Steven Davidoff Solomon writes for The New York Times, May 19, 2015
For besieged public corporations in the United States, giving favored shareholders two votes instead of one sounds like an answer. France certainly thinks so.
France once barred its companies from using anti-takeover defenses, known in Europe as “frustrating actions,” to stop hostile bidders. But last year, with the takeover market heating up and European countries worried about losing jobs, France reversed course. The French Parliament passed a law, known as the Florange Law, to give companies the ability to fend off hostile bids.
The title of the law says it all. Florange is the French town where ArcelorMittal tried to close down two blast furnaces after a successful hostile takeover. ArcelorMittal backed down after France threatened to nationalize the plant.
The centerpiece of the Florange Law is a mandate that French companies give two votes to any share held for longer than two years. This goes against the historical one-vote-for-every-share system that most countries have. The law allows an opt-out if two-thirds of shareholders approve one by March 31, 2016.
In addition, the law permits French companies to adopt American-style poison pills and requires that any hostile bidder negotiate with French workers before proceeding with a takeover.
The ostensible purpose of these changes, particularly the new voting rules, is to foster “long-termism” — rewarding French shareholders for holding shares for the long term and committing to the company. It’s a law clearly directed not just at hostile takeovers, but also at shareholder activists and at United States institutional investors, which are increasingly vocal in influencing companies across the globe.
It seems like common sense. After all, why not reward shareholders for sticking with their company?
Alas, it turns out to be complicated.
France previously allowed for double voting rights after a holding period, but on an optional basis. More than half of the companies in the benchmark CAC 40-stock index already have such a rule. But the mandatory nature of the rule has raised hackles among both shareholders and French corporations.
Shareholders led by PhiTrust, a French asset manager, have vociferously protested because of the anti-takeover nature of these rules. By allowing French companies to fight off takeovers, shareholders argue, the law could protect entrenched and underproductive boards.
Shareholders also fear that the rules will stem investor activism. If activists do not have as much voting power to change boards and companies, their job will become much harder. And they will be unwilling to lock up millions in capital and wait years to earn significant influence.
Following its shareholder clientele, the world’s largest proxy adviser, Institutional Shareholder Services, has issued a note largely opposing these rules. I.S.S. says it will recommend in some cases that shareholders withhold votes for directors of companies that adopt the new voting rule.
For French corporations, the reasons for opposition are even more complicated. Some have wanted this rule simply because they buy into it as part of good corporate governance. Yet many French companies have significant shareholders already, including the biggest of them all, the French government.
With double voting rights, you could end up with stakeholders with divergent interests and different degrees of power. One can easily see how the interests of the French state might not always align with those of other shareholders, particularly when it comes to preserving jobs.
Some French companies have actively resisted. Renault, Orange, Vivendi and others have pushed for votes to allow the companies to opt out.
In some cases, it has resulted in a chess game, as shareholders and companies plot moves and countermoves. For example, the French government bought $1.4 billion worth of shares to block Renault from opting out of the
voting law. Meanwhile, Nissan, the owner of 15 percent of Renault, is fuming, as its shares do not even have voting rights.
Vivendi, too, faced the issue of whether to opt out of the rule in light of the fierce support of the French billionaire Vincent Bolloré, who owns 14.5 percent of Vivendi. Mr. Bolloré vocally pressed for adoption of the new voting rule, a position for which the economy minister, Emmanuel Macron, offered his “full support.” Maybe not so coincidentally, Vivendi has been a target of the hedge fund P. Schoenfeld Asset Management. In a recent vote, Vivendi shareholders chose against opting out.
In other cases where the French government does not hold a stake, companies have moved quickly to reject the rule. Vinci, the French construction behemoth, had 99.3 percent of its shareholders approve the opt-out, according to Bloomberg News.
The French controversy highlights similar issues over the one-share-one-vote rule in the United States. Technology companies like Facebook and LinkedIn went public with dual-class share structures that concentrate ownership with a core set of shareholders. Even Shake Shack has followed the trend among initial public offerings.
That trend is a result of a bit of regulatory history.
In 1988, during a wave of hostile takeovers, the Securities and Exchange Commission barred public companies from issuing stock with extra voting rights. The idea was to prevent midstream capitalizations — that is, companies’ conversion to high-vote share structures in order to avoid hostile takeovers. But the rule was struck down in federal court. The subsequent compromise was that the exchanges adopted rules allowing deviation from one share one vote only if the company went public with the structure.
The consequence is that today we have two levels of governance, just as France does. The haves are those companies that have gone public with two or more classes of shares and are controlled by a small group of shareholders. And the have-nots are companies with one share one vote that are more exposed to shareholder activism and hostile takeovers.
The push against one share one vote has left the United States a weak outlier when it comes to market regulation. Alibaba, for example, had its I.P.O. in the United States after the Hong Kong exchange would not allow the company’s share structure.
People who speak of “shareholder democracy” may not be happy with the trend away from one share one vote, but does giving some shareholders more votes improve anything?
If the French plan is adopted, long-term holders like institutional investors may win. Yet the average actively managed mutual fund turns over its portfolio every year, meaning many such investors will not benefit.
Shareholder activists may lose, though they may not. Instead, they would have to cater to a different set of shareholders. This may be index funds, which do hold on to shares and would have more power.
The mixed results extend to management. Presumably, a high-vote structure will discourage hostile takeovers by giving management protection, but it will also make management subservient to a smaller group of existing shareholders.
And so, the increased voting power may not be a good thing. It may give an advantage to more passive shareholders and those that may have special interests.
In the dual-class world, high-vote stock may keep power with founders, perhaps longer than they should have it. Google’s and Facebook’s huge expenditures on such things as self-driving cars and WhatsApp are protected because these companies are controlled by their founders. This may be a good thing in the case of Google or Facebook, but it is unclear why the grocery chain Fairway, another public company with dual-class stock, needs this structure.
In other words, while it may seem like the cure for short-termism, high-vote shares may instead do something else, giving power to a small group of shareholders with odd interests. And whether they exercise that power vengefully or selfishly is an unknown. C’est la vie.