Shareholder Voting Rights*
Maravilla, Christopher Scott, Texas International Law Journal
Shareholder Voting Rights* Shareholder Voting Rights and Practices in Europe and the United States, The Hague; Boston: Kluwer Law International (Thomas Baums & Eddy Wymeersch eds., 1999), price: US$165.00.
Shareholder Voting Rights and Practices in Europe and the United States1 is essential reading for the practitioner, scholar, and interested reader. The completed work is the result of a conference organized by the editors, Professors Theodor Baums of the University of Osnabruck and Eddy Wymeersch of the University of Ghent. The aim of the conference was to compare the rights and privileges of shareholders among different European legal regimes with the rights and privileges of shareholders in the United States. The work is divided into two parts: (1) a series of individual country studies and (2) a general report that summarizes the findings.
The book labors to identify areas of European law that govern shareholders' rights and obligations where existing legislation diverges. At the same time, the book provides detailed analysis of the various regimes. The multitude of authors contributing to the work conclude that overall, European laws provide for some form of shareholder voting rights and participation. Their differences, however, lie in the details of the individual state regulations. These differences in the regulatory regimes result in barriers to effective participation by shareholders, particularly by institutional investors. The authors also consider translation and language barriers an impediment to effective participation. Namely, investors must quickly and accurately process information and notices that are presented to them, often on short notice, in a foreign language.
The book is intended to be both informational concerning the individual legal regimes of the countries that make up the European Union (EU) and polemic in its advocacy of more uniform laws for shareholders' voting rights and participation. The subject itself has been more than a passing interest to the EU. In 1995, the EU commissioned a study of shareholders' rights and representation at general meetings of companies of member states.2 Model uniform legislation has been proposed. However, at the present time, neither prong of the Fifth Directive of the EU-the limited company and the draft of the societas europaea statute-has been promulgated, nor is much expected to come from them.
Shareholder Voting Rights and Practices in Europe and the United States responds to the increasing frequency with which institutional investors are investing in European companies and to these investors' increased presence at general meetings. The countries whose legal regimes are reviewed in the book are Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, Switzerland, the United Kingdom, and the United States. An understanding of the legal status and rights of the shareholder in each system is essential to provide for the fullest amount of participation by the investor in the company's decision-making process. The practitioner will find this book useful for its detailed descriptions of local laws and practices. The individual reader, especially the scholar, will find the book's advocacy for legal uniformity to be insightful.
II. THE GENERAL REPORT
The book identifies a variety of concerns about shareholder voting rights and effective participation in the different European legal regimes. It specifically addresses the preparation for the general meeting, information provided to shareholders, and the overall conduct of the general meeting. In most European states, the authority to convene a general meeting of the company lies with the board of directors. Some countries with statesponsored supervisory bodies or the firm's highest corporate body, not the board, will possess this authority. An example of such an institution is the Vorstand in Germany. Another example is Denmark's special shareholders committee with the power to convene meetings. In France it is the Conseil du Surveillance, and in Italy, the sindaci is the oversight body who possesses the power to call a shareholders' meeting. In regimes in which an individual shareholder has the right to convene a meeting, the threshold of ownership to do so is typically five to twenty percent of shares outstanding. Conversely, in the United States, the threshold ranges from twenty-five to fifty percent. There are no special rules in any of the European legal regimes allowing for foreign shareholders, specifically, to be able to call a general meeting.
The next issue dealt with is the blocking of participation of shares recently acquired prior to the general meeting. Frequently the rules in statutes or articles of association allow a freeze of the transfer of title for participating in the meeting some days before. Some European countries do not have this provision. Of those regimes that have adopted blocking measures, the practice included depositing the shares; freezing the new shareholder's relationship to the company or completely blocking the transfer of title; and finally establishing a "record date," similar to the practice in the United States, with five days as the predominant limitation on setting the record date of ownership of the shares.
Attendance at general meetings is lower in Europe than in the United States. The introduction of voting by mail has not influenced the situation much in France or Belgium, but the 1998 reforms enacted in Italy have achieved modest success. Proxy voting is permitted in European states, but there are inherent difficulties with contacting other shareholders. There is no right to attend the meeting. Some countries, like France, limit access to certain shareholders based on how many shares they own. Others give a right to attend to voting shareholders, non-voting shareholders, and bondholders. In Denmark, the media possesses a right to attend the meeting, but only if the company in question is publicly held.
The ability of the shareholder to propose motions and proposals in Europe tends to be limited to issues previously set on the agenda. Shareholders may make counterproposals or motions at the meeting, but only if the subject matter to be addressed is within the scope of an issue already on the agenda. Motions and counterproposals can be made without a quorum present. The board of directors, however, is bound by its own preliminary proposals. Nevertheless, it may circumvent this restriction by utilizing third party shareholders sympathetic to their position.
The book focuses heavily on the subject of proxies. The importance of proxy solicitation has diminished in Europe due to the increase of institutional investors. However, there are three issues presented by the authors concerning proxy voting:
(1) Is there a freedom under law to select a proxyholder? Legal systems are divided on whether a company can internally limit the proxyholder. In some legal systems board members cannot be proxyholders.
(2) What can the law do to make sure that the real shareholder's intentions are investigated and realized?
(3) What about interpreting the scope of proxies? How can they be understood in terms of new proposals which may come up at meetings and prior to meetings after proxy is given?
The general report notes that the answers to these questions are too varied for further elaboration in the general report. However, the individual country studies go into greater detail on proxy voting in their respective states. Information to shareholders is another area of concern in the book regarding a lack of uniformity in the laws across Europe. There is a uniform standard for the contents and instruments of information that may be provided to shareholders. The means of providing shareholders with this information, however, varies among the different legal regimes.
Regarding the individual requests for information made by shareholders, the predominant rule in Europe is that the inquiry must be put forward at the general meeting and answered during the course of the meeting. Other countries will allow questions to be presented prior to the meeting and offer some measure of flexibility in answering the shareholder's questions either during or outside of the meeting. Some countries' laws are a complete mixture of the two. Often in countries where shareholders can present questions before the meeting, there are no provisions that address the scenario where the question presented by the shareholder is one that requires additional study.
Finally, the book addresses some of the problems that arise among the different European regimes concerning the actual conduct of the general meeting. Many of the laws examined do not require a legal minimum of shareholders to be present at the general meeting in order to establish a quorum. Other countries have very low attendance requirements by statute, or it is left individually for the company to decide in its articles of association.
Voting rights is another area in which there is a wide divergence among the rules in Europe. Some countries have an explicit one-share, one-vote rule. Others allow privileged voting. And still others have limited the actual voting power of certain individual shareholders in their articles of association. The majority of shareholder votes required for decisions to be made is generally an absolute majority, although some countries allow a simple majority to prevail.
The following is a summary of the law in some of the leading European legal regimes covered in the book.
Under France rules regarding the participation of shareholders in the general meeting, each shareholder can attend meetings. However, the company's articles of association can require ownership of a minimum number of shares-no more than ten-in order for a shareholder to participate in the general meeting. Shareholders may bundle their shares together with other minority shareholders in order to reach the minimum amount of ownership that the articles require. Access to the meeting is generally open to all shareholders regardless of the number of shares.
The agenda for the meeting is set by the author of the convening notice. In order for motions to be considered during the general meeting, they must be fixed on the agenda. Items that are not fixed on the agenda will be null. Nevertheless, a director or member of a supervisory board may still be removed at the general meeting whether or not it was put forth on the agenda beforehand. The contents and scope of the items set on the agenda must be clearly expressed in the notice convening the meeting. Minority shareholders may request a draft of any resolution mentioned on the agenda if three prerequisites are met: (1) the request emanates from a shareholder or shareholders owning more than five percent of the outstanding capital stock of the company; (2) the request must be made before the meeting in order to ensure that the company is able to provide sufficient notice to the other shareholders; and (3) if election of directors or members of the supervisory board are mentioned in the agenda, any shareholder may present a slate of candidates for offices.
Upon the receipt of the convening notice, a shareholder may submit questions to managers to be answered at the general meeting. The chairman is required to reply to all questions presented regardless of the topic or importance. In order to avoid abuse of this procedure by dissident shareholders, questions are reviewed beforehand by an auditor or by the Commission des Opérations de Bourse (COB). The right of the shareholder to request information outside of the general meeting is limited. Annual accounts of corporate documents for the preceding three years are mandatorily made available at the company's headquarters. However, the release of all other information is at the discretion of the company.
Attendance at general meetings of French companies is low. Many shareholders tend to vote by proxy or not at all. Yves Guyon of Université Paris 1-Panthéon Sorbonee, the author of this chapter of the book, offers three possible solutions to this problem through the implementation of incentives to increase participation. These proposed incentives are: (1) making general meetings more interesting by replacing the formal reading of legal and accounting documents that have already been presented to the shareholders with Powerpoint projections and other visual media; (2) implementing electronic voting systems in order to take a vote immediately after the discussion of the particular resolution instead of at the close of all debate and to facilitate collecting of votes; and (3) paying a fee in the form of a sum of money or a present in kind to the shareholders who attend the meeting.
