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The Costs of Control-enhancing Mechanisms: How Regulatory Dualism Can Create Value in the Privatisation of State-owned Firms in Europe

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Abstract

Empirical studies show that ownership structures that separate control and cash flow rights create agency problems and are associated with reduced value for minority shareholders. Institutional investors recognise these inefficiencies and expect a discount on the share price of companies with control-enhancing mechanisms like multiple voting rights shares or pyramidal ownership structures.

In the US, corporate pyramids are discouraged through the taxation of intercompany dividends, whereas multiple voting rights shares are allowed but have to be issued before the firm goes public. Therefore, controlling shareholders who want to entrench themselves in control by retaining multiple voting rights shares pay the costs of this inefficient capital structure when the firm initially goes public at a discounted price.

Some European countries — including Spain, Portugal, Greece and, until very recently, Italy — have adopted a diametrically opposite solution. Multiple voting rights shares have been expressly prohibited by the legislator, but corporate pyramids are commonly used by listed companies and can be created following the IPO of the firm without approval from the shareholders. In this situation, if institutional investors expect that a pyramidal ownership structure will be created in the future, they will discount the price of the shares when the firm goes public. Therefore, if Italy, Spain, Portugal and Greece are willing to privatise some of their state-owned companies and want to maximise the price of their stocks, they should create the conditions to assure the market that these companies will not be controlled through pyramids in the future.

Because of strong opposition from national business elites which control the largest corporate groups, it is very difficult to adopt strict regulations aimed at prohibiting — or at least limiting — the use of pyramidal ownership structures in a relatively short period of time. In order to solve this Olson problem, I suggest that Italy, Spain, Portugal and Greece should use regulatory dualism to create new markets with enhanced corporate governance rules that prevent shareholders’ control through pyramids.

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  61. Ibid., at p. 3246.

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  64. Bebchuk, supra n. 25, at p. 18; Randall Morck and Masao Nakamura, ‘Business Groups and the Big Push: Meiji Japan’s Mass Privatization and Subsequent Growth’, 8 Enterprise & Society (2007) p. 543, at p. 548 (‘State orchestrated collusion, protectionism, and ready subsidies limit the competitive pressures on business groups, permitting inefficient operations to survive and compromising economic growth’); Tarun Khanna and Yishay Yafeh, ‘Business Groups in Emerging Markets: Paragons or Parasites?’, 45 Journal of Economic Literature (2007) p. 331, at p. 359 (‘[A]s business groups accumulate political and economic influence, the nature of their relations with government tends to change — from government protégés to a strong lobby with often captured regulators’); Randall Morck, Daniel Wolfenzon and Bernard Yeung, ‘Economic Entrenchment and Growth’, 43 Journal of Economic Literature (2005) p. 655, at p. 657 (‘[E]ntrusting the governance of huge slices of a country’s corporate sector to a tiny elite can bias capital allocation, retard capital market development, obstruct entry by outsider entrepreneurs, and retard growth’).

  65. Bebchuk, supra n. 25, at p. 18; see Morck, Wolfenzon and Yeung, supra n. 67, at pp. 693–699.

  66. Paul Rosenstein-Rodan, ‘Problems of Industrialisation of Eastern and South-Eastern Europe’, 53 Economic Journal (1943) p. 202.

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  69. Gilson, supra n. 19, at p. 636.

  70. See Joh, supra n. 59, at p. 318 (‘As the economy develops, the potential benefits of overcoming these market imperfections decreases while the cost of agency problems and conflicts of interest between controlling family shareholders and minority shareholders can increase’); Masulis, Pham and Zein, supra n. 71, at p. 3589, note 39 (‘[I]n an unreported test, [they] find that the valuation discount of group firms is actually lower in emerging markets than in developed markets’).

  71. See supra n. 59.

  72. Lucian A. Bebchuk, Interim Report Prepared for the Committee on Increasing Competitiveness in the Economy (9 October 2011), at p. 13, available at: <http://www.law.harvard.edu/faculty/bebchuk/Policy/Bebchuk-Shani-Report.pdf> (‘If controllers continue holding their large groups using other people’s money, but switch from outside equity financing to outside debt financing, leverage levels would rise above their current high levels, exacerbating systemic risk concerns’).

