EU Directive 828/2017 on the encouragement of long-term shareholder engagement transposed into Romanian legislation
EU Directive 828/2017 transposed in Romania
Law 158/2020 amending and supplementing Law no. 24/2017 on issuers of financial instruments and market operations was published in the Official Journal of Romania on 29 July. It transposes into Romanian legislation EU Directive 828/2017 on the encouragement of long-term shareholder engagement (also known as the EU Shareholders’ Rights Directive II or SRD II).
The new provisions on Directors’ Remuneration will enter into force 30 days after the publication of Law 158/2020 (i.e. as of 28 August 2020). Nevertheless, companies have 12 months from the date the law enters into force to comply with the new requirements (i.e. until 28 August 2021). Failure to comply will result in considerable fines, from 15,000 lei to the highest value of 45,000,000 lei or 5% of the total annual turnover according to the latest available annual financial statements.
Please see below a summary of the main changes.
1. Who is subject to this Law?
Romanian registered companies which are listed on a regulated market have to apply the new provisions concerning directors’ remuneration. Directors are defined as “any member of the administration board, as well as any director in the case of the unitary management system, or any member of the supervisory board and the directorate, in the case of the dual system of administration, in accordance with Law 31/1990, including, in all cases where he/she has been appointed, the Executive Director and, if any, the Deputy Executive Director”.
2. The Remuneration Policy
Companies need to have in place a Remuneration Policy for their Directors and it has to be voted for by the shareholders. Companies can pay only the remuneration established through the remuneration policy voted by the Annual General Meeting. Under certain exceptional conditions (related to meeting the long-term objectives of the company), companies may derogate from the policy, as long as the policy includes the applicable procedural clauses and it limits the elements from which deviations are allowed.
Any significant change to the Remuneration Policy should be subject to voting and the Remuneration Policy should be voted on at least every 4 years. Also, the Policy together with the results of the voting should be posted on the website of the company and should be available free of charge, for as long as they are applicable.
Principles of the Remuneration Policy:
- The Policy should explain how it contributes to the company’s long-term interests and should be aligned with the strategy and objectives of the company.
- It should be clear and easy to understand.
- It should give details the types of compensation paid or awarded in any form (fixed, variable, fringe benefits, etc.) to the Directors.
- It should contain explanations about how the remuneration and the employment criteria of other employees have been taken into account.
- It should include details about variable remuneration (type of benefits – e.g. shares - the criteria for receiving such awards, details about the connection between such criteria and the long-term strategy of the company, the methods used to assess how such criteria were met, the postponement periods, as well as malus and claw-back provisions).
- It should mention the duration of the contracts of the Directors, the notice periods, and termination clauses, including termination payments, as appropriate.
- It should include details of private pension schemes.
- It should describe the decision making process for the Remuneration Policy, measures to avoid conflicts of interests and roles in the Remuneration Committee, if this exists, or in any other committee involved.
3. The Remuneration Report
Annually, the company should prepare a Remuneration Report including all types of remuneration paid or granted during the last financial year, to each Director, including former or newly recruited Directors, based on the Remuneration Policy.
The Report is subject to a consultative vote at the Annual General Meeting (ex-post vote) and the company has to explain in the following report how the vote has been taken into consideration. Also, the Remuneration Report should be posted on the company’s website and this information should be available for 10 years.
The Remuneration Report should include all types of remuneration paid or granted during the last financial year, to each Director (current, former or newly recruited), such as:
- Total remuneration, relative proportion between fixed and variable components, how such remuneration is paid in accordance with the Remuneration Policy, and how the performance of each individual justifies the remuneration.
- Any change in remuneration, company performance and the average remuneration of the employees of the company (other than the Directors) over at least the past 5 years.
- Any remuneration received from any other Group company.
- Any share-based remuneration and the conditions to be met in order to receive the awards.
- Information about the possibility to reclaim the variable remuneration or part of it.
- Detailed information about any deviation / derogation from the Remuneration Policy.
Companies subject to the new provisions will have to reassess their entire remuneration process in order to check if they are compliant with the provisions of the Directive. Also, they need to formalize and record this process into a detailed and comprehensive Remuneration Policy and to prepare a Remuneration Report annually summarizing how the policy has been applied.
Also, companies will need to pay special attention to the way in which the information is presented in the Remuneration Report during the first year. It should be in a way which allows comparison and the calculation method used should be applicable during the following years, in order for the report to include consistent and relevant information each year. In addition, considering that the report should include information about variation of the Directors’ remuneration, performance of the company and average salary of the employees (apart from Directors) over the last 5 years, companies need to prepare in advance to be compliant with these provisions.
The 12 month period granted to companies to comply with these provisions is quite short, considering the amount of information which needs to be included in a specific required format. Also, the Law is not very clear as to whether companies need to prepare only the Remuneration Policy by 28 August 2021 or if this is also the deadline for preparing the Remuneration Report. It can be assumed that the report should be prepared based on the remuneration policy, however this is not clarified under the law.
Moreover, companies will need to pay special attention to communicating and justifying the remuneration paid or granted to Directors and to be very clear on the method of calculation used and how the amounts paid are connected not only to the performance of each individual, but also to the performance of the company. In addition, any increase in remuneration needs to be justified through a proportional increase in the benefits granted to all interested parties (investors, employees, the community). This aspect is even more import now, considering the effects of the pandemic on public perceptions.
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