Loyalty Voting Rights in Belgium: Nothing More than a Control-enhancing Mechanism

Loyalty voting rights have been high on the agenda of legislatures in Europe. In 2019, Belgium decided to allow listed companies to adopt loyalty voting rights, ie, double voting rights for shareholders who have held their shares for more than two years. The underlying goal of the Belgian legislature was to combat short-termism and encourage IPOs.

In a recent article, published in the European Company and Financial Law Review and also available on SSRN, we present novel empirical evidence on the use of loyalty voting rights in Belgium and argue that loyalty voting rights mainly function as a control-enhancing mechanism for insiders.

Our empirical evidence finds that about 10% of Belgian companies listed on Euronext Brussels have adopted loyalty voting rights since it became legal in 2019. Almost all adoptions took place in the first three years (2019-2021). It therefore appears that there was no gold rush on loyalty voting rights among Belgian listed companies. This is perhaps surprising, as almost 60% of the other listed companies could have easily adopted loyalty voting rights upon the vote of the insiders alone (assuming normal attendance rates) but decided not to do so. In addition, none of the IPOs since 2019 opted for loyalty voting rights, which shows that the second goal of the Belgian legislature to encourage IPOs has not (yet) been achieved.

With respect to the goal of combatting short-termism, we developed two conceptual models that show how short-termist pressures could translate into corporate behaviour. In the investor short-termism model, the myopic behaviour of managers is caused by short-termist institutional investors and asset managers who disproportionally succeed in influencing corporate decision-making. In the managerial short-termism model, short-termism originates from the managers directly, facilitated by a failure of shareholders to monitor this managerial short-termism.

However, for both models, it is difficult to see how loyalty voting rights would help to combat short-termism. In the investor short-termism model, it is unlikely that the silent majority of long-term shareholders will turn into activists simply by virtue of having additional votes. In the managerial short-termism model, it is unclear what can be accomplished by granting double voting rights to dispersed shareholders, since their lack of incentives to monitor managerial short-termism will not be affected by extra votes. The only realistic way in which loyalty voting can have an impact on managerial short-termism is by allowing an (aspiring) long-term-oriented controlling shareholder to build a larger stake, in order to better discipline short-termist management and capture the money supposedly left on the table by the company not pursuing long-term value maximization (whether controlling shareholders are actually more long-term oriented is analysed by one of us in other work).

Our empirical evidence confirms that loyalty voting rights are almost exclusively used by controlling shareholders (or at least by large insiders). The companies that adopted loyalty voting rights typically already had a concentrated ownership structure, slightly more so than the average. In most cases, the insider vote alone guaranteed adoption, regardless of how the minority shareholders voted (assuming a realistic attendance rate of 65%). Non-insiders on average voted against the adoption of loyalty voting rights.

Consistent with empirical studies in Italy and France, loyalty voting rights in Belgium are almost exclusively used by insiders and create a significant and immediate voting bonus of on average of 11 percentage points. Our research also shows that, at least in some cases, insiders use loyalty voting rights to decrease their stake while retaining control. This can have a negative effect on the long-term incentives of controlling shareholders, although it can also have a positive effect more generally if it allows the company to conduct a capital increase to fund further long-term investments, without insiders losing control (and we find some examples of this).

Overall, our empirical data supports the view that loyalty voting rights mainly serve to leverage the control of insiders and thus function as a control-enhancing mechanism.

This is consistent with the design of the Belgian legal framework, which favours controlling shareholders and other insiders, as the majority threshold to adopt loyalty voting rights is lower than regular amendments to the articles of association (two-thirds instead of 75% majority). In addition, shareholders who are already holding their shares in registered form for more than two years (in practice mostly controlling shareholders) can immediately benefit from loyalty voting rights.

While our conclusion that loyalty voting rights mainly function as a control-enhancing mechanism is not fatal from the perspective of combatting short-termism, it does raise some questions for proponents of loyalty voting rights. Loyalty voting rights allow insiders to control the company with a smaller equity stake, which exacerbates the incentives to extract private benefits of control. This is especially worrying for existing minority shareholders who are faced with a midstream change to the governance of a company. The case for allowing loyalty voting rights is the strongest at the IPO stage, but so far, Belgian companies have only adopted loyalty voting rights in the midstream phase.

Finally, we also note that loyalty voting rights are in practice much closer to dual-class shares than they first appear. The obvious question then becomes: why does the Belgian legislature not allow dual-class shares for listed companies? And perhaps more controversially: is it really warranted that minority protection is so much weaker for loyalty voting rights than for dual-class shares? If loyalty voting rights are in the end nothing more than a control-enhancing mechanism, we fail to see the policy reasons for this wide divergence.

This blogpost is based on a paper published in the European Company and Financial Law Review.

Steven Declercq is an attorney at the Dutch-Speaking Brussels Bar.

Jeroen Delvoie is a Professor at Vrije Universiteit Brussel and an attorney at the Dutch-Speaking Brussels Bar.

Theo Monnens is a PhD Candidate at the University of Antwerp.

Tom Vos is a Visiting Professor at the Jean-Pierre Blumberg Chair (University of Antwerp) and an attorney at the Dutch-speaking Brussels Bar.