The pending dilution of shareholder rights as a result of the Florange Act in France – which seeks to reward long-term investment – sets a worrying precedent in the country. Even more concerning is that proposed amendments to the EU Shareholder Rights Directive could lead to EU member states implementing similar rewards that could advantage some shareholders over others.
While we are in favour of encouraging long-term investment, we firmly support the principle of ‘one-share, one-vote’, which ensures proportionality between equity ownership and voting powers and economic risk bearing. We believe equal voting rights should be attached to shares regardless of the total holding or other characteristics of an investor. Any divergence from the one-share, one-vote principle is extremely concerning and could have a disenfranchising effect on minority shareholders.
We also have concerns about paying enhanced dividends to long-term shareholders. This practice disadvantages some shareholders, increases investment risk and may reduce management accountability.
In addition, we believe the requirement by the Florange Act to register shares in order to receive double voting rights and loyalty dividends creates an unfair playing field for international investors due to the complexities and costs involved in share registration, limitations on eligibility given the different fund and holding structures and a potential lack of understanding of the Act. Due to the unintended consequence of strengthening large stockholdings over the interests of minority shareholders, the process effectively prevents some investors from being able to benefit from either initiative. In our view, the mechanisms of the Florange Act – which was adopted on 29 March 2014 – will not achieve the objective of long-term investment in a fair and equal manner.
Lessons from Italy
In recent weeks, the Italian government changed its position on a similar law to the relief of global investors.
The Italian government had passed a resolution in July 2014 lowering the majority requirement from two thirds to half the votes cast for companies wanting to implement loyalty shares with double voting rights for investors who have held their shares for two years. The prospect of this law being introduced caused significant concern given that according to the Italian regulator CONSOB approximately 70% of Italian listed companies are majority controlled.
Following pressure from institutional investors and non-executive directors at major Italian companies, Italy’s government succumbed and announced it would not extend the simple majority rule, which expired at the end of January 2015. But prior to the expiry, three prominent Italian companies – Campari, Amplifon and Astaldi – took advantage of the special resolution.
Expanding into Europe
This step forward by Italy has now been overshadowed by proposals to amend the EU Shareholder Rights Directive which could force each EU member state to implement similar rewards for shareholders to those the Florange Act envisaged. The proposals include differential voting rights, loyalty shares and tax incentives for long-term shareholdings.
The proposed amendments are extremely worrying. If enacted, they could not only have devastating effects for minority shareholders but also reduce the attractiveness of European companies as investments.
As in Italy, we sincerely hope investor pressure can prevent this concerning trend from spreading. We have been engaging with French companies on the importance of maintaining equal voting rights for shareholders and will continue our engagement with policy-makers to ensure an optimum outcome for our clients and investors.