SHRD II - CONSOB approves new rules for remuneration reporting, related parties transactions and engagement policies

CONSOB approved regulatory changes to adapt the Italian second-level regulation to the Shareholder Rights Directive II.¹

The key regulatory changes² concern: 

• Remuneration Reporting,
• Related-Party Transactions, and
• Engagement policies of asset managers, proxy advisors and institutional investors.

Remuneration reporting

CONSOB has approved new rules regarding the remuneration policy (Section I) and  remuneration report (Section II) of the "Relazione sulla politica in materia di remunerazione e sui compensi corrisposti" that issuers are obligated to disclose. 

The most significant new items are  the following:

•  The remuneration policy must include (i) an explanation of how the policy takes into account long-term values like the working conditions of the company’s employees and the company’s sustainability; (ii) the criteria for determining the remuneration of the statutory auditors; and (iii) any peers taken into account in setting the issuer’s remuneration policy.
• The variable component (or a portion thereof) of remuneration must be: (i) awarded with respect to clear, comprehensive and differentiated criteria and to the achievement of financial and non-financial targets; and (ii) temporarily derogated only in the exceptional cases specified in the policy.
• Remuneration paid must be compliant with the remuneration policy. The remuneration report must: (i) show the results achieved against the established performance targets as well as how such criteria were applied; (ii) show the change of each director³'s annual remuneration over the previous five financial years or from listing, if shorter; and (iii) any ex-post adjustments to variable compensation (e.g. malus and clawback).  
• Both the remuneration policy and report have to be made available on issuers' website for at least ten years and shall not disclose sensitive personal data of managers and their family members.⁴

Failure to comply with the rules on remuneration reporting may result in: (i) an administrative fine of up to Euro 10 million for the issuers and/or (ii) an administrative fine between Euro 10 thousand and Euro 2 million for persons discharging administrative, management or control functions whose conduct contributed to the issuer's compliance failure.  

Related-Party Transactions

CONSOB has approved new rules regarding related party transactions ("RPT")⁵, which will be effective starting July 1, 2021.

The new RPT rules include: 

• New definition of "related-party": in lieu of the previous definition, related-party will now be defined by reference to the definition provided under the international accounting principles (IAS 24), which can change from time to time⁶. 
• Directors' abstention from voting: directors having a conflicting interest in the context of a RPT are now prohibited from voting on the resolution approving the relevant RPT.⁷ CONSOB is expected to provide guidance on the application of such provision by releasing an updated version of its 2010 RPT communication No. 10078683.
• Reserved board competence to approve large RPTs: the exclusive competence of the board of directors to resolve upon large RPTs  has been extended to recently-listed companies, smaller companies and issuers of widely-distributed shares, due to their more frequent engagement in inadequately supervised RPTs. 
• Exemptions: among other transactions, the following are exempt from the new rules, (i) RPTs involving and granting the same conditions to all the shareholders; (ii) resolutions on remuneration of executive directors and key managers, as long as (a) they are compliant with the remuneration policy approved by the annual shareholders' meeting, and (b) the remuneration is quantified based on non-discretional criteria; and (iii) the obligation upon the issuers (and no longer an option) to exempt from their RPT procedure the "transactions for smaller amounts," which issuers are now obligated to exempt from their RPT policies subject to differentiated criteria for identifying such transactions at least based on the nature of the counterparty.
• Reporting on exempted large RPTs to independent directors: issuers are now required to establish procedures through which independent directors in charge of advising on RPTs⁸ receive: (i) at least annually, the information regarding the large RPTs that have been exempted from the RPT procedure; and (ii) verify the correct application of the exemptions applied to large RPTs qualified as "regular transactions" and RPTs carried out at "market or standard equivalent terms" (this information being simultaneously transmitted to CONSOB and independent directors).
• Exemptions: among other transactions, the following are exempt from the new rules, (i) RPTs involving and granting the same conditions to all the shareholders; (ii) resolutions on remuneration of executive directors and key managers, as long as (a) they are compliant with the remuneration policy approved by the annual shareholders' meeting, and (b) the remuneration is quantified based on non-discretional criteria; and (iii) the obligation upon the issuers (and no longer an option) to exempt from their RPT procedure the "transactions for smaller amounts," which issuers are now obligated to exempt from their RPT policies subject to differentiated criteria for identifying such transactions at least based on the nature of the counterparty.
• Reporting on exempted large RPTs to independent directors: issuers are now required to establish procedures through which independent directors in charge of advising on RPTs receive: (i) at least annually, the information regarding the large RPTs that have been exempted from the RPT procedure; and (ii) verify the correct application of the exemptions applied to large RPTs qualified as "regular transactions" and RPTs carried out at "market or standard equivalent terms" (this information being simultaneously transmitted to CONSOB and independent directors).

