When One Counts for Two

LOYAL SHAREHOLDERS GET TO HAVE DOUBLE VOTING RIGHTS, THANKS TO MEASURES INTRODUCED IN 2014 TO REWARD LONGTERM INVESTORS, AND CONTROLLING INVESTORS ALSO MANAGE TO DOMINATE EXTRAORDINARY SHAREHOLDER MEETINGS

by Chiara Mosca, Bocconi Department of Legal Studies
Translated by Alex Foti

Starting in 2014, Italian listed companies, or at least some of the 300 that list their stocks, have started to investigate the opportunity to reward their shareholders. But it was not, as often happens, a bonus in the form of an extra dividend, perhaps tied to exceptional business performance, but rather the strategic choice of rewarding shareholders loyal to the company. And in spite of the obvious capitalist logic which drives the normal operations of joint-stock companies, the premium in question is not a monetary one. In fact, the decision that many companies have weighed, and some concretely implemented, concerns the inclusion of a clause in the corporate statutes to reward a certain class of shareholders by giving them extra powers.

What the loyalty of an investor consists of is soon told. The shareholder who believes in the company stays in for the longer term. The long-term shareholder pursues a buy-and-hold investment logic in contrast with those who seek short-term returns on equity markets. Thanks to a base represented by loyal shareholders, chief executives are free to pursue value-creation strategies and invest in innovation and R&D, without undergoing excessive market pressure.

And what is the premium? The premium really is superpower. In terms of corporate law, it means being able to "weigh" more in shareholder meetings, having additional votes when it comes, for example, to appointing directors or approving financial statements.

The question was posed in 2014, because in that year, as some may recall, Fiat Chrysler, whose CEO was then Sergio Marchionne, migrated abroad, choosing the Netherlands as HQ and motivating the choice also based on the possibility, in the Dutch system, to assign more than one vote per share.

The reaction of the Italian government, worried that other companies could follow the suit, did not take long. With a decree passed in the summer of 2014, loyalty shares were introduced for listed companies, consisting of a mechanism based on the registration of shareholders who would double their voting rights if they held onto share from more than twenty-four months. The premium does not have any (direct) economic value, as it cannot be transferred, and expires when shares are sold. The mechanism is comparable, in all respects, to a control-enhancing mechanism (significantly strengthen the power of those who already have controlling stakes in the company), but subjected to some sunset clauses (such as forfeiture in the event of a sale).

To tell the truth, if one looks at the international scene, double voting rights are not an Italian novelty. A similar loyalty award has been given in France since 1933, and was recently transformed (in 2014) into a rule that is automatically valid for all companies, unless a different corporate governance choice is made.

But it is still difficult to deny that this is revolutionary in corporate democracy. While in politics weighing votes according to voters would be taboo, European business (in France, Italy and recently in Belgium) is experimenting with instruments that, bypassing the one share-one vote rule, assign more votes to loyal shareholders who are more invested in the growth of the company.

In Italy, the measure has by and large been successful. There are currently 45 listed companies that choose to reward long-term shareholders (CONSOB figures). The empirical analysis shows that, in almost all cases, these are companies where dominating shareholders have acquired, or are set to acquire, voting superpowers. In particular, from an analysis conducted on the companies that had adopted double voting rights by October 2018, it emerges how this allowed controlling shareholders to dominate not only ordinary shareholder meetings but, in many cases, also extraordinary ones.