The One-Share-One-Vote Controversy in the EU
European Business Organization Law Review (EBOR), Vol. 8, pp. 335-367, 2007
31 Pages Posted: 15 Jun 2006 Last revised: 27 Jun 2008
The EC's proposal to establish shareholder democracy and mandate the one-share-one-vote rule has drawn much attention and controversy. In the pursuit of a popular appeal for the rule, EC policy-makers have tried to make equiproportional representation nearly an aphorism tied with corporate egalitarian sentiments underscoring justice, fairness and ethics.
Based on law, finance and economics literature, this article evaluates economic underpinnings and efficiency of the 1S1V and concludes that it is generally a suboptimal corporate voting mechanism compromising economic efficiency and distorting incentives of corporate constituencies. Moreover, it is submitted that any attempt to mandate the 1S1V in the EU may induce companies to move either to pyramidal structures, or worse yet, to use complex derivative instruments to decompose the 1S1V. While pyramidal holdings may further facilitate expropriation of private benefits of control as compared to the status-quo, the decomposition of the 1S1V can i) further advance heterogeneity of preferences of shareholders, ii) create incentives for negative voting arbitrage, iii) encourage the approval of value-reducing transactions or worse yet, become a takeover defense. Hence, even if the EC can hypothetically move corporate Europe from controlled ownership structures to minority ownership ones, the 1S1V is clearly worse than the status quo, and, paradoxically, instead of advancing rights of disadvantaged shareholders, the 1S1V can further demote shareholder rights in the EU.
This article proposes that EC policy-makers should refrain from taking any measure at the level of the community, and, instead strengthen disclosure rules and enforcement thereof. Furthermore, some standards of review governing significant conflict of interest transactions can be introduced. It is also submitted that EC policy-makers can provide for opt-in and opt out-provisions for the Member States. Such menus should be once again complemented by rigorous disclosure rules and enforcement mechanisms.
Keywords: corporate governance, corporate law, shareholder democracy, one-share-one-vote
JEL Classification: G32, G34, G38, K22, L51
Suggested Citation: Suggested Citation