Multiple Voting Shares and Private Ordering: Should Old Taboos Be Abolished? The Recent Italian Reform

The following post comes to us from Marco Ventoruzzo of Pennsylvania State University, Dickinson School of Law, and Bocconi University.

Italian Law No. 116 of 2014 introduced several rules designed to make corporate law more flexible, create incentives to corporations to go public, and might also allow controlling shareholders and directors to entrench themselves more effectively, limiting the risk of hostile acquisitions. The new rules, which became effective a few weeks ago, are both interesting and controversial. They can be seen as a response to the increase of regulatory competition in Europe, epitomized by the reincorporation of Chrysler-Fiat, which last year moved its registered seat from Italy to The Netherlands, thus becoming subject to Dutch law.

For example, the new provisions introduce greater flexibility in determining, in the bylaws, the triggering event that mandates the launch a public offer in the framework of the European Takeover Directive (Directive 2004/25/EC). With this reform the Italian government has also disposed of an old taboo of Italian corporate law prohibiting the issuance of multiple voting shares, thus joining the ranks of several other European and American jurisdictions that allow disproportionate voting structures. More specifically, it is now possible for closely-held corporations to issue shares with a maximum of three votes per share (MVS). While listed corporations cannot issue MVS, somehow similarly to the U.S. a corporation that goes public can keep its previously issued and outstanding MVS, and also approve—with some limitations—dual-class recapitalizations with MVS. In addition, following the French experience, both listed and non-listed corporation can introduce “loyalty shares:” the bylaws can provide that beneficial owners holding the shares for a minimum period of 24 months are entitled to two votes per share. Going back to Chrysler-Fiat, it is interesting that the corporation allegedly moved to The Netherlands also to be able to issue MVS, and the reform was enacted just a few months after the reincorporation of Chrysler-Fiat.

This Italian mini-reform shares some of the goals of the French so-called “Loi Florange” of 2014 (Law No. 2014-348), and other similar recent legislative innovations in Europe, aimed at curbing hostile tender offers, especially by foreign buyers. The French Loi Florange, for example, made “loyalty shares” with stronger voting rights for long-term shareholders the default rule for listed corporations, and introduced other measures to protect national champions, rules that have also been challenged in the French Constitutional Court.

These trends might hinder the European market for corporate control and in particular hostile bids, and raise the question of the proper balance between private ordering and mandatory provisions protecting minority investors and other stakeholders. Obviously and as the U.S. experience clearly illustrates, greater flexibility and freedom of contract are often a consequence of regulatory competition, but they also raise concerns for minority shareholders, especially when they are not accompanied by adequate protections and enforcement mechanisms in case of abuse.

In a recent Article entitled “The Disappearing Taboo of Multiple Voting Shares: Regulatory Responses to the Migration of Chrysler-Fiat,” I examine MVS from different perspectives. After a brief introduction on the Italian reform in the broader context of regulatory competition in Europe, I offer a comparative perspective on MVS in the U.S. and in other European countries. The conclusion is that virtually no jurisdiction follows a strict one-share, one-vote rule, but all systems allow the adoption of disproportionate voting structures or other control-enhancing devices that have similar effects, from limited or non-voting shares, to shareholders’ agreements, to pyramid structures. The way in which MVS have developed and have been regulated, and the public-choice justifications for a more or less liberal approach on their use, however, vary considerably in different countries. In particular the analysis points out how in the U.S., differently from Europe, the issue has primarily been regulated by stock exchanges and as a result of regulatory competition among stock exchanges, and (attempted) interventions by the SEC. This story revolves around the important Business Roundtable v. SEC decision (905 F.2d 406 (D.C. Cir. 1990)) and its consequences. In Europe, on the other hand, the issue is regulated primarily by Member States legislatures at the statutory level, and competition among states has led, or is leading, to a not profoundly different level of flexibility. The Article informs about the actual use of MVS in different European countries, which is probably more common than in the U.S. in some systems, and briefly describes some regulatory approaches.

I next consider some of the most recent and interesting empirical studies on the effects of MVS, especially from the perspective of minority shareholders. These studies are not entirely conclusive, not only for the usual caveats about empirical studies, but also because they adopt different methodological approaches and measure the impact of this class of shares with different variables, from the value of the corporation, to the cost of capital, to risk and return for investors. All things considered, however, the evidence suggests that MVS are generally not desirable for minority investors. Even more interesting, some studies challenge commonly-held believes, such as the fact that stronger controlling shareholders using disproportionate voting structures increase the long-term return on investment. Anecdotal evidence also corroborates the idea that MVS might be more desirable in certain industries and when the personal qualities of the majority shareholder in terms of skills, charisma, and understanding of the business are particularly important; and that MVS are an incentive to bring a corporation public and a meaningful competitive leverage for stock exchanges.

I also offer a succinct analysis of the new Italian rules and the interpretative and systematic problems they raise. I focus, among other issues, on the possibility of shareholders to exercise their appraisal rights when MVS or loyalty shares are introduced or eliminated, concluding that the legislature has significantly limited the availability of this remedy, a choice that, at least in some cases, can be questionable.

In the conclusion, I place the introduction of MVS and loyalty shares in Italy in the broader framework of regulatory competition in Europe. At a more theoretical level, there are three take-away points here. The first one is that, in order to work effectively, the forces of regulatory competition require, so to speak, a specific balance between harmonization and differences among jurisdictions. Legal systems need to be similar enough to allow corporate decision makers, investors and regulators to understand and compare them with limited costs, but also present some differences that motivate regulatory arbitrage. Secondly, charter competition naturally requires the ability of corporations and investors to move freely among jurisdictions. While these two conditions exist and are growing in Europe, they are not comparable to the U.S., something that casts doubts on the virtuous effects of the European market for rules. Finally, I also underline how, in the European Union, harmonization follows two paths: top-down, through E.U. directives and regulations (with limited success, according to some scholars and commentators); and bottom-up, through spontaneous circulation of models and imitation of rules. The introduction of MVS in Italy offers a good example of the latter.

The Article, in English, is part of the ECGI Law Working Papers series, and is forthcoming in the German journal Zeitschrift für Vergleichende Rechtswissenschaft. It can be downloaded for free here.

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