Trapped in Delusions: Democracy, Fairness and the One-Share-One-Vote Rule in the European Union

Abstract

The European Commission's proposal to establish shareholder democracy and mandate the one-share-one-vote (1S1V) rule has drawn much attention and controversy. In the pursuit of a popular appeal for the rule, European Commission policymakers have tried to turn equiproportional representation into something close to an aphorism tied to corporate egalitarian sentiments underscoring justice, fairness and ethics.

Based on law, finance and economics literature, this paper evaluates the economic underpinnings and efficiency of 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 1S1V in the European Union may induce companies to move either to pyramidal structures or, worse yet, to use complex derivative instruments to decompose 1S1V. While pyramidal holdings may further facilitate expropriation of private benefits of control as compared to the status quo, the decomposition of 1S1V can: (i) further advance heterogeneity of preferences of shareholders; (ii) create incentives for negative voting arbitrage; and (iii) encourage the approval of value-reducing transactions or, worse yet, become a takeover defence. Hence, even if the European Commission can hypothetically move corporate Europe from controlled ownership structures to minority ownership ones, 1S1V is clearly worse than the status quo, and, paradoxically, instead of advancing the rights of ‘disadvantaged shareholders’, 1S1V can further demote shareholder rights in the European Union.

This article proposes that European Commission policymakers should refrain from taking any measure at the level of the Community and should instead strengthen disclosure rules and the enforcement thereof. Furthermore, some standards of review governing significant conflict of interest transactions can be introduced. It is also submitted that European Commission policymakers can provide opt-in and opt-out provisions for the Member States. Such menus should be once again complemented by rigorous disclosure rules and enforcement mechanisms.