  73. Stijn Claessens, Simeon Djankov, Joseph P. H. Fan and Larry H. P. Lang, ‘Disentangling the Incentive and Entrenchment Effects of Large Shareholdings’, 57 Journal of Finance (2002) p. 2741, at p. 2744 (using a sample of East Asian corporations).

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  75. Stephen M. Bainbridge, ‘The Short Life and Resurrection of Rule 19c-4’, 69 Washington University Law Quarterly (1991) p. 565.

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  79. The same reasoning explains why — unlike the multiple voting rights shares — non-voting or limited-voting shares can be issued (but not exchanged) in ‘mid-stream’. In this case, the issuance of the new class of shares is not coercive, because the insiders cannot exploit the collective action problem.

  80. See Alessio Pacces, Rethinking Corporate Governance: The Law and Economics of Control Powers (Routledge 2012), at p. 210: One or more layers could be added on top of the pyramid, thereby diluting the controller’s ownership stake in any lower layer. Minority shareholders of existing layers cannot but be harmed by such a strategy; but again they are powerless. In contrast, new outside investors are more easily found on top rather than at the bottom of a pyramid.

  81. Klaus Busch, Christoph Hermann, Karl Hinrichs and Thorsten Schulten, ‘Euro Crisis, Austerity Policy and the European Social Model. How Crisis Policies in Southern Europe Threaten the EU’s Social Dimension’ (2013), at p. 22, available at: <http://library.fes.de/pdf-files/id/ipa/09656.pdf> (‘In Greece and Portugal, the granting of ESM [the European Stability Mechanism] loans was linked to extensive privatization. Spain and Italy have also announced far-reaching privatizations under pressure from the ECB and international institutions’); Laura Cabeza-García and Silvia Gómez-Ansón, ‘Post-privatization Ownership Concentration: Determinants and Influence on Firm Efficiency’, 39 Journal of Comparative Economics (2011) p. 412: Privatization became a priority on government agendas in the past few decades and remains of high importance despite the current global financial crisis. In fact, European countries such as Poland, Greece, Portugal and Spain are stepping up their divestment programs, in search of greater revenue to help reduce fiscal deficits.

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  82. See Poste Italiane S.p.A. Financial Statement 2013, available at: <http://www.posteitaliane.post/resources/english/editoriali/pdf/Annual_results_for_the_year_ended_31_december_2013.pdf>.

  83. See Ferrovie dello Stato S.p.A. Financial Statement 2013, available at: <http://www.fsitaliane.it/cms-file/allegati/fsitaliane_en/Investor-relations/17_04_2014_Summary_of_the_annual_Financial_Results_for_2013.pdf>.

  84. See Enav S.p.A. Annual Report 2012, available at: <http://www.enav.it/portal/page/portal/PortaleENAV/Home_EN/Comunicazione_EN?CurrentPath=/enav/en/comunication/news/news_archive/annual_report>.

  85. See Rachel Sanderson, ‘Italy Set to Launch Privatization Drive with Fincantieri Listing’, Financial Times, 5 May 2014, available at: <http://www.ft.com/intl/cms/s/0/b7bfe22a-d462-11e3-a122-00144feabdc0.html#axzz32lnmzsZA>; Guy Dinmore and Rachel Sanderson, ‘Italy Launches Big Privatization Push’, Financial Times, 26 January 2014, available at: <http://www.ft.com/intl/cms/s/0/d3ff8c8c-8454-11e3-9710-00144feab7de.html#axzz2wduPMWGI> (‘Italy’s coalition government has embarked on what it calls its largest privatization program since the late 1990s with a plan to raise €12bn’); Christopher Emsden, ‘Italy to Privatize $16 Billion of Assets’, Wall Street Journal, 21 November 2013, available at: <http://online.wsj.com/news/articles/ SB10001424052702304791704579211751435589712>; Paolo Festuccia, ‘Poste, Ferrovie e Fincantieri, l’obiettivo è incassare 10 miliardi’, La Stampa, 24 March 2014, available at: <http://www.lastampa.it/2014/03/23/economia/poste-ferrovie-e-fincantieri-lobiettivo-incassare-miliardi-2MiuYbpX1ZVr1y62qaQr3O/pagina.html>; Laura Serafini, ‘Avanti su Poste, Fincantieri e Ferrovie’, Il Sole 24 Ore, 24 March 2014, available at: <http://www.ilsole24ore.com/art/notizie/2014-03-23/avanti-poste-fincantieri-e-ferrovie-081722.shtml?uuid=>.

