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20 / 07 / 2021

Securities Trading Act: Stricter requirements for asset managers

Clearer requirements for information obligation for active shareholding

On 1 January 2020, an amendment was made to company law that regulates active share ownership. We now have a clearer regulated information obligation for active shareholding for both institutional investors and asset managers. The change is due to a development with excessive short-term risk-taking, passive involvement from investors, and unconscious support from shareholders in accordance with the EU's amendment directive 2017/2018 (Shareholder Rights Directive II / SRD II).

Will increase long-term value creation

The lack of clear rules in connection with the long-term commitment of shareholders and investors has resulted in a reduction in the companies' long-term results and overall value creation. The amendment is intended to increase the shareholders' and investors' long-term involvement in the companies and thereby reduce the asset managers' focus on short-term gains. In practice, this is done by setting clearer requirements for the asset managers' publication of an investment strategy and the effects of this not being published.

Requirements for preparation of investment strategy

The rules mean that institutional investors and asset managers must prepare and publish guidelines for active shareholding. These must describe how active shareholding is integrated into the investments. If the guidelines are not prepared and published, the companies must publish an explanation of why they have not formulated the guidelines for active shareholding.

The strategy must be made public

The change in the law sets clearer requirements for the asset managers' publication of investment strategies. The asset managers' shareholder involvement must also be publicly available. The publication can take place via the asset managers' website or in other ways. The strategy shall describe and publish how the exercise of shareholder rights is included in the companies' investment strategy. In addition, follow-up of the company, exercise of voting rights and other rights related to the shares must be included. It must also be stated whether the company has other relevant interests in the company, and how the company handles conflicts of interest that may arise in such cases.

Must be published at least once a year.

The strategy for exercising shareholder rights shall be published at least once a year. A general description of the voting, an explanation of the most important polls and whether the enterprises have used voting advisory services shall be provided. Furthermore, it must be stated how they voted at the general meeting of the companies in question.

Requirements for an account of how the strategy contributes to active share ownership

The strategy also requires that asset managers report annually on how their investment strategy and its implementation are in accordance with the agreement entered into. The statement shall also state how the investment strategy, in the medium to long term, contributes to the result of the institutional investor's investments or the fund in which they have invested.

Description of the strategy must include the following:

  • Significant risk factors when investing in the medium to long term.
  • Portfolio composition
  • Turnover rate
  • Turnover costs
  • Use of proxy advisers in the exercise of proxy advisors

Must specify the practice for lending securities

The statement must also state the company's practice for lending securities and how these are used to meet the asset managers 'investment for the case in question, this includes the composition of, turnover of and turnover costs associated with the asset managers' portfolio. According to the amending directive, the portfolio's turnover rate is an important indicator of whether the asset manager's practice is in accordance with the established strategy. The turnover rate also indicates whether the asset manager holds shares for a certain period of time, and whether it gives the manager sufficient opportunity to actively engage in the company. This may prove to be of particular relevance at the time of the general meeting of the companies in which it is invested.

Lending of securities can, however, prove to be problematic, especially in cases where the investor's units have in reality been sold and are covered by the right of first refusal. Sold shares must therefore be taken back before the shareholding can be exercised. Therefore, it is important that the asset manager reports on its practice of lending securities, and how the practice is used to fulfill their commitment regarding active share ownership.

The statement shall also contain information on how the asset manager takes into account the long-term result of the listed company, whether conflicts of interest have arisen in connection with the commitments, and how the conflicts have been handled.

The changes in ASL § 3-8 - Good news for startups

Section 3-8 of the Norwegian Companies Act is intended to provide procedural rules for certain agreements between the company and a shareholder, a shareholder's parent company and members of the company's management. This circle is now being expanded to also include agreements entered into with related parties to the company's board members and general managers. In addition, the approval competence of such agreements is presented to the company's board before the general meeting.

The board will now approve related agreements

The amending directive on related parties can be pointed out to be one of the more important practical changes the ministry has recommended. The change in the law means that related agreements must be approved by the board in the future. Upon the board's approval of the agreement, the ordinary rules on board consideration will be applied. Furthermore, the change entails a regulation of legal effects in the event of a breach of the provision on transactions with related parties.

The board must prove that the agreement was not valid

Prior to the amendment, the ministry also emphasized that the previous provision could have unfortunate consequences for the contracting party, the company's speculative access, and give the bankruptcy estate a random advantage. The previous rule on unconditional invalidity has consequently been replaced by the agreement being invalid only if the company can prove that the party to the agreement understood or should have understood that the board, possibly the general meeting, has not approved the agreement. In contrast to the new amendment to the law, the previous provision would give the general meeting the right to automatically invalidate the agreement if it was not approved.

No need to process agreements under NOK 100,000

In addition, it has been decided to increase the lower amount limit from NOK 50,000 to NOK 100,000. The change also means that the fair value of the company's performance by agreement must exceed 2.5% of the company's balance sheet total. Previously, the threshold value was set at 10% of the share capital. The lower amount limit and the increase in this is justified by the Ministry in that a company will not have to process smaller agreements and can thus prevent the companies from being imposed unnecessary administrative and financial burdens. However, there will still be a requirement for the Board to prepare a statement in connection with such agreements. The statement shall be further confirmed by the auditor and sent to all shareholders and the Register of Business Enterprises.

John E. Nilsen

John E. Nilsen

Lawyer