Explanatory Memorandum to COM(2022)761 - Multiple-vote share structures in companies that seek the admission to trading of their shares on an SME growth market - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2022)761 - Multiple-vote share structures in companies that seek the admission to trading of their shares on an SME growth market. |
|---|---|
| source | COM(2022)761  |
| date | 07-12-2022 |
1. CONTEXT OF THE PROPOSAL
• Reasons for and objectives of the proposal
This proposal is part of the Listing Act package, a set of measures to make public capital markets more attractive for EU companies and facilitate access to capital for small and medium-sized companies (SMEs). It is in line with the Capital Markets Union (CMU) core aim to improve access to market-based sources of financing for EU companies at each stage of their development, including for smaller companies. Listed companies often outpace privately owned companies in terms of annual revenue growth and job creation. By listing on public markets, companies can diversify their investor base, reduce their dependency on bank financing, gain easier access to additional equity capital and debt finance (through secondary offers), raise their public profile and increase brand recognition.
Since the publication of the first CMU action plan in 2015, progress has been made to make it easier and cheaper for companies, in particular SMEs, to access public markets. In January 2018, the Markets in Financial Instruments Directive II (MiFID II) 1 introduced a new category of multilateral trading facilities (MTFs), the SME growth markets, to incentivise SMEs to access capital markets 2 . In 2019, new EU rules were put forward to cut red tape and reduce regulatory burden for companies listing on SME growth markets while preserving a high level of investor protection and market integrity 3 . Nevertheless, despite the changes introduced, stakeholders continue to argue that further regulatory action is needed to streamline the listing process and make it more flexible for issuers. The new CMU action plan, adopted in September 2020, announced that ‘in order to promote and diversify small and innovative companies’ access to funding, the Commission will seek to simplify the listing rules for public markets’. Following up on this and building on Regulation (EU) 2019/2115, the Commission set up a Technical Expert Stakeholder Group (TESG) on SMEs that confirmed stakeholders’ concerns that further legislative action is needed to support listing of companies, especially of SMEs. In its final report of May 2021, the TESG made 12 recommendations to amend the listing framework both on regulated markets and SME growth markets 4 .
On 15 September 2021, President von der Leyen announced in her letter of intent 5 addressed to the Parliament and the Presidency of the Council a legislative proposal to facilitate SMEs’ access to capital, which has been included in the 2022 Commission work programme 6 .
A company’s decision to list is a complex one and is influenced by a multitude of factors, many of which are outside the reach of regulators and therefore cannot be addressed directly by a legislative intervention. For instance, the features of the ecosystem that determine the cost of listing services, geopolitical instability, Brexit, COVID-19, central bank policy and inflation – have all had (and will continue to have) an impact on whether to list, when and where to list, and whether to remain listed in the EU. Regulatory requirements and the associated costs and burden, however, are also important factors in a company’s decision to list and remain listed. The Listing Act package presents a targeted set of measures aiming to: (i) reduce the regulatory burden where it is considered to be excessive (i.e. where regulation could contribute to investor protection/market integrity in a more cost-efficient manner for stakeholders); and (ii) increase the flexibility given under company law to companies’ founders/controlling shareholders to choose how to distribute voting rights after the admission to trading of shares.
The regulatory framework applying to the listing process is multifaceted. Companies must comply with regulatory requirements before, during and after the initial public offering (IPO). This proposal focuses on the regulatory barriers that emerge at the pre-IPO phase and concerns the unequal opportunities of companies across the EU to choose the appropriate governance structures when listing. The proposed Directive is accompanied by two other legislative proposals: (i) a proposal for a Regulation amending the Prospectus Regulation 7 , the Market Abuse Regulation (MAR) 8 , (ii) the Markets in Financial Instruments Regulation (MiFIR) 9 and (iii) a proposal for a Directive repealing the Listing Directive 10 and amending MiFID II. Both proposals aim to streamline and clarify disclosure requirements applying to primary and secondary markets while maintaining an appropriate level of investor protection and market integrity. The proposed Directive repealing the Listing Directive and amending MiFID II also seeks to increase the low level of investment research on SMEs.
