ARUG II – Implementing Law regarding Shareholders’ Rights Directive II
The Implementing Law regarding Shareholders’ Rights Directive II (ARUG ll) stipulates the application of the European requirements of said EU Directive in German law.
For this purpose, comprehensive changes have been made to the German Stock Corporations Act (“AktG”) and various further laws and ordinances.
What are the rights and duties granted pursuant to ARUG II?
The Implementing Law of Directive 2017/828 amending Directive 2007/36/EC regarding the encouragement of long-term shareholder engagement (ARUG ll) obligates issuers to a substantial extent to involve the shareholders within the Member States of the European Economic Area (EEA) in the corporations’ business policy processes.
The requirement for this is positive knowledge of the identity of the shareholders concerned (Know Your Shareholder – KYS).
Without a successful identification of its shareholders, an issuer will not be able to adequately fulfil its legal obligations pursuant to ARUG II in the future.
Pursuant to ARUG II, issuers have been authorised since 3 September 2020 to request information from intermediaries within the EEA.
This statutory provision enables the identification of all shareholders, who are domiciled in the EEA or who maintain their securities account at an intermediary within the EEA.
In addition to publishing the convening notice for the general shareholders’ meeting in the Federal Gazette as the publication medium for company announcements pursuant to Sec. 121 (4) AktG, it has been a further requirement since 3 September 2020 to mail out a convening notice for the general shareholders’ meeting pursuant to Sec. 125 AktG along the entire chain of intermediaries.
When did ARUG II come into force?
Implementation of the requirements in national law was scheduled by 10 June 2019 under the Shareholders’ Rights Directive II.
ARUG II was announced on 19 December 2019 in the Federal Law Gazette and it has been in effect since 1 January 2020.
What are the subject matters that are treated by the ARUG II?
Contents relating to transactions with related parties (Related Party Transactions), the identification and information of shareholders (Know Your Shareholder), and transparency obligations of institutional investors, asset managers and voting rights advisers have been adopted largely unmodified from the government’s draft bill. Changes have been made to the contents relating to the remuneration of the management board and supervisory board (“Say on Pay”).
The complete text of the law can be found here.
What are the deadlines according to ARUG II for identifying shareholders?
The requirements for the identification of shareholders (Know Your Shareholder) have been in effect since 3 September 2020.
The rules on informing shareholders apply to general shareholders’ meetings.
What does the Shareholders’ Rights Directive II (SRD II) mandate?
Directive (EU) 2017/828 of the European Parliament and of the Council of 17 May 2017 (“Shareholder Rights Directive II”) as an amending directive is a reform of the original Shareholders’ Rights Directive of the year 2007.
“The Directive overall aims at a further improvement of the participation of shareholders of stock-exchange listed companies, the simplification of the cross-border exchange of information, and the exercise of shareholders’ rights. For this purpose, the Directive contains a number of provisions on the co-determination rights of shareholders regarding the remuneration of the supervisory board and the management board ("Say on Pay"), and regarding transactions with associated companies and persons associated with the company ("Related Party Transactions"), for the purpose of a better identification of shareholders and improved provision of information to shareholders ("Know Your Shareholder"), and so as to improve transparency regarding institutional investors, asset managers and voting rights advisers.” (Excerpt from the government’s draft bill of ARUG II, page 1, lit. A, para. 2)
What does Say on Pay mean?
In accordance with the requirement of the Shareholders’ Rights Directive, it is envisioned that shareholders grant their agreement at least every 4 years to the remuneration policy for the remuneration of the management board and the supervisory board of the respective issuer.
Moreover, the general shareholders’ meeting is to vote on the remuneration report of the previous year.
What transparency obligations apply to institutional investors?
The Shareholders’ Rights Directive requires of institutional investors, asset managers and voting rights advisers that they disclose various information relating to the participation, investment behaviour and business model of the institutional investors, asset managers and voting rights advisers.
What does Related Party Transactions mean?
The Shareholders’ Rights Directive provides for approval requirements as relates to the transactions with associated companies and related persons. Granting the approval is generally a responsibility of the supervisory board, meanwhile additional requirements are prescribed for the approval procedure. In addition, these transactions shall be publicly announced at the latest on the date of their closing.
What is behind the shareholder identification?
Based on the requirements of Directives 2007/36/EC and 2017/828 and their implementation in ARUG II, issuers have been granted the right since 3 September 2020 to definitively identify their own shareholders.
The provisions of the Directives apply to all issuers domiciled in the EU, whose shares are admitted to trading on a regulated market.
The Directives obligate all intermediaries to answer and/or transfer the requests for the disclosure of information as to the identity of shareholders along the chain of intermediaries without delay.
What are the framework conditions applicable to the shareholder identification?
The following information regarding the shareholder is to be returned in response to the request by the issuer:
- Definitive identification of the shareholder
- Name(s) of the shareholder
- First name(s) of the shareholder if applicable
- Complete address of the shareholder (incl. country code)
- Email address of the shareholder (if available to the intermediary)
- Type of participation
- Number of shares held by the respective shareholder at the responding intermediary
- Start of the shareholding
- Name and unique identification of a third party appointed by the shareholder if any
What challenges can be expected in the course of the shareholder identification?
Based on the large number of issuers (alone for Germany, we are looking at roughly 480 stock corporations) and multiples of potentially participating intermediaries (for Germany alone at least 1,800 depositaries), substantial costs and effort for administration and personnel must be expected by all parties involved for the processing of the request and the response.
As part of this communication, all feasible variants and methods will be made available between the actors involved.
This entails that the processes can vary for each request, which causes an extremely high level of manual effort.
This might result in a low acceptance and rare use of this identification possibility.
The use of DPAii offers the solution to this problem.
What are the deadlines for forwarding and responding to identification requests?
In a chain of intermediaries, the following periods apply for the forwarding of the disclosure requests:
- If the disclosure request is received before 4:00 PM, the request shall be forwarded to the nearest intermediary in the chain without delay, whereas at the latest by the end of the same business day.
- If the disclosure request is received at or after 4:00 PM, the request shall be forwarded to the nearest intermediary in the chain without delay, whereas at the latest by 10:00 AM of the next business day.
Strict deadlines also apply to answering to disclosure requests:
- The answer to the issuers shall be given without delay and at the latest on the business day following the day of receipt or the day following the reporting date (record date) indicated in the request.
Validity of the right to identify shareholders:
- The unrestricted right to identify shareholders has applied since 3 September 2020.
- The right of the issuers to receive information from all intermediaries applies across borders within the EEA.