5th European Company Law and
Corporate Governance Conference
Proportionality between ownership
and control in EU listed companies –
Legal Study: Comments and Highlights
Berlin
28 June 2007
Christophe Clerc
Shearman & Sterling LLP
Scope of the Legal Study
 19 jurisdictions
 13 Control Enhancing Mechanisms:
Securities
By-law provisions
Structures
Agreements
Multiple Voting
Rights Shares
Voting Right Ceilings
Pyramid Structures
Cross-Shareholdings
Non-Voting Shares
(without preference)
Ownership Ceilings
Partnerships Limited
by Shares
Shareholders’
Agreements
Non-Voting
Preference Share
Supermajority
Provisions
Priority Shares
Golden Shares
Depositary
Certificates
 900 page long report
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Preliminary Comments*
“One share, one vote”, an issue of corporate governance?

Two principles are at stake:
–
–

Historically, the issue has always been related to company law:
–
–

the comparatively new proportionality principle, or “one share, one vote” principle (“OSOV”), which tends
to call for the suppression of Control Enhancing Mechanisms (“CEMs”),
and the traditional freedom of contract principle, or “inherent right to self organisation” principle
(“IRSO”), which is based on the premise that, subject to certain precautionary measures, corporations should
be left with the ability to organize themselves as they see fit.
In the XIXth century, the model was the “one head, one vote” rule
The question was whether the “one share, one vote” rule would be allowed, as it deviated from the “one
head, one vote” rule
If it is today often seen an issue of corporate governance: what is the purpose of corporate
governance rules?
“The corporate governance framework should be developed with a view to its impact on
overall economic performance …”
(OECD Principles of Corporate Governance, revised edition, 2004)
* The “Preliminary Comments” section is not part of the Legal Study submitted to the European Commission. It is meant to introduce the subject and only
expresses the opinion of its author.
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Preliminary Comments
Three main models
Corporate governance is usually looking at three main models (1)
Finance-oriented model
(UK)
Company-oriented model
(Continental Europe)
Management-oriented model
(US)
•
Dispersed shareholders
• Block holders
• Dispersed shareholders
•
No takeover defenses
• Mild takeover defenses
• Strong takeover defenses
•
Agency theory (Principal/
Agent or Master/Servant
relationship between
shareholders and managers)
• Corporate interest
• Fiduciary duties
(1)
Obviously, none of these models are pure and other models exist.
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Preliminary Comments
What is the debate?
Position A
(Finance standpoint)
Position B
(Industry standpoint)
 Unfettered markets are best placed to monitor companies.
 Block holders are best placed to control companies.
 A unique model should prevail: “one share, one vote”
 Diversity should prevail (freedom of contract and “Inherent Right
to Self Organization” (IRSO))
 Shareholders should have the ultimate powers, as they bear the ultimate
risks (shareholder primacy).
 A system of checks and balances is preferable (consensus
formation)*.
 Block holders may misuse their powers.
 Transparency rules and appropriate protective laws prevent this
risk.
 The fear or take-overs pushes management to act diligently (“disciplinary
effect” against “management entrenchment”)
 If the markets discipline managers, who disciplines the markets?
(Issues of market rationality and short- termism).
 Focus: shares as a class of assets. Method: “Forecasting the psychology of
the market”. (John Maynard Keynes)
 Focus: productive assets. Method: “Forecasting the prospective
yield of assets over their whole life” (John Maynard Keynes)
* (In addition, shareholders may hedge their risk through a diversification of
their portfolio. Other stakeholders such as employees may not).
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Preliminary Comments
The questions raised by the Legal Study

