Proposed changes to Swedish company law affecting listed companies

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.