One of the main issues that deters founders and families from deciding to go public (at the pre-IPO stage) is the fear of losing control over their company once it is listed. Listing entails diluting ownership, thus reducing founders and families’ control over important investments in and operating decisions of the company. Companies, in particular SMEs, may be more likely to list on public markets if controlling shareholders can retain decision-making power in the company after listing. This lets them continue to shape the business according to their strategic vision while enjoying the advantages linked to being a publicly listed company and raising enough funds that justify having gone through the listing process. This is particularly the case for smaller family-owned companies, start-ups, and businesses with long-term projects that require significant upfront costs. All these companies can run the risk of being overly exposed to fluctuations of public markets or the threat of a hostile takeover. These companies would also benefit the most from listing on an SME growth market – a category of MTFs designed specifically for SMEs and where they can benefit from less stringent regulatory requirements. Smaller companies may be in greater need of diversified funding than larger companies due to their typically riskier profile, reduced visibility vis-à-vis potential investors, inability to afford to list abroad as well as, in some cases, a greater need to scale up. Therefore, given that the access to public markets is particularly important for smaller and fast-growing companies, the focus of this proposal is on companies listing on SME growth markets.
Multiple-vote share structures are an effective mechanism to allow companies’ owners to retain decision-making powers in a company while raising funds on public markets. These share structures permit a shareholder (or a group of shareholders) to hold a controlling stake in a company without having to make the proportionate economical investment required for the size of the stake, should all shares have the same voting power. Multiple-vote share structures typically include at least two distinct and separate classes of shares with a different number of voting rights attached to the shares belonging to each class.
Multiple-vote share structures are only one among the existing control enhancing mechanisms, i.e. mechanisms generating a discrepancy in the relation between financial ownership and voting power with the result that a shareholder can increase its control without holding a proportional stake of equity. The study on the proportionality between ownership and control in Member States 11 , published in 2007, showed that the available mechanisms to enhance/lock in control by leveraging voting power may also include, among others loyalty shares 12 , non-voting shares 13 , non-voting preference shares 14 , and voting right ceilings 15 .
Nevertheless, being more rigid in their set-up, most of these alternative share structures constrain the amount of funds that can be raised at the IPO stage and through follow-on issuances. Furthermore, loyalty shares are an enhanced control mechanism that is designed specifically to foster long-term shareholding among investors and lead to a more stable, long-term oriented ownership rather than to increase the attractiveness of raising funds from the public. Since loyalty shares are typically associated with less additional voting rights than multiple-vote right shares for controlling shareholders and since they usually require a holding period before activating the enhanced voting rights, they are considered less attractive by founders and family-owned companies. This is supported by empirical evidence that has demonstrated that the introduction of loyalty shares in certain Member States has not increased the amount of companies that access public markets. By contrast, multiple-vote shares would allow founders to retain control, while selling a larger portion of their investment in the company thanks to the greater disassociation between economic interest and voting rights.
The introduction of multiple-vote share structures in a company results in other shareholders (investors) having less decision-making power relative to their economic investments. This diminished voting power could lead to specific problems if not properly mitigated. Such problems could include, for example, shareholder entrenchment 16 , the funnelling of company’s assets and, in general, the extraction of private benefits by the controlling shareholder, through for example related party transactions. Moreover, the diluting effect of multiple-vote shares may result in controlling shareholders blocking certain resolutions, including those aimed at sustainability goals, thus fostering the interests of the controlling shareholder rather than the long-term sustainable development of the company. However, these potential problems can be addressed by putting in place safeguards aimed at protecting minority shareholders and the interests of the company, such as a maximum voting ratio, sunset clauses and limitation to the use of the multiple-vote shares in certain cases, for example when it comes to sustainability matters.
