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III. One Share One Vote: Fairness, Efficiency and EU Harmonisation Revisited
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– 145 – One Share One Vote: Fairness, Efficiency and EU Harmonisation Revisited Koen Geens1 and Carl Clottens2 Jan Ronse Institute – K.U.Leuven Abstract One of the most controversial aspects of the Company Law Action Plan of 2003 was the European Commission’s ambition to establish real shareholder democracy and to impose the principle of proportionality between capital and control – One Share One Vote (1S1V) – for listed companies in the EU. This paper considers the arguments that have been raised in the animated debate between advocates and critics and analyses whether such a rule – either a general and permanent 1S1V or a breakthrough rule (BTR) limited to takeover situations – could be justified from the viewpoint of efficiency and/or fairness. Starting from the premise that the law can have an impact on ownership structure, this paper argues that the EU legislator, by imposing a mandatory bid rule, has expressed a preference for dispersed ownership of listed companies. In the long run, the continental EU will therefore gradually converge towards the UK model. The mandatory bid rule reduces the odds that a BTR or a general 1S1V rule would result in more concentrated ownership. A consistently formulated BTR has an added value in speeding up this process, because it exposes existing block-holders to the market for corporate control. Whereas contestability of control would solve most of the problems which 1S1V remedies, the merits of 1S1V are not limited to takeovers and therefore a general 1S1V rule should at least be reconsidered. A Fifth or Ninth Directive, while perhaps not feasible politically, would be useful to resolve closely related issues (e.g. board rules, pyramids) and could constitute a less intrusive means of achieving more uniform capital and voting structures while allowing for some flexibility. Finally, if the EU legislator remains unwilling or unable to advance further on the path towards 1S1V, the case law of the European Court of Justice on the free movement of capital and the freedom of establishment could prove to be a useful substitute for secondary EU legislation. 1 Professor and Director of the Jan Ronse Institute for Company Law, K.U.Leuven, attorney Brussels Bar (Eubelius). 2 Ph.D. candidate K.U.Leuven; attorney Brussels Bar (Eubelius). – 146 – Table of contents 1. Introduction 146 2. Models of Corporate Ownership and Control 149 3. The Mandatory Bid Rule 153 4. The Effects of 1S1V on Control Allocation and Operational Governance 155 4.1. Theoretical Approach 155 4.2. Empirical Evidence 157 5. The Effects of 1S1V on Ownership Structure 159 6. The Breakthrough Rule 161 7. Added Value of the Breakthrough Rule in the light of the Mandatory Bid Rule 166 8. Added Value of 1S1V in the light of the Mandatory Bid and Breakthrough Rules 167 8.1. Minority Protection (Outside the Takeover Situation) 169 8.2. Cost of Capital 172 8.3. Shareholder Participation 174 8.4. Restructuring (Other than in a Takeover Situation) 177 8.5. Uniformity: Level Playing Field and Legal Certainty 177 9. Negative Harmonisation of 1S1V and the Role of the European Court of Justice 179 10. Conclusion 184 1. Introduction 1. The Company Law Action Plan 2003. The European Commission, in its Company Law Action Plan of 2003, considered that there was a strong case for promoting the principle of proportionality between capital and control – One Share One Vote (“1S1V”) – as a means of achieving, in the medium to long term, real shareholder democracy in the EU3 . This proposal was part of a broader set of corporate governance measures intended to strengthen shareholders’ rights. 2. The true meaning of “shareholder democracy” is efficiency. Shareholder democracy is in itself a rather vague notion which may sound appealing but only creates confusion4 . Indeed, it is capital that reigns in a stock corporation, not people; a company is therefore more akin to a plutocracy5 . If the EU is to 3 Communication from the Commission to the Council and the European Parliament – Modernising Company Law and Enhancing Corporate Governance in the European Union – A Plan to Move Forward, COM (2003) 284 final, Brussels, 21 May 2003, no. 3.1.2. 4 H. MANNE, “The ‘Corporate Democracy’ Oxymoron”, Wall Street Journal, 2 January 2007. 5 Historically, 1S1V has not always been the rule. See e.g. C. DUNLAVY, “Corporate Governance in Late 19th-Century Europe and the U.S.: The Case of Shareholder Voting Rights”, in K.J. Hopt, [44.213.99.37] Project MUSE (2024-03-19 04:46 GMT) – 147 – take any legislative...