As the year draws to a close, there is still time for significant developments in the area of European corporate governance for the coming year. Just in time to cause issuers and shareholders to reevaluate their approach to 2015 annual meetings, the Spanish Companies Act has gone through a major revision of its legal framework for corporate governance.
Following the earlier introduction of the Sustainable Economy Law, which amended the Securities Market Law, the Spanish government appointed a commission of experts to focus on further improving corporate governance in Spain; these results can now be seen in the revised Companies Act which had been drafted for months but was only approved in late November 2014. Many of the changes will be welcomed by corporate governance enthusiasts as they strengthen shareholder rights and align with European best practice.
The main changes can be roughly divided into those that relate to shareholder rights, the board of directors and executive remuneration.
Shareholder Rights
Touching on shareholder rights, the ownership threshold for adding proposals to the meeting agenda has been lowered from 5% to 3% of the share capital, while the ownership threshold to legally challenge corporate resolutions has been set at 0.1% for listed companies. In a development that is likely to get mixed reactions from institutional investors, shareholders owning at least 1% of the share capital may now be entitled to request beneficial ownership information for any shareholder under certain circumstances. The powers of general meetings are also extended as shareholder approval is required to authorize material actions amounting to more than 25% of the total assets of the company.
Board of Directors
The new Companies Act also clarifies the responsibilities, duties and structure of the board. The term lengths of directors have been reduced from six to four years. While already a recommendation under the Unified Code, under the new law, directors will be considered non-independent after serving on the board for 12 or more consecutive years. The law also introduces more stringent independence requirements for key governance committees. The audit, nomination and remuneration committees must be composed entirely of non-executive members with at least two independent directors, including an independent chairman.
The previous recommendation to separate the roles of chairman and the CEO has received more emphasis under the new law. The appointment of an executive chairman is still allowed if the election is supported by two-thirds of the board and a lead independent director is appointed to provide a counterbalance to the chairman. When it comes to diversity, while the law states that companies should have a diverse group of directors and facilitate the election of women to the board, more specific recommendations are not expected until the upcoming Corporate Governance Code.
Executive Remuneration
Spain also joins the growing number of European countries with a binding vote on remuneration policy. Shareholder approval on say-on-pay will be required every three years or for any instances in which changes are made to the policy. A binding vote would also be required the following year if an already mandatory annual advisory vote were to be rejected by shareholders. This is modeled on the change to UK law that took effect in 2014 and mirrors new provisions in a draft version of amendments to the 2007 EU Shareholders Rights Directive that may be approved in 2015.
The new law will come into effect on December 24, 2014, although companies will be given a transitional period of one year to comply with certain provisions. Looking forward, we are left anticipating the new Unified Code of best practice recommendations which will incorporate the new law and provide an even more precise corporate governance framework for the Spanish market.