Why loyalty voting rights and dual class shares should coexist

In the last decade, several European countries have relaxed the principle of one-share-one-vote for listed companies and have allowed companies to introduce classes of shares with multiple voting rights (“dual class share structures”). In France and Belgium, the only type of multiple voting rights that is allowed in listed companies is loyalty voting rights, i.e. multiple voting rights for shareholders who have held their shares for a certain period (in Italy and the Netherlands, both loyalty voting rights and dual class shares are allowed). In this blog post, we argue that loyalty voting rights are nothing more than a control-enhancing mechanism. Therefore, there is no reason for France and Belgium to allow loyalty voting rights, but not dual-class shares.

In general, two main justifications for loyalty voting rights are given by European legislators: first, loyalty voting rights are thought to combat “corporate short-termism”, i.e. the sacrifice of long-term value for short-term profits, by encouraging shareholders to hold their shares for a longer period and redistributing power to these shareholders. Second, loyalty voting rights could encourage IPOs by allowing the founders to retain control with a smaller participation.

Although these considerations appear to be intuitive, our recent empirical study in Belgium nuances this story. First, in Belgium, similar to France and Italy, loyalty voting rights are almost exclusively used by controlling shareholders (or at least by large insiders). Minority shareholders and institutional investors are not interested, due to the restrictive and liquidity-reducing registration requirement.

This, however, is not fatal from the perspective of combatting short-termism: there are some arguments why controlling shareholders could be more long-term oriented and why loyalty voting rights can help to promote the long-term strategy of a company. For instance, cash-restrained controlling shareholders can use the additional voting rights to reduce their equity stake and raise new capital to finance (long-term) investments, without losing control over the company. However, that same goal can be accomplished by dual class share structures. In addition, while that loyalty voting rights could be preferred to dual class shares, since they are open for all (loyal) shareholders, in practice, loyalty voting rights are only open to controlling shareholders. Hence, there is no reason to treat loyalty voting rights more leniently than dual class shares. Making loyalty voting rights the default rule (as the Loi Florange has done in France) or lowering the threshold for introducing loyalty voting rights (as Belgium and Italy have done), while being stricter or even banning dual class share structures, therefore makes no sense to us. If legislators believe that loyalty voting rights play a useful role, they should also allow dual class share structures.

This is important, because the second objective of loyalty voting rights, encouraging IPOs, can be achieved in a much more effective manner by allowing dual class shares. The mere possibility, however remote, that another shareholder would obtain double voting rights and challenge the control of the founders, makes it difficult to convince founders to go public with only loyalty voting rights. In Belgium, for example, none of the IPOs since 2019 (when loyalty voting rights were introduced) have made use of loyalty voting rights. In addition, dual class shares are more transparent to the market, given that it is ab initio clear that they are used to strengthen the position of the controlling shareholder. This would avoid the misleading narrative that all loyal shareholders can benefit equally from the additional voting rights. Finally, dual class share structures can be easier to administer for companies, as the fluctuating number of voting rights can give rise to problems when voting and ownership thresholds need to be calculated.

In any case, both dual class shares and loyalty voting rights should require some form of minority shareholder protection when they are introduced, especially in the midstream phase, for example by banning the beneficiary of the multiple voting rights (the controlling shareholder) from voting on the introduction of dual class shares and loyalty voting rights (basically “majority of the minority” approval). Another possibility to protect minority shareholders would be to link multiple voting rights to a mandatory transfer- or time-based sunset clause, which avoids a perpetual entrenchment by the controlling shareholders and allows dual class share structures to be abolished when they are no longer efficient, considering the company’s lifecycle..   

Some have also argued that the multiplicator of voting rights should be limited, to limit the wedge between cash flow and voting rights. This argument has also been used to defend loyalty voting rights, on the basis that the multiplicator for loyalty voting rights is limited to two (at least in Belgium and France). This argument is unconvincing, as it is perfectly possible to also limit the multiplicator in dual class share structures. In addition, we believe that such a limit to the multiplicator is an arbitrary and unnecessary limit on multiple voting rights, as long as minority shareholders are adequately protected when the multiple voting rights are introduced.

These arguments illustrate that dual class shares can be a useful alternative to loyalty voting rights. Hence, legislators that allow loyalty voting rights (such as France and Belgium), should also give companies the option to choose for dual class shares, as long as minority shareholders are sufficiently protected. 

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By Tom Vos, Assistant professor at Maastricht University; visiting professor at the Jean-Pierre Blumberg Chair (University of Antwerp); attorney at Linklaters LLP, Theo Monnens, PhD Candidate at the University of Antwerp, Steven Declercq, attorney at Eubelius & Jeroen Delvoie, professor at Vrije Universiteit Brussel; attorney at Eubelius

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