On 16 April 2020, the Belgian Parliament adopted the Act implementing the Shareholder Rights Directive II of 17 May 2017 (SRD II), introducing new obligations for listed companies. The European legislator sought to strengthen the position of shareholders and to encourage their long-term engagement by involving them in the remuneration policy and by making transactions with related parties subject to stricter rules.

Here we analyse the new remuneration policy ("say on pay") and remuneration report, as well as the rules for transactions with related parties. Other obligations under SRD II mainly relate to the engagement of shareholders in listed companies (entering into force on 3 September 2020) and the functioning of proxy advisors.

The remuneration policy: say on pay

The shareholders of listed companies will have a say in the remuneration of the board members, the members of the (formal) management board, the persons in charge of the daily management, and the persons in charge of the management (i.e. the members of an (informal) management committee). On the one hand, shareholders are given the ex ante right to determine the company's remuneration policy by means of a binding vote. On the other hand, the board is required to account for the remuneration granted in a more detailed manner ex post. At present, the remuneration policy, as part of the remuneration report, is not as such subject to a separate vote. This will change: the remuneration policy will also be submitted to the general shareholder meeting for approval, in relation to every material change and in any case at least every four years. If the remuneration policy is not approved, remuneration must be paid in accordance with the most recently approved remuneration policy or, if there is no approved remuneration policy, the existing practices.

Under current law, the remuneration of board members is already the exclusive competence of the general shareholder meeting. The most significant change therefore lies in the remuneration of the persons in charge of the (daily) management. Until now, their remuneration has fallen under the exclusive competence of the governance body responsible for their appointment. In future, the general meeting will also be able to exert its influence on this. Although the relevant governance body remains competent to determine the remuneration of these persons, it will have to do so in accordance with the remuneration policy approved by the general meeting. A deviation from the remuneration policy is only possible in exceptional circumstances (e.g. the appointment of a crisis manager if the company faces severe financial difficulties) and in accordance with the procedure laid down in the approved remuneration policy.

The remuneration policy must explain how it contributes to the company's business strategy, long-term interests and sustainability. The policy includes the different components of fixed and variable remuneration that can be granted, and indicates the financial and non-financial criteria that are used for granting variable remuneration (including, where appropriate, criteria relating to corporate social responsibility). If the company grants share-based remuneration, the policy specifies the vesting periods, among other things. In addition, the policy contains information relating to notice periods, supplementary pension or early retirement schemes and severance payments. Finally, the policy explains how the pay and employment conditions of the company's employees were taken into account when establishing the remuneration policy.

To ensure that the remuneration policy is implemented correctly, from now on the remuneration report must include various additional categories of information:

  • Information on an individual basis: The information in the remuneration report for the members of the management board and all persons in charge of daily management must also be disclosed on an individual basis. For persons in charge of management, it is still sufficient for the information to be disclosed on an aggregated basis, except for severance payments and (options on) shares. The proposal to disclose their remuneration on an individual basis did not make it to the final text.
  • Justification in the light of long-term performance: The report explains how the total amount of remuneration is in line with the established remuneration policy, and in particular how it contributes to the long-term performance of the company;
  • Comparison with average compensation of employees: In order to provide some guidance on the interpretation of the remuneration report, the annual change in remuneration, the performance of the company and the average remuneration of the other employees should also be presented. These figures should cover a period of at least five financial years, presented together in a manner that permits shareholders to compare them easily. Furthermore, the report should present the ratio between the highest remuneration and the lowest remuneration within the company.

The European Commission has published draft non-binding guidelines with a view to standardising the presentation of the remuneration report.

The deadline for applying the new rules will be the 2021 annual general meeting for most listed companies. They must draw up their remuneration reports in the new format for the first time in respect of the first financial year started after 30 June 2019. The first remuneration policy must be submitted to the general meeting approving the annual accounts for the same financial year.

Related party transactions

When a company enters into transactions with a shareholder, director, manager or other related party, there is a risk that the latter could appropriate value belonging to the company. SRD II therefore introduces rules on transactions of listed companies with related parties within the meaning of IAS 24.

The procedure is largely in line with our existing Belgian rules on intra-group conflicts of interest, laid down in articles 7:97 and 7:116 of the Code of Companies and Associations (the former article 524 of the Companies Code). However, its scope of application has been extended considerably.

The draft act contains the following innovations compared to the current regulation:

  • Also for companies without a controlling shareholder: Whereas the scope is currently limited to transactions with the controlling shareholder (and its subsidiaries), in future the procedure will have to be applied to transactions with any "related party" within the meaning of IAS 24. This concept also covers relationships other than control, such as the exercise of a significant influence, membership of the key management personnel and family ties between natural persons. This not only means that listed companies without a controlling shareholder will also have to apply the procedure, but also that the number of potentially relevant counterparties will increase significantly. When a listed company enters into a transaction with a board member, in principle it will no longer suffice to merely apply the rules on conflict of interest laid down in articles 7:96 or 7:115 of the Code of Companies and Associations (the former article 523 of the Companies Code).
  • Three independent board members: Each transaction with a related party must be approved by the board. If the related party is a member of the board, that party may not participate in the deliberations or the vote. In addition, a committee of three independent directors must give the board a reasoned opinion in writing on the terms of the transaction. The practical consequence is that a listed company will have to have at least three independent directors in order to be able to enter into transactions with related parties. Unlike under the current regime, the committee is free to decide whether or not to engage an independent expert.
  • Also for subsidiaries: Not only the transactions entered into by the listed company itself but also those of its non-listed subsidiaries are covered. Therefore, subsidiaries can no longer enter into transactions with related parties without the prior approval of the board of their listed parent company.
  • Immediate disclosure: The transaction must be publicly disclosed at the time of the conclusion of the transaction at the latest. This is much earlier than under the current regime, where the transaction only has to be published in the next annual report. This immediate disclosure must include at least the identity of the related party, the value of the transaction and all other information required to assess whether the transaction is reasonable and fair from the point of view of the listed company and its shareholders. The conclusion of the committee of independent directors will also have to be published, together with, where appropriate, the reasons why the board has chosen to depart from it.
  • Exemptions: The current regime already contains an exemption for non-material transactions, with a value below 1% of the net assets on a consolidated basis, and for customary transactions at market conditions. What is new is that for the calculation of the 1% materiality threshold, the non-material transactions with the same related party must be aggregated over a period of 12 months. In addition, as regards the customary transactions at market conditions, the board must establish an internal procedure for periodically assessing whether these conditions are fulfilled. Remuneration decisions are excluded from the scope, as are transactions in own shares, interim dividend payments, and capital increases with preferential subscription rights.

These rules will come into force on the tenth day after the day of publication of the implementing act in the Belgian Official Gazette.