Law 5/2021 of 12 April amending the Consolidated Text of the Capital Companies Law regarding the promotion of long-term shareholder engagement in listed companies

OFFICIAL STATE GAZETTE
No. 88 Tuesday, 13 April 2021 Sec. I. Page 40928
I. GENERAL PROVISIONS
HEAD OF STATE
5773 Law 5/2021, of 12 April, amending the Consolidated Text of the Capital Companies Law, approved by Royal Legislative Decree 1/2010, of 2 July, and other financial regulations, regarding the promotion of long-term shareholder engagement in listed companies. (Correction of errors).

FELIPE VI
KING OF SPAIN

To all who see and understand this.
Know: That the General Courts have approved and I come to sanction the following law:

PREAMBLE
I

This Law aims to transpose into the Spanish legal order 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 in listed companies.

The Directive was approved after nearly five years of negotiations between European institutions, demonstrating the relevance of some of the novelties it incorporates. Its ultimate objective is, as its title indicates, that shareholders participate more in the long term in the listed companies in which they invest. The Commission's Action Plan of 2012, titled "European Company Law and Corporate Governance – A modern legal framework for more active shareholder involvement and corporate sustainability," from which this legislative act derives, stated that "an effective and sustainable shareholder commitment is one of the cornerstones of the corporate governance model of listed companies, which depends, among other things, on internal control mechanisms and balance between the different bodies and stakeholders. If, for example, the majority of shareholders maintain a passive attitude, do not seek interaction with the company, and do not exercise their right to vote, the functioning of the current corporate governance system is less effective."

That same Commission Action Plan adds that "the interest of workers in the viability of their company is an aspect that must be considered when designing any appropriate corporate governance framework (...) The research carried out in the preparation of the 2011 Green Paper and the responses to it indicate that worker participation systems in capital could play an important role in increasing the proportion of shareholders with a long-term vision."

Indeed, short-term investment strategies tend to negatively affect the sustainable development potential of listed companies. On the one hand, the pressure to generate and distribute financial profits in the short or even very short term pressures the management of listed companies to focus excessively on quarterly financial results. By focusing fundamentally on maximizing financial results in the short or very short term, listed companies often adopt corporate strategies that only seek to revalue their shares as soon as possible. Some measures, such as share buyback programs or corporate restructurings, generate ephemeral financial benefits that, however, may mortgage the sustainable future of the listed company and its shareholders, workers, creditors, and customers, thereby harming the sustainability of the company.

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OFFICIAL STATE GAZETTE
No. 88 Tuesday, 13 April 2021 Sec. I. Page 40929

Certainly, those listed companies with a shareholder base oriented mainly to short-term returns have incentives to divert resources away from long-term productive investment, which would contribute to improving the sustainability and future profitability of such listed companies. Various studies demonstrate that listed companies seeking to maximize their short-term results usually invest less in R&D+i. This lower investment in turn affects the future development of the company by hampering its capacity to adapt to the market, competitiveness, position in international markets, etc.

Another potential adverse effect of short-term investment strategies is that they influence the listed company to focus essentially on financial performance to the exclusive benefit of its shareholders. The other non-financial objectives of the listed company and the interests of other stakeholder groups, and especially its workers, thus move to the background of corporate strategy. On the contrary, long-term investment strategies naturally integrate other non-financial objectives, such as worker well-being and environmental protection, guaranteeing the long-term sustainability of companies. And indeed, those companies that are viable in society and the environment are also more economically sustainable in the medium and long term. The same objective is pursued by the recent Law 11/2018, of 28 December, amending the Commercial Code, the Consolidated Text of the Capital Companies Law, and the Audit Law, regarding non-financial information and diversity.

This type of short-term behavior in listed companies can also have a very harmful aggregate effect on the economy and society as a whole. Indeed, according to numerous studies, short-term investment policies not only affect the sustainability and profitability of companies considered individually, but can also generate relevant risks for the stability of capital markets and the economy. This so-called "quarterly capitalism" (referring to the pressure to maximize financial results in each of the quarterly financial reports) has effects on economic growth, employment, and capital productivity. The 2008 financial crisis occurred, among other factors, as a result of a short-term view of the economy. The growth model prior to the crisis, being based on the need to generate profits in the short term, generated a risky and excessively leveraged business model.

This diagnosis is expressly collected in the Directive itself, stating in its recitals that "the financial crisis has shown that, in many cases, shareholders have supported excessive short-term risk-taking by managers. Furthermore, there is clear evidence that the current level of 'monitoring' of the companies in which they invest and the engagement of institutional investors and asset managers is often inadequate and focuses too much on short-term profitability, which can lead to management and corporate performance that are far from optimal. (...) Effective and sustainable shareholder engagement is one of the cornerstones of the corporate governance model of listed companies, which depends on the control and balance system between the different bodies and the different stakeholders. Greater shareholder involvement in corporate governance constitutes one of the instruments that can contribute to improving the financial and non-financial performance of these companies, also with regard to environmental, social, and governance factors, in particular those mentioned in the Principles for Responsible Investment supported by the United Nations. Furthermore, greater involvement by all stakeholders, particularly workers, in corporate governance constitutes an important factor in ensuring a more long-term approach by listed companies, which should be encouraged and taken into account."

