Analysis: Differentiated Voting Rights in Europe

Over the past decade, a number of European governments have implemented or debated the use of different voting rights. Most recently, France in February of last year adopted the Florange Act, whereby shares that are registered for two years will automatically receive double voting rights. Prior to this, French companies were only allowed to grant such double voting rights to shareholders having registered their shares for at least two years, provided the companies had provisions in their articles of association explicitly allowing such a structure. For companies whose articles of association are silent on double voting rights, action is necessary to preclude the automatic granting of double voting rights by a shareholder-approved bylaw amendment. Bylaw amendments in France, either in the form of a management proposal or as a shareholder proposal, require the approval of two-thirds of voting rights to be enacted. Double voting rights will be the default rule.

The feasibility of the access to double voting rights is not the same for all shareholders and could be particularly challenging for non-French shareholders as double voting rights will be automatically granted by companies to all registered shareholders holding their shares in their own names (“nominatif pur”) for at least two years. On the contrary, companies do not have this kind of obligation toward financial intermediaries in case of registered shares managed by themselves (“nominatif administré”).  In practice, this makes the acquisition of double-voting rights more complex for foreign registered shareholders.

Similarly, Italy last year introduced reforms for promoting long-term shareholder behavior through the mechanism of loyalty shares allowing Italian listed companies to grant up to a maximum of two votes per share to those shareholders who have continuously held their shares for at least two years (so-called “loyal shareholders”). Hence, the double voting rights will be granted no earlier than 24 months after shareholders’ approval, which means that it should apply as of 2017 proxy season.

In addition, the law notably provides for (i) an exceptional provision allowing for simplified quorums (i.e., the majority of the capital share attending the shareholders’ meeting) for the resolution (to be adopted by Jan. 31, 2015) of the extraordinary shareholder’s meeting approving the loyalty shares (Article 20, subsection 1-bis of Law Decree No. 91/2014); and (ii) an explicit provision excluding any withdrawal right of dissenting or absent shareholders with respect to the approval of such resolution.

Three Italian companies have so far convened a general meeting of shareholders to introduce double voting rights. These general meetings of shareholders will take place at the end of January 2015.

Market Prevalence

Looking more closely at ISS QuickScore data across individual markets, 54 percent of French companies analyzed have issued shares entitled to double voting rights according to the condition mentioned above.

In the Nordic region, multiple voting rights are granted through dual class share structures. Except for Norway such structure is most apparent in Sweden (64 percent of Swedish QuickScore companies maintain two share classes with unequal voting rights, compared to 28 percent in Denmark, and 31 percent in Finland). Sweden has a history of parting from the one-share, one-vote structure. The share capital is usually divided into A and B shares with the former usually being the super voting share and often in the hands of different family groups. Class A shares generally carry tenfold the votes of class B shares, which is also the legal disparity limit. In Finland class A shares more often carry 20 votes and class B shares one vote. There are, however, no restrictions in the market regarding how large of a difference the amount of votes between different share classes can be.

In Denmark, the current Companies Act reintroduced two years ago the possibility for Danish firms to issue non-voting shares with equal right to dividends, which were forbidden by the previous Companies Act. It furthermore enables companies to issue bearer shares. Shares with no voting rights do not carry any special cash-flow rights (such as a preferential dividend).

When analyzing multiple voting rights, ISS applies a double materiality test by (1) examining the impact of the multiple voting rights relative to the total number of voting rights (if this has high impact, for instance more than 50 percent, this means that holders of multiple voting rights can effectively sway decisions at the general meeting). Furthermore (2) ISS will examine the level of free float (a low level of free float meaning that the holders of multiple voting rights are predominantly strategic shareholders).

In the Nordic markets, the majority of QuickScore companies with a dual class structure have multiple voting rights, which on average amount to 57 percent of the total voting rights, thereby having a major influence in the outcome of votes at the general meeting. In France, the impact of the multiple voting rights is lower and reaches 37 percent.

The free float of shares with multiple voting rights is lower than 50 percent at almost three-fourths of companies in both markets. At one-third of the Nordic GQS companies, the multiple voting right shares have no free float, meaning that all the multiple voting shares are held by strategic shareholders. In France, there are no such companies. Also the proportion of companies where the level of free float of multiple voting shares is 100 percent is higher in France than in the Nordic region.

Non-voting shares, meanwhile, are often not considered to be a breach of the one-share, one-vote principle as the lack of voting is compensated by a higher dividend. Furthermore non-voting shares are seen more as debt instruments given the comparability of holders of non-voting shares and holders of debt (guaranteed or preferential dividend, no voting rights).

Most markets legally allow for companies to issue non-voting shares (exceptions are Australia, France, and the Netherlands).

In Europe, non-voting shares have been observed in Switzerland (6 percent of companies), Germany (19 percent of companies), Denmark (5 percent of companies), Russia (17 percent of companies), Spain (3 percent of companies) and Italy (22 percent of companies).

These companies on average make up 22 percent of the share capital. The free float of the voting shares amounts on average to 57 percent, meaning the ordinary voting shares are held up to 43 percent by strategic shareholders. –Kristof Ho Tiu, Product Manager – Governance Data

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