  86. Jeannette Neumann, ‘Spain Launches Privatization of Bankia, Wall Street Journal, 27 February 2014, available at: <http://online.wsj.com/articles/SB10001424052702304071004579409233996132914>; Charles Penty, ‘Spain Starts Sale of Bankia to Recoup Bailout Funding’, Bloomberg, 28 February 2014, available at: <http://www.bloomberg.com/news/2014-02-27/spain-starts-sale-of-7-5-stake-in-nationalized-lender-bankia.html>.

  87. David Roman and Ana Garcìa, ‘Spanish Airport Operator Aena Eyes IPO This Year’, Wall Street Journal, 7 March 2014, available at: <http://online.wsj.com/news/articles/SB10001424052702304554004579425080790134214>; Tobias Buck, ‘Spain to Sell 49% of Airports Group Aena’, Financial Times, 13 June 2014, available at: <http://www.ft.com/intl/cms/s/0/bd8f885e-f307-11e3-85cd-00144feabdc0.html>.

  88. Angeliki Koutantou, ‘Greece to Meet 2013 Asset Sales Target, Upbeat on 2014 Plan: Privatization Chief, Reuters, 16 December 2013, available at: <http://www.reuters.com/article/2013/12/16/us-greece-privatisation-idUSBRE9BF0Y920131216> (‘Greece is aiming at total privatization proceeds of about 24 billion euros by 2020 to cut its debt, which is seen exceeding 175 percent of GDP this year, and to kick-start its austerity-hit economy as part of its 240-billion euro international bailout’); B. Bortolotti, ‘The Proposer’s Opening Remarks’, in ‘Privatisation: Opening Statements’, The Economist, 4 February 2014, available at: <http://www.economist.com/debate/days/view/1062>.

  89. Consob, supra n. 38, at p. 3 (Table 1.2) (the Consob report considers publicly held ‘[c]ompanies neither controlled by a single shareholder … nor by a shareholders’ agreement with a free float higher than 70 percent of the ordinary shares’).

  90. Faccio and Lang, supra n. 34, at p. 379; La Porta, Lopez-de-Silanes and Shleifer, supra n. 26, at pp. 492–495; Panayotis Kapopoulos and Sophia Lazaretou, ‘Corporate Ownership Structure and Firm Performance: Evidence from Greek Firms’, 15 Corporate Governance: An International Review (2007) p. 144, at p. 156.

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  91. Nenova, supra n. 65, at p. 334; Dyck and Zingales, supra n. 65, at p. 551.

  92. See supra section 2.2.

  93. Mark J. Roe, Political Determinants of Corporate Governance: Political Context, Corporate Impact (Oxford University Press 2003).

  94. Skadden, Arps, Slate, Meagher & Flom LLP, ‘Europe M&A: The Evolving Takeover Landscape’, 25 February 2013, available at: <http://www.skadden.com/sites/default/files/publications/Europe_MandA_The_Evolving_Takeover_Landscape.pdf>. 98 Bianchi and Bianco, supra n. 34, at p. 11.

  95. Michele Meoli, Stefano Paleari and Giovanni Urga, ‘When Controlling Shareholders Live Like Kings. The Case of Telecom Italia’ (24 January 2006), available at: <http://ssrn.com.ezp-prod1.hul.harvard.edu/abstract=883655>.

  96. John Tagliabue, ‘Move by Olivetti Backfires with Sotck Traders’, New York Times, 1 October 1999, available at: <http://www.nytimes.com/1999/10/01/business/international-business-move-by-olivetti-backfires-with-stock-traders.html>.

