Should Shareholders Be Rewarded for Loyalty? European Experiments on the Wedge Between Tenured Voting and Takeover Law

Abstract

Corporate law reveals its democratic background when it comes to the general meetings of shareholders, finding, on both sides of the Atlantic, its most tangible expression in the “one share, one vote” principle. While, in the political landscape, the “one person, one vote” standard is absolute dogma and weighting votes according to people’s preferences and interests has never proved feasible, in the corporate scenario the one share, one vote principle is constantly challenged by the incentives of companies and their shareholders to shape corporate rights according to specific needs. In this respect, some legislators (specifically in France and Italy) have provided mechanisms that allow more loyal shareholders to increase their voting power. Tenured voting (or time-phased voting rights) should be analyzed in light of the modern corporate governance debate, which calls for a stronger role for long-term investors. However, the other side of the coin should be considered: the increase in voting rights broadens the range of control-enhancing mechanisms, although specific sunset clauses (whether provided for by law or voluntarily opted in by companies) may restore the one share, one vote rule. The analysis suggests that the mechanism based on tenured voting is more transparent and potentially less stable than other common control-enhancing mechanisms and deserves to be considered in the debate. At the EU level, the possibility left to the Member States of weighting shareholders’ voting power according to their long-term interests, leads to legislative fragmentation across Europe. Specifically, in Italy, the adoption of tenured voting coupled with a tradition of ownership concentration sharply empowers controlling shareholders. At the same time, European takeover regulation plays an exogenous role in indirectly selecting the companies that adopt time-phased voting rights. The final result is completely mistrusted, as tenured voting rights disappoint their expectations and are rarely used to meet a true need of long termism. The paper describes the paradox that emerges when tenured voting rights interact with the core principles of the EU financial market law system, and it offers various ways to alleviate this difficult coexistence.