Dual-class shares on the rise. Some remarks on the (re)introduction of multiple-voting rights in German stock corporation law

Dual-class shares are on the rise. Regulators and lawmakers in the EU and elsewhere have recently relaxed their rules on the permissibility of dual-class shares or are about to do so. Thereby, they abandon the long dominant notion that a ‘one share, one vote’ regime is the superior regulatory strategy. In Germany, the current coalition declared at the beginning of its term of government in December 2021 its intention to develop a comprehensive strategy to support ‘start-ups, founders of new enterprises and innovation’. The ensuing efforts led to a ‘Law on Financing Investments for Securing the Future’ (ZuFinG) which came into force on 15 December 2023. This law reintroduces, inter alia, multiple-voting rights for stock corporations. In a forthcoming article I give an overview of this reform of multiple-voting rights in the German law of stock corporations. The article aims at contributing to the EU-wide debate on dual-class structures, but may also be of interest beyond the EU since the reform of such structures is currently also being discussed in the UK and elsewhere.

The aims of the reformers for abandoning the creed of ‘one share, one vote’ are quite similar all over the world. In times of a decline in new public listings the exchanges around the world face fierce competition for new issuers. While the operators of trading venues in the EU, but also in the UK, fear to fall behind their Asian and US competitors, they observe that especially the US markets have attracted numerous listings of tech firms, start-ups and growth companies since the IPO of Google in 2004. This development has been attributed, among other things, to the liberal rules on multiple-voting rights in the US. Indeed, with multiple-voting rights controlling shareholders can have the cake and eat it. Endowed with such rights they are able to retain control while raising money through the public markets to finance their visions. As a socially desirable side-effect—some argue—multiple-vote shares would help founders once listed to avoid short-term market pressures. The official comments on the recent reintroduction of multiple-voting rights in the German law of stock corporations echo these rationales for law reform.

However, allowing for dual-class structures comes with costs. The decoupling of control and economic ownership increases perverse incentives for controlling shareholders to extract private benefits from the company. The entrenchment of control through multiple-voting rights stifles shareholder activism by institutional investors. Furthermore, such entrenchment weakens the market for corporate control. As has been convincingly pointed out in the literature, these effects exacerbate over time, because (1) controlling shareholders tend to reduce their economic exposure by selling shares and (2) the superiority of the founder’s leadership skills which might outweigh the costs in the beginning will recede as time goes by.

When trading off the benefits and costs of reintroducing multiple-voting rights in the law of stock corporations, German legislators heavily stressed the incentives for founders to go public against the backdrop of fierce competition among trading venues. However, the impact of multiple-vote shares as a controlling device carries only as far as corporate decisions are taken by a majority of the shareholders’ votes. Insofar, the effect is limited under German law since the shareholders’ meeting wields decision-making power only on a limited set of subject matters. Among them is the amendment of the corporate charter. Such a decision, however, requires not only the majority of votes, but also three-quarters of the share capital represented at the meeting.

After the German legislators decided to lift the ban on multiple-voting rights on grounds of regulatory competition with a view to founders who consider going public, one might have expected them to go ‘all in’ and opt for the most liberal rules available. Because going for less raises the question whether a liberal, but still stricter regime than those of the competitors helps in gaining a competitive edge. German lawmakers, however, took a different route by introducing considerable restrictions on dual-class share structures in listed companies. This bifurcated regime with rather liberal rules for non-listed and more restrictive rules for listed companies might be due to the consideration that a more liberal trial-and-error strategy for listed companies could lead to reputational damage for the domestic financial markets that would be costly to repair.   

The general rules on multiple-voting rights which apply to both listed and non-listed stock corporations can be distinguished into (1) legal requirements for the creation of multiple-vote shares and (2) legal restrictions on the design of multiple-vote shares. As to the first, it is noteworthy that the endowment of shares with multiple-voting rights has to be allowed for in the corporate charter and, furthermore, requires a resolution in the shareholders’ meeting to which ‘all shareholders affected’ give their consent. In principle, all holders of voting shares are ‘affected’ in this sense. As a consequence intended by the legislators, the creation of multiple-vote shares after the initial listing is practically impossible. As to the latter restrictions on multiple-vote shares, the maximum weighted voting ratio is 10:1. With regard to resolutions on the appointment of the statutory auditor or a special auditor multiple-vote shares carry only one vote. Further restrictions may be stipulated in the corporate charter.

Additional restrictions are in place for listed companies. Firstly, multiple-voting rights expire if and when the multiple-vote shares are transferred (ie, a transfer-based sunset clause). Such a ‘transfer’ encompasses any legal succession. Secondly, multiple-voting rights expire ten years after the initial listing, provided that the corporate charter does not stipulate a shorter expiration period (ie, a time-based sunset clause).  However, the statutory expiration period can be extended once for a maximum of ten (more) years by a corresponding amendment of the corporate charter.

What to make of these new rules on multiple-vote shares? Could they serve as a model for legislators elsewhere? Or are they unconvincing or even flawed? To help the reader make his or her own judgment some observations and remarks are, finally, added on two aspects of the new regime. (1) In contrast to the UK listing rules, there are no personal requirements for holders of multiple-voting rights. At the outset, this seems to be a prudent decision. However, companies and other legal entities are allowed to hold multiple-vote shares, which can lead to the noxious perpetuity of such shares. At least for listed companies this result is prevented by the time-based sunset regime. (2) Perhaps the most contentious issue regarding dual-class share regimes in Germany and elsewhere is the introduction of a time-based sunset clause for listed companies. And indeed, the well-known criticism of a ‘one size fits all’ approach carries some weight. The objections raised can, however, be addressed by the option to extend the period in which the dual-class structure remains in place. The new German sunset rules, unfortunately, only go halfway down this route, as they allow for an extension of the expiration period only once. A more convincing approach would be to allow such an extension repeatedly as long as it is supported by a (qualified) majority of the non-controlling (and unaffiliated) shareholders.  

Klaus Ulrich Schmolke is Law Professor of Private, Commercial and Business Law, and Comparative Law at Johannes-Gutenberg-University in Mainz, Germany.

The author’s full article can be found here.