The European proposal to open up multiple-vote share structures to listing companies: a simplification in trompe l’oeil

The European Commission has included in its Listing Act package, dated December 7, 2022, a proposal for a Directive on the use of multiple-vote share structures (‘MVSSs’) by companies seeking the admission to trading of their shares on an SME growth market (‘SME GM’)[i]. This endeavour is both practically important for potential candidates to listing and politically significant for the Commission itself, given its long-standing inclination towards the ‘one share – one vote  principle’. Pressing considerations are now leading the EC to propose requiring Member States to offer companies that are candidates to listing on a SME GM the possibility of using MVSSs, so as to enable their promoters to retain or even strengthen their control despite the IPO[ii]. The aim is to incentivise growth and innovative companies to list on EU capital markets, which are facing attrition and regulatory competition from their largest global rivals. In recent years, the use of MVSSs has indeed increased in countries that did not prohibit them, such as the US, leading to their authorization on competing Asian and British markets.

The pseudo mandatory ‘one share – one vote  principle’, which is in fact an exception under ordinary company law, is thus being attacked in its final frontier: that of listed companies. The EC proposal is, however, cautious in two respects. Firstly, it limits the scope of the reform to companies applying for admission to an SME GM. Secondly, it provides safeguards for the use of MVSSs, either at the time of their adoption or during their lifetime. These safeguards, considered in terms of fair treatment of shareholders, must necessarily include the adoption of the MVSS by a qualified majority at the shareholders’ meeting and a quantitative limit to the voting disparity. The deliberate choice has been made to harmonize the rules at European level as little as possible, for reasons of flexibility and efficiency. It is simply added that Member States may adopt additional safeguards in the interests of shareholders and the company.

The terms of this initial balance are in the process of being substantially redefined within the European Parliament. If the path opened up by the European Parliament’s Committee on Legal Affairs for the Committee on Economic and Monetary Affairs, in a draft report dated June 14, 2023[iii], were to be followed, significant changes would ensue, adding to the shortcomings of the Commission’s proposal and leading one to question the very usefulness of such a reform.

The draft report envisaged that the scope of the directive will extend to regulated markets. On the face of it, this extension is to be welcomed. In any case, it is understandable, since some Member States do not have SME GMs. As for the Member States that already authorise MVSSs on their regulated markets, a limitation to SME GMs would have led to the paradoxical result of creating regulatory constraints for these growth markets that do not find application on larger markets.

This scope extension has, however, a negative impact on the content of the proposed reform. Overall, it leads to stricter conditions for using MVSSs, including for SME GMs. In particular, the stricter conditions are achieved by imposing a fixed ratio of MVSSs which ‘can only range between a one to two ratio and a one to five ratio’, which is a rather curious way of defining a maximum ratio of multiple voting. Similarly, a fixed limit of 10 years would be imposed on the lifespan of MVSSs. Furthermore, some of the safeguards provided on an optional basis by the Commission would become mandatory. This is the case for those relating to the adoption of certain collective decisions by a qualified majority or to ratification by separate votes ‘within each class of shares the rights of which are affected’. This is also the case for the prohibition to use the enhanced voting rights to block decisions reducing adverse impacts on human rights or the environment, which is hardly reassuring given the singularity and vagueness of this substantive condition.

This rigidification, dominated by a one-size-fits-all approach, seems ill-advised. Admittedly, this is only a Directive, and a certain level of differentiation will be possible at national level. The Directive would nonetheless impose a set of minimum legal requirements, which would mean that differentiation could operate upwards, by adding legal constraints for companies listed on regulated markets, rather than downwards, by providing relief for companies listed on SME GMs.

What’s more, the European proposal would lead Member States that already allow MVSSs for companies listed on regulated markets or SME GMs to tighten their conditions of use. This would be quite paradoxical for a Directive aimed to alleviate listing regularity burdens and costs. From being simplifying and liberating, the Directive would simply become a text of harmonization of further constraints, imposing conditions that are often without equivalent in relation to what already exists.

Given the current evolution to open up the remaining Member States, notably France and Germany, to MVSSs under conditions adapted to local situations and the types of markets considered, doubts increase regarding the very appropriateness of the European proposal, and its real added value in terms of European listing attractiveness, besides the ones on the legitimacy of this EU intrusion in national corporate governance[iv]. If its prime goal is to make European markets more attractive, rather than to reduce intra-European regulatory arbitrage, the proposal deserves to be reconsidered because of the effects it induces and its drawbacks in relation to the bottom-up opening-up process currently under way.

In reality, the authors of the Directive seem to be caught in a dilemma. Either the Directive simply introduces a new freedom in prohibitive Member States, leaving it up to them to set the conditions for using MVSSs, and is trivial in terms of added value given the existing situation and ongoing national developments; or, the Directive is intended above all to set minimum mandatory protections in MVSSs companies, and the Directive appears to be an element of rigidity and constraint within the Union, far from the initial objective and entrepreneurs’ expectations. The main merit of the Directive proposal would then have been its mere existence, inasmuch as the most reluctant Member States may have seen it as a further, or even determining, step in the process of accepting the inevitablity of authorising a mechanism which, in just a few years, has become an essential component of modern markets the world over. It will thus have exhausted its useful effect before it is even enacted...

The European Company Law Experts Group (ECLE) is comprised of Paul Davies (Oxford), Susan Emmenegger (Bern University), Guido Ferrarini (Genoa), Klaus Hopt (Max Planck, Hamburg), Adam Opalski (Warsaw), Alain Pietrancosta (Paris), Andrés Recalde Castells (Autonomous University of Madrid), Markus Roth (Marburg), Rolf Skog (Gothenburg), Martin Winner (Vienna University of Economics and Business), Eddy Wymeersch (Gent).

[i] https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A52022PC0761

[ii] A. Pietrancosta, « Propositions françaises et européennes pour ouvrir le vote multiple aux sociétés entrant en bourse », BJS janv. 2023, n° BJS201q7

[iii] www.europarl.europa.eu/doceo/document/ECON-PR-749139_EN.pdf; adde, Draft Opinion of the Committee on Legal Affairs, https://www.europarl.europa.eu/doceo/document/JURI-PA-750107_EN.pdf

[iv] See J. L. Hansen, A Harmonising Step Too Far – A Comment on the Proposal for a Directive on Multiple Voting Rights in SME, Nordisk Tidsskrift for Selskabsret nr. 1/2023, https://www.linkedin.com/posts/jesper-lau-hansen-7b8aa81_jl-hansen-a-harmonising-step-too-far-nts-activity-7069257976837984256-XJJM?utm_source=share&utm_medium=member_desktop