One share, one vote

Faced with the background that corporate boards in the EU employ a wide range of poison pills and other devices to ward off takeovers, particularly from cross-border investors, the European Commission has now commissioned a formal study on the one share, one vote principles.

European management boards generally support national rules designed to hinder takeovers. The Commission itself would presumably represent the interests of shareholders and the capital market, thought at present it is portraying a “we are open to all ideas” attitude.

Charlie McCreevy, commissioner of the internal market, describes the voting rights research project as a “discussion on the adequacy of control of capital”. He recently said that the study would provide “a systematic picture of the essential features of corporate Europe that the European public opinion is waiting for… Any discussion about how to move on … needs to be based on sound facts”.

The report, due for publication next spring, will scrutinise the relevant regulatory frameworks in member states and evaluate the economic impact on EU investors that deviations from the one-share-one-vote principle bring. McCreevy added that the study will also evaluate at least one country known for its fully modernised company law, for example, Australia or New Zealand.

Significantly, McCreevy has also stated that legislation will probably not be the best way to confront the issue. He suggested that a “recommendation” by the Commission might be more appropriate. This would give EU member nations the right to adopt or reject any Commission guidelines.

EU patriots might interpret this course as uncharacteristically spineless. However, the recommendation approach is no doubt dictated to McCreevy under a political edict by José Manuel Barroso, EC president. Barroso wishes to calm Brussels-based legislative zeal, possibly to increase his chances of a second term of office.

The research project is being carried out under contract by three organisations. These comprise the Institutional Shareholder Services, the proxy voting adviser to institutional investors, the Paris office of the law firm Shearman & Sterling and the Brussels-based European Corporate Governance Institute.

One subject that the triumvirate is investigating is the situation in the US, where target companies in take-over bids can issue shareholder rights plans that dilute the bid offer. According to Shearman & Sterling, approximately 2,000 listed companies in US have this mechanism in place at the present. Half of the S&P 500 companies use it. It comes under Delaware Law, plus versions of the same, in 30 to 40 other states.

In the EU, shareholder rights rules are divided between the UK, where rules favour shareholders, and the rest of the EU, where government legislation varies widely. Business management’s cool stance on the one share, one vote principle is reflected well by the European employers’ federation’s (UNICE) Jérôme Chauvin, who said: “We are not at all convinced that there is a need for any action at EU level.”

In continental Europe, the protection of national champions plays a strong role. Currently in focus is the French government’s takeover decree, which recently was subjected to a “reasoned opinion” from the Commission. This is a legal
procedure, which could precede France being arraigned before the European Court of Justice. The Commission’s position would be that France’s anti-takeover provisions hinder the free movement of capital.

Further evidence of heated sensitivities in France comes from Pervenche Bères, a French socialist member of the European Parliament, who “deplores” the mere fact that the Commission has ordered its study.

When the subject of poison pills comes up in Germany, minds often turn to Volkswagen. Its complicated ownership structure that opposes predators is notorious. The governor of the Bank of Italy, Mario Draghi, has felt the need to question rules that limit voting rights to shareholders in mutual banks to one vote each, regardless of ownership. In Japan, pill popping includes the right of a target company to resort to various techniques, including the option to review a bid for up to 30 weeks.

In the US, the SEC is due to address the proxy issue on the 13 December. This follows a second US Circuit Court of Appeals decision ruling supporting shareholders’ say in the appointment of directors. Under Republican rule the SEC was expected to stick to opposing proxy rights. But against the changed political picture, SEC chairman Christopher Cox may feel obliged to be more flexible.

Certainly the EU study will take into account a paper from Henrik Cronqvist of Ohio State University, and Mattias Nilsson, of Worcester Polytechnic Institute (WPI). They found that return on assets was significantly lower for firms with concentrated vote control. In other words, one share, one vote principles are more efficient.

Re-emergence of the one share, one vote issue in the EU goes to the 2002 report by company law experts, chaired by Professor Jaap Winter, a Dutch authority on corporate law, which concentrated on the modernisation of European company law. A subsequent communication from the EC reviewed the Commission’s action plan on company law and corporate governance, which includes attention to strengthen shareholders’ rights.

A paper from the CEA, Europe’s insurance federation, stresses that the industry has great potential to deal with the problem of the ageing population. At present, insurance ‘penetration’, in the EU, at 8.5%, lags behind that of the US, at 10%. Penetration measures the ratio of premiums to GDP. The low ratio in Europe highlights the industry’s development potential.

The CEA report sets out the argument as to how the insurance sector fosters economic growth, by providing a primary channel for corporate financing. It takes France as an example. With more than €1,250bn assets under management in 2005, insurers are the biggest institutional investors in France. Almost half of the assets, which devolve primarily from life insurance, are invested in shares and bonds issued by enterprises. In
France, insurers contribute 15% to the financing of private equities. This compares with 13% equivalent for Europe as a whole, and 4% in the US.