  97. Paul Maidment, ‘Pirelli, Benetton Team up to Grab Olivetti’, Forbes, 27 July 2001, available at: <http://www.forbes.com/2001/07/30/0730telecomitalia_print.html> (noting that Mr Tronchetti Provera was ‘effectively gaining control of Italy’s leading industrial group, with a stock market capitalization of 55 billion euros, for 7 billion euros in cash’); Greg Burke, ‘All in the Families’, Time Magazine, 13 August 2001, available at: <http://www.time.com/time/magazine/article/0,9171,170116,00.html#ixzz2QHSAb16P>: By keeping their share of Olivetti under 30%, Pirelli [a company controlled by Mr. Tronchetti Provera] and Benetton [one of his allies] were not obliged to offer the buy-out to all investors. Minority shareholders are understandably furious, especially since Olivetti dropped 15.3% the first day after the deal.

  98. Luca Enriques and Paolo Volpin, ‘Corporate Governance Reforms in Continental Europe’, 21 Journal of Economic Perspectives (2007) p. 117, at p. 121.

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  99. Bebchuk, supra n. 57, at p. 37 (‘When control is valuable, leaving it up for grabs will invite attempts to grab it and will not constitute an equilibrium’).

  100. As already mentioned above, this result can be achieved by acquiring a participation in the share capital of the target company which is just below the threshold provided for the application of the mandatory bid rule. See supra n. 96.

  101. See supra section 4.2.1.

  102. See Leuz, Lins and Warnock, supra n. 63, at pp. 3253–3254.

  103. See supra n. 10.

  104. Gilson, supra n. 19, at p. 653; Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer and Robert W. Vishny, ‘Investor Protection and Corporate Governance’, 58 Journal of Financial Economics (2000) p. 3, at p. 21 (‘What the reformers see as protection of investors, the founding families call “expropriation of entrepreneurs”. No wonder, then, that in all countries — from Latin America to Asia to Europe — the families have opposed legal reform’); Lucian A. Bebchuk and Zvika Neeman, ‘Investor Protection and Interest Group Politics’, 23 Review of Financial Studies (2010) p. 1089 (they identify several ‘factors that push toward suboptimal investor protection, including corporate insiders’ ability to use public firms’ assets to influence politicians, and institutional investors’ inability to capture fully the value of investor protection for outside investors’); Gerhard Schnyder, ‘Varieties of Insider Corporate Governance: The Determinants of Business Preferences and Governance Reform in the Netherlands, Sweden and Switzerland’, 19 Journal of European Public Policy (2012) p. 1434, at p. 1447: While electoral pressures may push parties to cater for the needs of minority shareholders where these constitute a large part of the electorate, the preferences of the business élite constitute a second channel through which ownership structures influence the politics of corporate governance reforms. Which one of these pressures ultimately prevails is an empirical question which depends on additional variables, such as the power and preferences of centre-left parties, the salience of an issue and the intensity of business lobbying.

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  105. See Communication from the Commission to the Council and the European Parliament, ‘Modernising Company Law and Enhancing Corporate Governance in the European Union — A Plan to Move Forward’, Brussels, 21 May 2003, COM(2003) 284 final, at p. 14; Report of the High-Level Group of Company Law Experts on Issues Related to Takeover Bids, Brussels, 10 January 2002; Tobias Buck, ‘EU to Endorse “One-share, One-vote” Principle’, Financial Times, 16 October 2005, available at: <http://www.ft.com/intl/cms/s/0/2f2a10c0-13cb-11dc-9866-000b5df10621.html#axzz2QJ6ajbPU> (reporting that Charlie McCreevy — the EU Internal Market Commissioner — publicly said: ‘It is my goal to get the one-share, one-vote principle accepted across the 25 member states’).

