We have governments that distrust citizens but expect citizens to trust them

 

 “We can’t go on together with suspicious minds /And we can’t build our dreams on suspicious minds”

Elvis Presley 

The European Union seeks to make capital markets more attractive for medium‑sized companies and, to that end, has enacted the following legislative instruments:

First, Regulation (EU) 2024/2809 of the European Parliament and of the Council of 23 October 2024, amending Regulations (EU) 2017/1129, (EU) No 596/2014 and (EU) No 600/2014 in order to make public capital markets in the Union more attractive for companies and to facilitate access to capital for small and medium‑sized enterprises.

Second, Directive (EU) 2024/2810 of the European Parliament and of the Council of 23 October 2024 on multiple‑vote share structures in companies that seek admission to trading of their shares on a multilateral trading facility.

Finally, Directive (EU) 2024/2811 of the European Parliament and of the Council of 23 October 2024, amending Directive 2014/65/EU in order to make the Union’s public capital markets more attractive for companies and to facilitate access to capital for small and medium‑sized enterprises, and repealing Directive 2001/34/EC.

Of these three instruments, the second is the one of interest here. It obliges Member States to allow companies seeking admission to trading to issue multiple‑vote shares. The objective — in line with loyalty shares or double‑voting shares — is to enable controlling families to take their companies public while retaining control even if they hold less than 50% of the share capital.

However, Brussels is incapable of liberalising anything. Every liberalising gesture comes with strings attached. Accordingly, the Directive provides, in recital 15, that Member States are left

“the discretion to introduce and maintain additional safeguards to ensure adequate protection of the interests of shareholders that do not hold multiple‑vote shares, for example through sunset clauses.”

And since this is Europe, and we cannot trust Member States with any discretionary power,

“Member States should assess the appropriateness of such safeguards in light of their effectiveness in protecting the interests of those shareholders while, at the same time, ensuring that they do not run counter to the purpose of multiple‑vote share structures.”

Otherwise, Member States could formally allow multiple‑vote shares, only to provide immediately that multiple voting rights may be exercised solely to approve the annual accounts, but not to appoint directors or approve a merger.

Brussels therefore establishes a monitoring mechanism:

“Member States should also communicate to the Commission any additional safeguard, including any changes thereto.”

The regulatory detail of the Directive is astonishing and excruciating. One should read Article 3, but above all Article 4, whose official English version reads as follows:

Article 4 – Safeguards

(Official English version – Directive (EU) 2024/2810)

1. Member States shall ensure that companies with a multiple‑vote share structure whose shares are admitted or are to be admitted to trading on a multilateral trading facility after having exercised their right under Article 3 have adequate safeguards in place to ensure adequate protection of the interests of shareholders who do not hold multiple‑vote shares. To that end, Member States shall:

(a) ensure that a company’s decision to modify a multiple‑vote share structure in a way that affects the voting rights attached to shares is taken by the general meeting of that company by at least a qualified majority, as specified under national law, and that such a decision is subject to a separate vote for each class of shares whose rights are affected;

(b) limit the effects of multiple‑vote shares on the decision‑making process in the general meeting by introducing at least one of the following measures:

(i) a maximum ratio between the number of votes attached to multiple‑vote shares and the number of votes attached to the shares with the lowest voting rights;

(ii) the requirement that decisions of the general meeting which require a qualified majority of the votes cast under national law, excluding decisions relating to the appointment and removal of members of the administrative, management and supervisory bodies of the company, as well as operational decisions to be taken by those bodies that are subject to approval by the general meeting, be adopted by:

(1) a qualified majority, as specified by national law, of both the votes cast and the share capital represented at the general meeting or of the number of shares represented, or

(2) a qualified majority, as specified by national law, of the votes cast and be subject to a separate vote for each class of shares whose rights are affected.

1. Member States may provide for additional safeguards to ensure adequate protection of the interests of shareholders who do not hold multiple‑vote shares. Those safeguards may include, in particular, provisions to prevent the additional voting rights attached to multiple‑vote shares from continuing to exist after:

(a) their transfer to third parties, or upon the death, incapacity or retirement of the original holder of those multiple‑vote shares (transfer‑based sunset clause);

(b) a specified period of time (time‑based sunset clause);

(c) a specific event (event‑based sunset clause).

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As is apparent, Brussels does not trust Member States. Do they really lack incentives to protect minority shareholders? Why does the Directive impose “safeguards” against multiple‑vote shares? The answer is simple: Europe does not believe that capital markets are capable of pricing multiple‑vote shares correctly. European public officials do not believe in the efficiency of capital markets.

