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New requirements for companies in implementing Shareholder Directive
Amendments to the Republic of Lithuania Law on Companies adopted on 27 June 2019 (TAR, 2019, No 2019-11167) implementing Directive (EU) 2017/828 of the European Parliament and of the Council of 17 May 2017 amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement.
With the provisions of the said Law on Companies now in force, public limited liability companies whose shares are admitted to trading on a regulated market (hereinafter – companies) are now subject to additional requirements:
- Company remuneration policy. In accordance with Article 28 of the Law on Companies, the general meeting of shareholders must adopt a decision approving the company’s remuneration policy by qualified majority that must be at least two thirds of all votes conferred by shares held by the shareholders participating in the meeting. The remuneration policy must apply at least to the head of the company and the members of the board and the supervisory board. Article 373 of the Law on Companies elaborates on the content of the remuneration policy.
- Company remuneration policy report. Article 233 of the Republic of Lithuania Law on Financial Reporting of Companies sets out the requirements for the content of a company remuneration policy report.
The Company Law stipulates that the drawing up of the draft remuneration policy, the drawing up of the draft remuneration policy report and the publishing of the remuneration policy and the remuneration policy report on the website of the public limited liability company whose shares are admitted to trading on a regulated market are the responsibility of the head of the company. After the board approves the company’s annual statement, the general meeting of shareholders may adopt a decision to endorse the remuneration policy report (which is part of the annual statement). The endorsement of the general meeting of shareholders does not indemnify the board in respect of the decision made. Where the general meeting of shareholders decides not to endorse the remuneration policy report, when approving the following year’s remuneration policy report the board explains how the arguments for not endorsing the report put forward by the general meeting of shareholders have been accounted for.
The remuneration policy of companies must be approved at the next regular general meeting of shareholders of the public limited liability company whose shares are admitted to trading on a regulated market.
Before the company’s remuneration policy is approved by the next regular general meeting of shareholders, remuneration to the head of the company and the members of its board and supervisory board is paid in accordance with the remuneration practices in place prior to the entry into force of these amendments to the Law on Companies (6 July 2019).
The remuneration policy report must be drawn up and included in the company’s annual statement when drawing up the company’s financial statements for 2020.
- Requirements for company transactions with a party concerned. The amendments to the Law on Companies supplement Article 372(10) with a requirement that the company’s annual statement must additionally indicate the sum of the values of all transactions concluded in the course of usual economic activity with the same party concerned within a financial year.
- Regulation of the activities of proxy advisors. The Republic of Lithuania Law on Markets in Financial Instruments (hereinafter – the Law), transposing the provisions of the Directive (EU) 2017/828 of the European Parliament and of the Council of 17 May 2017 amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement, regulates the activities of proxy advisors that are subject to the supervision of the Bank of Lithuania.
Prior to these amendments related to the implementation of the Directive, the activities of proxy advisors were not regulated by the Lithuanian law. The meaning of a proxy advisor was defined along with the adopted amendments.
A proxy advisor may be a legal person, another organisation or unit that analyses, on a professional and business basis, information disclosed by public limited liability companies whose shares are admitted to trading on a regulated market and, if needed, other information of such companies in order to provide investors with study results, consultations or voting recommendations necessary to make informed decisions on the exercise of their voting rights.
Article 414 of the Law specifies new responsibilities for proxy advisors, relating to the transparency of their activities and publication thereof on their websites. Some requirements are subject to the ‘comply or explain’ principle (referring to a code of conduct/its compliance report), while certain information must be published on a mandatory basis (clear and reasonable explanation why proxy advisors do not apply the code of conduct in its entirety or certain provisions thereof; crucial information referred to in paragraph 4 of the mentioned Article regarding the specificity of the activities of such entities, information on the existing or potential conflicts of interest or business relations, etc.).
The requirements laid down in the Law apply to proxy advisors, to the extent that they provide services to shareholders with respect to shares of companies which have their registered office in a Member State and the shares of which are admitted to trading on a regulated market situated or operating within a Member State.
