Category: Austria

The EU Shareholder Rights Directive II (2017/828) (SRD II), amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement, must be transposed into national law by 10 June 2019.

The directive aims to improve shareholder participation by addressing three major regulatory issues relating to the corporate governance of listed companies:

• the identification of shareholders and the role of intermediaries, such as institutional investors, asset managers and proxy advisers;
• shareholders’ involvement in the remuneration of members of management (say on pay); and
• material transactions with related parties (related party transactions).

With the implementation deadline fast approaching, the government recently published a ministerial draft of the Stock Corporation Amendment Act 2019, which addresses the rules on say on pay and related party transactions. The provisions on the facilitated identification of shareholders and the transparency of intermediaries are addressed in another draft, which remains to be finalised.1

Following the general direction set by the government, the ministerial draft seeks to minimise the administrative burden on listed companies by avoiding any ‘gold plating’. Further, it closely follows SRD II and takes advantage of the business-friendly options. The new rules will be implemented by amending:

• the Stock Corporation Act;
• the Stock Exchange Act; and
• the Act on the European Company.

Say on pay

The adequate level and the composition of the executive remuneration of managers remains a hotly debated topic. The structure of the remuneration package can be an important means to address the principal-agent conflict in public companies by aligning the economic interests of managers more closely with those of the company.

Therefore, Austrian law already provides for certain rules on the content of the remuneration of management board in the Stock Corporation Act and the Code of Corporate Governance. Under Section 78 of the Stock Corporation Act, supervisory boards must ensure that the total remuneration of management board members is in reasonable proportion to the duties and benefits of individual board members, a company’s position and overall remuneration levels. The remuneration should provide long-term incentives for the sustainable development of the company. The desired arrangement of executive compensation is further specified in Rule C-27 of the Code of Corporate Governance.

While SRD II – and its envisaged implementation in the form of the ministerial draft – contains no requirements for the contents of remuneration, it supplements the existing law with numerous procedural requirements. For the first time, a general model for shareholders’ participation in regard to the remuneration of directors of a listed company is introduced. It consists of two elements:

• a vote on the general remuneration policy at least every four years; and
• an annual vote on the remuneration report.

The mandatory publication of these documents on a company’s website seeks to enhance the transparency of executive compensation across companies.

The ministerial draft implements the SRD II requirements cautiously by making use of the options granted and taking into account the special features of the Austrian two-tier board system. It succeeds in keeping the existing governance structures of the Austrian stock corporation largely unchanged, as the remuneration of the management board remains in the hands of the supervisory board. Shareholders are given only an advisory, non-contestable vote on the remuneration policy and the remuneration report.

In addition, the new requirements apply to the remuneration granted to supervisory board members.

Remuneration policy

The proposed rules designate the supervisory board as the body competent to set up a remuneration policy. Following the wording of SRD II, the remuneration policy must promote the business strategy and long-term development of a company and explain how it does so. Further, it must be clear and comprehensible and describe the various fixed and variable components of the remuneration that may be granted to management board members.

In terms of its scope, the new remuneration policy is comparable, but more detailed, than the guidelines currently provided under Austrian law. However, the website publishing requirement entails significant risks for any companies concerned. The remuneration policy must be specific enough to comply with Section 78a of the Stock Corporation Act, but at the same time it should not reveal any data that contains sensitive information or puts the company at a competitive disadvantage. Further, as companies are allowed to temporarily derogate from the policy only in exceptional circumstances, it must contain any financial benefits that may form part of the directors’ remuneration package in the future. It must therefore be drafted carefully to reflect various legal and commercial considerations.

The remuneration policy must be submitted to a shareholder vote at least every four years or if any significant change occurs. Under the proposed legislation, the vote will be of a recommending nature only and not subject to appeal. Notwithstanding its non-binding nature, the right to vote on the remuneration policy could still have significant consequences, as supervisory board members are ultimately dependent on shareholders’ favour and may be reluctant to ignore a negative vote.

The submitted remuneration policy and the result of the vote in the general meeting must subsequently be published on the company’s website.

