They Are at It Again

The European Commission (‘EC’) should be commended for its work on the Capital Markets Union, notably the package of proposals on company listing presented last month. Unfortunately, among the new proposals is one that appears to seek harmonisation for no better reason than harmonisation itself, which, as the readers of OBLB know, is contrary to the basic principles of the Union.

This is the Proposal on shares with multiple-voting rights (‘MVR’), which would require all Member States to allow national companies that are SMEs and seeking admission on an SME growth market to adopt a MVR structure, ie dual class shares. Contrary to the rest of the package, which offers a fair attempt at addressing important outstanding issues relevant for making listing more efficient, the MVR Proposal, which is more in line with the EC’s sustainable corporate governance initiatives, exposes how the EC’s obsession with harmonising national law on corporate governance makes it venture beyond what could be reasonably supported by empirical facts or common sense.

First and foremost, the necessary empirical and legal basis to adopt a harmonising instrument as the one suggested is lacking.

As the Commission itself observes, the uniform Company Law Directive, which comprises legislation adopted over more than half a century, does not regulate MVR for the very reason that they are tightly interwoven with the corporate governance systems of the individual Member States and thus unsuitable for harmonisation, as that might tear into the fabric of property rights in contravention of the fundamental principle enshrined in Art 345 of the Treaty on the Functioning of the European Union (‘TFEU’).

The mere fact that governance systems may vary among Member States is not in itself sufficient to overcome the Principle of Subsidiarity of Art 5(3) of the Treaty on European Union (‘TEU’), so important to delineate the powers vested with the Union authorities and its constituent Member States. One also looks in vain in the case law of the Court of Justice of the European Union (‘CJEU’) to find support for the notion that differences of national law should in and of themselves amount to restrictions on treaty freedoms.

There will always be minor differences between Member States due to culture, language, and, inevitably, law, which is a strength of the Union ensuring broad popular support, experimentation, flexibility, and tolerance. The very existence of the Principle of Subsidiarity is testament to this acceptance of diversity.

In order to respect that Principle, solid empirical evidence must be presented that any particular variation in national corporate governance systems is sufficiently detrimental to harm the functioning of the Union. This is not the case here.

The same freedom secured by the CJEU’s case law for all citizens to avail themselves of the jurisdiction of any Member State that they prefer when establishing a company (see the case law following Centros), and the very freedom for established companies to transfer to any Member State of their choice as secured by the Mobility Directive also reflect the inalienable right of each Member State to design its national company law as it pleases, as long as it is not discriminatory or in any other way restricts the freedoms of companies from other Member States.

Second, the reasoning offered in the Proposal appears to be at odds with itself.

The Proposal begins by extolling the virtues of MVR as a measure to ensure that the founders of an SME may seek investment by use of a public trading venue without sacrificing their ‘focus on their long-term vision for the company.’

But then it is suddenly asserted without any empirical support that MVR may cause ‘specific problems if not properly mitigated.’ The paragraph then goes on to exemplify a range of problems that are well-known in company law, like the abuse of power by controlling shareholders, for example in the form of private benefits extraction through related party transactions (‘RPT’).

This is odd, because the problems identified are not specific to MVR, but spring from the existence of control, ie enough votes to determine the outcome of a vote at the AGM, which obviously is a problem irrespectively of whether the company has a MVR structure or a one share, one vote (‘OSOV’) structure.

It is not possible to argue a priori that an MVR structure would increase the risk of such abuse of power, because it may equally be argued that the OSOV principle has the effect of dispersing the influence of shareholders and thus enables control by holding fewer shares.

Only if it is empirically documented that MVR provoke these ‘specific problems’ would the reasoning make sense. But no such empirical evidence is offered. In fact, the Proposal itself mentions the Commission’s own 2007 Study, which found no detrimental effects of MVR. What is really bewildering is that the ‘specific problems’ concerning abuse of control are already addressed both in the national law of Member States and even in EU law (see SRD2 on RPT).

It is also odd that the Proposal goes on to suggest that the existence of MVR may result in controlling shareholders blocking certain resolutions, including those aimed at ‘sustainability goals.’ This argument appears designed simply to make use of the concept of sustainability, which, it is granted, often triggers political support without any reflection on the subject matter at hand.

There is no explanation why a shareholder enjoying MVR would vote against ‘sustainability goals.’ Because shareholders, all shareholders, find that the value of their shares represent the present-day value of the long-term financial performance of their company, there is no reason why any rational shareholder would block such a decision. On the contrary, experience shows that shareholders are acutely aware of the risks connected to climate change and are anxious for these problems to be dealt with by the companies they invest in.

It is true that the aforementioned initiative on so-called sustainable corporate governance was based on the erroneous idea that shareholders were somehow moved by an urge to prevent their company from addressing climate problems. But it should not be overlooked that this was entirely without empirical basis, that the initiative was repeatedly rejected by the Regulatory Scrutiny Board for this very reason, and that the present proposal for a directive on sustainable due diligence (‘CSDDD’) has been modified considerably in negotiations. The idea that shareholders present an obstacle to the green transition was an unfortunate aberration from the normal course of EU company law that should not be repeated.

The only situation where a shareholder would block a proposal based on sustainability considerations is where that proposal would be economically detrimental to the company without any prospect of its securing its viability in the future. But if that was the case, then no shareholder would vote for it irrespectively of an MVR or OSOV structure. Where such measures are deemed necessary, and they often are, they fall outside company law and must be mandated by legislation on environmental protection or the like.

Thus, there is no valid reason to harmonise corporate governance in this way and many good reasons not to.

Jesper Lau Hansen is Professor of Law at the University of Copenhagen.