There is currently fragmentation in the EU as regards multiple-vote share structures, which leads to unequal opportunities for EU companies when deciding to list. Some Member States, such as Sweden or Denmark, have allowed multiple-vote shares since almost the beginning of their capital markets. In Sweden, the percentage of listed companies with these share structures has always remained above 40%, and in Finland and Denmark they represent the majority of publicly listed companies in terms of market capitalisation. In contrast, other Member States have banned multiple-vote shares. In some cases, the ban is limited to public companies, for instance in Germany and Belgium, while in others it applies to all companies, for instance in Austria and Croatia.
The existing differences in national regimes on multiple-vote share structures create an uneven playing field for companies in different Member States. Entrepreneurs and companies from Member States, that prohibit multiple-vote share structures, are at a comparative disadvantage with companies from Member States that permit multiple-vote share structures. Entrepreneurs and companies looking to introduce multiple-vote share structures and benefit from the flexibility are faced with a choice of remaining private or moving to another Member State (or a non-EU country), thus restricting their choice of funding and increasing their cost of capital. This affects, in particular, SMEs and early-stage start-ups that lack resources to cover the additional costs associated with listing in another Member State or in a non-EU country.
This proposal seeks to achieve a minimum harmonisation of national laws on multiple-vote share structures of companies listing on SME growth markets, while leaving sufficient flexibility to Member States for its implementation. While regulated markets are generally more suitable for larger and more mature companies, SME growth markets were largely designed for listing of smaller companies, whereby the regulatory treatment of SME growth markets takes the particularities of SMEs into account. Nevertheless, not all companies with securities listed on SME growth markets are SMEs. Companies other than SMEs generally have more liquid securities and hence their inclusion allows SME growth markets to generate higher trading fees to maintain profitability of their business model. Nevertheless, to ensure clarity for investors, all issuers on SME growth markets, irrespective of their size, are currently subject to the same rules. In line with this approach, this proposal introduces the possibility to adopt multiple-vote share structures for all companies seeking admission to trading of their shares on an SME growth market for the first time.
This proposal provides for safeguards to ensure protection of minority shareholders and the interests of the company. Those safeguards require all Member States to ensure that any decision to adopt a multiple-vote share structure, or to modify that structure where there is an impact on voting rights, is taken by a qualified majority at the general shareholders’ meeting. The safeguards set out in this proposal also introduce a limitation on the voting weight of multiple-vote shares by introducing restrictions either on the design of the multiple-vote share structure or on the exercise of voting rights attached to multiple vote shares for the adoption of certain decisions. These safeguards are designed to protect the interest of minority shareholders and the interests of the company, while at the same time allowing sufficient flexibility to controlling shareholders so as to not disincentivise the use of multiple-vote share structures. Furthermore, these safeguards are largely in line with those already in existence in the legal systems of the Member States with well-functioning multiple-vote share structure regimes. Thus, those Member States would require minimum adjustments to their current legal systems.
• Consistency with existing policy provisions in the policy area
Multiple-vote share structures are currently exclusively regulated at national level.
The proposed Directive is consistent with the objectives of existing EU legislation laying down requirements for public companies and coordinating national provisions in company law. This includes the Company Law Directive 17 that aims to ensure minimum equivalent protection for both shareholders and creditors. It harmonises national provisions on certain aspects of company law, such as setting up public limited liability companies, share capital requirements and distributions to shareholders. The scope of the proposed Directive does not overlap with the scope of the Company Law Directive, which does not regulate the share structures of companies (including multiple-vote share structures). Instead, this matter is addressed in this proposal.
Furthermore, by requiring Member States to put in place provisions to safeguard the interests of the company and of minority shareholders, the proposal is consistent with the policy objective pursued in Directive (EU) 2017/828 18 , including fostering the long-term sustainable development of companies and protecting the interests of the company and its minority shareholders in the case of related party transactions, despite the difference in scope of the two acts (the Directive concerns shareholder rights in companies admitted to trading on regulated markets, whereas this proposal concerns shareholder rights in companies admitted to trading on SME growth markets).