Remuneration report

In addition to the remuneration policy, the management and supervisory boards must also prepare a remuneration report each year, which must provide a comprehensive overview of the remuneration granted to members of the management board in the course of the previous financial year. The ministerial draft specifies in detail the information on the remuneration of individual members of a management board which the remuneration report must contain. The report must also be submitted to the annual general meeting for a vote and subsequently published on the company’s website.

Related party transactions

Neither SRD II nor the ministerial draft aim to prevent related party transactions as such. However, the proposed regulations are intended to make certain transactions with related parties transparent and less susceptible to manipulation. In line with these objectives, SRD II and the ministerial draft provide for a two-stage model: material transactions with persons or companies which meet the definition of a ‘related party’ must:

• be made public to facilitate the control of these transactions for the (minority) shareholders; and
• be subject to the approval of another corporate body of the company.​

Material scope

In its proposed Section 95a of the Stock Corporation Act, the ministerial draft covers material transactions of a listed company with individuals or companies which meet the definition of a ‘related party’, unless one of the exceptions provided for applies.

According to the ministerial draft’s legislative materials, a ‘transaction’ is any transfer of resources, services or obligations, regardless of whether a consideration is charged for it. A transaction qualifies as ‘material’ if its value exceeds 10% of the listed company’s balance sheet sum. For a particular financial year, the balance sheet sum from the annual financial statements submitted to the general meeting of the previous year is relevant. If several transactions are concluded with the same related party within a financial year, the values of such transactions are to be summed up.

The term ‘related party’ will have the same meaning as under the international accounting standards adopted pursuant to EU Regulation 1606/2002 – currently IAS 24.9. Related parties are, on the one hand, all individuals (or their family members) who:

• control the company or are involved in its joint management;
• have a significant influence on the company; or
• hold a key position in the management of the company or a parent company.

On the other hand, another company is a related party if:

• both companies belong to the same group of companies;
• both companies are controlled by the same person; or
• a related party to the listed company has a significant influence on the other company.

The ministerial draft makes extensive use of the exceptions provided for by SRD II. A material transaction with a related party is not subject to the provisions on related party transactions if (among other things) it is concluded in the ordinary course of business and on arm’s length terms, between a listed company and its subsidiary or with a credit institution on the basis of measures aimed at safeguarding stability which have been approved by the competent regulatory authority.

Transaction disclosure

Management boards must disclose a material transaction with a related party to the public by the time it is concluded. In any case, the disclosure must contain:

• the names of the related parties;
• the date of the transaction; and
• a notice stating that more detailed information about the transaction is available on the listed company’s website.

This more detailed information must include at least the nature of the relationship with the related party, their names, the date and value of the transaction and any other information necessary for assessing whether the transaction is appropriate and reasonable.

Supervisory board approval

A material transaction with a related party must be approved by the listed company’s supervisory board. If a particular member of the supervisory board is a related party to the specific transaction, such member cannot vote.

Outlook

With the present ministerial draft, the Austrian legislature has tried to achieve a business-friendly and minimal implementation of SRD II by incorporating certain options and exceptions it provides.

Notwithstanding the fact that shareholders’ votes on remuneration policies and reports are non-binding, these votes could still have a significant impact on the composition of executive remuneration. Considering the fact that both documents, as well as the result of the vote, will have to be published on a company’s website, it is essential that the policy and the report are drafted in a diligent manner.

The new provisions on related party transactions are not expected to have a serious material impact on the governance of listed companies. By setting a materiality threshold of 10% of a balance sheet sum, no new significant obstacles are likely to be created in the day-to-day business of listed companies. Most of the transactions that will fall under the definition of ‘material transactions’ are likely already included in the legal catalogue of transactions for which management boards must currently obtain supervisory board consent.

In addition, transactions amounting to 10% (or less) of the balance sheet sum are arguably already subject to supervisory board approval, as per the principle of adequate control over company management. Such requirement of consent is often stipulated in the rules of procedure of listed companies.

The current law also already provides for an obligation to disclose transactions with related parties in the annual financial statements of medium and large companies. However, in contrast to the new regulation, this is not ex ante information prior to the conclusion of the transaction. Therefore, new procedures will be required for companies to fulfil the disclosure obligation in a timely manner.  

