationship prior to the deal.

An example could be a transaction between a major shareholder and a corporation, perhaps a contract of sale of an asset, such as a building, to a family member of a major shareholder. This is to the obvious detriment of any minority shareholder.

Share ownership in large blocks, which facilitates RPTs, is not uncommon in SMEs and large companies in parts of Europe. 

According to a Commission source, present-day gaps in national legislation could enable RPTs to continue. He cites some southern EU member states. But it might not stop there, because, according to a different source, there have been lobby pressures from Germany and some Nordic countries to dilute the RPT rules. 

The Commission’s proposals include a new article on the right to vote on related party transactions. It requires, among other things, that listed companies must first submit certain RTPs for shareholders’ approval. This applies if the contract represents more than 5% of company assets, or if it could have a significant impact on profits or turnover.

Mirzha De Manuel Aramendia, director of capital markets policy at the CFA Institute, believes that the legislation will encourage investors to explain how their equity investments align with their long-term liabilities. “This should make prudential supervisors feel more at ease with equities. It is a nice complement to Solvency II,” he says. 

However, the UK’s Investment Management Association’s corporate governance director, Liz Murral, says the disclosure rules could damage the interests of institutional investors. 

Peter Montagnon, associate director at the London-based Institute of Business Ethics, finds that the Commission’s approach should achieve the right balance. 

On the subject of churning, he believes that the various pressures on investment managers could mean that this problem will not go away. This is despite high turnover, which generates costs. 

François Passant, executive director of Eurosif, describes the European Commission’s move on RPTs as “pretty bold” in dealing with a “pretty opaque practice”. Another welcome comes from the Dutch Eumedion corporate governance forum. 

And yet another comes from the Best Practice Principles Group, an unofficial collective of six shareholder voting research service providers. One member, Sarah Wilson, founder of Manifest, supports cross-border rights. 

But there are already indications that provisions on RPTs could face a concerted attack from vested interest groups as the legislation passes through Brussels. The next step will be deliberations in the EU Parliament and Council, which could add another 12 months. 

During this time, it is likely that ‘comitology’, Brussels jargon for the committee procedure, will continue on this issue. Lobby forces could put a spoke in the wheel of new legislation.

Indeed, it is ironic that a proposal advocating transparency in the financial sector could be dealt with in notably non-transparent negotiations.

In the case of the Shareholders Rights Directive, the legislation would eventually face a further grace period of 18-24 months, before coming into law in EU member states. 

In other words, any definitive impact on pensions funds will only take place in the long term.

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