They forget that if, for instance, the Puig family decides to take its company public while retaining control through multiple‑vote shares, the market will simply be willing to pay less for the shares sold to the public, discounting the risk that the family has both the incentives and the ability — through multiple‑vote shares — to extract what are known as “private benefits of control”. 

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In truth, it is difficult to understand why Europe is regulating this matter at all. As noted, Member States have the proper incentives both to allow multiple‑vote shares and to establish whatever safeguards they deem appropriate to protect ordinary shareholders. Nor should it be argued that differences in national regulation constitute an obstacle to the creation of a single capital market. On the contrary, competition among national legal systems is the best guarantee that the most efficient regulation will prevail. Those national laws that offer greater flexibility in this respect will attract companies for which multiple‑vote shares are valuable.

It is sufficient to ensure that the law of the State where the company is listed applies, or that a change of registered office — and thus of the applicable law (lex societatis) — is easily facilitated. But Europe does not know how to do things simply. The devilish European decision‑making process almost invariably leads to the most complex solution being chosen, with a terrible result: unintended consequences abound.

……... 

What has the Spanish Ministry of Economy done?

It has made matters worse. Because it has assimilated multiple‑vote shares to loyalty shares or double‑vote shares. The draft Bill transposing the three European measures listed above introduces a new Subsection 5 into the Spanish Companies Act (Ley de Sociedades de Capital), Title XIV (Listed public limited companies), Chapter VI (Special rules on the general meeting of shareholders), Section 3, entitled Multiple‑Vote Shares.

Particular attention should be paid to Article 527 novodecies (Extinction of multiple voting rights).

The relevant provisions read as follows:

Article 527 duodecies. Multiple‑vote shares

As an exception to Articles 96(2) and 188(2), the articles of association of public limited companies whose shares are not yet admitted to trading on a Spanish regulated market or a multilateral trading facility may authorise the issue of multiple‑vote shares or the conversion of ordinary shares already issued into multiple‑vote shares.

The exercise of the multiple voting right shall be suspended until the admission to trading of those shares on a multilateral trading facility or a regulated market. The multiple voting right shall lapse if such admission to trading does not take place within two years from the resolution approving the issue or conversion, in which case the directors shall, without delay, reimburse the subscribers for the value of the contributions made and, in any event, amend the articles of association to reflect the new situation.

Multiple‑vote shares are those that alter the proportion between nominal value and voting rights, granting a higher number of votes than those corresponding to each share on the basis of its nominal value.

Multiple‑vote shares must be fully paid up at the time of subscription.

Article 527 terdecies. Class or classes of multiple‑vote shares

Multiple‑vote shares with the same nominal value and the same number of votes shall constitute a single class. Where multiple‑vote shares with the same nominal value carry different numbers of votes, they shall be divided into separate classes according to the number of votes attached to each share.

Article 527 quaterdecies. General multiple voting and special multiple voting

Multiple‑vote shares may confer multiple voting rights for all matters included on the agenda, or only for specific matters, as provided for in the articles of association.

Article 527 quindecies. Voting limits

The maximum number of votes attached to a multiple‑vote share may not exceed ten times the number of votes attached to the share with the highest nominal value issued by the company, excluding loyalty shares in all cases.

The decisions of the general meeting referred to in Article 194(1) shall be subject to a separate vote for each class of shares whose rights are affected. For these purposes, a decision shall be deemed to affect a class of shares where it has a detrimental impact on the rights of the shareholders holding that class.

Public limited companies may agree to issue multiple‑vote shares or to convert ordinary shares into multiple‑vote shares only up to thirty per cent of the share capital.

Article 527 sexdecies. Prohibition of privileges

In no case shall the issue of multiple‑vote shares be conditional upon the attribution of economic privileges to shares without multiple voting rights.

Multiple‑vote shares shall not enjoy any privilege in respect of amounts distributed as dividends or liquidation proceeds.

Article 527 septendecies. Amendment of the articles of association to authorise the issue of multiple‑vote shares

The valid constitution of the general meeting of shareholders for the purpose of amending the articles of association to authorise the issue of multiple‑vote shares or the conversion of ordinary shares into multiple‑vote shares shall require, on both first and second call, the attendance — in person or by proxy — of at least fifty per cent of the share capital, including non‑voting shares.

The attendance list shall state, alongside the capacity or representation of each attendee, the number of shares with which they attend and the number of votes attached to those shares.

Where the articles of association generally set a maximum number of votes that a single shareholder may cast, that limitation shall also apply to holders of multiple‑vote shares.