By Leon Scheicher, Associate and Christopher Junger, Associate Schoenherr

The CRISPR method: Genome editing designates new methods that allow targeted interventions to be carried out in the genetic material, the genome of a cell. The CRISPR/Cas method is a molecular biological method to specifically cut and modify DNA (“genome editing” or “gene scissors”). Genes can be inserted with the CRISPR/Cas9 method or used only remotely or switched off. This method was discovered in 2012, originally as a defence mechanism of bacteria against viruses. Soon, researchers around the world were using it to modify the DNA of a wide variety of organisms.

The CRISPR/Cas9 method works in protozoa, fungi, plants, animals and humans.  

It provides a fast, cost-effective and easy-to-use system for making precise genetic changes. This has made it easier to investigate the function of genes. For example, CRISPR/Cas9 is used to modify model organisms in basic research, in cancer research or in research on infectious diseases. Especially in agriculture, this targeted mutation or alteration of crops plays a major role. The plants could be improved by this change in their genes, becoming more resistant to fungi, pests, drought and so on. These changes can also be triggered by classical breeding, e.g. using chemicals or irradiation. However, this method is unspecific and takes several generations. With CRISPR/Cas9 it is more precise, faster and cheaper. 

The decisive question for the possible future commercial application of CRISPR plants in agriculture is whether they are legally regarded as genetically modified plants if only something has been removed from the genome (mutagenesis) and no transgene has been inserted (transgenesis). This is because genetically modified plants are very strictly regulated, especially in the EU. The ECJ answered this question in 2018.

Decision of the ECJ

Following a preliminary ruling procedure initiated by the French Council of State, the ECJ had to clarify whether the new breeding methods for plants (mutagenesis methods for producing herbicide-resistant plant varieties) are to be subsumed under the term “genetically modified organisms” within the meaning of Article 2(2) of the GMO Directive.

In its judgment of 25 July 2018, the ECJ ruled that Article 2(2) of the Directive on GMOs is to be interpreted as meaning that organisms obtained by new targeted mutagenesis methods/procedures are “genetically modified organisms” (GMOs) within the meaning of this provision. Article 3(1) of the Directive on GMOs (the exception to the scope of the Directive on GMOs), in conjunction with Annex IB No 1 and recital 17, must be interpreted as meaning that only those organisms which have been traditionally used in a number of applications by mutagenesis processes/methods and which have long been regarded as safe (i.e. conventional) are excluded from the scope of the Directive on GMOs. 

The consequence of this judgment is that organisms which have not yet been produced with new mutagenesis processes/methods in a number of applications (such as the CRISPR method) are subject to the authorisation and labelling requirements of the GMO Directive.

The ECJ justified its decision by citing the protection of human health, the precautionary principle and the potential adverse effects on the agricultural market (in the sense of an uncontrolled spread across national borders with possibly irreversible effects).

According to the Austrian Ministry of Social Affairs, which is responsible for the enforcement and further development of genetic engineering law in Austria, the ruling of the ECJ confirms the Austrian legal position, because according to Section 2 para 2 subpara 4 of the Genetic Engineering Act only the procedures of undirected (conventional) mutagenesis are excluded from the scope of the Austrian Genetic Engineering Act.

Comment

In Austria, the CRISPR/Cas9 method is used in basic research, particularly in the fields of molecular, cell and developmental biology, microbiology, biomedical research, population genomics research on model organisms and basic plant genome research. According to the Federal Ministry of Education, Science and Research, the decision of the ECJ has no direct consequences for Austria, because in Austria work with GMOs is only carried out in a closed system. There is therefore no release and no placing on the market of GMOs under the Austrian Genetic Engineering Act.

