Reincorporations in Europe: Control Matters More Than Taxes

Several European firms have chosen to transfer their registered office to a different country, mostly the Netherlands, in the last few years. Most recently, Spanish company Ferrovial and Italian company Brembo announced their intention to reincorporate in the UK and in the Netherlands, respectively. This phenomenon has raised concerns about possible unfair competition from the Netherlands (a European Delaware?) and about the reduced attractiveness of domestic regulatory frameworks. Some national legislators are considering introducing Dutch-style provisions to keep companies in their home jurisdiction.

Within Europe, 36 firms (with a market cap above one billion euro as of the end of 2021) have reincorporated during the period 2000-2021. Figure 1 clearly identifies the Netherlands as the ‘winner’, attracting 22, or 61% of the reincorporating firms, and Italy as the ‘loser’, with 15 (42%) outgoing firms. Reincorporations in Italy are ramping up: 93% of the cases occurred after 2010.

Figure 1: reincorporation inflows and outflows by country

In a recent paper ‘Così non fan tutte: An analysis of Italian companies moving abroad’ we analyze reincorporations within Europe.

We identify three main reasons for moving the corporate seat: (1) expansion, ie the desire to grow internationally through additional investments (capex) and/or M&A transactions; (2) tax saving; (3) regulatory arbitrage, ie taking advantage of a looser regulatory framework, for example to adopt otherwise inaccessible Control-Enhancing Mechanisms and/or takeover defenses (hereinafter, jointly referred to as ‘CEMs’).

Our evidence shows that both the expansion and the tax saving motivations play at best a minor role in firms’ decision to reincorporate. On the other hand, we find strong support to the regulatory arbitrage hypothesis, especially for firms moving to the Netherlands, whose regulation is particularly permissive. Firms’ CEM choices, however, are remarkably different for Italian and other European firms. Italian companies reincorporating in the Netherlands frequently use multiple voting right (‘MVR’) shares providing controlling shareholders with additional voting power; they normally follow a loyalty scheme, attributing increasingly more power to ‘loyal’ shareholders over time (10 votes on average, but some schemes provide up to 20 votes per share). Other European firms moving to the Netherlands, instead, tend to insert in their bylaws supermajority provisions typically associated with director election and removal.

Dutch firms, on the other hand, often establish a protective foundation serving as a takeover defense. Such foundation typically: a) sells non-voting depository receipts to the public; and b) holds an option to request the issuance of additional shares at nominal value (a US-style poison pill). Several Dutch firms make use of supermajority provisions, possibly in addition to the protective foundation.

In a nutshell, virtually all firms that choose the Netherlands in our dataset use CEMs; however, not all follow the same pattern (così non fan tutte). Perhaps the most striking difference regards the incidence of MVR shares, widespread among Italian firms and negligible among both other European and ‘native’ Dutch firms.

The reasons behind the divergent behavior of Italian firms may be more than one. Italian founders may attribute a higher value to family control. This might be, in turn, driven by the desire to defend their business against a more aggressive domestic political class, in the vein of Mark Roe. A complementary explanation may be connected to a more ‘deferent’ approach by Italian courts, giving more discretion to shareholders’ decisions. This interpretation is consistent with anecdotal evidence concerning one of the reincorporations (Mediaset) where the original scheme implying MVR shares was not rejected by the Italian court, but was subsequently prohibited by a Dutch court on the basis that the unequal treatment of shareholders was not justified against the following test: ‘whether (i) there is an objectively justifiable reason (for it), (ii) whether the scheme is suitable to achieve the objective, (iii) whether the scheme is necessary to achieve the objective, and (iv) whether (it) is proportionate to the objective it pursues’.

The different pattern we identify has important governance implications. Dutch firms and European (other than Italian) firms reincorporating in the Netherlands aim at protecting the board. On the contrary, Italian firms aggressively boost the voting power of the controlling shareholder, which, after completion of the loyalty program, ends up holding, on average, 40.8% of equity capital and 64% of the voting rights (a 23.2% wedge). Consequently, holding 20.8% (12.5%) of capital allows controllers to hold half (one third) of the voting rights.

The risk of entrenchment becomes more severe in the long run, since shareholders can retain control while progressively reducing their equity stake. Furthermore, since MVRs are cancelled in case the shares are sold, controlling shareholders (and their heirs) might have little incentive to sell their equity stake to a prospective buyer with superior managerial skills, because they would be unable to monetize the value associated to corporate control. National legislators should think twice before importing Dutch-style solutions which may well exacerbate domestic problems.

Massimo Belcredi is Professor at Università Cattolica del S.Cuore.

Lara Faverzani is Research Fellow at Università Cattolica del S.Cuore. 

Andrea Signori is Associate Professor at Università Cattolica del S.Cuore.