On 24 June 2014, without much fanfare in the media, the Italian Government amended one of the cornerstones of the Italian legal system: the principle of “one share – one vote” enshrined in Article 2351 of the Civil Code. The new rule, introduced in the so-called “Development Decree”, allows listed companies to amend their articles of association, increasing the voting rights attributable to each ordinary share, up to a maximum of two votes per share. The additional vote may only be granted to shareholders who have held the shares for at least two years, provided, however, that such shareholders are registered in a special register.
Unlike “Fiat-Chrysler's ”loyalty voting structure", the opportunity to obtain additional voting rights will be offered to all shareholders, both current and future. Furthermore, through an appropriate amendment to Article 104-bis of the TUF, additional voting rights will not be taken into account at general meetings convened to resolve on any defensive measures in the event of a takeover bid. Again with a view to protecting minority shareholders, the Decree has also provided that the obligation to launch a takeover bid shall apply even where a shareholder comes to hold more than 30% of the voting rights (as well as of the share capital), whether as a result of acquisitions or by virtue of the increase permitted under the new provision.
The multiple voting instrument therefore cannot be used to reduce the contestability of Italian companies, and all shareholders will be able to take advantage of the new opportunity. It would therefore seem that all the objectives declared by the Government are met: facilitating the listing of businesses (by reducing the risks of losing control) and promoting stable shareholding. In reality, even this shareholder loyalty system presents notable grey areas, which risk distorting (or unmasking?) its real motivations.
The risks of multiple voting (the French experience)
To obtain the additional vote, shareholders will have to apply for registration on a special list, and presumably very few minority shareholders will take action to register. In addition to the “one share – one vote” principle, another fundamental principle, that of equal treatment of shareholders, would also be undermined, as voting rights would be differentiated between registered and non-registered shareholders (even if they hold the same class of shares).
The increase in voting rights, introduced by the Development Decree, is largely borrowed from French legislation, which has long provided for the allocation of an additional vote to shareholders registered for at least two years (from April 1, 2014, the allocation has been automatic, whereas previously it had to be provided for in the articles of association).
What have been the effects of multiple voting in France? According to an analysis carried out in 2013 by Proxinvest, France’s leading proxy adviser and managing partner of ECGS, without the double vote, more than 60% of the resolutions proposed by companies in the SBF 120 index would have been rejected. This confirms that multiple voting significantly reduces the decision-making influence of minority shareholders, whether they are short-term or long-term (“Proxinvest recommends loyalty shares to maintain stable shareholding.”, L'AGEFI Quotidien, 4 April 2014.
As has been reported several times, the new regulations for assemblies, exacerbated by the financial crisis, had greatly weakened the power of strategic shareholders In Italian listed companies, laying the groundwork for the much-hoped-for transition from “relational capitalism” to “market capitalism”. The enormous risk, represented by multiple voting shares, is to nip this transformation in the bud. Indeed, the government's true objective, like that of any majority shareholder, would appear to be the sale of significant stakes in the companies it holds (Enel, Eni and Finmeccanica), without the risk of losing control of the shareholders' meeting.
However, the increase in voting rights will have to be approved by an extraordinary general meeting, where two-thirds of the votes must be in favour (three-quarters at Finmeccanica). One has to wonder if the Government has considered the investors“ reaction to the new rule, which effectively constitutes a violation of the fundamental principle of ”one share, one vote" to the detriment of minority shareholders. The outcome of any vote is by no means a foregone conclusion, especially in light of what happened only a few months ago, when the Government's proposal to introduce stricter probity requirements for directors was rejected by the shareholders of Eni, Finmeccanica and Terna (the Government only had the necessary numbers for approval at Enel).
The new regulation could therefore have a double boomerang effect: on the one hand, if it were to be rejected by the shareholder meetings of state-controlled companies, it would hinder the Government's privatisation project; on the other hand, its application in other contexts would take Italian listed companies“ governance back at least three years, effectively returning control to the various ”good old boys' networks".
L-Shares: a valid alternative for rewarding loyal shareholders
One of the stated objectives of the Government, with the introduction of multi-vote shares, is to support stable shareholding. However, this objective could be more effectively achieved through other instruments, which allow for rewarding long-term investors without violating the equal treatment of all shareholders.
One tool that would achieve both aims has been proposed by Patrick Bolton (Columbia Business School) and Frédéric Samama (SWF Research Initiative and Head of Financial Solutions at Amundi in New York), through so-called Loyalty Shares, or L-Shares for short.
In their November 2012 paper, “L-Shares: Rewarding Long-Term Investors”, Bolton and Samama propose issuing a type of warrant (“L-warrant”) linked to ordinary shares, which allows for the receipt of additional rights after a defined holding period. In practice, L-Shares would be issued with a different identification code (ISIN) compared to ordinary shares (a form of “L-ISIN”). Upon expiry of the “loyalty period”, holders of securities identified by the L-ISIN would receive the L-warrants, necessary to subscribe for the additional rights. If, however, a shareholder were to sell the shares beforehand, they would revert to being identified by the ordinary share ISIN, thereby losing the right to receive the L-warrant.
Through a simple exchange of ISINs, carried out by the depositary bank, all the problems related to registration in special registers would be avoided, also safeguarding the principle of equality of shareholders.