Nevertheless, as far as plant breeding is concerned, the ECJ ruling was praised by environmentalists. In science and industry in the field of plant breeding, however, this judgment is disappointing. From an objective point of view, the judgment means objectively baseless unequal treatment of biotechnological methods. This is because DNA can also be removed by “classical”, albeit more time-consuming, methods of breeding such as radioactive radiation or using genetically modified chemicals. But these products are not classified as genetically modified organisms pursuant to the GMO Directive, because they have long been considered safe. Still, these classical methods are based on the random principle, which is not without risk, and this would not be the case with the targeted CRISPR method. 

Other countries, such as the USA, Canada, Argentina, Brazil, Australia, Japan or Israel, take a case-by-case approach. The authorities check whether newly edited plants are to be regarded as normal breeding or fall under the respective genetic engineering regulations. In fact, it remains unclear how agricultural imports from such countries are to be kept “genome editing-free”, because there is no way of proving whether the genetic modification was carried out by CRISPR/Cas (19).  

By Veronika Wolfbauer Counsel and Sandra Kasper, Associate Schoenherr

Incorrect land register entries may trigger public liability. But in a recent decision the Austrian Supreme Court (1 Ob 198/18a) held that incorrect land register entries can only constitute public liability claims for a certain group of people.

The present case

In 2000 a woman agreed to transfer real estate to her nephew. A prohibition on encumbrance and sale (Belastungs- und Veräußerungsverbot) in favour of the nephew’s son was also agreed. All corresponding land register entries were filed and approved by the land register court in 2001. Yet, the land register court failed to register the prohibition on encumbrance and sale, while registering all other approved entries.

Twelve years later the nephew assumed personal liability for a bank loan granted to his company. The real estate was the nephew’s only asset that could be used as collateral. Prior to granting the loan, the bank checked the land register for encumbrances. It relied on the land register’s status (Grundbuchstand) (wrongly showing that the real estate was unencumbered) and decided not to request a mortgage to secure the loan. The bank would not have granted the loan if the prohibition on encumbrance and sale in favour of the son had been registered correctly.

In 2014 the bank filed a preliminary injunction for a prohibition on encumbrance and sale of the real estate (einstweilige Verfügung zur Begründung eines sicherungsweisen Belastungs- und Veräußerungsverbots) to secure its claims under the loan agreement, which was approved by the court. Upon registering the prohibition on encumbrance and sale the land register court noticed its error and initiated a rectification procedure (Berichtigungsverfahren), registering the prohibition on encumbrance and sale in favour of the son in its original rank, i.e. with priority to the bank’s rights. The bank filed a public liability lawsuit for damages, arguing that it would not have granted the loan had the prohibition on encumbrance and sale been registered correctly.

Key findings

The Austrian Supreme Court found that:

1. In principle, an erroneous non-registration of an approved land register entry, as a violation of the provision to keep the land register accurate and complete, can constitute public liability.
2. Even if such provision is violated, only those damages which the provision in question was intended to prevent are to be compensated (Rechtswidrigkeitszusammenhang).
3. As a public register, the Austrian land register merely provides information on the legal situation of a property, not official information on assets and creditworthiness.
4. Consequently, the provision to keep the land register accurate and complete only protects persons who either already have rights registered in the land register or are directly aiming to constitute such rights. Therefore, only these groups of people may assert public liability claims based on incorrect land register entries.

Summary and open question

In principle, incorrect (including missing) entries in the land register trigger public liability. However, according to a recent decision of the Austrian Supreme Court, only persons who either already have rights registered in the land register or are directly aiming to constitute such rights are entitled to public liability claims based on incorrect land register entries.

This particularly affects the common banking practice of only requesting registrable mortgage certificates (EPU; eintragungsfähige Pfandurkunde) from debtors (after checking the land register for encumbrances) while not registering the mortgage to avoid registration fees. Such creditors cannot rely on the correctness or completeness of the land register and therefore bear the risk of missing, incomplete or incorrect land register entries.

Finally, it remains unclear whether only partial registration of a mortgage would suffice to constitute public liability claims in the amount of the whole mortgage, i.e. also for the unregistered part. In future, creditors will need to carefully assess whether to always register mortgages with the land register in the full amount to avoid suffering damages due to incorrect land register entries. 

By Miriam Simsa, Partner and Philipp Kalser, Associate Schoenherr