IDEAS home Printed from https://ideas.repec.org/p/eps/ecmiwp/1203.html
   My bibliography  Save this paper

The One-Share-One-Vote Controversy in the EU

Author

Listed:
  • Khachaturyan, Arman

Abstract

The proposal by the European Commission (EC) to establish shareholder democracy and mandate the one-share-one-vote (1S1V) rule has drawn much attention and controversy. In the pursuit of enhancing the rule’s popular appeal, EC policy-makers have tried to make equiproportional representation nearly an aphorism tied to corporate egalitarian sentiments underscoring justice, fairness and ethics. Against this background, the question of who could be against or oppose shareholder democracy and the 1S1V principle has both positive and normative implications. Based on a review of law, finance and economics literature, this paper evaluates the economic underpinnings and efficiency of the 1S1V rule and concludes that it is generally a suboptimal corporate voting mechanism that compromises economic efficiency and distorts the incentives of corporate constituencies. Moreover, it is submitted that any attempt to mandate the 1S1V rule in the EU may induce companies to either move to pyramidal structures, or worse yet, to use complex derivative instruments to decompose 1S1V. While pyramidal holdings may further facilitate the expropriation of private benefits of control as compared with the status-quo, the decomposition of 1S1V can i) advance the heterogeneity of shareholders’ preferences, ii) create incentives for negative voting arbitrage and iii) encourage the approval of value-reducing transactions, or more detrimentally, become a takeover defence. Hence, even if the EC could hypothetically move corporate Europe from controlled ownership structures to minority ownership ones, the 1S1V rule 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 EU. As a result, 1S1V cannot promote a value-enhancing corporate governance regime in the EU in general or meet the policy objectives of the intervention in particular in terms of strengthening the rights of shareholders, enhancing third-party protection or fostering the efficiency and competitiveness of businesses in the EU. On the normative side, the issue is how corporate law can efficiently police the ability of controlling shareholders to expropriate rights from minority shareholders in general and extract private benefits in particular. Generally, it is asserted that if a corporate law regime is adequately structured, there is less need to worry about the voting rule and non-proportionate votes would not be a serious concern. In this light, this paper concludes by outlining some policy alternatives. First, it is proposed that EC policy-makers refrain from taking any measure at the level of the Community and instead strengthen disclosure rules and their enforcement. Furthermore, some standards of review governing significant conflict-of-interest transactions can be introduced. Second, it is submitted that EC policy-makers can also provide for opt-in and opt-out provisions for the member states. Such menus should once again be complemented by rigorous disclosure rules and their enforcement.

Suggested Citation

  • Khachaturyan, Arman, 2006. "The One-Share-One-Vote Controversy in the EU," ECMI Papers 1203, Centre for European Policy Studies.
  • Handle: RePEc:eps:ecmiwp:1203
    as

    Download full text from publisher

    File URL: http://www.ceps.eu/system/files/book/1364.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Rafael La porta & Florencio Lopez-De-Silanes & Andrei Shleifer & Robert Vishny, 2002. "Investor Protection and Corporate Valuation," Journal of Finance, American Finance Association, vol. 57(3), pages 1147-1170, June.
    2. Lucian Bebchuk & Oliver Hart, 2001. "Takeover bids vs. Proxy Fights in Contests for Corporate Control," NBER Working Papers 8633, National Bureau of Economic Research, Inc.
    3. Bengt Holmstrom & Steven N. Kaplan, 2003. "The State Of U.S. Corporate Governance: What'S Right And What'S Wrong?," Journal of Applied Corporate Finance, Morgan Stanley, vol. 15(3), pages 8-20.
    4. Marco Becht & Fabrizio Barca, 2001. "The control of corporate Europe," ULB Institutional Repository 2013/13302, ULB -- Universite Libre de Bruxelles.
    5. Easterbrook, Frank H & Fischel, Daniel R, 1983. "Voting in Corporate Law," Journal of Law and Economics, University of Chicago Press, vol. 26(2), pages 395-427, June.
    6. Stein, Jeremy C, 1997. " Internal Capital Markets and the Competition for Corporate Resources," Journal of Finance, American Finance Association, vol. 52(1), pages 111-133, March.
    7. Hirshleifer, David & Thakor, Anjan V., 1994. "Managerial performance, boards of directors and takeover bidding," Journal of Corporate Finance, Elsevier, vol. 1(1), pages 63-90, March.
    8. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    9. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-1158, December.
    10. Jarrell, Gregg A. & Poulsen, Annette B., 1988. "Dual-class recapitalizations as antitakeover mechanisms : The recent evidence," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 129-152, January.
    11. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
    12. Partch, M. Megan, 1987. "The creation of a class of limited voting common stock and shareholder wealth," Journal of Financial Economics, Elsevier, vol. 18(2), pages 313-339, June.
    13. Shleifer, Andrei & Vishny, Robert W, 1986. "Large Shareholders and Corporate Control," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 461-488, June.
    14. Olivier Blanchard, 2004. "The Economic Future of Europe," Journal of Economic Perspectives, American Economic Association, vol. 18(4), pages 3-26, Fall.
    15. David Hirshleifer, 2001. "Investor Psychology and Asset Pricing," Journal of Finance, American Finance Association, vol. 56(4), pages 1533-1597, August.
    16. Mayers, David & Smith, Clifford Jr., 1986. "Ownership structure and control : The mutualization of stock life insurance companies," Journal of Financial Economics, Elsevier, vol. 16(1), pages 73-98, May.
    17. Bettis, J. Carr & Bizjak, John M. & Lemmon, Michael L., 2001. "Managerial Ownership, Incentive Contracting, and the Use of Zero-Cost Collars and Equity Swaps by Corporate Insiders," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 36(03), pages 345-370, September.
    18. repec:cup:apsrev:v:71:y:1977:i:03:p:999-1010_26 is not listed on IDEAS
    19. Hertzel, Michael G & Smith, Richard L, 1993. " Market Discounts and Shareholder Gains for Placing Equity Privately," Journal of Finance, American Finance Association, vol. 48(2), pages 459-485, June.
    20. Ronald Gilson & Alan Schwartz, "undated". "Sales and Elections as Methods for Transferring Corporate Control," Yale Law School John M. Olin Center for Studies in Law, Economics, and Public Policy Working Paper Series yale_lepp-1022, Yale Law School John M. Olin Center for Studies in Law, Economics, and Public Policy.
    21. Demsetz, Harold, 1983. "The Structure of Ownership and the Theory of the Firm," Journal of Law and Economics, University of Chicago Press, vol. 26(2), pages 375-390, June.
    22. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817.
    23. repec:hrv:faseco:30747191 is not listed on IDEAS
    24. Gary S. Becker, 1983. "A Theory of Competition Among Pressure Groups for Political Influence," The Quarterly Journal of Economics, Oxford University Press, vol. 98(3), pages 371-400.
    25. Wruck, Karen Hopper, 1989. "Equity ownership concentration and firm value : Evidence from private equity financings," Journal of Financial Economics, Elsevier, vol. 23(1), pages 3-28, June.
    26. Harris, Milton & Raviv, Artur, 1988. "Corporate governance : Voting rights and majority rules," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 203-235, January.
    27. Masulis, Ronald W., 1987. "Changes in ownership structure : Conversions of mutual savings and loans to stock charter," Journal of Financial Economics, Elsevier, vol. 18(1), pages 29-59, March.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eps:ecmiwp:1203. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Margarita Minkova). General contact details of provider: http://edirc.repec.org/data/cepssbe.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.