Welcome to Manifest-I

Welcome to Manifest-I the blog of Manifest Information Services Ltd. Here we take a wide ranging view of topical governance and stewardship issues. Please feel free to add your comments and join the debate. Sign up to receive free weekly updates.

Manifest is a signatory of the Best Practice Principles for Shareholder Voting Research

Delivering Diverse Viewpoints

In the pursuit of secure investment returns, diverse viewpoints based on high-quality data and varied information are critical for portfolio construction. We believe that share ownership is no different. Manifest intelligently navigates the complexities of global governance and voting delivering actionable and defensible stewardship insights.

Manifest: showing, not telling

Get in touch to find out more about Manifest's governance research, data and advisory services

A poison pill by any other name would taste as bitter

Or: “one person’s economic stimulus might be another’s entrenchment opportunity”.

On 25 June 2014, as part of its ongoing recovery plan, the  Italian Government adopted Law Decree no. 91/2014 the so-called “Development Decree” or “DECRETO sviluppo imprese”. Like the USA’s “Jump-start our Business Startups Act” (JOBS Act), the Decree is intended to stimulate enterprise and non-banking investment. And like the JOBS Act, new corporate governance measures are also introduced which bear more detailed scrutiny.

The Decree overall contains a bundle of measures covering green energy, tariffs, school construction and proposals to limit EU regulatory breaches.  From an investor’s perspective, the main governance measures set out in the Decree (Article 20) include:

  1. Allowing companies to issue multiple voting shares BEFORE they go public.
  2. The ban on voting caps (also for companies that are already listed) has been removed.
  3. A new 25% threshold for mandatory bids, which is in addition to the 30% one, which will remain valid for all companies. And,
  4. For a transitional period (i.e. within the next few months) companies can propose charter (by-law or articles of association) amendments with a view to adopting loyalty shares that can be approved by simple majority.

The loyalty shares proposal will allow companies to offer up to two votes per share to those of those shareholders who have continuously held their shares for at least two years – provided that such shareholders had previously requested the registration of their shares in a “special register”. This is different from Fiat-Chrysler’s recently proposed loyalty voting structure as all existing and future shareholders will be entitled to register their shares and to receive the additional vote, not just those on the register at the time of the shareholder meeting.

In certain circumstances, in order to avoid the use of multiple voting rights as an anti-takeover device, the additional votes may not be used in a takeover defence bid. However, all shareholders acquiring 30% of total voting rights will be required to launch a mandatory offer on all remaining shares.

On the face of it, the balancing measures proposed alongside the multiple voting shares do not appear to further entrench Italian companies.  However, rather than a rewarding all long-term shareholders, the multiple voting shares may represent a gift for major shareholders, distorting (or revealing?) the real reasons behind the new rules. The proposals also ignore the practical realities of institutional investor owners – the very providers of capital that the Italian government is seeking to encourage.

France shows the risks of multiple voting rights 

According to the proposals, only the holders of registered common shares will be entitled to receive the additional vote. This is a clear breach of the basic principle of equal treatment of shareholders. In theory institutional shareholders could jump through the administrative hoops needed to take up their rights. However the complexities of pooled nominees, global custodian/sub-custodian relationships, stock lending and transition managers make such registration unlikely. The net result is that major shareholders will be in a position to control shareholders meetings with a relatively low percentage of the share capital.

The new Italian rule is very similar to the French legislation, which grants an additional voting right to all shareholders who have been registered for at least 2 years. In 2013, the French proxy advisor Proxinvest, estimated that more than 60% of resolutions proposed by the SBF 120 index constituents would have been rejected had it not been for the double voting rights (“Proxinvest recommande des bons de fidélisation pour conserver un actionnariat stable”, L’AGEFI Quotidien, 4th April 2014).

A major challenge for many European countries is how to move their State and majority-owned businesses and financial markets from “relational capitalism” to  “market capitalism”. Recent changes in Italian general meetings rules have strongly reduced the influence of strategic shareholders, often linked by cross-ownerships (the “salotto buono”) . The introduction of multiple voting rights in Italy could be to stop this difficult transformation in its tracks. According to sources close to the Ministry , one of the primary purposes of the “Development Decree” is to allow the Government to sell significant holdings in State-owned companies (Enel, Eni and Finmeccanica), without losing the control of the AGM.

Once the law is enacted, multiple voting shares will need the approval of the extraordinary general meeting, with two-thirds of votes in favour  (75% at Finmeccanica). For state-owned companies that approval by cannot be taken for granted; only recently the government’s proposal of stricter director requirements were rejected by the shareholders of Eni, Finmeccanica and Terna (only Enel’s EGM approved the proposal). However, during the provisional period, only a simple majority will be needed, putting international dispersed shareholders at a significant disadvantage.

Multiple voting rights in Italy present two immediate dangers:

  • EGM rejections at State-owned companies would impede the Italian government’s divestment program, essential to partially refinance the huge Italian debt.
  • If approved by other listed companies, the double vote may set the Italian market back to the situation three years ago when the main shareholders (and their “friends”) were in full control of almost all meetings.

According to the Italian government, the introduction of the multiple voting shares is designed to encourage long-term ownership. However, such purpose may be more effectively achieved through other instruments, rewarding long-term investors without breaching the principle of equality of shareholders.

Following publication of the Decree, the Italian parliament has 60 days  to confirm and convert the Decree into law (possibly with amendments) or to repeal it. According to insiders, some of  the proposals (items 3 and 4) were pushed through despite Ministerial concern. Unless institutional investors make their concerns plainly heard within the next month, the Decree will be a fait accompli.

NOTE: An earlier version of this post was published on the blog of FrontisGovernance on Friday, July 22, 2014. Additional reporting and editing by Manifest.

As an shareholder are you concerned about the dilution of your ownership rights? Please contact info@manifest.co.uk to find out more about the impacts of loyalty ownership plans.

What do you think?