Spanish Loyalty Shares: Effects on the General Shareholders´ Meeting, on Takeover Bids and on Significant Holdings

Abstract

The Spanish legislator has taken advantage of the implementation of Directive (EU) 2017/828 as regards the encouragement of long-term shareholder engagement to incorporate so-called "loyalty shares" into our corporate system. These are essentially shares that attribute a double vote to shareholders who maintain uninterrupted ownership of them for a minimum period of two years. These shares are only allowed for listed companies that also choose to incorporate them into the by-laws ("opt-in" system), for which certain reinforced majorities are imposed and even an atypical regime of "renewal" of the resolution after five years since approval. The companies that introduce loyalty shares must keep a special register in which the shareholders who want to receive the double vote must be recorded, which is public, so that shareholders and investors can know both the voting rights existing at any given time (depending on the shareholders who enjoy the loyalty votes at any time) as well as the immediate changes that these rights may undergo (depending on the shareholders who have requested their registration and are fulfilling the appropriate two-year loyalty or "maturation" period).

The relevance of this instrument is evidenced considering that the rule of proportionality between participation in the share capital and voting rights has traditionally been considered as a genuine organisational principle of public limited companies ("sociedades anónimas"). In these, shares that directly or indirectly alter the proportion between nominal value and voting rights are generally prohibited. Until now, this principle admitted only two exceptions: non-voting shares, which are characterized by configuring a class of shares that compensates for the lack of voting rights with an economic privilege; and the limitations on the maximum number of voting rights that can be included in the by-laws, which have traditionally been surrounded by some controversy in the Spanish legal system, and which in practice continue to be used by a few listed companies for the purpose -generally shameful and unconfessed- of hindering the formation of significant stakes and of limiting the influence capacity of those who acquire them. And these exceptions have been extended to include loyalty shares, which can in some way be viewed as the reverse of the limitations on the maximum number of votes. Both are, in effect, of a subjective nature, in the sense that both the double vote and the limitation apply to the shareholder subjectively considered, without being incorporated into the content of the shares' own rights or therefore configuring a special class (as evidenced in relation to the loyalty shares by the fact that the double vote is lost in case of transfer of the shares, which prevents the value of the vote from being realized or "monetized" by the shareholder). But the two concepts operate in the opposite way: while the limitation deprives the shareholder of part of the votes that should correspond to it due to its participation in the capital (those that exceed the limit set in the by-laws), the loyalty shares on the contrary attribute a greater strength or voting capacity than that which should proportionally correspond to it based on said participation.

Two reasons have been invoked by the Spanish legislator to justify the introduction of loyalty shares. On the one hand, loyalty shares may help to promote "the long-term involvement of shareholders in listed companies" and combat the short-termism that would, supposedly, afflict the stock markets, by way of encouraging shareholders to maintain their investment in the long term with the attribution of a double vote. And it has also been sought, on the other hand, to allow in Spain an instrument known in other European countries (such as France, Italy or Belgium), to avoid the risk of some Spanish companies being tempted to transfer their registered office to jurisdictions that are more flexible and permissive in matters of plural or privileged voting. In addition, it has also been understood that loyalty shares may help facilitate IPO processes, a circumstance that led the Spanish Comisión Nacional del Mercado de Valores to actively promote the introduction of the concept.

Based on the new regulation, this paper analyses the effects of loyalty shares on the operation of general shareholders' meetings, from the double perspective of the constitution quorums and the voting majorities required for the approval of resolutions. The consequences that loyalty shares will have for the companies that include them in their by-laws in relation to the takeover bid regime are also analysed, specifically in relation to the obligation to formulate a mandatory bid imposed on any person that reaches or exceeds the threshold of 30% of the voting rights, as well as in the systems of significant holdings applicable to listed companies and in certain regulated sectors, such as banking or insurance. The main question is that in these companies the number of their voting rights, which is normally stable and changes only with capital increase or capital reduction transactions involving the issue or redemption of shares, will become variable and elastic, depending on the number of shareholders who request the double vote, for all or part of their shares, and of those who enjoy it but waive it or lose it totally or partially due to the transfer of their shares.

Keywords: loyalty shares, general shareholder´s meeting, mandatory takeover bid, significant holding regime

JEL Classification: K22