On the 24thth In June 2014, the Italian Government approved the so-called “Development Decree,” introducing the possibility to issue multiple voting shares, waiving the principle of “one share – one vote,” which had previously been a cornerstone of Italian market legislation.
Under the new law, Italian companies are able to amend their articles of association to include the possibility of increasing the voting rights (up to a maximum of two votes per ordinary share) of shareholders who have continuously held their shares for at least two years, provided that such shareholders had previously requested the registration of their shares in a special register.
Unlike the Fiat-Chrysler's “loyalty voting structure”, all existing and future shareholders will be entitled to register their shares and to receive the additional vote. In order to prevent the use of multiple voting rights as a means of defending against a takeover, the additional votes shall not be counted at any general meetings convened to approve countermeasures against a bid that has already been launched. Furthermore, any shareholder who comes to hold more than 30% of the total voting rights (even following the allocation of the additional voting right) shall launch a mandatory offer for all remaining shares.
Thanks to the aforementioned corrective measures, multiple voting shares will not make Italian companies less contestable, and at least one of the main objectives disclosed by the Italian Government appears to be met: to facilitate the listing of new companies. However, rather than a reward for all long-term shareholders, multiple voting shares may represent a gift for major shareholders, distorting (or revealing?) the true reasons behind the new rules.
The risks of multiple voting rights (the case of the French market)
In accordance with the new legislation, only holders of registered common shares will be entitled to receive the additional vote, which constitutes a clear violation of the fundamental principle of equal treatment of shareholders. Moreover, it is unlikely that many shareholders will request to register their shares, meaning that major shareholders could control meetings with a comparatively low percentage of the share capital.
The new Italian rule is very similar to French legislation, which grants an additional voting right to all shareholders who have been registered for at least two years. In 2013, Proxinvest, the leading French proxy adviser and managing partner of ECGS, estimated that more than 60% of resolutions proposed by companies in the SBF 120 index would have been rejected without the double voting rights (“Proxinvest recommends loyalty shares to maintain stable shareholding.”, L’AGEFI Quotidien, 4th April 2014.
As already highlighted in this blog, the recent changes in Italian general meetings’ rules, with the complicity of the financial crisis, have strongly reduced the influence of strategic shareholders, often linked by cross-ownerships (the “Good parlour”), facilitating the transformation of the Italian market from one of “relational capitalism” to “market capitalism”. The main risk of introducing multiple voting rights in Italy is to halt this difficult process in its early stages. In fact, one of the primary aims of the “Development Decree” is to enable the Government to sell significant holdings in State-owned companies (such as Enel, Eni and Finmeccanica) without losing control of general meetings.
However, the issue of multiple voting shares will require the approval of the extraordinary general meeting, where two-thirds of favourable votes are needed (three-fourths in Finmeccanica). Approval by state-owned companies cannot be taken for granted, especially in view of the poor results achieved just a couple of months ago by the government’s proposal for stricter requirements for directors, which was rejected by shareholders of Eni, Finmeccanica and Terna (the proposal was only approved by Enel’s EGM).
In conclusion, the introduction of multiple voting rights in Italy may lead to at least two dangerous effects. On one hand, the eventual rejection by the EGMs of State-owned companies would impede the Government’s divestment programme, which is needed to partially refinance the huge Italian debt. On the other hand, if approved by other listed companies, the double vote may bring the Italian market back to at least 3 years ago, when the main shareholders (and their friends) were in full control of almost all meetings.
L-Shares: a serious option to reward loyal shareholders
According to the Italian Government, the introduction of multiple voting shares would support long-term shareholding. However, such a purpose may be more effectively achieved through other instruments, rewarding long-term investors without breaching the principle of equality of shareholders.
A very interesting financial innovation has been designed by Patrick Bolton (Columbia Business School) and Frédéric Samama (SWF Research Initiative and Head of Financial Solutions of Amundi’s New York branch), through the so-called Loyalty-Shares, or L-Shares.
In their 2012 paper “L-Shares: Rewarding Long-Term Investors”, Prof. Bolton and Mr. Samama propose attaching a sort of call warrant to common shares, which only vests if the shareholder continuously holds the share for a specific period. The L-Shares should initially be identified by a different ISIN code (the “L-ISIN”). Upon expiry of the “loyalty period”, all holders of shares identified by the L-ISIN code would receive an L-warrant, entitling the subscription of additional rights. If the shareholder sells their initial shares before the expiry of the “loyalty period”, the custodian of the L-Shares would assign the original ISIN code to the common shares.
Through a simple switch of ISIN codes, the right to receive additional votes (though that would be the same for increased dividends) would not be transferred. This way, all long-term investors would be rewarded, with no difference between registered and non-registered shareholders.