As the season for shareholders' annual general meetings is fast approaching, we are sharing suggestions that we believe provide strategic flexibility and reflect best practices in corporate governance.
In this newsletter, we discuss the following topics:
- The momentum of ESG in the financial world;
- Extension of the COVID-19 simplified procedures to the 2021 shareholders' meetings;
- Remuneration Reporting;
- Simplified recapitalizations; and
- Suspension of recapitalization rules.
The momentum of ESG in the financial world
(a) Legislative roadmap
The increasing awareness of environmental, social and governance ("ESG") issues like climate change, employees' wellbeing, social diversity and sustainability is a driving force in large investors' capital allocation strategy and regulators' legislative action.
The European Union has recently adopted a series of acts to develop a socially conscious financial system, such as: (i) the Shareholder Rights Directive II1, which turned ESG themes into the cornerstone of the corporate model of listed companies and (ii) the EU Taxonomy Regulation2 on the establishment of a framework to facilitate sustainable investments.
The Shareholder Rights Directive II, which is environmentally conscious, was implemented in Italy by the Legislative Decree no. 49 of May 10, 2019 in the Consolidated Law on Finance3 and Issuers' Regulation4. In addition, the 2020 version of the Corporate Governance Code5 requires directors to lead their companies by pursuing their sustainable success and proactively develop a knowledge on ESG matters.
(b) Key actions
Issuers are required to carefully factor ESG themes into their business model, strategy and corporate disclosure. We believe the most significant new items to be the following:
- Sustainability Report and Consolidated non-Financial Statement: long-term investors are more likely to be attracted by high quality ESG information. Issuers should leverage on this trend by carefully drafting these documents and disclosing how and to what extent their activities are environmentally sustainable economic activities6.
- Shareholders' Activism: it is safe to assume that in the near future shareholders will have to cast a non-binding vote on a Sustainability Report and Consolidated non-Financial Statement similar to the non-binding vote that they currently cast on the report on compensation paid in the previous fiscal year. Issuers should start to systematically engage their shareholders with respect to ESG matters. In this respect, we believe that the engagement policies to be adopted by Italian issuers should be considerate of ESG matters.
- Remuneration: linking executives' remuneration to ESG objectives is the first step to make stakeholders aware of issuers' green actions. The remuneration policy will become a pressure point to respond to the attentive scrutiny of ESG-conscious shareholders, whose vote is now binding for the approval of the remuneration policy7. Regulators might also pay closer attention on the ESG aspects tied to the remuneration report. Issuers are so required to explain how the following items contribute to the pursuit of their long-term interests and sustainability: (i) the remuneration policy as a whole; (ii) the components of the variable remuneration; and (iii) the exceptional derogations to the remuneration policy.
- Green Finance: a market for "green" debt securities is gradually developing. Issuers should attentively monitor this development and consider ESG-linked issuances.
White & Case has worked on one of the first ESG bank financings, first Italian ESG LBO financing and regularly assists ESG financing transactions in the capital markets and banking sector.
Extension of the COVID-19 simplified procedures to the 2021 shareholders' meetings
Law Decree no. 18/2020 (the "Cura Italia Decree") introduced – as a response to changed organizational needs arising from the COVID-19 pandemic – simplified measures for the conduct of shareholders' meetings, which were implemented by listed companies during the 2020 shareholders' annual general meeting season.
In light of the recent extension of the special provisions until July 31, 2021 under Law Decree no. 183/2020 ("Milleproroghe Decree"), as converted by Law no. 21/2021, listed companies can apply these measures also for the 2021 shareholders' annual general meetings. Therefore, also this year, the following simplified measures – which can also be implemented in absence or in derogation of specific bylaw provisions – will apply to the shareholders' annual general meeting of listed companies this year as well:
- shareholders' meetings called to approve the financial statements as of December 31, 2020 may be convened within 180 days from the end of the financial year;
- shareholders' meetings may be held, also on an exclusive basis, by means of telecommunications that ensure the identification of participants, their attendance to the meeting and the exercise of their voting rights;
- participants may vote (i) electronically, (ii) by means of correspondence, or (iii) through a representative appointed for this purpose (the "Designated Representative");
- the notice of call of listed companies' shareholders' meetings may provide that the shareholders can participate and vote exclusively through the Designated Representative; and
- the meetings may be duly held without the need for the chairman of the meeting, the secretary and the notary public to be in the same place.
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 director's8 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 must not disclose sensitive personal data of managers and their family members9.
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.
a) Simplification Decree
Law Decree no. 76/2020 (the "Simplification Decree") introduced permanent and temporary measures, expiring on April 30, 2021 aimed at simplifying rights issues and accelerating the approval of certain equity transactions.
Italian Law no. 120/2020, converting the Simplification Decree, has partly modified and extended the temporary measures until June 30, 2021.
Simple majority for EGMs to approve or delegate powers to resolve capital increases and rights issues, provided at least 50% of the outstanding capital attends the meeting.
Until June 30, 2021, EGMs of Italian issuers will be able to:
(a) approve capital increases in kind, capital increases without preemptive rights and, as a result of the recent amendment to the Simplification Decree, capital increases in cash; or
(b) approve the inclusion in the company bylaws of the delegation of powers to the Board of Directors to approve rights issues or capital increases,
with the favorable vote of a simple majority of the capital attending the shareholders' meeting, provided that at least 50% of the outstanding capital attends the meeting (instead of the ordinary legal requirement of the favorable vote of two thirds of the capital attending the meeting, provided that at least 20% of the share capital attends the meeting).
Simplified capital increases without preemptive rights allowed up to 20% of the pre-existing capital and shortened a notice period for the relevant EGM.
