2nd Shareholders’ Rights Directive – Implementations in the Stock Corporation Act
With the Stock Corporation Amendment Act 2019, Federal Law Gazette I No. 63/2019 of 23 July 2019 (AktRÄG 2019), the corporate law provisions of the 2nd Shareholders’ Rights Directive (2nd SRD) were implemented into Austrian law. The provisions attributable to the financial services sector were implemented in the Stock Exchange Act 2018 (more on this here). The aim of AktRÄG 2019 was to minimize the burden on listed companies. Relevant changes concern:
- “Say on Pay“: the right to vote at the General Meeting on the remuneration of members of the Management Board and the Supervisory Board (Corporate Management), as well as
- “Related Party Transactions“: increased transparency and approval of the company’s transactions with related companies or persons
Say on Pay
So far, pursuant to Section 78 of the Stock Corporation Act (AktG), the Supervisory Board was required to ensure that the total remuneration of the members of the Management Board was adequately proportionate and providing long-term incentives for a sustainable corporate development.
In accordance with the newly introduced Sections 78(a)-(e) and 98(a) AktG, the Supervisory Board must establish the principles (but not the amount) of the remuneration of the Corporate Management. What is new is that the remuneration policy represents a binding framework for future financial years within which the remuneration of the Corporate Management must lie.
Furthermore, the minimum content of the remuneration policy is regulated in significantly more detail. For example, the remuneration policy must promote the business strategy as well as the long-term development of the company and outline how it fulfils these requirements. The remuneration policy is intended to ensure a clear, comprehensible and comprehensive overview of the remuneration system for the Corporate Management and thus lead to increased transparency.
A further innovation is that the remuneration policy must be submitted to the General Meeting for approval at least every fourth financial year and in the event of any significant change. The vote is merely of a recommending nature. Such recommending resolutions are new to Austrian stock corporation law and cannot be challenged for lack of binding force. The remuneration policy must be published on the company’s website within two working days after the vote. However, it is possible to deviate from the adopted remuneration policy if this is necessary for the long-term benefit of the company and if the remuneration policy provides for this.
Another new provision is the remuneration report as a control instrument. This instrument shall ensure shareholders’ control over the consistency between the remuneration policy and the remuneration actually granted to the Corporate Management. The remuneration report shall contain, in a clear and comprehensible form, a comprehensive overview of the remuneration including all benefits granted during the previous financial year.
The remuneration report shall be submitted to the General Meeting for approval. The vote is again merely of a recommending nature. The remuneration report must be published on the company’s website for a period of at least 10 years after the vote. Thereafter, all personal data relating to the Corporate Management shall be deleted or the remuneration report shall no longer be publicly accessible. The remuneration report must not be disclosed in the commercial register, as otherwise the time limit required under data protection law would not be met.
The auditor shall review the remuneration report for completeness of content – but not for correctness of content – and for its proper publication.
In case of listed monistically organized European Companies (SE), the newly introduced Section 98(a) AktG applies mutatis mutandis to the remuneration of the members of the Administrative Board (Section 54(1) SEG).
The first remuneration policy shall be drawn up and submitted to the General Meeting in the financial year commencing after the effective date (10 June 2019). The remuneration report shall be prepared for the first time in the following financial year and submitted to the General Meeting.
Related Party Transactions
To date, transactions with related parties of the company have been governed by numerous individual provisions preventing conflicts of interest – in particular the prohibition on the return of deposits (Section 52 AktG), provisions on self-dealing (Section 97(1) AktG), general provisions on transactions requiring approval (Section 95(5) AktG), as well as disclosure obligations under the Commercial Code (Section 238(1) no. 12 UGB) and the Stock Exchange Act 2018 (Section 125 BörseG 2018).
Newly introduced was Section 95(a) AktG, a specific provision governing the company’s transactions with related companies and persons. In line with this Section, material transactions with related parties of the company require the Supervisory Board’s approval and, if applicable, public announcement, unless one of the numerous exceptions applies.