In implementing the provisions of the Directive, the Law has been supplemented with additional transparency requirements for institutional investors, to the extent that they invest, either directly or through an asset manager, in shares of public limited liability companies admitted to trading on a regulated market, as well as for asset managers, to the extent that they invest on behalf of investors in shares of public limited liability companies admitted to trading on a regulated market. The engagement policy reports of both institutional investors and asset managers, in addition to other information, must contain information on the use of services of proxy advisors. Furthermore, the transparency report of asset managers, in addition to other information, must include information about the use of services of proxy advisors for the purpose of engagement activities.
On bonds
What signs show that bonds are issued?
The concept of bonds is defined in the Republic of Lithuania Law on Companies (hereinafter – the Law on Companies). Article 55(1) of the Law on Companies stipulates that “a debenture of a company shall be a fixed-term non-equity security under which the company which is the issuer of the debentures becomes the debtor of the debenture holder and assumes obligations towards the debenture holder. These obligations must be indicated in the decision to issue debentures.”
The key criteria to establish whether an instrument issued by a company is to be deemed a security (a bond) are the rights conferred by the instrument issued, the liabilities assumed by the issuer and the procedure for issuing and offering the instruments:
(1) persons purchasing bonds are entitled at a pre-determined moment to receive from the issuer an amount consisting of the face value of the bond and annual interest;
(2) bonds as securities have a face value established by the issuer and by a decision of the entity’s management body (the meeting of shareholders or the board) they are issued in series (in issues), i.e. issuing momentarily identical bonds conferring property and non-property rights (Article 2(38) of the Republic of Lithuania Law on Securities and Article 55(3) of the Law on Companies);
(3) there is an objective possibility for the instruments (the bonds) to circulate in the capital market, i.e. not only to buy and sell them freely to other persons but also to ensure secondary public circulation of such securities in regulated markets and in multilateral or organised trading facilities.
In what cases are bonds of private limited liability companies are deemed allotted publicly and non-publicly?
The main piece of legislation regulating the issue of company shares and bonds in Lithuania is the Law on Companies. It sets out a decision-making procedure, the rights conferred by shares and bonds, etc., as well as criteria for when the allotment of shares and bonds is not deemed public. The requirements for public offer of securities and the obligation to publish a prospectus (or an information document) are set in the Republic of Lithuania Law on Securities (hereinafter – the Law on Securities) (Chapter 2) and the directly applicable Regulation (EU) 2017/1129 of the European Parliament and of the Council (hereinafter – the Prospectus Regulation). The Prospectus Regulation defines an offer of securities to the public as a communication to persons in any form and by any means, presenting sufficient information on the terms of the offer and the securities to be offered, so as to enable an investor to decide to purchase or subscribe for those securities. This means that any offer by any means to persons to purchase securities providing information thereon and enabling investors to decide whether to purchase them or not is deemed an offer to the public but the value of the issue, the number of subscribers and other terms are the criteria to decide which issue document (a prospectus or an information document) is to be drawn up (and whether it is subject to at least one exception listed in Article 1 of the Prospectus Regulation).
It should be noted that the legislation of the Republic of Lithuania contains no specific and general definitions of non-public allotment/offer of securities. Criteria of what is not a public offer of shares in a private limited liability company are listed in the Company Law setting out a rule on to whom a private limited liability company may allot its shares. In accordance with Article 2(4) of the Law on Securities, a private limited liability company may not allot its shares to the public but where the shares offered by a private limited liability company or the offer thereof meet at least one of the conditions set out in the Law on Securities and/or the Prospectus Regulation that no prospectus is required when offering securities to the public, the offer of shares to shareholders in that public limited liability company, its employees, creditors, professional investors meeting the criteria laid down in the Republic of Lithuania Law on markets in financial instruments, and informed investors meeting the criteria laid down in the Republic of Lithuania Law on Collective Investment Undertakings for informed investors is not deemed an offer of securities to the public.