Until June 30, 2021, Italian issuers will be able to approve simplified capital increases with exclusion of preemptive rights up to 20% (instead of the ordinary 10%) of the pre-existing capital by convening an EGM with 30 calendar day notice (instead of the shortened 15 day period originally envisaged by the Simplification Decree), and even if their bylaws do not explicitly reference them.
This special provision will apply only to simplified capital increases for listed companies (under article 2441, paragraph 4, last sentence of the Italian Civil Code) up to 20% where the issuance price is set at market value (valore di mercato) and confirmed by the auditor.
Unlike the original version of the Simplification Decree, the inclusion in the bylaws of such provision will not benefit of the simple majorities described above.
The permanent measures originally introduced by the Simplification Decree have been partly amended.
(a) The rules initially provided for a reduction of the rights offering subscription period from 15 to 14 calendar days and removed the requirement to hold (following the offering subscription period) a five trading day auction of the unsubscribed rights.
(b) While the reduction of the rights offering subscription period has been confirmed, the requirement to hold an auction of the unsubscribed rights has been reinstated for a minimum period of two trading days (instead of five).
(c) The Simplification Decree also allowed listed companies to require existing shareholders to exercise the right of first refusal (diritto di prelazione) on unsubscribed rights concurrently with the exercise of their option rights. This possibility has been removed, in part as a result of the technical difficulties of its prompt implementation on the centralised management system of Monte Titoli.
b) EU Recovery prospectus. A simplified prospectus for recapitalizations.
On February 26, 2021, in the context of the European measures to swiftly address the severe economic impact of the COVID-19 pandemic, Regulation (EU) 2021/337 has introduced the EU Recovery prospectus, a short-form prospectus that aims at allowing a rapid recapitalization of companies in the European Union and enabling issuers to tap into public markets at an early stage in the recovery process.
The EU Recovery prospectus regime will expire by December 31, 2022. EU Recovery prospectuses approved before such term will be governed in accordance with the special regime until the end of their validity or until December 31, 2023 (based on the approval date).
Conditions and limitations
EU Recovery prospectus is intended for secondary issues and, therefore, available only to issuers of shares traded, on a regulated market (or that have been trading on an SME growth market, such as AIM Italia, continuously for at least the last 18 months)10; and
Shares offered must not have significant dilutive effects. In particular, the Regulation (EU) 2021/337 requires that the offer must concern shares representing no more than 150% of the existing share capital, taking into account all the shares that may have already been issued on the basis of another EU prospectus in the previous 12 months.
Format and approval
The EU Recovery prospectus will be drafted as a single document and will have a maximum length of 30 pages11. The disclosure regime is limited to essential information must include at least 400 words on the actual and estimated future impact of the COVID-19 pandemic on the issuer's business and financial situation.
EU Recovery prospectus will benefit of a faster approval procedure (reduced to seven working days, instead of the regular ten working days).
Suspension of recapitalization rules
On April 8, 2020, the Italian Government enacted Law Decree no. 23/2020 (the "Restore Liquidity Decree") introducing several measures aimed at providing financial assistance to Italian businesses severely affected by COVID-19.
The Restore Liquidity Decree allowed companies whose losses had substantially eroded the share capital to suspend the duty to recapitalize. The 2021 Budget Law12 has clarified that such suspension applies only for those losses that arose during the financial year ended as of December 31, 2020. According to the Notarial Board of Milan13, this provision also includes all losses resulting from annual or interim financial statements relating to financial years or parts of financial years in progress as of December 31, 2020, regardless of the year in which the losses were actually generated14.
The term for the recapitalization (or the liquidation or transformation of the company) as a result of the losses incurred is postponed until the fifth financial year following said losses, i.e. until the approval of the financial statements as of December 31, 2025.
In the event of losses, ascertained by the board, reducing the share capital by more than one third, a general shareholders' meeting must be promptly convened by the Board of Directors pursuant to Articles 2446 and 2447 of the Italian Civil Code, which will resolve upon the approval of the financial statements of the company and the decision to apply the postponement described above.
During this 5-year suspension period, companies may carry out capital increases against payment without the prior need to reduce the share capital to cover the losses that arose during the financial year ended as of December 31, 2020.
1 Directive (EU) 2017/828, amending Directive No. 2007/36/CE.
2 Regulation (EU) 2020/852 amending Regulation (EU) 2019/2088 on sustainability‐related disclosures in the financial services sector.
3 Legislative Decree No. 58 of February 24, 1998.
4 Consob Regulation no. 11971 of 14 May 1999.
5 The corporate governance code of listed companies, adopted in January 2020 by the Corporate Governance Committee and promoted by Borsa Italiana S.p.A., ABI, Ania, Assogestioni, Assonime and Confindustria.
6 The Commission will specify the content and the presentation of this information by June 1, 2021.
7 The shareholders' right to cast a binding vote on the remuneration policy was introduced by the Legislative Decree no. 49 of May 10, 2019, which transposed the SHRD II into the Italian legislation.
8 Or any other person whose remuneration has to be indicated on an individual basis.
9 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.
10 Regulation (EU) 2021/337 extends the EU Recovery prospectus regime also to offerors which intend to carry out a sale or a placement of securities admitted to trading on a regulated market (in line with the applicable regime for simplified prospectuses).
11 In A4 format (excluding the summary).
12 Law no. 178/2020.
13 See Notarial Board of Milan, orientation no. 196 of 23 February 2021.
14 See also Assonime, Circular no. 3 of 25 February 2021, according to which this formulation may include also losses incurred during 2019, but recognized during 2020. Same circular clarifies that losses shall not be directly connected to the COVID-19 pandemic.
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