Proportionality between ownership and control in EU listed companies – Legal Study: Comments and Highlights Christophe Clerc Shearman & Sterling LLP Berlin 28 June th European Company Law and Corporate Governance Conference

28 June Scope of the Legal Study  19 jurisdictions  13 Control Enhancing Mechanisms:  900 page long report SecuritiesBy-law provisionsStructuresAgreements Multiple Voting Rights Shares Voting Right CeilingsPyramid StructuresCross-Shareholdings Non-Voting Shares (without preference) Ownership CeilingsPartnerships Limited by Shares Shareholders’ Agreements Non-Voting Preference Share Supermajority Provisions Priority Shares Golden Shares Depositary Certificates

28 June “One share, one vote”, an issue of corporate governance?  Two principles are at stake: – the comparatively new proportionality principle, or “one share, one vote” principle (“OSOV”), which tends to call for the suppression of Control Enhancing Mechanisms (“CEMs”), – and the traditional freedom of contract principle, or “inherent right to self organisation” principle (“IRSO”), which is based on the premise that, subject to certain precautionary measures, corporations should be left with the ability to organize themselves as they see fit.  Historically, the issue has always been related to company law: – In the XIXth century, the model was the “one head, one vote” rule – The question was whether the “one share, one vote” rule would be allowed, as it deviated from the “one head, one vote” rule  If it is today often seen an issue of corporate governance: what is the purpose of corporate governance rules? “The corporate governance framework should be developed with a view to its impact on overall economic performance …” (OECD Principles of Corporate Governance, revised edition, 2004) * The “Preliminary Comments” section is not part of the Legal Study submitted to the European Commission. It is meant to introduce the subject and only expresses the opinion of its author. Preliminary Comments*

28 June Three main models Management-oriented model (US) Dispersed shareholders Strong takeover defenses Fiduciary duties Finance-oriented model (UK) Dispersed shareholders No takeover defenses Agency theory (Principal/ Agent or Master/Servant relationship between shareholders and managers) Preliminary Comments (1)Obviously, none of these models are pure and other models exist. Corporate governance is usually looking at three main models (1) Company-oriented model (Continental Europe) Block holders Mild takeover defenses Corporate interest

28 June What is the debate?  Block holders are best placed to control companies.  Diversity should prevail (freedom of contract and “Inherent Right to Self Organization” (IRSO))  A system of checks and balances is preferable (consensus formation)*.  Transparency rules and appropriate protective laws prevent this risk.  If the markets discipline managers, who disciplines the markets? (Issues of market rationality and short- termism).  Focus: productive assets. Method: “Forecasting the prospective yield of assets over their whole life” (John Maynard Keynes) * (In addition, shareholders may hedge their risk through a diversification of their portfolio. Other stakeholders such as employees may not). Preliminary Comments Position A (Finance standpoint) Position B (Industry standpoint)  Unfettered markets are best placed to monitor companies.  A unique model should prevail: “one share, one vote”  Shareholders should have the ultimate powers, as they bear the ultimate risks (shareholder primacy).  Block holders may misuse their powers.  The fear or take-overs pushes management to act diligently (“disciplinary effect” against “management entrenchment”)  Focus: shares as a class of assets. Method: “Forecasting the psychology of the market”. (John Maynard Keynes)

28 June The questions raised by the Legal Study  What is the approach of the legal study? 1)How do the 19 jurisdictions apply the OSOV or the IRSO principles from a legal standpoint? Do they impose the OSOV rule or let companies decide? 2)How does that match with practice? 3)How are shareholders protected in the event CEMs are implemented? 4)What types of rules and regulations should be reviewed when regulating issues such as OSOV? Preliminary Comments

28 June Freedom of contracting is strong in all jurisdictions, even when the OSOV principle has been formally adopted  All countries allow between five and eleven CEMs.  Even countries which have, to some extent, formally adopted the OSOV principle, such as Belgium, Germany, Estonia, Greece, Spain, Luxembourg and Poland, allow a number of CEMs.  CEMs are also legally available in the three non-European countries that have been reviewed: the US (10 CEMs), Japan (9 CEMs) and Australia (8 CEMs). Legal review