Similarly, the proposed Directive does not overlap with the scope of the Takeover Bid Directive that lays down rules applicable to public companies, when such companies are the subject of takeover bids, in order to safeguard the interests of shareholders. Importantly, the Takeover Bid Directive 19 only applies to companies admitted to trading on a regulated market and not to companies admitted to trading on an SME growth market, which are in the scope of this proposal. Nevertheless, transparency provisions in this proposal pursue similar objectives to those in the Takeover Bid Directive, focusing on a company’s share capital structure, shareholding structure as well as rights and obligations attached to the company’s securities.
Lastly, the proposed Directive is in line with the provisions of MiFID II regulating SME growth markets.
• Consistency with other Union policies
The proposal is fully in line with the CMU core aim to make financing more accessible to EU companies and in particular to SMEs. It is consistent with a number of legislative and non-legislative actions taken by the Commission in the framework of the 2015 CMU Action Plan 20 , 2017 Mid-term Review of the CMU Action Plan 21 and 2020 CMU Action Plan.
In order to support jobs and growth in the EU, facilitating access to finance for companies, especially SMEs, has been a key goal of the CMU from the outset. Since the publication of the CMU Action Plan in 2015, some targeted actions were taken to develop adequate sources of funding for SMEs through all their stages of development. In its Mid-term Review of the CMU Action Plan published in June 2017, the Commission chose to raise its level of ambition and strengthened its focus on the SMEs’ access to public markets. In May 2018, the Commission published a proposal to promote the use of SME growth markets 22 aiming to reduce the administrative burden and the high compliance costs faced by SME growth market issuers while ensuring a high level of market integrity and investor protection; foster the liquidity of publicly listed SME shares to make these markets more attractive for investors, issuers and intermediaries; and facilitate the registration of MTFs as SME growth markets. The proposal to promote the use of SME growth markets was adopted in November 2019.
Furthermore, following the COVID-19 crisis, the Commission published the Capital Markets Recovery Package, which comprised targeted amendments to capital markets and bank regulation, with the overarching aim to make it easier for capital markets to support EU businesses to recover from the COVID-19 crisis. The suggested changes to the capital market rules aimed in particular to alleviate regulatory burden and complexity for investment firms and issuers.
This proposal follows up on the 2020 CMU Action Plan and its objective to make financing more accessible to EU companies (Action 2 ‘supporting access to public markets’). The proposal focuses on alleviating the regulatory requirements that can deter a company from deciding to list or to remain listed. Other factors that may deter issuers from listing, such as a narrow investor base and a more favourable tax treatment of debt over equity, are addressed by other ongoing and upcoming CMU initiatives that complement the amendments put forward in this proposal and should be analysed in conjunction with this initiative. These initiatives relate, for example, to (i) the creation of an EU Single Access Point (ESAP) 23 that will tackle the lack of accessible and comparable data for investors, making companies more visible to investors, (ii) the centralisation of EU trading information in a consolidated tape 24 for a more efficient public market trading landscape and price discovery, (ii) the introduction of a debt-equity bias reduction allowance (DEBRA) 25 to make equity financing more attractive (and less costly) for companies.
Furthermore, a series of the Commission initiatives will further strengthen the investor base for listed equity. The EU SME IPO Fund will play the role of an anchor investor to attract more private investment in SMEs’ public equity by partnering with institutional investors and investing in funds focused on SME issuers. The CRR and Solvency II reviews will increase the investor base for issuers by facilitating investments from banks and insurance companies in public (long-term) equity.
This proposal is also in line with the New European Innovation Agenda 26 published in 2022, since it would make capital markets more attractive to company founders, without the need of having to relinquish control when listing in public markets.
The proposal takes into account the evidence behind the opinion of the Fit for Future Platform on facilitating SMEs’ access to capital and in particular on simplification of the procedures for the admission to trading of securities of SMEs and other listing obligations.
As this proposal will allow more SMEs to access more and more diversified funding through listing on SME growth markets, based on the most suitable corporate governance structure, it will also be in line with the objective of the SME relief package announced by President von der Leyen in the State of the Union speech in September 2022.