Article 55(11) of the Law on Companies regulating the issue of bonds stipulates that a private limited liability company may offer bonds, except for convertible bonds, to the public provided that it fulfils the requirements laid down in that Article. This means that the provisions of Article 2(4) of the Law on Companies apply mutatis mutandis to bonds in private limited liability companies including convertible bonds. This leads to the conclusion that the offer of bonds in private limited liability companies (like in the case of shares) to company shareholders, employees, creditors, professional investors and informed investors where, given the value of the issue and other terms, there is no obligation to draw up a prospectus, may be deemed a non-public offer. Such issues are not bound by the provisions of Articles 55(12) to 55(14) of the Law on Companies relating to audits of financial accounts, the opening of securities accounts and issue documents (where applicable).
It should be noted that where bonds are issued to the public as provided for in Article 55(15) of the Company Law, they are subject to the provisions of the Republic of Lithuania Law on the Protection of Interests of Holders of Bonds in Public Limited Liability Companies and Private Limited Liability Companies obliging issuers to conclude a contract with a trustee representing bond holders (the provisions of that Law do not apply only in the cases listed in Article 3(2)).
Is a public limited liability company on a website publicly offering to purchase its bonds whose value within 12 months does not exceed €1,000,000 (sales value) obliged to publish a prospectus? If not, what minimum information must be published on its website and how can it inform investors about publicly distributed bonds?
The concept of bonds, rights rendered thereby and the issuer’s obligations as well as the procedure for adopting decisions to issue bonds are set out in the Republic of Lithuania Law on Companies. Apart from other things, Articles 55(2) and 55(3) of the Republic of Lithuania Law on Companies stipulate what must be included in a decision to issue bonds such as the nominal value, the annual interest amount or the procedure for calculating that amount, the procedure for paying interest, the redemption date for the bonds and other terms and conditions of the issuance. It should be noted that where a public limited liability company decides to borrow funds when issuing bonds (and employ other means), it must respect not only the provisions of the Republic of Lithuania Law on Companies (Article 55 and others) but also other statutory requirements, e.g. in order not to breach the Republic of Lithuania Law on Financial Institutions, a public limited liability company may issue bonds only with a view to gaining funds for its own needs rather than for relending them, giving them out as loans, etc. because this may be considered to constitute financial institution services.
Obligations relating to the publishing of a prospectus and an information document when publicly offering securities in the Republic of Lithuania are set out in the Republic of Lithuania Law on Securities while any exceptions concerning the drawing up of a prospectus, the procedure for publishing it, the content of a prospectus and other key terms and conditions are stipulated in Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 on the prospectus [...] (hereinafter – the Prospectus Regulation) and respective delegated acts of the European Commission.
Article 5 of the Republic of Lithuania Law on Securities stipulates the securities may be offered to the public in the Republic of Lithuania only where there is a prospectus published in accordance with the procedure laid down in the Prospectus Regulation, except for the exceptions set in the Regulation. In accordance with Article 3 of the Prospectus Regulation, the obligation to publish a prospectus does not apply in the Republic of Lithuania where the total sales value of all securities publicly offered by the issuer in Member States is less than a monetary amount calculated over a period of 12 months not exceeding €8,000,000. The issuer issuing securities of the total value calculated over a period of 12 months falling between €1,000,000 and €8,000,000 must publish an information document before offering securities to the public (Article 7 of the Republic of Lithuania Law on Securities). The content of the information document is stipulated in the requirements for drawing up an information document that must be drawn up when publicly issuing medium-sized issues and concluding medium-sized crowd financing transactions approved by Resolution No 03-173 of the Board of the Bank of Lithuania of 19 September 2019 setting out the requirements for drawing up an information document that must be drawn up when publicly issuing medium-sized issues and concluding medium-sized crowd financing transactions.
A public limited liability company issuing securities of the total value calculated over a period of 12 months that is below €1,000,000 is not subject to statutory disclosure requirements, except for the aforementioned procedural provisions of the Republic of Lithuania Law on Companies, but the issuer may also provide more information about the public limited liability company’s activity and the securities issued including information on possible risks.
We would like to note that the aforementioned requirements only apply where bonds are to be offered to the public only in the Republic of Lithuania. Where the bonds are intended for distribution in other Member States of the European Union, the public limited liability company should scrutinise national statutory requirements applicable in those Member States (they may contain additional requirements for issues of the value under €1,000,000). Preliminary applicable requirements are available in the document National thresholds, below which the obligation to publish a prospectus does not apply (ESMA31-62-1193) published on 2 March 2020 on the website of the European Securities and Markets Authority.