  106. Schnyder, supra n. 108, at p. 1445; ‘Keeping Shareholders in Their Place: Bosses Around the World Celebrate a Series of Victories over Shareholder Activists’, The Economist, 11 October 2007, available at: <http://www.economist.com/node/9961252> (the European Commission had to abandon the proposed reform mainly because of the strong opposition of lobbyists for big shareholders such as Sweden’s Wallenberg family, which uses special shares to retain control of the dynasty’s businesses); André Nilsen, ‘The EU Takeover Directive and the Competitiveness of European Industry’, The Oxford Council on Good Governance, OCGG Analysis, No. 1 (2004), at p. 4 (reporting that the proposal for ‘expanding the scope of Article 11 [of the EU Takeover Directive] to outlaw multiple classes of common stock carrying different voting rights’ was abandoned ‘[f]ollowing intense lobbying by the Wallenberg family and the rest of the Swedish establishment in 2003’).

  107. Bank of Israel Annual Report 2009 (Jerusalem, 2010), at p. 174, available at: <http://www.boi.org.il/en/NewsAndPublications/RegularPublications/Documents/Doch2009/pe_4.pdf>.

  108. Bebchuk, supra n. 75, at pp. 9–10.

  109. Ibid., at p. 10.

  110. Ibid., at p. 8.

  111. Ibid., at p. 11.

  112. Among the opponents of the proposals contained in the Interim Report were Professors Ronald J. Gilson and Alan Schwartz, who had been retained by Israeli corporate groups Norstar Holdings Inc., Gazit Globe Ltd. and Alony Hetz Properties & Investments Ltd. to write a divergent report that highlights the possible drawbacks of Bebchuk’s solutions and in which they propose to contrast the agency costs created by Israeli pyramids by strengthening the ex post judicial review; and Professor William T. Allen, who had also been asked by the Association of Publicly Traded Companies to review the Interim Report. See Gilson and Schwartz, supra n. 21; Allen, supra n. 56.

  113. The Committee on Increasing Competitiveness in the Economy, Final Recommendations and Supplement to the Interim Report (18 March 2012), at p. 14, available at: <http://www.israeltrade.org.au/final-recommendations-and-expert-opinions-of-the-committee-on-increasing-competitiveness-in-the-economy>.

  114. Bebchuk, supra n. 25, at pp. 21–25.

  115. Ibid., at p. 24.

  116. See Freshfields Bruckhaus Deringer LLP, ‘Israel Passes Landmark Legislation Aimed at Breaking up Conglomerates’, available at: <http://www.freshfields.com/uploadedFiles/SiteWide/Knowledge/Israel%20concentration%20law.pdf>; David Shamah, ‘New Law Makes Business “Pyramids” History’, Times of Israel, 10 December 2013, available at: <http://www.timesofisrael.com/new-law-makes-business-pyramids-history>.

  117. See Kandel, Kosenko, Morck and Yafeh, supra n. 29 (‘[I]n developed democracies, the dominant factor that delays the implementation of reform measures is extended legal battles, especially in cases where regulatory changes are perceived as infringing on property rights and other fundamental freedoms. This was certainly the case in the United States in the 1930s and 1940s’).

  118. Bebchuk, supra n. 25, at p. 18.

  119. Steven Davidoff, ‘Overhaul of Israel Economy Offers Lessons for United States, Int. New York Times, 7 January 2014, available at: <http://dealbook.nytimes.com/2014/01/07/overhaul-of-israels-economy-offers-lessons-for-united-states/?_php=true&_type=blogs&_php=true&_type=blogs&_r=1> (reporting that ‘a furious battle broke out as the big pyramids hired a slew of lobbyists and law firms to persuade lawmakers to either kill the bill or remove their own pyramid from its strictures’). See also Guy Rolnik, ‘Could Judge Kabub Be the Great Reformer of the Israeli Finance System?’, Haaretz, 25 September 2014, available at: <http://www.haaretz.com/business/premium-1.617219>.

