New Belgian Law on Shareholder Rights: Fostering Corporate Transparency and Long-Term Shareholder Engagement
The Situation: On April 16, 2020, the Belgian Parliament approved a law to transpose the EU Shareholder Rights Directive II ("SRD II") (Directive (EU) 2017/828 amending Directive 2007/36/EC)) into Belgian law ("Transposing Law"). SRD II, adopted in May 2017, was enacted to facilitate corporate transparency and long-term shareholder engagement.
The Result: The Transposing Law will afford shareholders with, in particular, greater clarity and control in relation to the remuneration of directors and managers. Belgian listed companies will gain enhanced knowledge of their shareholders and improve their information flow.
Looking Ahead: Belgium has taken a notable step toward boosting shareholder loyalty and limiting risks raised by short-term and speculative shareholder behavior. This substantive change will work toward achieving SRD II's broader objective of contributing to the strengthening of European financial stability.
Belgium's Transposing Law, which amends, in particular, the Belgian Code of Companies and Associations ("BCCA"), contains a series of measures to enhance corporate transparency and engagement of shareholders. As discussed below, these include increased shareholder control over the remuneration policy and the remuneration report, the immediate public announcement of related-party transactions, the right for companies to identify their shareholders, and disclosure of the engagement policy of institutional investors.
Remuneration Report and Remuneration Policy—Greater Clarity and Influence for Shareholders. Building on existing rules regarding director and executive remuneration in listed companies, the Transposing Law elevates shareholder power, notably by subjecting the remuneration report to shareholder vote (for advisory vote), as well as the remuneration policy (for binding vote).
To facilitate these expanded roles for shareholders, new transparency measures include information requirements for the remuneration report, as follows:
Director/Daily Management Level. The information below must be provided individually for each director. For a company with a two-tier governance structure, such information must be provided for each member of the supervisory board and each member of the management board. It also must be provided for each person entrusted with daily management:
- Global remuneration, whether paid by the company concerned or by another company belonging to the same group, split by category (fixed and variable remuneration, pension plan, and any other component of remuneration); the ratio between fixed and variable remuneration; an explanation of how the remuneration complies with the remuneration policy (including how the remuneration contributes to the company's long-term performance and information on how the performance criteria have been applied);
- Details on number of shares, stock options, and assimilated securities, including their main terms and conditions of exercise;
- Severance pay details;
- If applicable, information on possible clawback clauses related to variable remuneration; and
- Any differences with the remuneration policy.
Other Executive Level. For other managers (such as members of an executive committee in a company with a one-tier governance structure), only items (2) and (3) must be individually disclosed. Items (1), (4), and (5) must be disclosed as well, but may be provided on an aggregated (not individual) basis for those executives.
In addition, the remuneration report must provide the annual variation in relation to the following: (i) remuneration of directors/managers; (ii) performance of the company; and (iii) average remuneration on a full-time equivalent basis of employees of the company. Such sets of figures must be presented over at least the five most recent financial years, presented together in a manner that permits comparison.
In a further boost to transparency, the remuneration report must also contain the ratio between the highest remuneration of the highest-paid director/manager and the lowest remuneration (in full-time equivalent) employee.
Shareholder Vote and Publication of Report. A remuneration report is subject to a nonbinding, advisory vote by the general meeting of shareholders. The remuneration report is published in the annual report.
Listed companies are also required to establish a remuneration policy, applicable to directors as well as to each person entrusted with management and daily management that must contain the following information:
- Various components of fixed and variable remuneration;
- How the remuneration of employees has been taken into account to establish the remuneration policy;
- Criteria for awarding variable remuneration;
- For share-based remuneration, details on the vesting and retention periods and how such share-based remuneration contributes to the issuer's business strategy, interests, and long-term sustainability;
- Information on contracts with directors, persons entrusted with management, and daily management (duration, notice period, main characteristics of early retirement scheme and occupational pension plans, terms of termination, and severance payments);
- Decision-making process for the remuneration policy's determination, review, and implementation; and
- Explanation of significant changes in the remuneration policy and how such changes take into account shareholder votes since the most recent vote on remuneration policy during the general meeting of shareholders.
Shareholder Vote and Publication of Report. A remuneration policy is subject to the approval of the general meeting of shareholders at least every four years and upon each major change. The vote of the shareholders is binding. The remuneration policy is made public for as long as it applies.
For the first time, the new provisions are applicable to the remuneration report concerning the financial year starting after June 30, 2019. The remuneration policy, as a separate document, must be submitted to the vote of shareholders' meetings to be held in 2021.
Related Party Transactions—More Visibility. The Transposing Law expands the scope of the intragroup conflict of interest procedure for listed companies under Article 7:97 BCCA.
A special procedure will apply to any decision or operation falling within the responsibility of the board of directors of a listed company, in relation to a "related party" within the meaning of International Accounting Standard 24 ("IAS24"), except in certain specific cases. The definition of a "related party" under IAS24 is wider than under the former regime and includes relationships other than control, such as the exercise of significant influence, membership of key management personnel, family ties between natural persons or associates, and joint ventures.
Such decision or operation must be submitted to the assessment of a committee composed of three independent directors, as assisted by an expert if the committee deems this necessary. The committee draws up a report for the board of directors. The board considers this opinion and must justify why it would decline to follow it. The committee opinion and decision of the board of directors are examined by the auditor.
All decisions and operations concerning related party transactions will be publicly announced, at the latest, at the time the decision is made or the operation concluded. This is notably earlier than under the currently applicable regime, where such transactions need only be published in the next annual report. The public announcement must contain information about the nature and identity of the related party, the date and value of the operation, and any other information necessary to assess whether the transaction is fair and reasonable for the company's shareholders.
The current exemption will remain for de minimis decisions representing less than 1% of the consolidated net assets of the company, but transactions with the same related party must be aggregated over a 12-month period in calculating the threshold.
In addition, for customary transactions with related parties at market conditions, the board must establish an internal procedure for periodically assessing whether these conditions are in fact fulfilled. Excluded from the scope of such internal procedure are remuneration decisions, own shares transactions, interim dividend payments, and capital increases with preferential subscription rights.
The Transposing Law's provisions on related party transactions will enter into force on the 10th day following the publication of the Law in the Belgian State Gazette.
Expanding Transparency Obligations of Intermediaries
Shareholder Identification and Information Requirements. Beginning on September 3, 2020, listed companies will have the right to request from intermediaries the identity of their shareholders, without any minimal threshold applicable.
Moreover, intermediaries must communicate the information that companies are required to provide to shareholders to enable them to best exercise their voting rights.
Transparency in Intermediary Engagement Policy. Institutional investors and asset managers will be required to develop and publicly disclose an engagement policy that describes how they integrate shareholder engagement in their investment strategy or explain why they have declined to do so ("comply or explain").
Each year, institutional investors and asset managers must also publicly disclose how their engagement policy has been implemented, including a general description of voting behavior, an explanation of the most significant votes, and use of proxy advisor services.
The provisions on transparency for intermediaries will enter into force on the 10th day following the publication of the Law in the Belgian State Gazette.
Three Key Takeaways
- The Transposing Law introduces greater shareholder control over the remuneration of directors and other executives in listed companies.
- Increased transparency regarding intragroup transactions with related parties will facilitate the assessment of whether such transactions are fair and reasonable for the company's shareholders.
- Companies and shareholders will benefit from additional transparency and information-transmission obligations for intermediaries.
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