A governmental inquiry, presented in the report Ds 2018:15, has proposed various changes to Swedish company law. The changes are primarily intended to implement directive 2017/828/EU amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement (the “Directive”) and include mainly the following:
- Changes to the so-called Lex Leo rules in Chapter 16 of the Swedish Companies Act
- Limitation of shareholders’ right of initiative in public limited liability companies
- New rules for publicly listed companies regarding remuneration to senior executives and material transactions with related parties
Changes to the Lex Leo rules in Chapter 16 of the Swedish Companies Act
The report proposes changes to the so-called Lex Leo rules, which are applicable to all public limited liability companies and concern issues and transfers of financial instruments and certain loans to board members, employees and their related persons. The Lex Leo rules have been criticised throughout the years, e.g. for creating competitive disadvantages for listed investment companies compared to private equity sponsors and for making management buy-outs more complicated.
Firstly, the report proposes that transfers of shares and other financial instruments whose value is less than one percent of the group’s value is to be exempted from the Lex Leo rules. The group’s value refers to market capitalisation for listed companies. The board is required to perform an objective value assessment, but there is no requirement for an auditor to review such assessment.
Secondly, the report proposes that the majority rule regarding the Lex Leo rules should be reduced from 9/10 to 2/3 of the votes represented at the shareholders’ meeting as well as 2/3 of the votes cast. The proposal also covers transfers of financial instruments that have been issued to another company within the same group.
Limitation of shareholders’ right of initiative in public limited liability companies
The shareholders’ right to include matters in the agenda at shareholders’ meetings is proposed to be limited with regard to public limited liability companies. For a petition to be taken into consideration, it is required that one or several shareholders’ who own at least 1/10,000 of the total number of shares in the company or at least 25 shareholders, jointly, initiate such petition. It can be noted that this proposed limitation of the shareholders’ right to initiative does not affect the shareholders’ right to ask questions during the shareholders’ meeting.
New rules for listed companies regarding remuneration to senior executives and material transactions with related parties
A new definition of publicly listed limited liability company is introduced to Swedish company law. The definition concerns limited liability companies whose shares are listed on a regulated market or a corresponding market outside the EEA. The proposed new rules regarding remuneration to senior executives and material transactions with related parties will only apply to companies covered by the definition.
The report stipulates publicly listed limited liability companies to implement guidelines for remuneration to senior executives which largely correspond to the Swedish rules that are already in force (including the same circle of people). However, changes are proposed which entail that the Swedish Companies Act is provided with more detailed provisions regarding the content of the guidelines. For instance, the guidelines must now include (i) to what extent the remuneration contributes to the company’s long-term interests, (ii) how conditions for the company’s other employees have been taken into consideration, and (iii) how variable remuneration has been determined. The new proposed provisions also include certain requirements for the decision-making process regarding the guidelines. In the event that the annual general meeting would not adopt the new guidelines proposed by the board, the most recently adopted guidelines will continue to apply. Also, the scope for the board to deviate from the guidelines in special circumstances is clarified.
A new requirement regarding an annual detailed report on paid compensation to senior executives during the year is also proposed. The remuneration report shall be submitted for approval at the annual general meeting.
Furthermore, a new chapter – 8a – of the Swedish Companies Act is proposed. The chapter shall govern material transactions between publicly listed companies, including wholly-owned subsidiaries, and their related parties. The chapter supersedes the Swedish Securities Council’s statement AMN 2012:05 in terms of publicly listed companies but does not include transactions that fall under special regulation, e.g. issues of financial instruments (including the Lex Leo rules), board fees and remuneration to senior executives.
A transaction will be covered by the new rules in Chapter 8a if the transaction value exceeds MSEK 1 and also amounts to at least one percent of the company’s market capitalization. All transactions with the same party during a twelve-month period are treated as one transaction. However, there is an exemption for transactions that are part of the company´s ongoing operations and which are conducted on market terms.
Material transactions with related parties shall be submitted for approval at the annual general meeting in the group parent company. The board shall make a review of the material transactions during the year and submit it for approval at the annual general meeting. The review shall include terms regarding the relevant transaction and shall be made public at least three weeks before the annual general meeting.
The proposed rules regarding remuneration to senior executives and material transactions with related parties shall according to the Directive be implemented by 10 June 2019. The new rules have been referred to the Swedish Council on Legislation and a government bill is expected to be submitted no later than 31 March 2019.
The time schedule regarding the implementation of the proposed changes to the Lex Leo rules and the limitation of shareholders’ right of initiative is more uncertain. However, the Swedish government has stated that the changes will be handled separately.