  120. See Case C-127/97 Centros Ltd. v. Erhvervs-og Selskabsstyrelsen [1999] ECR I-1459; Case C-208/00 Überseering B.V. v. Nordic Construction Baumanagement GmbH [NCC] [2002] ECR I-9919; Case C-167/01 Kamer van Koophandel en Fabrieken voor Amsterdam v. Inspire Art Ltd. [2003] ECR I-10155; Case C-210/06 Cartesio Oktató Szoláltató bt [2008] ECR I-9641. See also Wolf-Georg Ringe, ‘Corporate Mobility in the European Union — A Flash in the Pan? An Empirical Study on the Success of Lawmaking and Regulatory Competition’, 10 European Company and Financial Law Review (2013) p. 230, at pp. 235–236: The Centros case law has had a significant impact on company activity in Europe. With every free movement judgment handed down from Luxembourg, enterprises became increasingly assured that the freedom of establishment indeed allowed them to register in Member State A, while conducting their business exclusively in Member State B. In this manner, the Court of Justice has created a market for corporate forms within the European Union, granting de facto a choice between the legal forms of Member States.

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  121. In these two countries, for example, insiders can use both corporate pyramids and multiple voting rights shares to secure their control over the company. See Institutional Shareholder Services, Sherman & Sterling and the European Corporate Governance Institute, supra n. 24.

  122. Ronald J. Gilson, Henry Hansmann and Mariana Pargendler, ‘Regulatory Dualism as a Development Strategy: Corporate Reform in Brazil, the U.S. and the EU’, 63 Stanford Law Review (2011) p. 475, at p. 478.

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  123. Ibid., at pp. 482–486.

  124. Ibid., at p. 486; Bernard S. Black, Antonio Gledson De Carvalho and Joelson Oliveira Sampaio, ‘The Evolution of Corporate Governance in Brazil’, Northwestern Law & Economics Research Paper No. 12-22 (2012), available at: <http://ssrn.com.ezp-prod1.hul.harvard.edu/abstract=2181039>.

  125. Black, Gledson De Carvalho and Oliveira Sampaio, supra n. 130, at p. 5; Gilson, Hansmann and Pargendler, supra n. 128, at p. 489.

  126. Gilson, Hansmann and Pargendler, supra n. 128, at p. 495.

  127. If the state owns just a controlling block of a listed firm, and the ‘equal opportunity’ rule does not apply, the private placement of the participation will usually create more value than the dispersion of the stock in the market, because the seller receives the controlling premium without sharing this value with outside investors. In this scenario, since this premium is closely related to the private benefit of control that the buyer can extract, in order to maximise the price received, it would be better for the seller to avoid any improvement of outside shareholders rights. Therefore, firms that are controlled by the state and could be sold at a higher price through private placement should not be listed in the new market with improved corporate governance standards.

  128. In 2012, only 279 Italian companies were listed on the Milan stock exchange, while in Frankfurt 665 German companies were listed, in Paris 862 French companies and in London 2,179 British companies. In the same year, the market capitalisation divided by the GDP was only 23.9% in Italy, while in the UK this was 124%, in France 69.8% and in Germany 43.7%. These numbers are particularly impressive if we consider that, according to Assonime (Association of Italian Companies), more than one thousand Italian companies already have the characteristics required for listing on a stock market but prefer to remain private. In Portugal and Greece, the market capitalisation divided by the GDP is also considerably low (30.8 in Portugal and 17.9 in Greece in 2012), while Spain is the only economy among the GIPS with a relatively developed capital market (73.7% of GDP in 2012). See data available on the World Bank website: <http://data.worldbank.org/indicator/CM.MKT.LCAP.GD.ZS/countries/1W?display=default>; Luigi Abete, ‘Audizione del Presidente dell’Assonime: Indagine Conoscitiva sui Mercati degli Strumenti Finanziari’ (3 May 2011), available at: <http://www.assonime.it/AssonimeWeb2/servletAllegati?numero=3772>.

  129. Bernard S. Black and Ronald J. Gilson, ‘Venture Capital and the Structure of Capital Markets: Banks Versus Stock Markets’, 47 Journal of Financial Economics (1998) p. 243, at p. 245: Other countries have openly envied the U.S. venture capital market and have actively, but unsuccessfully, sought to replicate it. We offer an explanation for this failure: We argue that a well developed stock market that permits venture capitalists to exit through an initial public offering (IPO) is critical to the existence of a vibrant venture capital market.

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  130. Bebchuk, supra n. 75, at p. 11.

