Miranda Beacham, corporate governance manager at Kames Capital, has said both France and Italy – which make up large parts of the investable universe for European fund managers – risk alienating investors if companies in those markets do not take action to protect minority shareholder interests.
The two policies causing concern are the Florange Act in France and the Growth Decree in Italy. Both will give investors who hold shares for more than two years double voting rights. Beacham said the acts could make equities domiciled in the two countries less attractive because of the advantages they give to existing large family shareholders and governments over smaller shareholders.
“In France, the Florange Act risks disproportionately benefiting large family shareholders and trade unions who often have stakes in French companies,” she said. “The Act also impacts the ‘neutrality principle’ of management bodies in the event of a takeover, potentially allowing company boards to reject any hostile takeover approach without consulting shareholders”. As such, both of these changes threaten the interests of minority shareholders in French companies.
Meanwhile in Italy, the rule change granting double voting rights to long-term shareholders will leave majority shareholders with far too much power. “The risk is that the decree leads to majority shareholders gaining perpetual control of these companies at the expense of minority shareholders. It would also make hostile takeovers impossible,” she said.
Kames co-signed a letter with other concerned investors in February to the Italian government regarding the further issue of allowing companies to adopt the double voting rights by simple majority rather than super majority. As a result of international investor feedback, Kames were encouraged to see the Italian government swiftly removing the temporary provision allowing companies to do this.
“When you consider 90% of Italian companies have a dominant shareholder, it becomes a real concern.”
Rather than make the changes, Beacham said Kames continues to believe in the one share, one vote principle which has worked successfully for many years in most countries.
“While the idea of encouraging long-term ownership by rewarding shareholders with extra votes sounds good in theory, in practice such systems are difficult to implement fairly, particularly given the significant registration difficulties for foreign institutional investors,” she said.
“In our view, one share, one vote is not the perfect principle, but it remains the best approach for now.”
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