What is the approach of the legal study?
1) How do the 19 jurisdictions apply the OSOV or the IRSO principles from a legal standpoint? Do
they impose the OSOV rule or let companies decide?
2) How does that match with practice?
3) How are shareholders protected in the event CEMs are implemented?
4) What types of rules and regulations should be reviewed when regulating issues such as OSOV?
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Legal review
1 - Freedom of contracting is strong in all jurisdictions,
even when the OSOV principle has been formally adopted
 All countries allow between five and eleven CEMs.
 Even countries which have, to some extent, formally adopted the OSOV principle, such
as Belgium, Germany, Estonia, Greece, Spain, Luxembourg and Poland, allow a number
of CEMs.
 CEMs are also legally available in the three non-European countries that have been
reviewed: the US (10 CEMs), Japan (9 CEMs) and Australia (8 CEMs).
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Legal review
All countries allow CEMs. No jurisdiction has opted for all an OSOV
or all IRSO system.
National regulatory framework : nb of CEMs allowed in each jurisdiction
6 or <
7-8
9-10
11
OSOV = One share – One vote principle
IRSO = Inherent right to self organisation
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4 June 2007
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Legal review
2 - The availability of a CEM provided for in a country’s legislation does not
necessarily translate into the actual utilization of such CEM by companies.
Country
CEMS legally available
CEMs used in the sample
Belgium
11
3
Denmark
10
6
Estonia
8
2
Finland
9
3
France
10
5
Germany
7
5
Greece
5
5
Hungary
7
7
Ireland
10
5
Italy
9
6
Luxembourg
7
5
Poland
7
6
Spain
7
5
The Netherlands
10
6
Sweden
7
5
UK
10
5
In the United Kingdom, for
example, most of the CEMs
discussed in the Study are not
prohibited by the local
legislation (in fact, ten out of
the thirteen CEMs discussed in
the Study are available for use
by British companies).
Nevertheless, market practice
and market expectations do
not encourage the use of many
of the available CEMs.
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4 June 2007
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Legal review
3 - A wide variety of protective devices is available
 In most cases, in Europe, when CEMs are implemented, shareholders are protected through
various specific legal mechanisms. For instance:
– Regarding multiple voting shares, the number of votes per share may be limited: the limit may for instance be 2
votes (France) or 10 votes (Denmark, Hungary, Sweden). (This may be compared with the limit in Japan: 1,000
votes).
– Non-voting preference shares may not represent more than a certain percentage of the share capital: for
example, 25% in France, 1/3 in Belgium and Estonia, 40% in Greece and 50% in Germany, Spain, Hungary,
Japan, Italy and Luxembourg.
– Priority shares must comply with specific rules regarding designation of directors or supervisory board members
in Denmark, Germany, Italy and Sweden.
– Mandatory tender offers may be triggered when shareholders enter into certain shareholders’ agreements (all
jurisdictions except the United States, where this issue may be addressed in the by-laws).
 In companies implementing CEMs, shareholders are also protected through fundamental
principles of corporate law. The applicable standards of review, which are formulated in broad
terms (such as decisions « oppressive to shareholders », « against the corporate interest », « in
violation of fiduciary duties », « contrary to good business practice ») grant wide powers to the
Courts to protect shareholders against abusive use of CEMs.
 Disclosure obligations are significant and have been recently enhanced by the Takeover
Directive and the Transparency Directive.
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Legal review
4 - Other legal mechanisms are relevant when assessing
CEMs
 Understanding the broader legal context in which CEMs are implemented is essential to a
fair assessment of such mechanisms. For instance:
– There are significant differences in rules regarding dismissal of directors: some jurisdictions
authorize the use of staggered boards (the USA), some provide for indemnification of directors
upon dismissal (such as Germany, Italy, or the United Kingdom), others restrict such
indemnification (such as Belgium). While most jurisdictions allow dismissal of directors only if it is
on the agenda, others do not impose this requirement (such as Germany, Spain, France,
Luxembourg or Japan).
– The right for minority shareholders to add an item on the agenda may differ significantly between
jurisdictions: for instance, this right may be granted to any shareholder (Denmark, Finland,
Sweden), to shareholders holding 1% of the company share capital (the Netherlands, Hungary,
Japan) or 10% of the share capital (the United Kingdom).
 Issues such as tax law, group law, related-party transactions or prevention of conflict of
interest, or rules subjecting foreign investment to prior administrative authorizations
(such as Australian rules for investments in more than 15% of the share capital of a
company) should also be considered when assessing CEMs.
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Legal review
CONCLUSIONS
A. The results of the study
1. Freedom of contract is a common value of all jurisdictions. Diversity prevails in Europe, just as it
does in the US between various states.
2. Markets play a significant role in selecting CEMs.
3. Legal protections are strong.
4. There are interactions between CEMs and other legal mechanisms.
B. What next?
A suggestion for future studies:
1. Pick-up a country with a strong economy, a high level of exports, a robust industry, a high
reputation for the quality of its products.
2. Review its model.
3. Compare how other EU countries deviate from this model.
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You may contact the author of the legal study for questions or
comments
Access full reports on proportionality:
http://ec.europa.eu/internal_market/company/shareholders/indexb_en.htm
Shearman & Sterling LLP
Christophe Clerc
European Counsel
+33 (1) 53 89 89 44
[email protected]
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