  131. On the possible use of equity derivatives in order to separate investors’ voting rights from their ultimate economic exposure in the same firm, see Henry T. C. Hu and Bernard Black, ‘The New Vote Buying: Empty Voting and Hidden (Morphable) Ownership’, 79 Southern California Law Review (2006) p. 811; Henry T.C. Hu and Bernard Black, ‘Equity and Debt Decoupling and Empty Voting II: Importance and Extensions’, 156 University of Pennsylvania Law Review (2008) p. 625.

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  132. In Italy, the Investor Protection Act (Legge sul Risparmio), introduced in 2005, requires all listed companies to adopt a voto di lista mechanism that allows minority shareholders to elect at least one member of the board. In Spain and in Portugal, the adoption of mechanisms similar to the voto di lista is authorised but not required. See, for Italy, Article 147-ter of the Financial Markets Consolidated Act (Testo Unico della Finanza) as amended in 2005; for Spain, Article 137 of the Anonimous Companies Act (Ley de Sociedades anonimas, Royal Legislative Decree 1564/1989); see also Simone Alvaro, Giovanni Mollo and Giovanni Siciliano, ‘Il voto di lista per la rappresentanza di azionisti di minoranza nell’organo di amministrazione delle società quotate’ (2012), Consob, Quaderni Giuridici, at pp. 16–17, available at: <http://www.consob.it/main/consob/pubblicazioni/studi_analisi/quaderni_giuridici/qg1.html>.

  133. Among other European countries, Denmark, Finland, Poland, Sweden and the Netherlands allow the issuance of multiple voting rights shares. See Institutional Shareholder Services, Sherman & Sterling and the European Corporate Governance Institute, supra n. 24.

  134. See supra section 4.3.

  135. As an example of CEMs that provide for additional votes for certain shareholders, see the ‘loyalty shares’, which have been permitted in France for a long time and have recently been introduced also in Italy. This CEM grants up to two votes per share to those shareholders who request registration of their shares in a special register and have continuously held these shares for at least two years. In both countries, this CEM can be adopted even following the IPO of the company, despite the fact that it provides a clear advantage to the incumbent controlling shareholders to the detriment of minority investors. As for France, see L.225-123 of the Code de Commerce. See also Simone Alvari, Angela Ciavarella, Doina D’Eramo and Nadia Linciano, ‘La deviazione dal principio “un’azione — un voto”’ (2014), Consob, Quaderni Giuridici, available at: <http://www.consob.it/main/consob/pubblicazioni/studi_analisi/quaderni_giuridici/qg5.html> (reporting that more than half of the CAC40 companies — i.e., the 40 French companies with the highest free float market capitalisation — have taken advantage of this CEM); Koen Greens and Carl Clottens, ‘One Share One Vote: Fairness, Efficiency and EU Harmonization Revisited’, in Koen Geens and Klaus J. Hopt, eds., The European Company Law Action Plan Revisited: Reassessment of the 2003 Priorities of the European Commission (Leuven University Press 2010) p. 145, at p. 175. As for Italy, see Article 127-quinquies of Italian Legislative Decree No. 58 of 24 February 1998, as amended by Law Decree No. 91, dated 24 June 2014, converted into Law No. 116, dated 11 August 2014.

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  138. Louis D. Brandeis, Other People’s Money and How the Bankers Use It (Augustus Kelley, ed., 1971) (1914), at p. 92. The importance of disclosure in related party transactions has also been recognised by the European Commission, which, in a recent proposal to amend the Shareholders Rights Directive, recommended requiring that ‘in case of transactions with related parties that represent more than 1% of their assets, [companies] publicly announce such transactions at the time of the conclusion of the transaction, and accompany the announcement by a report from an independent third party assessing whether or not it is on market terms and confirming that the transaction is fair and reasonable from the perspective of the shareholders, including minority shareholders’. See European Commission, Proposal for a Directive of the European Parliament and of the Council amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement and Directive 2013/34/EU as regards certain elements of the corporate governance statement, COM(2014) 213, at p. 24, available at: <http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52014PC0213&from=EN>.