Finally, the provisions of the proposal on safeguards also cater for the protection of the interests of the company against decisions creating risks for or resulting in adverse human rights, climate change and environmental consequences. The proposal is therefore in line with the Commission’s corporate governance policy objective of fostering sustainable and responsible corporate behaviour, and hence in line with the Commission proposal for the Directive on Corporate Sustainability Due Diligence 27 , which aims at anchoring human rights and environmental considerations in companies’ corporate governance systems.
2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY
• Legal basis
The proposal is based on Article 114 and Article 50 of the Treaty on the Functioning of the European Union (TFEU).
Article 114 provides for adopting measures for the approximation of the provisions laid down by law, regulation or administrative action in Member States which have as their object the establishment and functioning of the internal market. Recourse to Article 114 is possible where disparities between national rules are such as to obstruct the fundamental freedoms or create distortions of competition and thus have a direct effect on the functioning of the internal market. The objective of the proposed Directive is to remove obstacles to the exercise of fundamental freedoms, such as the free movement of capital and freedom of establishment. These obstacles result from differences between national company laws across the EU, insofar as some Member States prevent their companies from accessing public markets through multiple-vote share structures. This restricts their access to capital and creates an obstacle to establishing a single market for capital in the EU.
Article 50(1) TFEU and, in particular, Article 50(2)(g) provide for the EU’s power to act to attain freedom of establishment for a particular activity, in particular ‘by coordinating to the necessary extent the safeguards which, for the protection of the interests of members and others, are required by Member States of companies or forms within the meaning of the second paragraph of Article 54 with a view to making such safeguards equivalent throughout the Union’. The proposed Directive seeks to put in place coordination measures concerning the protection of interests of companies’ shareholders and other stakeholders to lower disparities between national rules and lower obstacles to the freedom of establishment.
• Subsidiarity (for non-exclusive competence)
Under Article 4 TFEU, EU action for completing the internal market has to be appraised in light of the subsidiarity principle set out in Article 5(3) of the Treaty on European Union (TEU). According to the principle of subsidiarity, action at EU level should be taken only when the objectives of the proposed action cannot be achieved sufficiently by Member States alone and thus require action at EU level. On multiple-vote shares, unless action is taken at the EU level, it is unlikely that Member States, which currently do not allow these share structures, would unilaterally and with no external incentive amend their rules in the near future. This is largely due to historical reasons, opposition from stakeholders in those countries and the fact that changing company law, which was developed over centuries, is often difficult. Any delays in introducing these structures throughout the EU would risk continuing to deprive smaller companies of funding opportunities in those Member States that ban multiple-vote shares. Finally, even if Member States decided to take action, the approaches could differ significantly, potentially leading to further fragmentation.
• Proportionality
The objective of the proposed Directive is to contribute to the proper functioning of the single market and remove obstacles to the exercise of fundamental freedoms, such as the free movement of capital and the freedom of establishment. These obstacles are caused by differences between national company law regimes on share structures and, in particular, the ability of a company to adopt a multiple-vote share structure. To achieve this objective, the proposal only sets out minimum harmonisation requirements and only in relation to the main principle of law on allowing for multiple-vote share structures, supplementing it with minimum safeguards necessary to protect minority shareholder interests and the interest of the company. Its scope is also limited to SME growth markets, in particular to cover SMEs that would benefit the most from such a measure.
The proposed Directive leaves Member States sufficient flexibility to frame the provisions of the proposal within the national legal regime. It does so by supplementing the rules with additional measures, including safeguards for shareholders and the interests of the company, provided that they are in line with the objectives of this Directive, or allowing for multiple-vote share structures in situations outside the scope of this proposal. Therefore, in line with the principle of subsidiarity, as set out in Article 5 of the TEU, the proposed Directive does not go beyond what is necessary in order to achieve its objectives.
• Choice of the instrument
The integration of the EU single market in the area of company law, particularly share structures, can be best achieved by approximating laws through harmonisation through a directive. Using a directive respects Member States’ different legal cultures and company law systems and provides for sufficient flexibility in the transposition process to implement common minimum standards in a compatible way with those different systems.
