Shareholder Rights Directive II in Lithuania: more than just UBO registration

As of September 2020, Shareholder Rights Directive II is bringing second package of the amendments to the Lithuania and most EU countries.

The general discourse concerning the Shareholder Rights Directive II (SRD II) is mainly concentrated on UBO registration and the UBO register[1]. However, SRD II is much more than that ‒ indeed, much of its implementation is coming into force on 3 September 2020.

As of September 2020, in Lithuania ‒ as in many other EU countries ‒ SRD II requirements related to an intermediary’s obligations towards both issuers and shareholders will have to be followed. According to government reports, Lithuania has already passed the necessary legislation and fully complies with transposition requirements.

As is known, SRD II aims to make it easier for shareholders to exercise their rights. It also ‒ though not so loudly ‒ encourages and aims to provide greater market transparency. Accordingly, intermediaries will be burdened with additional obligations as to sharing information or passing issuer information to shareholders. Essentially, intermediaries’ obligations will extend to:

  • relaying general meeting notifications to shareholders;
  • creating conditions for voting and ensuring feedback;
  • answering disclosure requests from EU issuers.

The scope of application of these requirements depends largely on what and who is considered a share and a shareholder. As SRD II does not provide a definition, it is for member states to decide what is considered to be shares in any specific jurisdiction. Lithuanian law does not define “shares” exclusively for the purposes of SRD II. In general shares are understood and described as securities confirming the following rights of the holder (shareholder):

  • to participate in the management of the company unless otherwise stated by law,
  • to receive dividends,
  • to receive a portion of the company’s assets remaining after liquidation.

By definition, shares do not include bonds, or other financial instruments. However, legal acts implementing SRD II usually use and refer to the broader term “financial instruments”, which includes:

  • shares in companies and other securities equivalent to shares in companies, partnerships, and other entities, as well as depository receipts representing shares;
  • bonds and other forms of non-equity securities, including depositary receipts in respect of non-equity securities;
  • other securities conferring the right to acquire or transfer transferable securities

Therefore, in the context of SRD II in Lithuania, the term “financial instrument”, rather than “share” is more appropriate.

Another potentially problematic area is identifying the shareholder (owner or holder) of financial instruments. Lithuania (as with some other CEE jurisdictions) describes ownership as a combination of three rights: Possession, Enjoyment and Disposition. In financial markets these elements are often divided between legal ownership and beneficial ownership. It is still not clear who should be regarded as the holder or owner of financial instruments in the case of separation and allocation of these three elements among several persons. However, considering the tendency in Lithuanian law to apply substance over form in terms of the principles and aims of SRD II, it is more likely that the economic ownership factor will prevail.

[1] A UBO register was introduced in Lithuania as of the beginning of 2019. However, despite its “existence” in legal acts, it is still not functioning in practice due to technical and organisational reasons.

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