Europe Focuses On ‘One Share, One Vote’

The European Union is preparing for an examination of the “one share, one vote” principle—an idea not exactly sacrosanct in some European countries, and one already raising the ire of some companies fearful that good governance might clash with protectionist interests.

Corporate boards in the EU employ a wide range of poison pills and similar shareholder-rights plans to prevent takeovers, particularly cross-border mergers where questions of preserving national pride might arise. Now, however, the European Commission has ordered a formal study on the practicality of making one-share-one-vote governance the law of the land.

Lobbyists already are getting down to work to thrash out complex issues. Some of them will take the side of European management boards, which would seem to be against any eventual changes to the myriad defensive national legislations designed to hinder takeovers. Though it is portraying a “we are open to all ideas” state of mind, the Commission itself presumably will be boxing from the corner representing the interests of shareholders and capital market.

McCreevy

Charlie McCreevy, commissioner of the Internal Market, delicately describes the voting rights research project as a “discussion on the adequacy of control of capital.” He told a recent meeting of the Transatlantic Corporate Governance Dialogue, a forum that brings together U.S. and EU financial legislators, that the study “will provide a systematic picture of the essential features of Corporate Europe that the European public opinion is waiting for … Any discussion about how to move on, about possible initiatives in this area, needs to be based on sound facts.”

The report will identify existing deviations from the proportionality principle in listed companies across the EU, McCreevy continued. It also will scrutinize the relevant regulatory frameworks in member states and evaluate the economic effect these deviations bring to EU investors.

Significantly, McCreevy also has stated that legislation will probably not be the best way to confront the one share-one vote issue. He suggested that a “recommendation” by the Commission might be more appropriate, which will give EU member nations the right to adopt or reject the Commission’s guidelines. EU patriots might fault this approach, but it likely stems from EC President José Manuel Barroso’s eagerness to calm Brussels-based legislative zeal.

More illumination on the one share-one vote issue comes from the office of European Parliament Member Klaus-Heiner Lehne, who points out that nations adopting any recommendation will see benefits to their own capital markets. Lehne was rapporteur (someone who shepherds a bill through the EU’s legislative process) for the EU’s Company Takeover Directive, which came into force earlier this year. His view is that any revisions to this kind of code should wait until the effectiveness of that measure can be assessed.

Studying National, Corporate Policies

The voting rights research project, which should be published next spring, is being carried out under contract by three organizations: Institutional Shareholder Services, the proxy-voting adviser to institutional investors; the Paris office of the law firm Shearman & Sterling, and the European Corporate Governance Institute, based in Brussels.

ISS states that the report will profile the structure of more than 450 companies in 16 EU member states. It will survey investors in European and international markets about their views on control-enhancing mechanisms, as well as include an overview of European regulatory frameworks. “With so many different legal frameworks and market practices across the European Union, this is no small exercise,” said Jean-Nicolas Caprasse, managing director of ISS Europe.

COMMENTS

An excerpt follows from a letter the ISS sent to the European Commission after the EC invited comments and responses to questions it raised regarding the future of the “one vote one share” principle in Europe.

Question 3:

2.1.1.1. One share, one vote

What would be the added value of addressing the issue at EU level?

(a) Deviation from the one-share, one-vote principle is an EU-wide problem. It should

therefore be addressed at the EU level for an EU-wide resolution.

(b) Specific requirements at the EU level would likely provide the impetus for local

governments to address the issue. Without EU level guidance, member states may

perpetuate unequal voting rights.

(c) Deviation from the principle has created imbalances in ownership between economic

interest and share equity that distort or impede the free-flow of investments between

different capital markets.

(d) Universal application of the one-share, one-vote principle across the EU would create

transparency in the capital markets to prevent inequalities or impediments to business, for

example, by precluding the use of unequal voting rights as an antitakeover device.

Recognizing the range of multiple exceptions to the one-share, one-vote principle across the

member states, addressing this issue at EU level would help create a level playing field necessary for achieving the main objectives of the Action Plan, i.e., fostering the efficiency and competitiveness of business and strengthening shareholder rights. The different practices applied across the EU significantly hinder the development of conditions essential for the realization of these two objectives. For example, the effective control of a company by a disproportionately small amount of capital via multiple voting shares or holding company pyramids significantly restricts fundamental shareholder rights. In addition, such an arrangement may allow poor business decision making by the controlling entity, without any redress for other shareholders.

