On paper, SRD II seems pretty simple, as it aims to facilitate communication between issuers and investors. Nonetheless, the first challenge is often to identify the information to share regarding annual general meetings (AGM) by the issuer itself, although for this article we will assume that this is adequately produced, and move on the next steps.

So, we assume the issuer has the information, and has to pass it to the different intermediaries. The normal process entails that the issuer informs its Central Securities Depositary (CSD), its issuing agent. The CSD connects with its clients, the custodian banks. These custodians pass the information down the chain, until it finally reaches the “ultimate” shareholder, who often is an individual, although it could be a fund, a pension plan or any other legal entity. This requires that at any time, all investors (including ones who may only possess one share) can be identified.

Then a second challenge arises: investors might wish to vote. So far, unfortunately, when (and if) the information reaches the investors, the process often stops there. Investors, unless particularly willing to be active, rarely vote and do not take part in the AGM, which might even be held in a different Member State as a further deterrent. With SRD II, financial intermediaries will have to track information recipients, propose voting options, and ensure that a mechanism to vote exists for all investors, either through traditional voting, or via a proxy arrangement that must be created and formalized.

As a third challenge, when firms manage client assets, they now have to define and disclose their engagement policy (begun in June 2019), explaining how financial intermediaries, asset managers, and other parties involved will vote when they represent investors. UCITS and AIFs are directly impacted by this aspect of the directive, but other forms of collective management of assets (typically discretionary portfolio managers) should also consider if, and how, they might draft a similar voting policy.

The fourth and probably most complex challenge is related to the fact that, at any moment, issuers can ask to identify who their shareowners are. The underlying difficulty lies in the criteria proposed by the EU Directive: identification might be subject to an ownership threshold of 0.5%. Member States might chose to go below that minimum, down to ownership of one share, with identification to be reported within 24 hours. In addition to the lack of harmonized definition of the notion of shareholder itself, the relevant percentage of detention to identify shareholders therefore varies from one Member State to the other.

Individually, the four previously-mentioned challenges would already weigh heavily on any organization, but in the case of shareholders’ rights regulation, these challenges are combined, with the additional twist that, at the present stage, not all useful templates are fully developed or available to the stakeholders, especially smaller ones.