A recommendation would not be able to achieve the desired approximation objective in this policy area where wide differences in Member States’ binding legislation were identified. Furthermore, approximation through a regulation would not give enough flexibility to Member States to adapt to local conditions and keep the EU rules consistent with broader national company law.
3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS
• Ex-post evaluations/fitness checks of existing legislation
Not applicable.
• Stakeholder consultations
In recent years, the Commission’s continuous evaluations have focused on companies’, especially SMEs’, access to public markets. Issues relating to the regulatory burden on companies when accessing public markets were raised in the context of the CMU HLF, the TESG and the 2020 CMU action plan. The Commission also took into account extensive research on the topic carried out in the Oxera study 28 . To obtain further evidence on these issues, a call for evidence as well as a public and a targeted consultation on the Listing Act were launched in November 2021. The consultations were open for 14 weeks (between 19 November 2021 and 25 February 2022).
The Commission also organised two technical meetings/workshops with industry stakeholders in April 2022 to further refine the policy options under consideration.
Furthermore, the Commission presented the proposal’s objectives to the European Securities Committee Expert Group on 15 October 2021, 17 May 2022 and 30 May 2022.
A meeting was also organised with the coordinators of the Economic and Monetary Affairs Committee (ECON) of the European Parliament to present the proposal’s objectives on 17 May 2022.
Finally, a meeting with the Company Law Expert Group was organised on 12 September 2022.
Contents
In the public and targeted consultations, respondents stressed that one of the key reasons for the wave of hi-tech, high growth issuers choosing to list in non-EU countries (such as the US or the UK) is the flexibility that these jurisdictions grant to issuers on multiple-vote shares 29 . Similarly, some respondents 30 highlighted that a number of EU companies have recently transferred their statutory seats from countries with limited possibilities for issuing multiple-vote shares (e.g. Italy, Germany and Spain) to the Netherlands, a country that adopted a permissible and flexible approach to multiple-vote share structures 31 . Lastly, 64 % of respondents saw merit in stipulating in EU law that issuers across the EU may list on an EU trading venue based on the multiple-vote share structure.
The majority of respondents to the consultation (83 %) 32 considered that, where it is permitted, the use of multiple-vote shares has effectively encouraged more firms to seek listing on public markets. When asked about the impact that multiple-vote shares has on the attractiveness of a company for investors, most respondents to this question (predominantly issuers and exchanges) considered that the impact is either positive or neutral 33 . These respondents noted that multiple-vote shares do not decrease investors’ appetite, provided that certain safeguards are in place, and highlighted that transparency is key to making sure investors can make fully informed investment decisions.
Those respondents who viewed the attractiveness negatively (including two NCAs and some investor associations) expressed concerns about the disappearance of the ‘one share – one vote’ principle. One respondent noted, in particular, that multiple-vote share structures may undermine existing accountability mechanisms in corporate governance law, such as shareholders’ ability to elect directors, and lead to management entrenchment. However, even amongst respondents viewing the impact slightly negatively or negatively, some noted that multiple-vote shares are beneficial in certain situations (particularly for high-growth, innovative, founder-led companies looking to list). They noted that any changes put forward should strike an appropriate balance. This balance should cater for adequate governance protection, such as limiting the decisions that can be taken with additional voting rights, allow founder-led companies to raise funds on public market, and maintain the founder’s long-term vision for the company.
The respondents thus highlighted that any flexibility on multiple-vote share structures should be approached in a way that safeguards governance standards (possibly through sunset clauses, non-transferability provisions, automatic cancellation/conversion on exit, etc.).
The CMU HLF recommended that companies should have a choice to opt for a multiple-vote share structure when going public. The expert group noted that such structures would help companies avoid being taken over by larger companies, incentivise owners to maintain growth, and help foster a long-term outlook for the company while keeping listing an attractive funding option. However, they emphasised that this needs to be balanced against the fact that it prevents other shareholders from exercising their stewardship and governance responsibilities.