  139. In Italy, Consob Regulation 17221 on Related Party Transactions, introduced in 2010, has already substantially improved the corporate governance rules on this issue. However, Italian listed companies still enjoy some degree of freedom in ‘opting up’ or ‘opting down’ from some of the default rules provided in the new regulation. In this case, the new market should restrict the companies’ freedom to ‘opt down’ from the default rules and require the adoption of the strictest procedures aimed at avoiding tunneling through related-parties transactions. See Magda Bianchi, Angela Ciavarella, Luca Enriques, Valerio Novembre and Rossella Signoretti, ‘Regulation and Self-regulation of Related Party Transactions in Italy’ (2014), Consob, Quaderni Giuridici, available at: <http://www.consob.it/main/consob/pubblicazioni/studi_analisi/quaderni_finanza/qdf75.html>. See also the proposal of the European Commission to require that Member States ‘ensure that transactions with related parties representing more than 5% of the companies’ assets or transactions which can have a significant impact on profits or turnover are submitted to a vote by the shareholders in a general meeting’. See European Commission, supra n. 145, at pp. 24–25.

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  142. A study conducted by Professors La Porta, Lopez-de-Silanes, Shleifer and Vishny measured the efficiency of judicial systems across several legal systems. From this study it emerges that, while the United States, the United Kingdom, Japan, Switzerland and other developed economies receive the highest score (i.e., 10 points), the GIPS’ judicial systems receive much worse evaluations (i.e., Italy 6.75, Spain 6.25, Portugal 5.5 and Greece 7.00). See Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer and Robert W. Vishny, ‘Law and Finance’, 106 Journal of Political Economy (1998) p. 113, at pp. 142–143 (Table 5). More recently, another study, realised in June 2013, ranked 189 countries’ efficiency in enforcing contracts. Even in that study, the GIPS performed considerably worse (i.e., Italy 103rd, Spain 59th, Portugal 24th and Greece 98th) than other developed economies, such as the United States (11th). See Doing Business 2013, data available at: <http://www.doingbusiness.org/data/exploretopics/enforcing-contracts>.

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  144. On the importance of requiring a strong commitment from the listed firms to comply with the high standards of corporate governance imposed by the new market, see Rock, supra n. 80: [He] argue[s] that the existing SEC system can be understood as providing issuers with a mechanism for making a credible commitment to high quality, comprehensive disclosure for an indefinite period into the future. This credible commitment device is particularly useful to new domestic issuers and to foreign issuers seeking to tap the U.S. capital markets. This credible commitment justification explains the striking but little discussed practical and formal asymmetry between the ease of entry into the SEC system and the difficulty of exit from it.

  145. In case of companies’ mergers — in order to avoid hold-up problems that could jeopardise value-enhancing business combinations — the charter could also provide, as an alternative to the supermajority approval, a positive vote by a majority of the minority investors.

  146. See Gilson, Hansmann and Pargendler, supra n. 128, at p. 492 (‘Persons wishing to delist a firm from the Novo Mercado must first launch a tender offer for the firm’s shares at a price at least equal to their economic value’).

  147. Bebchuk, supra n. 75, at p. 11.

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  1. Cleary Gottlieb Steen & Hamilton LLP, Milan, Italy

    Federico Cenzi Venezze LLM, Harvard Law School; PhD in Corporate Law, Università degli Studi di Brescia (Associate)

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  1. Federico Cenzi Venezze LLM, Harvard Law School; PhD in Corporate Law, Università degli Studi di Brescia
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This paper is a revised and expanded version of the author’s LLM research paper at Harvard Law School, which was awarded the Victor Brudney Prize in 2013. The author is very grateful for the helpful comments and suggestions from Professors Luca Enriques, Reiner Kraakman, Mark J. Roe and Andrei Shleifer, and from Kobi Kastiel, Jane Bestor and an anonymous referee.

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Venezze, F.C. The Costs of Control-enhancing Mechanisms: How Regulatory Dualism Can Create Value in the Privatisation of State-owned Firms in Europe. Eur Bus Org Law Rev 15, 499–544 (2014). https://doi.org/10.1017/S1566752914001268

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