Engagement policies of asset managers, proxy advisors and institutional investors

Asset managers are required to publish on their website (a) their engagement policy (and amendments thereof) within 15 days from their adoption (or by February 28, 2021 when the engagement policy rule is initially implemented), and (b) a report on the implementation of their engagement policy by February 28 of the following year and of each year thereafter.

Proxy advisors are required to publish on their websites a report in relation to the performance of their research, advice and voting recommendations by February 28 of each year. 

Pursuant to the Corporate Governance Code⁹, issuers shall adopt an engagement policy vis-à-vis their shareholders, taking into account the engagement policies prepared by institutional investors and asset managers, indicating, at least: timing, methods, and persons in charge of the dialogue with shareholders.

Conclusion

We recommend that issuers:

1. promptly review both their remuneration policy and remuneration report ahead of their 2021 annual shareholders' meeting, as the new rules are immediately effective. In particular, issuers should assess whether their 2021 annual shareholders' meeting needs to reapprove the remuneration policy. If the remuneration policy was approved in 2020 and it had a duration of at least 2 years, issuers can forego submitting the policy to their shareholders' meeting only if the ongoing review of the policy does not materially change its provisions;
2. start reviewing their RPT procedure and approve a revised RPT procedure no later than June 2021. We expect that CONSOB guidelines on the interpretation of certain key items will be published only later in 2021; and
3. start preparing an engagement policy by taking into account the engagement policies of institutional investors and asset managers to be adopted by February 28. 

_{1 Directive (EU) 2017/828, amending Directive No. 2007/36/CE.
2 CONSOB Resolution no. 21623 of December 10, 2020, CONSOB Resolution no. 21624 of December 10, 2020 and CONSOB Resolution no. 21625 of December 10, 2020. 
3 Or any other person whose remuneration has to be indicated on an individual basis.
4 Personal data revealing racial or ethnic origin, political opinions, religious or philosophical beliefs, or trade union membership, and the processing of genetic data, biometric data for the purpose of uniquely identifying a natural person, data concerning health or data concerning a natural person's sex life or sexual orientation.
5 CONSOB Regulation no. 17221 of March 12, 2010, as amended and supplemented from time to time. 
6 Pursuant to the current version of the IAS 24: (i) a related party is a person or an entity that is related to the reporting entity; (ii) a person or a close member of that person's family is related to a reporting entity if that person has control, joint control, or significant influence over the entity or is a member of its key management personnel; and (iii) an entity is related to a reporting entity if, among other circumstances, it is a parent, subsidiary, fellow subsidiary, associate, or joint venture of the reporting entity, or it is controlled, jointly controlled, or significantly influenced or managed by a person who is a related party.
7 The "directors involved in a RPT" are counted as present for the purpose of determining whether the meeting is quorate and are entitled to participate to the board's discussion but they are not counted as present for the purpose of determining whether the majority of directors attending the meeting have approved the resolution.
8 Large RPTs are transactions in which at least one of the following materiality indexes is higher than the 5% threshold: (i) countervalue materiality index; (ii) asset materiality index; and (iii) liabilities materiality index.  9 2020 Italian Codice di Autodisciplina issued by the Italian Stock Exchange (Borsa Italiana), applicable starting from the first financial year following December 31, 2020.
9 2020 Italian Codice di Corporate Governance issued by the Italian Stock Exchange (Borsa Italiana), applicable starting from the first financial year following December 31, 2020.}

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