EU Shareholder Rights Study Is Inconclusive

In the wake of a European Commission study on shareholder rights, Commissioner for the Internal Market Charlie McCreevy declared that there is currently no systematic call for imposing the one share, one vote principle. The aim of the study was to facilitate Commission evaluation of whether the present regime concerning shareholders' voting rights across the EU is an obstacle for financial market integration, and whether measures at EU level would, therefore, be appropriate. According to the commissioner, the picture is not clear cut.

But he has instructed staff to examine the issues with an open mind and determine if there is a need for Commission action. Also, an impact assessment to this end is under preparation, with all views on the issues to be properly taken into account. In addition, the European Corporate Governance Forum, which is a high level body advising the Commission, will review the study and may contribute its own recommendations.

The study was led by Institutional Shareholder Services (ISS), associated to a European network of leading academics, the European Corporate Governance Institute (ECGI) and the law firm Shearman & Sterling. The study provides a useful factual background to the issue of proportionality between capital and control, or the one share, one vote issue as it is more commonly referred to.

The core concept of the proportionality principle is that shareholders with capital at risk in a company should have a say about the conduct of that company and that their voice should be proportionate to the risk they take. Common deviations from the principle, which the Commission calls control enhancing mechanisms, are multiple-voting rights and non-voting shares, for example.

The study found that, overall, investors globally perceive control enhancing mechanisms as something negative. Supermajority provisions, however, are seen as almost neutral. Although there is no strong consensus, more large investors tend to perceive preference non-voting shares as neutral, on a weighted average.

Investors did contend that transparency is necessary in order to improve the level of information on the existence and impact of any of the control enhancing mechanisms. When a company features a control enhancing mechanism, investors want disclosure of such mechanisms in the annual report, as well as a clear and recurring statement by the board as to why the mechanism is kept in place.