On the 23rd of October 2024, Directive (EU) 2024/2810 was adopted, regarding share structures with multiple-voting rights for companies seeking admission to be listed on a multilateral trading facility (MTF).
Let us start by clarifying that a “multilateral trading facility” (MTF) is a trading platform operated by an investment firm or market operator that enables buying and selling interests in financial instruments to be brought together to give rise to contracts; the concept includes both regulated markets and SME growth markets (markets where at least 50% of the issuers of the financial instruments admitted are SMEs). It should also be made clear from the outset that so-called “loyalty actions” are outside the scope of the Directive.
In view of the Recitals of the Directive, the multiple-voting structure aims to increase the attractiveness of listing on trading platforms for SMEs as a means of raising finance. The aim is not to incentivise the listing of SMEs and the constant exchange of share ownership, but to allow the entry of stable and involved investors in the company in the medium to long term. To date, the fear of losing control of the company from the founding or controlling shareholders is the main deterrent to accessing a public market, as listing may imply dilution of ownership for them.
With multiple-voting shares it will be possible to access public markets for the purpose of raising finance outside traditional financial channels, without this benefit being subject to payment at the price of loss of control of the company.
The formula proposed by the Directive involves the issuance of two classes of shares: the first class is issued by shareholders in proportion to the capital contributed, carrying a voting right proportional to that capital, while the second class of shares gives the holders of each share the right to cast two or more votes (as laid down in the articles of association), so that, in the latter case, there is no proportionality with the nominal value of those shares.
Shares with multiple-voting rights will be held by controlling shareholders, so that even if they hold fewer shares than other shareholders who have gained access to them through their purchase on the public market, they will still control the company thanks to the greater number of votes conferred on them by their multiple-voting shares.
But the adoption of this mechanism excludes the possibility of other mechanisms to reinforce shareholder power, such as non-voting shares, shares incorporating a right of veto over general meeting decisions, and even loyalty shares themselves. As a consequence of this incompatibility, companies which have other alternative mechanisms in their articles of association must eliminate them when approving the structure of multiple-voting shares.
Perhaps the main motive of the Directive is to prevent the fractured regulation of multiple voting share structures in the Member States of the European Union or even their prohibition in some of the States. The Directive argues that such disparity would result in the creation of barriers to the free movement of capital within the EU market. This is not without criticism, since, as will be seen, the Directive itself leaves a relatively wide margin to Member States to establish certain safeguards for the exercise of multiple-voting rights, which may ultimately lead to not insubstantial differences between countries.
As regards formal requirements, companies wishing to set up a multiple- voting structure must decide on this at the general meeting of shareholders by a qualified majority and must include it in their articles of association. The adoption of such a structure may take effect prior to the admission of the shares to a multilateral trading system.
Once the structure has been created, the Directive allows Member States to make the effective exercise of the multiple- voting right conditional upon the company’s access to the multilateral trading system, which seems reasonable insofar as the purpose of the multiple- voting structure is to access to such trading markets.
Multiple-voting shares may be given in the case of both registered and bearer shares, since the Directive does not establish any prohibition or restriction in this respect. In any case, however, they must be represented by book entries, either registered using blockchain technology or distributed registers, a technical resource that will guarantee the veracity, unalterability and traceability of the shares.
One of the main objections to the multiple voting share structure is the risk of abuse of power by shareholders holding such shares. But the establishment of limits or “minority shareholder safeguards” may be an inappropriate intrusion into the corporate life and organisational regime of companies, as well as leading to regulatory differences between Member States. Safeguards are of two types: mandatory and optional.
The safeguards that Member States must introduce in their legislation include the following:
A) Member States must set a maximum number of votes per share (maximum ratio between the number of votes attached to the multiple-voting share and the number of votes of shares with lower voting rights). However, the Directive does not set a range or a specific number, which is left to the discretion of Member States.
B) Alternatively, or cumulatively to the above, Member States shall restrict multiple-voting rights for decisions requiring a qualified majority under the law of the Member State. In such cases, the majority must be either a qualified majority of the votes cast and of the share capital represented at the meeting; or a qualified majority of the votes cast and with a separate vote on each class of shares whose votes are affected.
Importantly, decisions relating to the appointment and removal of members of the management body, management and supervisory matters, as well as operational decisions requiring a qualified majority are excluded from this restriction on enhanced voting.
Member States may also, on a discretionary basis, introduce other safeguards relating to the extinction of multiple-voting shares, including the admission of:
(a) Sunset clauses based on the transfer of the enhanced voting shares, either inter vivos or mortis causa.
(b) Sunset clauses based on the lapse of time, although the Directive does not provide for a specific time limit.
(c) Termination clauses based on the occurrence of a certain circumstance or event.
(d) Other clauses, at the discretion of the Member State, since the Directive does not provide for a limited number of safeguards, but article 4.2 lists three of them, by way of example.
Recital No. 19 of the Directive states that additional voting rights attached to multiple-voting shares may not be used to prevent the company from complying with EU environmental or fundamental rights legislation. However, this vague statement did not finally materialise in the articles of the Directive, thus the statement must be interpreted as a programmatic gesture of an ideological nature but without it mandatorily being transferred to the EU states, leaving aside the probable negative repercussions it would have had on the purpose of multiple-voting structures, if it had finally been integrated as an obligation.
Finally, we will point out some obligations regarding transparency or the right to information that companies that choose to set up a multiple voting share structure must observe:
(i) Specification, in the prospectuses for admission of the shares to trading on the SME market and in the annual financial report, of the share structure of the company, detailing the classes of shares, their rights and obligations (both those admitted to trading and those remaining outside), the total number of shares and the votes they represent.
(ii) Report on any restrictions on the transfer of shares, indicating the provisions of the shareholders’ agreements that prevent this, if applicable.
(iii) Report on the identity of shareholders holding multiple-voting shares or proxies exercising voting rights who hold more than 5% of the voting rights of the Company.
(iv) Identification of the company with a structure of shares with multiple-voting rights admitted to trading, by means of a marker to be established by the market operator, although the Directive mentions this in its Recitals (Recital 18) and does not specifically define it, but entrusts it to a future technical project to be developed by the European Commission.
The Directive must be transposed into Member States’ legislation by 5 December 2026 at the latest. The practical effects on the market and, in particular, on strengthening SMEs that choose to adopt the multiple voting share structure do not seem clear at first sight, although it does seem that it will not have a uniform impact in the European Union, given the marked differences in the idiosyncrasies of the natural persons who control SMEs, especially in Spain, where the overwhelming majority of SMEs are family-owned and private. This does not prevent the system from being a practical method of providing a means of financing for embryonic or established SMEs with attractive projects but whose solvency or collateral circumstances would make it difficult for them to obtain finance via traditional methods, and which, on the other hand, can be achieved (and at a relatively low cost) within the framework of a multilateral financing system in which they will meet the demand of investors with an appetite for risk and high returns.
Eduardo Vilá
Vilá Abogados
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22nd of November 2024
