The “Development Decree” allows Italian companies to issue multiple voting shares. A measure to support long-term investors or a new defence of major shareholders?

Posted on July 22, 2014


On 24th June 2014, the Italian Government approved the so-called “Development Decree”, introducing the possibility to issue multiple voting shares, waiving the principle of “one share – one vote”, so far one of the basis of the Italian market’s legislation.

Pursuant to the new law, Italian companies may amend the bylaws by including the possibility to increase the voting rights (up to a maximum of 2 votes per common share) of those shareholders who have continuously held their shares for at least 2 years, provided that such shareholders had previously requested the registration of their shares in a special register.

Differently from the Fiat-Chrysler’s “loyalty voting structure”, all existing and future shareholders will be entitled to register their shares and to receive the additional vote. In order to avoid the use of multiple voting rights as an anti-takeover device, the additional votes shall not be counted in all general meetings called to approve countermeasures against an already launched offer. Furthermore, all shareholders that will come into possession of more than 30% of total voting rights (even following the attribution of the additional voting right) shall launch a mandatory offer on all remaining shares.

Thanks to the above mentioned corrective measures, the multiple voting shares will not make Italian companies less contestable, and at least one of the main objectives disclosed by the Italian Government seems to be met: to facilitate the listing of new companies. However, rather than a reward to all long-term shareholders, the multiple voting shares may represent a gift for major shareholders, distorting (or revealing?) the real reasons behind the new rules.


The risks of multiple voting rights (the case of the French market)

Pursuant to the new legislation, only the holders of registered common shares will be entitled to receive the additional vote, representing a clear breach of the basic principle of equal treatment of shareholders. Furthermore, very few shareholders will likely request to register their shares, so that major shareholders may control the meetings with a relatively low percentage of the share capital.

The new Italian rule is very similar to the French legislation, which grants an additional voting right to all shareholders who have been registered for at least 2 years. In 2013, the main French proxy advisor Proxinvest, managing partner of ECGS, estimated that more than 60% of resolutions proposed by the SBF 120 index’ components would have been rejected without the double voting rights (“Proxinvest recommande des bons de fidélisation pour conserver un actionnariat stable”, L’AGEFI Quotidien, 4th April 2014).

As already highlighted in this blog, the recent changes in the Italian general meetings’ rules, with the complicity of the financial crisis, strongly reduced the influence of strategic shareholders, often linked by cross-ownerships (the “salotto buono”), facilitating the transformation of the Italian market from a “relational capitalism” to a “market capitalism”. The main risk of the introduction of multiple voting rights in Italy is to stop such difficult process at the beginning. Actually, one of the main purposes of the “Development Decree” is to allow the Government to sell significant holdings in State-owned companies (such as Enel, Eni and Finmeccanica), without losing the control of general meetings.

However, the issue of multiple voting shares will need the approval of the extraordinary general meeting, where two-thirds of favourable votes are needed (three-fourth in Finmeccanica). The approval by State-owned companies cannot be taken for granted, also in view of the poor results achieved only a couple of months ago by the Government’s proposal of stricter requisites for the Directors, that was rejected by the shareholders of Eni, Finmeccanica and Terna (the proposal was approved only by the Enel’s EGM).

In conclusion, the introduction of multiple voting rights in Italy may lead to at least two dangerous effects. On one side, the eventual rejection by the EGMs of State-owned companies would impede the Government’s divestment program, which is needed to partially refinance the huge Italian debt. On the other side, if approved by other listed companies, the double vote may bring the Italian market back to at least 3 years ago, when the main shareholders (and their friends) were in full control of almost all meetings.


L-Shares: a serious option to reward loyal shareholders

According to the Italian Government, the introduction of the multiple voting shares would support long-term shareholding. However, such purpose may be more effectively achieved through other instruments, rewarding long-term investors without breaching the principle of equality of shareholders.

A very interesting financial innovation has been designed by Patrick Bolton (Columbia Business School) and Frédéric Samama (SWF Research Initiative and Head of Financial Solutions of Amundi’s New York branch), through the so-called Loyalty-Shares, or L-Shares.

In their 2012 paper “L-Shares: Rewarding Long-Term Investors”, Prof. Bolton and Mr. Samama propose to attach a sort of call-warrant to common shares, that vests only if the shareholder continuously holds the share for a specific period of time. The L-Shares should be initially identified through a different ISIN code (the “L-ISIN”). At the expiration of the “loyalty period”, all holders of the shares identified by the L-ISIN code would receive an L-warrant, entitling the subscription of the additional rights. If the shareholder sells its initial shares before the expiration of the “loyalty period”, the custodian of the L-Shares would assign the original ISIN code to the common shares.

Through a simple switch of ISIN codes, the right to receive additional votes (but that would be the same for increased dividends) would not be transferred. By this way, all long-term investors would be rewarded, with no difference between registered and non registered shareholders.

Posted in: Market rules