Within the meaning of a material restriction, a transaction is considered material if one of the following two thresholds is met:
- If a threshold value of 5% of the balance sheet total (from the annual or consolidated financial statements to be submitted to the General Meeting of the preceding financial year) is exceeded, the transaction is material and the Supervisory Board must approve the transaction.
- If a threshold value of 10 % of the balance sheet total is exceeded, the Executive Board must additionally make the transaction public in the manner provided for in Section 107(3) AktG at the latest at the time of its conclusion. Certain detailed information about the transaction must be published on the company’s website.
A series of transactions with the same related party that would not be material if considered in isolation are aggregated within one fiscal year.
The 2nd SRD does not define the meaning of the term transaction. According to the Explanatory Report on AktRÄG 2019, this term shall be interpreted in accordance with the definition of a “transaction” in Regulation (EC) No. 1606/2002 on the application of international accounting standards (IAS Regulation). Accordingly, a transaction is defined as any transfer of resources, services or obligations between the company and its related party, whether or not for consideration. Transactions based on a legal requirement or a sovereign decision are not covered by this term.
The term related party is determined according to the definition of “related party” in the IAS Regulation. In this sense, related persons are in any case all members of the Corporate Management (including employee representatives) of the company and its superordinate group companies. This also includes close family members of these persons. A company is related to a listed company if it belongs to the same group. Generally, the close relationship is also fulfilled for joint ventures and associated companies. This also applies to companies which are controlled by a related party of the company or over which such related party has significant influence.
However, there are exceptions:
- Firstly, material transactions with a related party that were concluded in the ordinary course of business and at arm’s length (third-party comparison) are neither to be published nor approved by the Supervisory Board.
- Secondly, Section 95(a) para 7 AktG contains a comprehensive list of exceptions, which are granted ex lege. However, companies may waive all or individual exceptions in their articles of association. Probably the most relevant exception in practice is that transactions with 100 % subsidiaries and with subsidiaries in which no other entity related to the company participates are excluded.
The newly introduced Section 95(a) AktG also applies mutatis mutandis to dualistically and – in a slightly adapted form – monistically organized listed SE (newly introduced Section 40(a) SEG).
Section 95(a) AktG has been applicable to business transactions since 1 August 2019.
The extent to which the margins for discretion are used to establish and amend the remuneration policy is yet to be seen. It is mandatory to vote on the remuneration report at the General Meeting. The Austrian legislator has opted for the least invasive implementation option, in that the resolutions are merely of a recommending nature. Nevertheless, the Corporate Management is well advised to ensure that the remuneration report is approved. A non-approval for infringement of the statutory provisions could be traced back to a violation of due diligence on part of the Corporate Management and therefore result in its liability. From our point of view, particularly auditors will be called upon, being responsible to formally review the remuneration report.
Transactions with a value of 5% or more of the balance sheet total are considered material and therefore subject to approval. The average (consolidated) balance sheet total of Austrian listed companies amounts to approximately € 1.5 billion. Therefore, a transaction with related parties with a value of approximately € 75 million or more would be considered material.
As a result of the implemented lower 5% threshold (contrary to the 10% threshold provided for in the Ministerial Draft), it is to be feared that no transparency will be achieved where this would actually be desirable. As major transactions were already subject to the approval of the Supervisory Board before the implementation of the 2nd SRD, this innovation is unlikely to lead to any major changes in practice.
Generally, transactions with related parties will already have been concluded upon publication. Therefore, concerns from minority shareholders and public pressure can usually no longer prevent the transaction. Nevertheless, the preventive effect of this regulation should not be underestimated.
We are happy to support you in holding General Meetings and to assist you in analyzing the effects of changes in the Stock Corporation Act on your company, e.g. on the drafting of your articles of association. Please do not hesitate to contact us if you have any questions.