The same conclusion is also shared by various international bodies such as the OECD and the G20 through the 2015 Corporate Governance Principles, which recognize the promotion of long-term investments as one of the objectives of corporate governance, or the United Nations Organization through the aforementioned Principles for Responsible Investment, which state that an economically efficient and financially sustainable system on a global scale will reward responsible investment in the long term and benefit the environment and society as a whole.

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OFFICIAL STATE GAZETTE
No. 88 Tuesday, 13 April 2021 Sec. I. Page 40930

Likewise, a recent report by the European Securities and Markets Authority (ESMA) has highlighted the relationship between long-term investments and the social and environmental sustainability of companies. According to this "Report on Undue Short-Term Pressure on Corporations," of 18 December 2019, long-term investment usually takes into account elements and objectives related to sustainability more. Indeed, according to ESMA, social and environmental sustainability objectives are closely related to long-term investments. Consequently, the proper management of social and environmental risks is aligned with the objectives of long-term investors. For this reason, ESMA believes that the long-term engagement policy of management companies and investment service companies should also consider environmental, sustainability, and governance indicators.

Likewise, at its fiftieth celebration, the World Economic Forum in Davos approved in its final conclusions a set of ethical principles to guide companies in the era of the Fourth Industrial Revolution, to advance towards a capitalism where the objective of companies goes beyond profit and generates value for all its stakeholders. Based on the premise that a company is more than an economic unit generating wealth, and attends to human and social aspirations within the framework of the social system as a whole, it highlights that performance should not be measured only as shareholder benefits, but also in relation to the fulfillment of environmental and social objectives.

Therefore, the effects of the Directive on the promotion of long-term shareholder engagement clearly transcend the scope of corporate governance and corporate profitability, and can have a positive impact on the economy and society as a whole.

II

The transposition of the Directive into the Spanish legal order will bring improvements in the field of corporate governance of listed companies in Spain. It must be taken into account that our model is, at present, one of the most recognized internationally. These improvements revolve around two axes: on the one hand, improving the long-term financing received by listed companies through capital markets; and on the other hand, increasing transparency in the conduct of capital market agents and regarding the remuneration of directors or the carrying out of transactions between the company and its related parties.

To this end, the recent reforms carried out in recent years in this matter in Spain are taken as a starting point, which have placed national standards at the highest level of compliance with the International Principles of Good Governance, compared to other countries. These reforms were proposed by the Commission of experts on corporate governance and were embodied mainly in Law 31/2014, of 3 December, amending the Capital Companies Law for the improvement of corporate governance. The application of the aforementioned Law has been, in general, satisfactory, so the transposition of the Directive starts from this legal framework as much as possible. Furthermore, legal certainty and the stability of commercial regulations are principles and values that must be preserved, avoiding unnecessary and frequent legislative modifications, to increase legal certainty, reinforce the confidence of all agents, and thus facilitate productive long-term investments in Spanish listed companies. Likewise, some of the solutions collected in the Directive, such as the approval of the remuneration policy of directors by shareholders, were already regulated in the aforementioned Law 31/2014 with a higher level of requirement than in the Directive being transposed here.

III

This Law incorporates as novelties the provisions of the Directive on the transparency policy of institutional investors, asset managers, and vote advisors.

To this end, this Law modifies Law 35/2003, of 4 November, on Collective Investment Institutions, and Law 22/2014, of 12 November, regulating venture capital entities, other closed-type collective investment entities, and management companies of closed-type collective investment entities, and amending Law 35/2003, of 4 November, on Collective Investment Institutions. The legal modification aims to oblige the management companies of these institutions and entities to draw up and publish an engagement policy. This policy must explain, among other aspects, how they integrate shareholder engagement into their investment policy and how they have exercised, if applicable, voting rights in the general meetings of shareholders of the companies in which they invest, especially in the most important votes, and, if applicable, the use of vote advisor services.

Since Directive 2017/828 includes among asset managers investment service companies that provide portfolio management services to investors, it is necessary to modify the Consolidated Text of the Securities Market Law, approved by Royal Legislative Decree 4/2015, of 23 October, to provide for this obligation of investment service companies, in a manner analogous to what is established for the management companies of collective investment institutions.

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OFFICIAL STATE GAZETTE
No. 88 Tuesday, 13 April 2021 Sec. I. Page 40931

It is true that the regulations in force until now included some similar information obligations, albeit in a fragmented manner. However, the Directive is more exhaustive and applies to various types of institutional investors, making it necessary to modify the current legal regime.

Another obligation related to this and incorporated by the Law is that imposed on asset managers towards the institutional investors whose assets they manage. With the legal reform, they must annually inform the entities with which they have concluded these asset management agreements, among other aspects, of the way in which their investment strategy and its application adjust to said agreement and contribute to the medium and long-term performance of the assets, among other aspects.

