Spanish Loyalty Shares: Effects on the General Shareholders’ Meeting, on Takeover Bids and on Significant Holdings

The Spanish legislator has taken advantage of the implementation of Directive (EU) 2017/828 as regards the encouragement of long-term shareholder engagement to incorporate so-called ‘loyalty shares’ into our corporate system. These shares attribute a double vote to shareholders who have held them uninterruptedly for a minimum period of two years. They are only allowed for listed companies that also choose to incorporate them into their by-laws (‘opt-in’ system), for which certain reinforced majorities and even an unusual regime of ‘renewal’ of the resolution after five years since approval are imposed. The companies that introduce loyalty shares must keep a special register in which the shareholders who want to receive the double vote must be recorded, which is public, so that shareholders and investors can know both how many voting rights exist at any given time (depending on the shareholders who enjoy the loyalty votes at any time) as well as the immediate changes that these rights may undergo (depending on the shareholders who have requested to be registered while not having yet held the shares for the relevant period).

This reform breaks with the traditional view of the rule of proportionality between participation in the share capital and voting rights as a genuine organizational principle of public limited companies (‘sociedades anónimas’). Shares that directly or indirectly alter the proportion between nominal value and voting rights had been prohibited so far with only two exceptions: (1) non-voting shares, which are characterized by configuring a class of shares that compensates for the lack of voting rights with an economic privilege; and (2) caps on voting rights that can be included in the by-laws, and which are in use in a few listed companies.

Three rationales have been invoked by the Spanish legislator to justify the introduction of loyalty shares. First, loyalty shares may help promote ‘the long-term involvement of shareholders in listed companies’ and combat short-termism, which, supposedly, afflicts stock markets. Second, loyalty shares are in use in other European countries (such as France, Italy, the Netherlands and Belgium). Their introduction reduces the risk that Spanish companies be tempted to transfer their registered office to jurisdictions that are more flexible and permissive on deviations from the proportionality principle. Finally, loyalty shares may promote IPOs, a circumstance that led the Spanish Comisión Nacional del Mercado de Valores to actively promote their introduction.

In a recent paper published in SSRN, I analyse, based on the new regulation, the effects of loyalty shares on the operation of quorums and voting majorities for general shareholders’ meetings. I also analyse the consequences that loyalty shares will have for companies that include them in their by-laws in relation to two specific regulatory regimes, namely, the mandatory takeover bids regime applicable to shareholders crossing the threshold of 30% of the issuer's voting rights and specific significant holding rules relating to both listed companies and certain regulated sectors, such as banking or insurance.

Javier García de Enterría is a Consultant and former partner of Clifford Chance and Professor of Commercial and Corporate Law at CUNEF (Madrid, Spain).