Voting rights policy in Luxembourg: 5 key aspects to keep in mind

The CSSF Circular 689/2018 establishes that investment fund managers (IFM) must develop an adequate and effective voting rights policy (defined in the circular as "a strategy"), for determining when and how voting rights are to be exercised.

With these requirements, the CSSF
develops Article 23 of CSSF Regulation 10-4 and Article 37 of Delegated
Regulation (EU) 231/2013 and partly implements the Shareholder Rights Directive
II (SRD II).

In 2007, the European Parliament
approved the Shareholder Rights Directive (SRD) to ensure better protection of
the exercise of rights of shareholders in listed companies. In 2017, the
revised Shareholder Rights Directive (SRD II) modified some aspects of the SRD
and described new obligations for EU Asset Managers, Institutional Investors,
Intermediaries, Proxy Advisors and Listed Companies.

In summary, Management Companies and Asset Managers based in Luxembourg must develop a voting rights policy. In some cases, they may refer either to a voting rights strategy developed in this regard by the group to which they belong or to recognised international standards.

5 aspects a voting rights policy must include:

1 – Regulatory Framework: It is a good practice when writing a voting rights policy to refer to all the set of rules. Defining this regulatory framework will help you also to define the current obligations and the follow up of future modifications.

2 – Decision-making process: Especially in the case of Luxembourg, there are certain scenarios where the Investment Management activity might be delegated to a third party. In some of these cases, it could be delegated also the exercise of voting rights. In other cases, the Management Company could be responsible for exercising voting rights. The voting rights policy should cover the different decision-making processes that a Management Company may carry out at the same time depending on the delegated functions for each investment vehicle.

3 – Voting Scope: This is one of the tricky issues. There are different metrics and approaches to defining the voting scope: aggregated investment in a certain company; consider the percentage of the participation within the capital of a single company, top-weighted positions for each fund, number of appearance of a certain company in all managed portfolios, covering only those with activity in process of M&A or capital modifications, … What we have found is that each Management Company defines its own scope considering internal strategies.

4 – Voting Principles and Voting Guidelines: The corporate governance activity covers a wide set of aspects and variables that might be asked for voting in each Shareholders’ Meeting. Some of them are related to the board policies and its directors, the executives' remuneration, the modifications of the capital structure or the shareholders' rights, among other issues. As the knowledge is very specific, the advice of a corporate governance expert and proxy advisor like Alembeeks is key to ensure your voting rights exercise is not misaligned with your interests' as a shareholder.

5 – Conflicts of interest: Within the financial sector is common that shareholders may have some links with some listed companies. It will be a well employed time to carry out an internal analysis detecting these conflicts of interest and a proper way to manage them.

Alembeeks is a proxy advisor and corporate governance consulting firm. We serve asset managers and institutional investors mainly in Luxembourg and Europe. We help our clients to define voting rights policies and clear voting strategies in order to vote well-informed in the Shareholder’s meeting of the companies where they invest in.

Alembeeks provides asset managers in Luxembourg the tools for ensuring transparency and supporting documentation of all their voting activities by using our VotingCloud platform.