The One-Share-One-Vote Controversy in the EU

Abstract

The proposal by the European Commission (EC) to establish shareholder democracy and mandate the one-share-one-vote (1S1V) rule has drawn much attention and controversy. In the pursuit of enhancing the rule’s popular appeal, EC policy-makers have tried to make equiproportional representation nearly an aphorism tied to corporate egalitarian sentiments underscoring justice, fairness and ethics. Against this background, the question of who could be against or oppose shareholder democracy and the 1S1V principle has both positive and normative implications. Based on a review of law, finance and economics literature, this paper evaluates the economic underpinnings and efficiency of the 1S1V rule and concludes that it is generally a suboptimal corporate voting mechanism that compromises economic efficiency and distorts the incentives of corporate constituencies. Moreover, it is submitted that any attempt to mandate the 1S1V rule in the EU may induce companies to either move to pyramidal structures, or worse yet, to use complex derivative instruments to decompose 1S1V. While pyramidal holdings may further facilitate the expropriation of private benefits of control as compared with the status-quo, the decomposition of 1S1V can i) advance the heterogeneity of shareholders’ preferences, ii) create incentives for negative voting arbitrage and iii) encourage the approval of value-reducing transactions, or more detrimentally, become a takeover defence. Hence, even if the EC could hypothetically move corporate Europe from controlled ownership structures to minority ownership ones, the 1S1V rule is clearly worse than the status quo, and paradoxically, instead of advancing the rights of ‘disadvantaged shareholders’, 1S1V can further demote shareholder rights in the EU. As a result, 1S1V cannot promote a value-enhancing corporate governance regime in the EU in general or meet the policy objectives of the intervention in particular in terms of strengthening the rights of shareholders, enhancing third-party protection or fostering the efficiency and competitiveness of businesses in the EU. On the normative side, the issue is how corporate law can efficiently police the ability of controlling shareholders to expropriate rights from minority shareholders in general and extract private benefits in particular. Generally, it is asserted that if a corporate law regime is adequately structured, there is less need to worry about the voting rule and non-proportionate votes would not be a serious concern. In this light, this paper concludes by outlining some policy alternatives. First, it is proposed that EC policy-makers refrain from taking any measure at the level of the Community and instead strengthen disclosure rules and their enforcement. Furthermore, some standards of review governing significant conflict-of-interest transactions can be introduced. Second, it is submitted that EC policy-makers can also provide for opt-in and opt-out provisions for the member states. Such menus should once again be complemented by rigorous disclosure rules and their enforcement.