As part of a research project focusing on shareholders’ duties, I have analysed the various disclosure duties imposed on shareholders in the EU. By focusing on the rules in EU law that impose disclosure duties, mainly in connection with listed companies, it is clear that the number of duties is increasing, but also that there are three other interesting developments.
From capital market law to company law
Historically, shareholders in listed companies have been subject to a number of disclosure duties in order to ensure an efficient capital market for listed shares. Some information about shareholdings may have an impact on the pricing of the shares. For this reason major shareholders have to notify their holdings, thereby giving the company and other stakeholders insight into the control structure and changes to that structure (Transparency Directive). Other transactions must also be disclosed, for instance voluntary and mandatory bids (Takeover Directive), or trading in shares by persons with managerial responsibilities in the company (Market Abuse Regulations).
However, more and more disclosure duties have been imposed on shareholders in order to improve corporate governance. There is a corporate governance element in the rules on major shareholdings and takeovers, and a corporate governance element is also evident in several of the disclosure duties proposed in the revised Shareholder Rights Directive (COM(2014) 213). Institutional investors, asset managers and proxy agents are subject to disclosure duties which are intended to encourage long-term shareholder engagement and thereby improve the corporate governance of listed companies.
This shift from capital market law to company law has several implications for the nature of the disclosure rules. For example, the degree and nature of the harmonization will differ as capital market law tends to require full harmonization rather than minimum harmonization; the way in which the information is disseminated differs in the two areas; and the conflict of laws rules differ, eg which rules apply to which companies.
Widening the scope
The scope of the duty to disclose is being widened in various ways.
First of all, the nature of what should be disclosed seems to be wider. Initially the focus was very much on the size of a shareholding acquired or disposed of, the identity of the shareholder and maybe the price. But the focus has now shifted to other transactions which a company may have with a shareholder (related party transactions) and to how shareholders exercise their influence. There are even a few cases where shareholders have to disclose how they intend to exercise their influence in the future.
A second development is that the definition of those who are subject to the rules has become wider. While it used to be shareholders who were subject to the duties, the rules have been extended to include those who have rights similar to those of a shareholder as well as others who have close links to shareholders but are not shareholders themselves. To illustrate the first, the rules on major shareholdings in the Transparency Directive have now been extended to cover holders of financial instruments which give the holder influence or economic rights similar to those of a shareholder. The other development is seen, for example, in the proposed Shareholder Rights Directive, which proposes imposing duties on asset managers and proxy agents who are not themselves shareholders but who may exercise the rights of shareholders or at least advise on the exercise of these rights.
Too much of a good thing?
It may be questioned whether this development can continue, or whether it may be problematic to continue imposing such duties on shareholders (and others). There is at least one example of where the legislator has reversed this trend to widen the scope of the disclosure rules. Normally disclosure duties apply to all shareholders, regardless of their nationality or residence. However, in the proposal for a revised Shareholder Rights Directive, in most cases the duties imposed on institutional investors, asset managers etcetera are limited to institutions based in the EU. The reason for this restriction is not spelt out in the proposal, but it is probably because the EU legislator fears that imposing such duties on non-EU institutions may discourage them from investing in EU companies. Thus it may be recognized that imposing too many duties on shareholders may make the EU capital market less attractive than other markets.
It is most unlikely that this will mean that no further disclosure duties will be introduced – the EU legislator seems very fond of using disclosure duties as a regulatory tool – but it does indicate that the pros and cons of imposing such duties may be more balanced in future.
The chapter "Shareholders’ Duty to Disclose", will appear in the autumn in the book “Shareholders’ Duties”, (ed. Hanne S. Birkmose), published by Kluwer Law International.
Karsten Engsig Sørensen is Professor of Law at Aarhus University and a guest contributor to the Oxford Business Law Blog.