In Italy… voting shareholders are typically not offered any compensation for the loss of their superior voting rights. Why would voting shareholders acquiesce to unification schemes with no compensation for reductions in their voting privileges?By design, stock unifications involving shares with differential voting rights dilute the value of the voting shares and increase the value of non-voting shares. Empirical research has found that voting shareholders are typically paid extraordinary dividends or new shares to compensate them for the loss of voting premium. In the U.K., Ang and Megginson (1989) report that, in 45 of the 49 stock unifications in their sample, voting shareholders received an extraordinary dividend equal, on average, to 12% of the voting share’s stock price. Hauser and Lauterbach (2004) document that in 52% of share unifications in Israel, voting shareholders are assigned new shares to compensate for the dilution in their voting power.... We find that in at least 22 unifications (almost half of the population), the majority shareholder also owns a large block of non-voting shares before the unification decision. In these firms, the majority shareholder directly benefits from the unification when the non-voting shares he owns are converted into voting shares… non-voting share ownership by the majority shareholder is significantly negatively related to the probability of voting shareholders being compensated.In two case-studies, a few months before the unification announcement, the controlling shareholder typically bought large blocks of non-voting shares, approved non-voting stock option plans and sold voting shares. Both the behavior of the controlling voting shareholders and the sharp drop of the voting share price at the announcement (ranging between -5% to -10%) support the hypothesis that dual class unifications can serve to transfer wealth away from minority voting shareholders.
Bigelli, Marco, Mehrotra, Vikas and Rau, Raghavendra, Why are Shareholders Not Paid to Give Up Their Voting Privileges? Unique Evidence from Italy (August 31, 2011). Journal of Corporate Finance, 17(5), 1619-1635, 2011; ECGI - Finance Working Paper No. 180/2007. Available at SSRN: http://ssrn.com/abstract=1921222