28 June June All countries allow CEMs. No jurisdiction has opted for all an OSOV or all IRSO system. National regulatory framework : nb of CEMs allowed in each jurisdiction 6 or < OSOV = One share – One vote principle IRSO = Inherent right to self organisation Legal review

28 June June The availability of a CEM provided for in a country’s legislation does not necessarily translate into the actual utilization of such CEM by companies. CountryCEMS legally availableCEMs used in the sample Belgium113 Denmark106 Estonia82 Finland93 France105 Germany75 Greece55 Hungary77 Ireland105 Italy96 Luxembourg75 Poland76 Spain75 The Netherlands106 Sweden75 UK105 Legal review In the United Kingdom, for example, most of the CEMs discussed in the Study are not prohibited by the local legislation (in fact, ten out of the thirteen CEMs discussed in the Study are available for use by British companies). Nevertheless, market practice and market expectations do not encourage the use of many of the available CEMs.

28 June A wide variety of protective devices is available  In most cases, in Europe, when CEMs are implemented, shareholders are protected through various specific legal mechanisms. For instance: – Regarding multiple voting shares, the number of votes per share may be limited: the limit may for instance be 2 votes (France) or 10 votes (Denmark, Hungary, Sweden). (This may be compared with the limit in Japan: 1,000 votes). – Non-voting preference shares may not represent more than a certain percentage of the share capital: for example, 25% in France, 1/3 in Belgium and Estonia, 40% in Greece and 50% in Germany, Spain, Hungary, Japan, Italy and Luxembourg. – Priority shares must comply with specific rules regarding designation of directors or supervisory board members in Denmark, Germany, Italy and Sweden. – Mandatory tender offers may be triggered when shareholders enter into certain shareholders’ agreements (all jurisdictions except the United States, where this issue may be addressed in the by-laws).  In companies implementing CEMs, shareholders are also protected through fundamental principles of corporate law. The applicable standards of review, which are formulated in broad terms (such as decisions « oppressive to shareholders », « against the corporate interest », « in violation of fiduciary duties », « contrary to good business practice ») grant wide powers to the Courts to protect shareholders against abusive use of CEMs.  Disclosure obligations are significant and have been recently enhanced by the Takeover Directive and the Transparency Directive. Legal review

28 June Other legal mechanisms are relevant when assessing CEMs  Understanding the broader legal context in which CEMs are implemented is essential to a fair assessment of such mechanisms. For instance: – There are significant differences in rules regarding dismissal of directors: some jurisdictions authorize the use of staggered boards (the USA), some provide for indemnification of directors upon dismissal (such as Germany, Italy, or the United Kingdom), others restrict such indemnification (such as Belgium). While most jurisdictions allow dismissal of directors only if it is on the agenda, others do not impose this requirement (such as Germany, Spain, France, Luxembourg or Japan). – The right for minority shareholders to add an item on the agenda may differ significantly between jurisdictions: for instance, this right may be granted to any shareholder (Denmark, Finland, Sweden), to shareholders holding 1% of the company share capital (the Netherlands, Hungary, Japan) or 10% of the share capital (the United Kingdom).  Issues such as tax law, group law, related-party transactions or prevention of conflict of interest, or rules subjecting foreign investment to prior administrative authorizations (such as Australian rules for investments in more than 15% of the share capital of a company) should also be considered when assessing CEMs. Legal review

28 June CONCLUSIONS A.The results of the study 1.Freedom of contract is a common value of all jurisdictions. Diversity prevails in Europe, just as it does in the US between various states. 2.Markets play a significant role in selecting CEMs. 3.Legal protections are strong. 4.There are interactions between CEMs and other legal mechanisms. B.What next? A suggestion for future studies: 1.Pick-up a country with a strong economy, a high level of exports, a robust industry, a high reputation for the quality of its products. 2.Review its model. 3.Compare how other EU countries deviate from this model. Legal review

28 June You may contact the author of the legal study for questions or comments Shearman & Sterling LLP Christophe Clerc European Counsel +33 (1) Access full reports on proportionality: