Self-Expropriation versus Self-Interest in Dual-Class Voting: The Pirelli Case Study
Bigelli, Marco, Mengoli, Stefano, Financial Management
Called to vote for a reduction in their dividend privileges, Pirelli's nonvoting shareholders appeared to expropriate themselves and favor the voting class of shares. However, what initially seemed to be self-expropriation became self-interest when the media coverage, voting decisions, and dual-class ownership of 36,361 shareholders were investigated. Most of the institutional investors voting "for" the proposal were found to have ownership ties with controlling shareholders or to have held voting shares. Moreover, dual-class ownership significantly increased the likelihood of shareholders voting to expropriate one class of shares if they benefited from the other class in their portfolios.
Low cross-border turnout at shareholder meetings combined with an increase in shares held by foreign investors have recently pushed the European Union (EU) to pass a directive (Shareholder Rights Directive 2007/36) aimed at strengthening shareholder fights and fostering participation at shareholder meetings by electronic means. The directive sets basic principles with respect to shareholder identification, communication, information, and voting. It also shrinks the procedural costs for cross-border voting (Zetzsche, 2008), but it does not address the conflict of interest in shareholder meetings and dual-class voting, although all EU countries are characterized by either multiple voting shares or nonvoting shares. (1)
In this paper, we analyze the voting process of an extraordinary resolution adopted by Pirelli, one of the world's largest tire producers and one of the major Italian listed companies. In November 2007, Pirelli's board of directors proposed to pay back part of the firm's equity by reducing the par value of both classes of shares. Since nonvoting shares were granted a minimum dividend payment set as a percentage of the par value, this proposal significantly harmed nonvoting shareholders and originated a wealth transfer between the two classes of shares. Given that the proposed plan modified the fights of the nonvoting shares, it required the approval of both Pirelli's voting and nonvoting classes of shareholders. (2) Obviously, the voting shareholders approved the plan as Pirelli was controlled by a voting pact among nine shareholders controlling 46.22% of voting rights. More surprisingly, the operation was also approved by the nonvoting class of shares, which apparently voted against their interests. However, what at first seemed to be "self-expropriation" turned out to be "self-interest" when the voting behavior and the dual-class ownership of 36,361 shareholders were investigated. Though based on a single case study, our paper provides some new contributions to three different streams of literature: 1) shareholder voting, 2) the corporate governance role of the media, and 3) shareholder expropriation.
As far as shareholder voting is concerned, the existing literature has analyzed situations when shareholders vote "sincerely" in their interests, basing their decisions on their own signals (Easterbrook and Fischel, 1983), or "strategically" by also observing the voting behavior of other shareholders (Maug and Rydquist, 2009). Other papers have addressed voting by institutional investors and found that they tend to approve management proposals even when they are detrimental to shareholder value (Brickley, Lease, and Smith, 1988) and that the approval rate is higher for institutional investors that have business ties with the related firm (Davis and Kim, 2007). Conversely, opposition to management proposals is stronger when institutions are more independent (Brickley et al., 1988) and when a negative recommendation has been expressed by the International Sales Support (ISS), the leading shareholder voting advisor (Bethel and Gillan, 2002). In a recent paper by Matvos and Ostrovsky (2008), institutional investor cross-ownership of both target and acquirer firms is found to favor approvals of value-destroying acquisitions at the acquirer's meeting. …