IV

Secondly, the Directive expressly recognizes the right of companies to identify their shareholders, with the aim of allowing direct communication with them to facilitate the exercise of their rights and their engagement in the company. Our legal regime for companies recognizes this right also to companies with respect to all their shareholders, without requiring that only shareholders with a minimum shareholding can be identified. The anonymous nature of the partners of joint-stock companies is deemed with respect to third parties as a consequence of the capitalist and not personal nature of the company and the privilege of limiting liability only to the capital contributed; but it is not consubstantially applicable at the internal level. Therefore, the Law maintains this right in favor of companies without limitation, despite the Directive allowing Member States to regulate that only shareholders holding more than a certain percentage of shares or voting rights, which cannot exceed 0.5%, can be identified.

Regarding this, this Law does modify an important aspect of this right; thus, article 497 of the Consolidated Text of the Capital Companies Law, approved by Royal Legislative Decree 1/2010, of 2 July, recognizes the right to identify shareholders, understanding by such in companies whose shares are represented by book entries, the persons who appear legitimized in the entries of the accounting register, as provided in article 13 of the Consolidated Text of the Securities Market Law, approved by Royal Legislative Decree 4/2015, of 23 October. The peculiarity of regulated markets in Spain, such as the stock exchange, is that they are systems of indirect shareholding and two-tier. Derived from all the above, it is not infrequent that the formal shareholder recognized in the register does not correspond to the ultimate beneficial owner of the economic and political rights associated with said shares. This is the case, for example, of final investors who do not have an account as an entity participating in the central securities depository and who acquire shares through intermediary financial entities. In these cases, the intermediary entity acts in its own name but on behalf of those investors, who are its clients, and who bear the risk of the investment. This situation was already expressly recognized by the Consolidated Text of the Capital Companies Law, whose article 524 allows that, in these cases, the financial intermediary may exercise its voting right in a company in a fractional or divergent manner on behalf of the various indirect holders of the shares.

The Directive recognizes the right to identify real shareholders with the aim of placing them in better conditions to exercise their rights, for which it establishes the mechanisms that allow companies to identify the ultimate beneficiaries, since the purpose of the Directive is not to alter the legal regime of securities holding that exists in each Member State.

In view of all the above, this Law adopts an intermediate and balanced solution to make this right effective. On the one hand, it recognizes the right of companies to identify not only the formal shareholders, but also the ultimate beneficiaries. And secondly, it expressly maintains unchanged the current Spanish system of securities registration. Finally, the Law directly and exceptionally empowers the holder of the Ministry of Economic Affairs and Digital Transformation to develop by regulation other technical and formal aspects necessary regarding the identification of shareholders and ultimate beneficiaries, an empowerment justified by the eminently technical character and by the difficulty of responding in the Law to the technical and operational problems that may arise with the practical application of these novel provisions, thus complying with the requirements collected in article 129.4 of the Common Administrative Procedure Law.

V

Thirdly, the Directive also deals with vote advisors, also known as proxy advisors, which have acquired great importance in the functioning of the general meetings of shareholders of listed companies in recent years. These entities providing professional advice to investors to exercise their voting rights in general meetings of shareholders are regulated for the first time in an act of the European Union. An increasing number of investors hire the services of these professionals to determine how to exercise the voting rights associated with their investments. Their growing importance is due, among other factors, to the obligation for institutional investors to diligently exercise the economic and political rights associated with their investments. In Spain, the Olivencia Report of 1998 already recommended that institutional investors actively exercise political rights in listed companies whose shares they held and inform their participants and final investors of the general criteria that, if any, they followed when exercising such rights.

The growing importance of vote advisors and the potential conflicts of interest in which they may incur recommends their regulation at the European level. In Spain, their regulation could be carried out through the modification of various laws, either in the field of corporate law, collective investment, or securities markets. However, it seems more appropriate that the legal reform be addressed in the Consolidated Text of the Securities Market Law, since the obligations imposed on them are of transparency and do not innovate the company contract, and the basic information they use to prepare their recommendations is the periodic information also regulated in said Law.

cve: BOE-A-2021-5773
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OFFICIAL STATE GAZETTE
No. 88 Tuesday, 13 April 2021 Sec. I. Page 40932

VI

Fourthly, the right of shareholders to pronounce themselves on the remuneration of administrators (say on pay) has been one of the most important novelties in corporate governance at the international level in recent years. In 2002, the United Kingdom obliged British listed companies to publish an annual remuneration report and submit it to a consultative vote of the general meeting. Since then, this right has been introduced, with different variations, in various jurisdictions, notably the United States and, since 2014, also in Spain.

The Directive now extends this mechanism to the entire European Union, but with sufficient flexibility to "respect the diversity of the corporate governance systems existing in the Union, which are a reflection of the different points of view of the Member States on the role of companies and the bodies responsible for determining the remuneration policy and the specific remuneration of each administrator." Thus, for example, the Directive allows Member States to regulate that the remuneration policy may be valid for up to four years before being approved by the general meeting of shareholders, or that the vote of the latter has merely consultative effects.

The national regulation in force until now is more demanding than the Directive, establishing a term of three years and configuring the vote of the general meeting of shareholders as binding. The application of this regime has been positive from the point of view of the majority of listed companies, investors, and financial agents, so this Law maintains this regime unchanged in its principal elements.

cve: BOE-A-2021-5773
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