The right of the shareholder to vote at the general meeting under French law is based on the principle à valeur nominale égale, droit de vote égal (one share, one vote). Any clause in the articles of association contrary to this principle is automatically void. There are, however, circumstances under which a shareholder will not have the right to vote. These circumstances include the company's issuing non-voting shares entitled to privileged dividends, conflicts of interest, and sanctions against a shareholder.
Since January 3, 1983, French law has allowed voting by mail. Proxies are also available under French law but may only be granted to spouses or other shareholders and not to third parties. Proxy voting is limited to a specific meeting and may only be used for the precise topic on the agenda of that meeting. Proxies held by banks may only relate to the administration of shares, not voting. A bank would only be allowed to represent its clients at a general meeting if the bank happened to be a shareholder of the company as well. Under Article 13 of the law, dated March 25, 1997, pension funds are obliged to exercise all voting rights attached to the securities held in the exclusive interest of their members. However, this law is not yet in force because the decree governing it has not been published. Consent is unlikely to be granted because the present government is not in favor of pension funds.
The legal regime in Germany is similar to other EU Member States in that German law recognizes two distinct types of corporations: the Gesellschaft mit beschrànkter Haftung (GmbH), a limited liability company, and the Aktiengesellschaft (AG), a stock issuing corporation. GmbHs are smaller companies whose stock is not publicly traded. AGs are larger, publicly held corporations. The focus of this chapter of the book is on the latter form of corporate entity. These two forms of corporate entities are governed by different statutes. The statute governing AGs is the Aktiengesetz of 1965. Most of these laws may not be modified by a company's articles of association. Ownership among AGs is highly concentrated with three-fourths of the companies having a majority owner.
Convening a meeting of shareholders is logistically more difficult in Germany than in many of its EU counterparts. Generally, an AG issues bearer shares. This means the company typically does not know the identity of the shareholders. Therefore, a general meeting must be announced publicly. If the shareholders are known to the company then a general meeting may be convened by individual letter. Furthermore, the agenda for the meeting must be published in the same manner as the notice that convenes the meeting. These requirements for public notice can be satisfied by publishing them in the Federal Bulletin. Proxies are permitted under German law. Votes may be cast by the proxy, or the shareholder may even authorize another person to cast the vote in his or her name.
C. The United Kingdom
Despite the frequency of amendments to U.K. company law over the past twenty years, general meetings and the voting rights of shareholders have not been addressed except for one exception. In particular, the protection of minority shareholders, the subject of much of the British law, has not been amended by the British Parliament by any substantive means. The main protection of minority shareholders under U.K. law provides a forum for complaints by individual shareholders in the courts. The function of the general meeting is viewed more as an agency relationship between the firm and its shareholders. Most provisions were drafted after World War II and were consolidated in Companies Act 1948. The Cadbury Committee states: "[i]f too many Annual General Meetings are at present an opportunity missed, this is because shareholders do not make the most of them and, in some cases, boards do not encourage them to do so."3 However, in recent years, reform has become a topic on the agenda of the Department of Trade and Industry.
Under the 1989 reforms enacted by the British Parliament, a private company can opt out of the requirement to hold annual meetings if it has the consent of all its members. This change in the law addresses the prior dilemma of companies without the institutional separation between shareholders. Any member of the privately held company, though, can require a general meeting even if the members have resolved not to hold one. The company may also unanimously opt out of its annual accounts before shareholders.
U.K. company law treats proxy voting as less desirable than actually attending the meeting. The current rules do not guarantee that proxy votes will be counted. Articles of association for U.K. companies generally state that resolutions will be decided initially by a "show of hands." In other words, resolutions are decided by those present at the meeting on a one-man, one-vote basis. This process is a disincentive for institutional investors to vote by proxy. A "demanding poll" may be called to count the votes attached to shares that are represented at the meeting. Practically speaking, though, this method is not often done because the outcome is likely to be the same as the show of hands. Pension Investment Research Consultants Ltd. (PIRC) has called for the abolishment of this practice altogether. The Hampel Committee was recently very critical of the process but stopped short of calling for its abolishment or of introducing voting by mail. Overall, a proxyholder has no right to vote on a show of hands, to participate in a demand poll, or to speak at the meeting.
The law governing general meetings and shareholder voting rights is embodied in Articles 2362-2379 of the Italian Civil Code of 1942 (CC). The law, like that in Britain and Germany, has two tiers with different rules that govern public and private companies. On February 24, 1998, the Italian Council of Ministers, following the schedule for harmonization of EU legislation, enacted the decreto legislative) h. 58: Testa unico delle disposizioni in materia di intermediazione finanziaria (Unified Text of Rules on Financial Services).4 Upon taking effect, these rules promulgated innovative regulations of public companies listed on the Italian Stock Exchange or the exchange of another EU state. The law attempts to strengthen the position of minority shareholders in the governance of companies with respect to voting rights at the general meeting.
