Equal Treatment of Shareholders – Can There be Too Much of it?
Article 3.1 (a) of the EU Takeover Bids Directive (2004/25/EC) expresses the principle of equal treatment of shareholders, which has been applied as a prohibition on price differentiation between share classes with different voting rights in the context of takeover bids in Sweden. With the increasing use of dual voting class structures in companies such as Google, Facebook and Snapchat in mind, we raise the question whether the Swedish application is in line with the rising global demand for active, long-term shareholders in our article ‘Equal Treatment of Shareholders – can there be too much of it?’.
Article 3.1 (a) of the Takeover directive expresses one of the fundamental principles of takeover regulations globally: during and in connection with a takeover bid, the offeror must treat the shareholders in the offeree company equally. The principle has always been at the centre of Swedish takeover regulation, introduced in the early 1970s. In Sweden though, the principle has become the focus of the public discussion on several occasions, more specifically with regard to how the principle should be applied when it comes to share classes with equal economic rights but different voting rights. Are such classes different enough for the principle not to exert its demand for equal treatment between holders of the different share classes in the event of a takeover bid on a dual voting class company, or should they be regarded as one and the same in this respect? For non-Swedish observers, this might seem like a theoretical question, but in the Nordic countries this is not the case. Approximately 50 % of the listed companies have a dual voting class share structure in Sweden (including Volvo, H&M, Ericsson and Electrolux), and with the high takeover activity of 20 - 25 takeovers a year, the question is all but theoretical.
The answer in Sweden was for a long time that it was within the right of the holders of high vote shares (so called A shares) to demand a higher price than the price paid for the low vote shares (B shares) in a takeover. In 2009, however, a ban on price differentiation between A and B shares was introduced, and today holders of A and B shares in the offeree company are for all practical purposes required to be treated equally by the offeror.
In the article we problematize this development and the widening of the scope of the principle of equal treatment from an active shareholders’ perspective. In multiple international public policy documents, a growing demand for active, long-term shareholders in listed companies has been expressed. Such ownership has been a dominant form in Swedish listed companies for a long time. More than two thirds of Swedish listed companies have controlling shareholders with large stakes in the companies – owners that generally play an important part in the governance of the companies, thereby fulfilling the desired active shareholder functions.
The dual voting class structure in Sweden has played an important role for active shareholders in Sweden in two respects. First, it constitutes a control enhancing mechanism, allowing an investor to acquire enough votes and control to be able to influence and engage in the management of a company without having to buy a sizable part of a listed company. Secondly, and that is the focus of our article, the possibility for holders to demand a control premium for A shares in a takeover bid has given the A share holders, most often the controlling shareholders, the possibility to get compensation for their increased costs of their governance activities – typically the costs for information gathering, the costs and increased risks of an unbalanced investment portfolio, and the work required to keep a company innovative, dynamic and cutting edge.
The demand for equal treatment between A and B shareholders has put an end to this practice, and the active shareholders can no longer acquire compensation for their governance costs through the means of price differentiation in takeover bids. This, we hypothesise, might affect the engagement of shareholders in Swedish companies negatively. And in light of the demand for active shareholders we raise the question: when it comes to equal treatment of shareholders – can there be too much of it?
Rolf Skog is Honorary Professor of Company and Stock Exchange Law at the School of Business, Economics and Law of the University of Gothenburg.
Erik Lidman is a Doctoral student at the School of Business, Economics and Law of the University of Gothenburg.
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