The Proposal on a Directive on Shares with Multiple Voting Rights

Multiple Voting Rights (MVR) shares are well known in almost half of the EU/EEA Member States, including all five Nordic member states. They are becoming more frequent even in the largest IPOs in jurisdictions where they were unfamiliar just a few years ago. Stock exchanges that used to prohibit them are revising their stance to stay globally competitive. It is thus strange, to say the least, that the EU is in the process of adopting new legislation in the form of a proposal for a directive that would seriously curtail the use of MVR shares and prevent their use. The proposal appears uninformed of this global trend and based on misconceptions that by now should have been overcome.

In a recent paper on this subject, I explore these old misconceptions that have confounded the jurisdictions that lack experience with these, rather ordinary, financial instruments of investment.

First and foremost, there’s the old canard that MVR shares pose a special risk of abuse of control, which, of course, is wrong as control (and hence its abuse) is determined by the number of votes at your disposal and not how they are distributed on the individual shares. Consequently, national laws on corporate governance need provisions to prevent abuse of control regardless of the share structure of the individual companies.  The most recent survey on this matter in 2016, suggests that these provisions are indeed in place without any need for harmonisation.

There’s also the misconception that parity between investment and votes is necessary to ensure efficient governance, which overlooks the fact that no such parity is ever present, because the price of shares, and hence of the votes they carry, vary at all times and may over time entail a great difference between what individual shareholders have paid for them. It also overlooks that MVR shares are only different from one-share-one-vote (OSOV) shares in respect of the votes they carry, not the right to share in the cash flow of the company. This fact is sometimes obscured by the notion of ‘private benefits’ that may, or may not, be extracted by a controlling shareholder. Note, however, that, if such benefits have a measurable financial quality, they are forbidden and if they don’t, they are unlikely to be of importance to company performance. Private benefits in economic literature appear to take on the role of monsters under the bed, often feared but seldom identified. To sum up, the financial structure of a company limited by shares, be that MVR or OSOV, should have no bearing on performance. Predictably, the studies instigated by the European Commission (EC) found no causation between share structure and share performance, which is why their onslaught against MVR shares back in 2007 had to be abandoned, and new studies even point to benefits from an MVR structure. In the Nordics, where MVR shares have been ubiquitous for decades, and are combined with strong investor protection, we find that these shares are relied upon particularly by industrial foundations to ensure long-term strategic ownership of listed companies—no doubt a reason why many Nordic companies are doing so well internationally, with Novo Nordisk as a recent example. It may also help explain why, in an unprecedented move, both the Danish Committee on Corporate Governance and the Danish Committee on Foundation Ownership issued a joint statement warning against the consequences of the directive proposal.

The persistence of these old misconceptions should be a problem only for those jurisdictions that harbour them, and competition is likely to cull their number without the need for harmonisation. Indeed, one of the major powers of the EU and a stalwart of opposition to MVR shares for decades, Germany, has recently changed its position and will now allow them again. And yet, the European Commission has chosen this moment to forward a proposal that is so committed to the outdated view of MVR shares as being problematic that it can be considered positively schizophrenic: The schizophrenic character of the proposal stems from the fact that it is made up of two very different parts, the former contradicting the latter.

The first part promotes the use of SME-Growth Markets (SME-GM) by making MVR shares available in all the EU. It has dawned on the EC that those who have created an SME successful enough to contemplate using an SME-GM to attract funding are reluctant to lose control of their company to external investors when that finance can be achieved from banks without any claim for control as long as the loans are being served. MVR shares may help overcome this reluctance.

It is questionable whether this first part on pre-listing behaviour has any justification for harmonising the use of MVR shares. After all, a member state that excludes the use of MVR shares hurts nobody but itself. The accompanying Impact Assessment makes no secret of the fact that there is no empirical support for harmonisation, which should have meant the end of the proposal, as per the principles of subsidiarity and proportionality enshrined in Art 5 of the EU Treaty. Unfortunately, that’s not how the EU works these days.

The proposal then contains a second part concerning how companies should behave once they have been admitted to public trading. This part is entirely independent from the first one as it concerns post-listing behaviour. Formally, the two parts are connected because where an SME uses MVR shares to enter an SME-GM, the post-listing requirements would apply, but if that latter part of the proposal is adopted, it is unlikely that member states would maintain two separate regimes on post-listing behaviour; more likely, the second part would come to apply generally as a uniform regime to great detriment to the member states that are familiar with MVR shares and know they are harmless. The global competitive advantage possessed today by the member states that apply MVR shares would be lost as the Union moves to the lowest common denominator just as the rest of the world is realising their benefits.

The second part on post-listing behaviour is committed to restricting the use of MVR shares, which is supposed to encourage companies to go public in the first part of the proposal, thus lending a self-defeating quality to the combined proposal.

What was from its conception a bad proposal has then been made worse by the European-Parliament (EP) by a string of amendments which go well beyond what could meaningfully be described as mere amendments, inter alia extending the scope of the proposal to comprise all types of companies and stock exchanges and adding their own inventory of restrictions on the use of MVR shares.

For instance, in Art 6 of the proposal, the EP even proposes the marker 'WVR' (weighted voting rights) to identify listed companies using MVR shares. This is justified with the parochial observation that the marker is necessary ‘to clearly indicate to the public that their shareholder structure is different from that of traditional companies’, which is bemusing to the many member states where MVR shares in listed companies are as usual as they are traditional.

Art 6 on post-listing transparency betrays ignorance of both national governance systems and the fact that the transparency of MVR structures based on the articles of a company is already secured through the national business registers that are accessible to the public across the EU. The only kind of MVR shares that are not transparent in this way is, in fact, the only kind that is expressly excluded from the proposal—the so-called ‘loyalty shares’, where MVR accrue over the time of possession without any consent or payment. So-called, because it is difficult to say whether the longevity of ownership is due to loyalty towards the company or mere passivity. While it makes sense to exclude these loyalty shares from a proposal that only concerns pre-listing behaviour, because loyalty shares are not relevant in that context, it is absurd not to include them in the second part that is concerned with post-listing governance and transparency. If the second part on post-listing behaviour is maintained in the proposal, loyalty shares must be included alongside other MVR shares.

Not only do the ‘amendments’ made by the EP further restrict the use of MVR shares, but many of the amendments are apt to sow confusion. That is for example the case of Art 5(1)(ba), which would exclude the reliance on MVR shares in ‘matters related to the impact of the company’s operations on human rights and the environment’. What kind of business activity does not ‘relate’ to or ‘impact’ on the environment?

Another amendment, almost as bad, is Art 5(1)(a), which requires member states to introduce a maximum voting ratio ranging from 1 to 2 to 1 to 12. Not only is the range picked at random and reflects an approach viewing MVR shares as toxic unless administered in limited doses—some kind of legal homeopathy and just as useless—but the wording itself suggests that member states can no longer allow non-voting shares because the mandated range apparently presupposes at least one vote per share.

It is now up to the Council to prevent this from becoming binding EU law. This is no way to legislate: not even sausages should be made in this manner.

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