Shareholders with voting rights are entitled to participate in the general meeting. Shareholder voting is based on the principle of "one share, one vote" just like under French law. There is no minimum number of shares of ownership in order to participate in the general meeting.
Where a shareholder possesses a preferential voting right with respect to a specific meeting, he or she may still be entitled to participate in the general meeting. However, owners of azioni di risparmio (savings shares) are explicitly barred from voting or participating at the general meeting. Attendance by the directors of the company and members of the auditing board is mandatory.
The 1998 reform legislation has established an abundance of measures to encourage shareholder participation and attendance at general meetings. A couple of these reforms include voting by mail and proxy solicitation. In practice, voting by mail is expensive and ineffectual. It is becoming a less frequent means of shareholder voting. Companies are also beginning to make efforts to encourage participation in order to attract new investors and press coverage. Some of these reforms include the paying of fees to shareholders who attend the general meeting.
Proxy voting is permitted under Article 2372 of the CC. The statute serves as a barrier to proxy voting through restrictive regulations. The representative at the meeting is limited to casting proxy votes for no more than ten shareholders if the shares are listed on the Italian Stock Exchange. The number of shareholders for whom the representative may cast proxy votes may increase. In addition, through the articles of association, the law allows the company to determine exactly to whom proxies may be granted, to limit the number of shareholders whom an individual may represent, and to waive the right of shareholders to be represented at general meetings altogether.
Irish company law is governed by the Companies Act 1963, the successor to the Companies Act 1908, which had been promulgated by the British Parliament. The 1908 Act had continued in force even after independence was achieved in 1922. The 1963 Act is based on the British Act 1948. However, since 1963, reform in Ireland has not been as frequent as it has in the United Kingdom. The last amendments made in company law were in 1990 when the Irish Parliament increased the powers of the general meeting in relation to directors. Overall, Irish company law is the result of inertia and, in many ways, resembles the same rule as under British law.
There is a growing need to revisit uniformity in the law governing corporations in Europe. Competition in European markets for international capital has become intense. After the euro, integration of corporate governance law becomes a logical step. The laws of the individual states were conceived at a time when cross-border transactions of European companies were less frequent, capital was mostly domestic, and voter participation was low. Divergence in the law governing shareholder voting rights among the nations of Europe will hinder those nations' ability to raise foreign capital, especially from U.S. institutional investors.
Currently, there are three trends in European companies that push for reform in the laws related to shareholder voting and participation in the general meeting, especially proxy voting. These are: (1) the increase in the number of American and British institutional investors as shareholders in foreign companies; (2) the trend toward increased privatization; and (3) the emergence of the private sector pension fund industry. Some of the problems pushing investors in Europe are timeliness, cost, disclosure, share blocking, and share registration requirements. This work will serve as an invaluable reference for those advocates of uniformity.
* Editor's Note: Due to unforeseen circumstances, this book review was not published in Volume 37 as originally intended. Texas International Law Journal apologizes for the delay.
1. SHAREHOLDER VOTING RIGHTS AND PRACTICES IN EUROPE AND THE UNITED STATES (Theodor Baums & Eddy Wymeersch eds., 1999).
2. THE SIMPLIFICATION OF THE OPERATING REGULATIONS FOR PUBLIC LIMITED COMPANIES IN THE EUROPEAN UNION (European Comm'n ed., 1995).
3. COMM. ON THE FIN. ASPECTS OF CORP. GOVERNANCE, THE FINANCIAL ASPECTS OF CORPORATE GOVERNANCE para. 6.7 (1992).
4. Decree-Law No. 52 of Feb. 24, 1998, GAZZ. UFF. No. 71 (Mar. 26, 1998), available at http://www.parlamento.it/parlam/leggi/deleghe/98058dl.htm (last visited Nov. 18, 2003).
CHRISTOPHER SCOTT MARAVILLA[dagger]
[dagger] Law Clerk to Justice J. Dale Wainwright, Supreme Court of Texas.…
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Publication information: Article title: Shareholder Voting Rights*. Contributors: Maravilla, Christopher Scott - Author. Journal title: Texas International Law Journal. Volume: 39. Issue: 1 Publication date: Fall 2003. Page number: 163+. © University of Texas, Austin, School of Law Publications, Inc. Summer 2008. Provided by ProQuest LLC. All Rights Reserved.
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