What would be the appropriate form for any EU instrument? Please give your reasons.

Deviations from the one-share, one-vote principle appear to be common across companies in many EU member states. A report compiled by Deminor Rating (now ISS Europe) on behalf of the Association of British Insurers in March 2005 highlights the prevalence of such deviations.

Considering the size and number of companies where such deviations are prevalent, a binding measure forbidding any exceptions to this principle and requiring that companies remove them by a certain deadline may be too drastic.

ISS supports the one-share, one-vote principle, and the EU should recommend that companies follow it. However, we would not support an outright requirement of the principle, as capital markets should make that determination. Instead, a formal recommendation by the European Commission would be best suited to address this issue.

Are there, in your view, specific elements which any such instrument should cover?

Any EU instrument issued in this respect should address the various forms of deviations from the one-share, one-vote principle. These include, among others, multiple voting rights, holding company pyramids, voting and ownership ceilings, preference and non-voting shares, golden shares, and depositary receipts. The instrument should provide a clear explanation of the reasons for such action and illustrate the advantages associated with the removal of exceptions to the one-share, one-vote rule.

As stated, ISS supports the one-share, one-vote policy and opposes mechanisms that skew voting rights. Shareholders’ voting rights should accrue in direct proportion to their equity capital commitment to the company.

Source

ISS Letter To European Commission (March 30, 2006)

One subject to be investigated will be the situation in the United States, where target companies in take-over bids can issue shareholder rights plans that dilute the bid offer. According to Christopher Clerc, a lawyer with Shearman & Sterling working on the study, approximately 2,000 listed companies in the United States currently have this mechanism in place.

In Europe, shareholder rights are divided between Great Britain (where rules favor shareholders over boards and the economy is strong) and the rest of the EU (where shareholder rights vary widely and many national economies are more sluggish). Clerc explains that whatever the result of the study, the Commission was likely to examine mechanisms where a majority group of shareholders could unduly extract private benefits from controlled companies.

Chauvin

The triumvirate of consultants will hear plenty from European industry, which looks as if it is taking a cool stance on the one share-one vote idea. “We are not at all convinced that there is a need for any action at EU level. But we are waiting to see the results of the study,” says Jérôme Chauvin, a corporate-governance specialist at UNICE, the European employers’ federation. “So far, all the talks have been based on assumptions rather than facts.”

Protectionist Impulses

Behind some of the tensions are fears that national champions might be more vulnerable to takeover from foreign acquirers. France, for instance, has set up obstacles to protect all sorts of sectors. The French government’s takeover decree, however, has just come up as the subject a “reasoned opinion” from the Commission. This is a legal procedure that could presage France being arraigned before the European Court of Justice. The Commission would then argue that France’s anti-takeover provisions hinder the free movement of capital.

Beres

Further evidence of the behind-the-scenes sensitivities in France comes from Pervenche Bères, a French socialist member of the European Parliament, who goes so far as to “deplore” that the Commission has even ordered its study. She says that “the rejection of the principle ‘one share, one vote’ as an obligation to every member state is justified.” Berès, chairwoman of the influential Economic and Monetary Control Committee in the European Parliament, did, however, emphasize the need to provide for transparency, responsible ownership, and good corporate governance.

When the subject of poison pills comes up in Germany, minds often turn to Volkswagen; the firm’s complicated ownership structure has helped to keep the carmaker out of harm’s way of predators. Last summer there were indications that Ford was seeking to buy VW, but the company’s statutes prevent any single shareholder taking more than 20 percent of the voting rights, creating a “poison pill” stake. In Japan, pill-popping includes the right of a target company to resort to all sorts of techniques, such as the option to review a bid for up to 30 weeks.

Certainly the study will take into account a paper from Henrik Cronqvist, of Ohio State University, and Mattias Nilsson, of Worcester Polytechnic Institute, who found that return on assets was significantly lower for firms with concentrated vote control. In other words, one-share-one-vote principles are more efficient.

The re-emergence of the one-share-one-vote issue in the EU goes back at least to a 2002 report by company law experts, chaired by Professor Jaap Winter, a Dutch authority on corporate law. That study concentrated on the modernization of European company law. A subsequent communication from the European Commission reviewed the Commission’s action plan on company law and corporate governance, which includes attention to strengthen shareholders’ rights.