Investors are usually informed about bonds offered to the public on the website of the issuer and/or the issue intermediary. It is not legally forbidden to disclose information to prospective investors using other means but all prospective investors must be given identical information. Moreover, the issue notice should clearly specify where the bonds are distributed to the public (whether it is only in the Republic of Lithuania or in other Member States of the European Union as well).
On prospectus
In what language and what information must be disclosed when allotting securities to existing or former directors or employees?
Article 1(4)(i) of Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Directive 2003/71/EC (hereinafter – the Prospectus Regulation) sets out an exception for publishing a prospectus where securities are offered, allotted or to be allotted to existing or former directors or employees by their employer or by an affiliated undertaking. In accordance with the above provision, it suffices to publish a document containing information on the number and nature of securities, the reasons for offering or allotting them, etc. In this case information is drawn up and communicated to employees by the employer or the affiliated undertaking that offers/allots the securities. Unlike in the case of other exceptions (for instance, the cases listed in points (f) and (g) of Article 1(4)), the Prospectus Regulation does not stipulate the contents of such a document and lays down no further requirements, nor is that right delegated to a competent supervisory authority. Similar information is to be disclosed in the case listed under Article 1(4)(h) of the Prospectus Regulation where dividends are paid out in the form of shares.
When drawing up and providing information we suggest following general linguistic requirements that would apply both to drawing up a prospectus (Article 27 of the Prospectus Regulation) and information where, pursuant to Article 1(7) of the Prospectus Regulation, its content is established by the European Securities and Markets Authority (ESMA31-62-1207). This means that where both the employee and the undertaking whose securities are allotted to employees or managers are established and active in Lithuania, information should be drawn up and published in Lithuanian. Where possible, it is recommended that information also be provided in Lithuanian where the employer is established in another country but it offers/allots securities only to employees of a Lithuanian undertaking or undertakings. However, where the employer or the affiliated undertaking are established outside of Lithuania and where securities are allotted not solely to employees or managers of an undertaking established in Lithuania, information may be published in English.
On drawing up insider lists
In accordance with Article 42(12) of the Republic of Lithuania Law on the Bank of Lithuania, the Bank of Lithuania advises on the Bank’s supervisory competence and takes other preventive steps to avoid possible violations of legislation governing financial markets. With this letter the Bank of Lithuania provides issuers and other entities relating to issuers’ activities (e.g. entities providing advisory, accounting and audit services) with information concerning the drawing up of insider lists.
Article 18 of Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC (hereinafter – the MAR) sets out the requirements for drawing up insider lists. In accordance with Article 18(1)(a) of the MAR, issuers or any person acting on their behalf or on their account shall draw up a list of all persons who have access to inside information and who are working for them under an employment agreement, or otherwise performing tasks through which they have access to inside information, such as advisers, accountants or credit rating agencies (insider list) as well as update the list and provide it to the competent authority upon its request.
The purpose of drawing up insider lists under the MAR is to cover any entity having access to insider information through their activity carried out on behalf or on the account of the issuer. Given the above, not only issuers but also other persons who are to be regarded as persons acting on behalf or on the account of the issuer and having access to inside information must draw up and keep insider lists. It is therefore important to know who, apart from issuers, are obliged under the MAR to draw up insider lists and fulfil related duties.
A matter of drawing up insider lists highlights two different situations and poses two different questions:
firstly, whether persons providing advisory, accounting, audit, credit rating agency and other services to the issuer (hereinafter – service providers) must be included in the insider list drawn up by the issuer;
secondly, whether persons providing advisory, accounting, audit, credit rating agency and other services to the issuer are persons acting on behalf or on the account of the issuer are therefore obliged to draw up an insider list of their own.