The TESG fully supported this recommendation, arguing that it should be the prerogative of the issuers to decide whether or not to include a sunset clause or a maximum weighted voting ratio.
The two technical stakeholder workshops that the Commission organised did not generate significant input on the topic of multiple-vote shares. Some stakeholders (exchanges) clearly supported EU harmonisation as it would make listing more attractive. In contrast, other stakeholders (investors) believed that there is no need for such harmonisation, while noting that, if such an approach is considered, appropriate safeguards would be important.
Meetings with the European Securities Committee Expert Group The Commission presented the possible way forwards on the Listing Act as part of the CMU project. Delegations participating in the discussion broadly supported the Commission’s objective of improving the attractiveness of EU public markets, while ensuring investor protection and market integrity. More specifically, 13 Member States that took the floor showed openness to considering a minimum harmonisation of multiple-vote share provisions in EU law.
The MEP Coordinators that participated in the discussion welcomed the Commission’s proposed way forward on the Listing Act, acknowledging the problem with EU public markets. They stressed that the Commission needs to find a right balance to ensure that all companies, especially SMEs, can access public markets for funding, while at the same time ensuring adequate investor protection.
A Company Law Expert Group meeting took place to exchange views on the existing national multiple-vote share structures in some Member States. Several Member States took the floor to further substantiate their responses to the Commission survey (July-August 2022).
• Collection and use of expertise
The Commission collected a significant amount of data directly from securities exchanges, issuers and SME associations. Moreover, the TESG (in force between October 2020 and May 2021) provided some evidence as well as the input from the market. Furthermore, the Commission contracted out a Study on Primary and Secondary Equity Markets in the EU from Oxera in November 2020, which provided a very detailed overview of the market 34 , also supported by data.
Previously, the Commission contracted out a study on the proportionality between ownership and control in EU-listed companies, which concluded with the Report on the Proportionality Principle in the EU (published in 2007) 35 . The conclusions of that report were recently confirmed in another study on minority shareholders protection, requested by the Commission and published in 2018.
An impact assessment was conducted based on extensive qualitative and quantitative evidence from the public and targeted consultations on the Listing Act: making public capital markets more attractive for EU companies and facilitating access to capital for SMEs.
Other sources used included extensive academic literature and research, particularly by examining jurisdictions that already have multiple-vote shares in place or that have recently adopted legislation allowing them. There was also extensive additional input from various industry associations.
• Impact assessment
This proposal is accompanied by an impact assessment that was submitted on 10 June 2022 to the Regulatory Scrutiny Board. It was approved by the Board – with reservations – on 8 July 2022.
The Board requested to amend the draft impact assessment to clarify: (i) the articulation and consistency of the Listing Act initiative with other linked capital markets initiatives; (ii) the risks and limitations of the analysis and acknowledge unintended consequences; and (iii) the different views expressed by different categories of stakeholders on the problem definition, the options and their impact. The comments formulated by the Board were addressed and integrated in the final version of the impact assessment.
The impact assessment analyses several policy options to make listings on EU capital markets more attractive through streamlined, clear and more flexible regulatory obligations in order to reduce the costs associated with raising capital on public markets for companies of all sizes.
The impact assessment describes three drivers that explain the problems relating to the three stages of the listing cycle: the pre-IPO stage, the IPO process itself and the post-IPO stage. The driver that was identified as relevant to this proposed Directive relates to unequal opportunities for EU companies regarding governance structure when listing, due to different national rules on multiple-vote shares.
The regulatory amendments set out in the options could not single-handedly address all the challenges faced by the EU public markets. However, together with other measures considered as part of a wider plan to improve companies’ access to public capital markets, the amendments aim to help reverse the current negative trend in the EU public markets. Without these regulatory improvements, EU public markets would continue to rely on the suboptimal regulatory framework for listing, which in turn would reduce the attractiveness of public markets. This would result in an economic cost for EU issuers, investors and the EU economy as a whole. The baseline scenario therefore includes no amendments to the legislative framework governing the rules for companies seeking to list or already listed.
