Golden Shares: Principles and Alternatives Colin Mayer Saïd Business School University of Oxford

Differential Voting Rights GS example of general class of differential voting rights, e.g. dual class shares Associated with disproportionate control by particular shareholders, e.g. founding families Create private benefits at expense of other shareholders

Block Premia Austria38% France2% Germany10% Italy37% Spain4% UK1% US1% Source: Dyck and Zingales (2004)

Consequences In absence of private benefits, one share-one vote is optimal Private benefits may justify deviations GS confers disproportionate control on the state May therefore be justified by deviation of social from market benefits Since free rider problem of market control, primarily impediment to market for corporate control Is this impediment warranted?

Bid Premia Large gains to target shareholders in takeovers, in excess of 15% Particularly so in hostile bids (30%) Where do these come from - wealth transfers or efficiency gains? Elimination of GS creates opportunities for large gains Is this desirable?

Takeover Restrictions Yes - provided that there is not a social/ market divergence Bid premia are prima facie but not sufficient evidence of benefits Critical questions: –Do takeovers create social-market conflicts? –Why? –How large? –Are there better remedies than GS?

Importance of Ownership Ownership confers control rights Significance in relation to investment and reinvestment decisions Important where there is contract incompleteness If possible to specify national objectives completely in, for example, regulatory contract then ownership is irrelevant But if not then ownership matters

Alternative Forms State ownership Partially privatized Private firm with GS Private regulated firm

GS versus State Ownership Large share blocks threaten minorities Divergence of interests, particularly so when large shareholder is state Discourages private investment and raises cost of capital GS lessen this problem by restricting the rights of the state to intervene Nevertheless, impede beneficial restructurings and undermine market integration

Market Integration Free flow of corporate control natural extension of free flow of capital Should avoid impediments to international markets for corporate control Analogous to takeover directive and break- through provisions Important distinction – differential voting rights consistent with freedom of contracting, GS are not. Are there alternatives?

Regulation Can social-market divergences be corrected through regulation? Can social obligations be specified in licences and contracts? Can bonds and covenants be used to provide appropriate incentives and protection?

Examples BAA – GS governs changes in holdings of more than 15% and airport closure decisions Spanish legislation regarding major corporate decisions, e.g. winding up, mergers and change in control of such companies as Endesa, Repsol and Telefonica ECJ ruled against British government in relation to BAA and Spanish government in relation to Tabacelera and Argentaria

Issue Concerns relate to delivery of services to customers (quality, efficiency, price) Can be specified in licences and regulatory contracts But more legitimate concern in relation to new services - would rival airport owner seek to develop London or domestic base? Where there is limited innovation, e.g. in water and electricity, regulatory contracts easy to specify but less so in e.g. telecoms

Investor Protection Efficient operation of market for corporate control requires regulation to protect investors as well as customers In particular, market in corporate control requires takeover legislation to protect minorities

Conclusions GS debate should be considered in context of literature on ownership and control Points to benefits of free market in control as well as capital GS should only be justified on basis of clear public interest case and absence of alternative contractual remedies

Conclusions Implication is that GS should only be permitted in limited number of cases and sectors Prohibition on state control does not however have implications for differential voting rights in private sector