Issuer’s obligation to include service providers in the insider list being drawn up
As for the first question (whether persons providing advisory, accounting, audit, credit rating agency and other services to the issuer must be included in the insider list drawn up by the issuer), the answer should be yes, i.e. such persons should be included in the insider list drawn up by the issuer where they gain access to inside information through their activity. It should be noted that in accordance with the MAR provisions (see preamble 57 and Article 18(1)) the insider list drawn up by the issuer must include all persons who, while performing their functions, have access to inside information, irrespective of their relations with the issuer, i.e. working for the issuer under labour relations or otherwise (for example, under an agreement). When drawing up the insider list the issuer must include all data listed in Annexes to Commission Implementing Regulation (EU) 2016/347 of 10 March 2016 laying down implementing technical standards with regard to the precise format of insider lists and for updating insider lists in accordance with Regulation (EU) No 596/2014 of the European Parliament and of the Council (hereinafter – Regulation No 2016/347). As for listing the data on service providers in the insider list drawn up by the issuer, the Bank of Lithuania believes that it would suffice if the issuer included the service provider’s contact person in the insider list indicating all the data provided for in Regulation No 2016/347 while all natural persons acting on behalf of that service provider and having access to inside information should be included in the insider list drawn up by the service provider proper.
Service providers’ obligation to draw up the insider list
As for the second question (whether persons providing advisory, accounting, audit, credit rating agency and other services to the issuer are persons acting on behalf or on the account of the issuer are therefore obliged to draw up an insider list of their own), there is a need to analyse the functions and the role of each group of entities. As certain entities such as advisers, accountants (the concept of accountants used in Article 18(1) of the MAR should also cover auditors) and credit rating agencies are directly referred to in Article 18(1) of the MAR, such entities are to be deemed persons acting on behalf or on the account of the issuer, which means that under the MAR they are obliged to draw up the insider list and fulfil other related requirements. The said advisers may be attorneys, business consultants, tax advisers and credit institutions providing advisory services for the issuer’s benefit and interests, e.g. on IPO, etc.
It should be noted that Article 18(1) of the MAR only gives an indicative list of persons acting on behalf or on the account of the issuer, which is why, apart from the advisers, accountants, auditors and credit rating agencies mentioned above, the obligation to draw up and keep insider lists may also arise for other persons providing services to the issuer. When deciding on the obligation for service providers to draw up and keep insider lists, one should evaluate on a case-by-case basis, firstly, whether the person in question has access to inside information and, secondly, whether that person acts on behalf or on the account of the issuer.
To sum up the above, it should be noted that in cases where:
- the issuer receives certain services and
- service providers are to be deemed persons acting on behalf or on the account of the issuer (e.g. persons providing advisory, accounting, audit and credit rating agency services), and
- such persons are given access to inside information to enable them to provide the services,
the obligation to draw up the insider list falls both on the issuer and the service provider.
In this context, it also makes sense to explain the application of the provisions of Article 18(2) of the MAR stipulating that where another person acting on behalf or on the account of the issuer assumes the task of drawing up and updating the insider list, the issuer remains fully responsible for complying with Article 18 of the MAR. Having regard, among other things, to the position presented by the ESMA in its questions and answers, the Bank of Lithuania believes that the said provision of Article 18(2) of the MAR should be construed as meaning that the issuer is fully responsible for fulfilling the obligations under Article 18 of the MAR only where another person draws up and updates the insider list while performing the task of drawing up and updating the insider list explicitly delegated to them by the issuer for that very purpose. Where persons acting on behalf or on the account of the issuer have the obligation to draw up and update insider lists under Article 18(1) of the MAR like, for instance, persons providing advisory, accounting, audit and credit rating agency services, it is those persons who are responsible for fulfilling their obligations under Article 18 of the MAR and the provision in Article 18(2) of the MAR under which the issuer is responsible for complying with Article 18 of the MAR does not apply. In this case the obligations to draw up and update insider lists of their own in accordance with Article 18(1) of the MAR and the provisions of Regulation No 2016/347 are the responsibility of such service providers proper. At the same time, this does not eliminate the issuer’s obligation to draw up their own insider list and include persons providing advisory, accounting, audit and credit rating agency services who through their activities have access to inside information. As already mentioned, in accordance with the principles of reason and balanced administrative burden, the Bank of Lithuania believes that when drawing up the insider list the issuer may include the data of an undertaking providing certain services to the issuer and give only the data of a contact person for that undertaking as required under Regulation No 2016/347.
It should be noted that in this letter the Bank of Lithuania gives examples of possible cases when an entity is obliged to draw up the insider list and fulfil other related requirements but the list of such cases is non-exhaustive. The Bank of Lithuania encourages entities to take account of their activities and their relations with the issuer on a case-by-case basis (whether the activities are performed on behalf or on the account of the issuer) as well as the nature of information received (whether information received is inside information) and, where reasonable, to align their activities with the requirements of Article 18 of the MAR. Issuers are also advised to inform entities providing relevant services to them and deemed persons acting on behalf or on the account of the issuer about obligations under Article 18 of the MAR for persons acting on behalf or on the account of the issuer to draw up and update insider lists. Should you have any questions, please contact the Bank of Lithuania for further advice.
Publishing of information on managers transactions
How to fulfil the obligation of persons discharging managerial responsibilities and persons closely associated with them to notify in due course any transactions concluded with shares, debt securities or derivatives?
Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (hereinafter – MAR) sets out the obligation for persons discharging managerial responsibilities and persons closely associated with them to notify every transaction involving the issuer’s shares or debt securities, derivatives or other related financial instruments. Such notifications are to be submitted to the issuer and the supervisory authority no later than within 3 working days following the transaction.
The obligation to notify transactions of the issuer’s persons discharging managerial responsibilities and persons closely associated with them applies to any subsequent transaction once a total amount of EUR 5,000 has been reached within a calendar year. This threshold is calculated by adding without netting all transactions of the person.
When a person discharging managerial responsibilities and a person closely associated with them notifies a done transaction to the issuer, the latter must ensure that information is disclosed to the public no later than within 3 working days. It is important to note that the deadline for submitting information is counted from the date of the transaction rather than from the moment when the issuer receives the notification of the transaction concluded. Persons discharging managerial responsibilities and persons closely associated with them should therefore notify the issuer as soon as possible after the transaction is concluded so as to enable the issuer to publish the information in due time. The issuer must make the information available to the public and immediately enter it in the Central Regulated Information Base.
Persons discharging managerial responsibilities and persons closely associated with them must notify transactions concluded to the Bank of Lithuania by email: tl.bl@dam.
Notifications are drawn up and published in accordance with the requirements laid down in the MAR, Commission Implementing Regulation (EU) No 2016/523 and the Rules on the Disclosure of Information approved by the Board of the Bank of Lithuania.
Is the Chief Financial Officer (Head of the Accounting Unit, Financial Director) deemed to be a person discharging managerial responsibilities within the meaning of the Market Abuse Regulation and must report each transaction relating to the issuer’s securities?
Given the significance of their role and decisions to the company, the Chief Financial Officer (Head of the Accounting Unit, Financial Director) is to be deemed a person discharging managerial responsibilities and their transactions should be reported in accordance with the procedure laid down in Article 19 of Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (Market Abuse Regulation). The position of the Bank of Lithuania in this regard is expressed in the Disclosure Guidelines approved by Decision No 241-19 of the Director of the Supervision Service of the Bank of Lithuania of 19 January 2019 where paragraph 102 stipulates that, in accordance with Article 3(25)(b) of the Market Abuse Regulation, persons discharging managerial responsibilities may be, for example, heads of key structural units having power to take managerial decisions affecting the entire company or capable of significantly influencing the decision-making process (e.g. Financial Director, Head of the Legal Unit, Personnel Manager, Head of the Business Development Unit, Head of the Risk Management Unit, etc.). It is also noted that when in doubt and especially where a person in a certain position disposes of the company’s financial instruments or intends to purchase such financial instruments, it is recommended to consider such a person, having regard to the scope of the Market Abuse Regulation, a person discharging managerial responsibilities. The CFO position is directly referred to in paragraph 2(a) of the Annex to Commission Implementing Regulation (EU) 2016/523 of 10 March 2016 laying down implementing technical standards with regard to the format and template for notification and public disclosure of managers’ transactions in accordance with Regulation (EU) No 596/2014 of the European Parliament and of the Council. Given the above, the Chief Financial Officer (Head of the Accounting Unit, Financial Director) should be included in the group of persons discharging managerial responsibilities.
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