Article 527 octodecies. Resolution approving the issue of multiple‑vote shares

The amendment of the articles of association for the issue of multiple‑vote shares or their conversion shall be adopted by a resolution of the general meeting of shareholders, on first or second call, with the favourable vote of at least sixty per cent of the share capital present or represented at the meeting and entitled to vote, or such higher majority as may be required by the articles of association.

Where there are several classes of shares, including multiple‑vote shares from a previous issue, the favourable vote — by means of a separate vote or a special meeting and by the same legal or statutory majority — of each class of shares whose rights are affected shall in all cases be required.

Article 527 novodecies. Extinction of multiple voting rights

Multiple voting rights shall lapse upon expiry of the period set in the articles of association, which may not exceed ten years from the date of the resolution approving the issue or conversion. The articles of association may, however, provide for their extension for an additional period of up to ten years, by resolution of the general meeting adopted with the requirements expressly laid down in the articles for that purpose.

Multiple voting rights shall also lapse by resolution of the general meeting adopted at any time with the same requirements applicable to the valid constitution of the meeting and the adoption of the resolution approving the issue or conversion of multiple‑vote shares. The extinction of multiple voting rights shall not entitle the holders of such shares to claim any form of compensation from the company.

Article 527 decies on loyalty shares shall apply to multiple‑vote shares.

Article 527 vicies. Duty of disclosure

Multiple‑vote shares shall be taken into account for the purposes of disclosure obligations regarding significant shareholdings and takeover bid regulations, as well as for the purposes of Chapter III of Title I of Law 10/2014 of 16 June on the organisation, supervision and solvency of credit institutions.

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As is clear from the foregoing, the Ministry of Economy has chosen to go beyond what the Directive requires in terms of “safeguards” and, in doing so, has effectively destroyed multiple‑vote shares by turning them into loyalty shares with multiple voting rights. How do they differ from double‑vote loyalty shares if, by virtue of Article 527 novodecies(3), the multiple voting right — or rather, the class of multiple‑vote shares — is extinguished upon transfer?

Why the Ministry included this provision is unknown. What is known is that it makes the issuance of multiple‑vote shares highly unattractive — particularly when combined with the thirty‑per‑cent cap and the ten‑year limit.

The appeal of multiple‑vote shares lies in the fact that the controlling shareholder can sell control and protect itself against the loss of control that could result from a successful hostile takeover bid. Accordingly, the entrepreneurs interested in this instrument are not only technology founders taking their companies public at the insistence of venture capitalists. That is the US model, where virtually all technology companies preserve founder control by using not only multiple‑vote shares but also non‑voting shares for dispersed shareholders, including index‑tracking funds.

In Europe, by contrast, the natural candidates for multiple‑vote shares are not high‑growth technology firms but family‑owned companies in their second or third generation, in which the number of family members has multiplied and it has become increasingly difficult to preserve control within the family core due to varying liquidity needs or preferences (over 300 in the case of Abengoa, between 20 and 30 in the case of Puig, and between 15 and 25 in the case of Grifols).

Going public allows the more restless family members to cash out while enabling the core group to retain control through multiple‑vote shares. The market discounts the shares of such family companies because it knows that insiders have their wealth concentrated in the company and value control more than any external shareholder — often because they receive substantial salaries from the company, which may at times exceed the income generated by the shares, even when those shares represent a significant proportion of the capital (especially where the company incurred debt prior to the IPO in order to avoid family dilution).

For such cases, what is required is to facilitate as much as possible the issuance of multiple‑vote shares at the time of the IPO or as part of a capital increase, not when they result from the conversion of ordinary shares. In the former cases, the market is able to price the privilege. If the market trusts the family — that it will not extract private benefits — multiple‑vote shares will not trade at a significant premium over ordinary shares. And vice versa.

Moreover, the legislator has provided that anyone who acquires control through multiple‑vote shares is required to launch a mandatory takeover bid for 100% of the shares (Article 108(d) of the Securities Markets Act, as amended in the draft), making it unclear why the seller of multiple‑vote shares is deprived of the ability to be compensated for the benefit that no takeover bid can succeed without its consent. In any event, due to the principle of equal treatment, the acquirer will not be able to pay more for multiple‑vote shares.

Worse still, the acquirer will wish to retain the multiple‑vote shares in order, where appropriate, to sell the ordinary shares acquired in the takeover bid and thereby finance the transaction.

Finally, the proposed regulation introduces a distortion into the dogmatic category of “classes of shares”. How can shares cease to belong to a class merely because their holder changes? If only part of a holding is transferred, do the retained shares remain in the class while the transferred shares cease to belong to it?

We have a government that hates freedom. We have a European government — the Commission — that hates freedom. We have governments that distrust citizens but expect citizens to trust them.