The preferred policy option for the pre-IPO stage envisages a minimum harmonisation of national laws governing multiple-vote share structures, while leaving discretion to Member States on how to frame it. Under this option, Member States currently banning multiple-vote share structures would have to amend their laws to allow for such governance structures. The option would not impose any additional far-reaching constraints on those Member States that currently have a flexible and well-functioning regime in place.
This option would be effective in providing companies (established in Member States that currently ban multiple-vote share structures) with an incentive to list. By ensuring that companies can be admitted to trading in all Member States with multiple-vote share structures, the preferred option would allow founders and company owners to mitigate the loss of control, which is typically associated with listing. This, in turn, would open up new funding opportunities for those companies that would not otherwise consider listing. It would also generate substantial cost savings for those companies who currently need to list abroad to benefit from flexibility. Furthermore, multiple-vote shares would help founders (once listed) avoid short-term market pressures and focus on their long-term vision for the company.
Under the preferred option, Member States would enjoy flexibility in setting safeguards and conditions around multiple-vote shares. However, they would need to ensure compliance with a few high-level principles and minimum safeguards set out at EU level. These include the need to ensure an adequate balance between the interests of founders and minority investor protection, as well as the protection of the interests of the company. As Member States would be required to take into account investors’ interests and the interests of the company when introducing these share structures in their national systems, this option would ensure investor protection. In addition, safeguards and conditions would be tailored to the particular characteristics of local markets, and the markets that already have multiple-vote share structures in place would retain their flexibility.
Another option (not the preferred option) provides for a maximum harmonisation of multiple-vote shares by introducing a detailed set of rules, including on safeguards for minority investors and for the company, such as voting power limitation clauses, sunset clauses, clauses setting out limitation on the number of votes attached to a single share, all of which would seek to protect minority investors and the company from undue impact of these share structures. Furthermore, under this option, EU law could also prescribe who may hold multiple-vote shares, in which decisions the additional voting rights are taken into account and on which conditions (and whether) they can be transferred to a third party. This option would be quite prescriptive as all Member States would be obliged to implement the same rigid framework, including the same safeguards which would not allow flexibility to Member States that already have a well-functioning system in place.
Therefore, the preferred option, while being effective, would also be more cost-efficient for stakeholders, specifically issuers: Member States that already have regimes on multiple-vote shares in place would not have to amend their rules and companies in those Member States would not have to adapt to a new regime and incur additional costs. A much more prescriptive alternative option (not the preferred option) is likely to lead to much higher (adjustment) costs for both Member States and issuers across the EU. While overall investors’ interests and the interests of the company may be better safeguarded at the EU level under the alternative option, it may be unfit for some Member States, where investors do not appear to be negatively affected under the current (flexible) multiple-vote share arrangements.
The proposal is expected to have a direct economic impact in terms of increasing access to alternative sources of funding for EU companies. It is likely to lead to more incentives for issuers to list on public markets across Member States, where these structures are not allowed. Combined with other enhancing measures, it may hence lead to overall more public issuances in the EU, hence contributing in general to the growth of EU capital markets.
As regards the environmental impacts, including do no significant harm and climate consistency check, this proposal is expected to have an indirect positive environmental impact as companies receiving funding from public markets may engage in the development and innovation of new environment-friendly technologies. Furthermore, the introduction of the specific safeguards should minimise an impact on the company arising from decisions that may result in adverse human rights, climate and environmental consequences. This proposal would also be conducive to the development of more open and more competitive capital markets, benefiting in particular faster-growing companies in innovative and research-intense sectors that tend to have higher capital needs. A better access to finance will allow these companies to grow at a more rapid pace and allocate more financial resources to R&D programmes that can contribute to the European Green Deal objectives.
The proposal may lead to an indirect positive social impact, provided that the preferred option achieves the objective of contributing to easing companies’ access to public markets whereby they would now be able to benefit from a more diversified and larger pool of funding sources, allowing to engage in social innovation and employ more people. As the initiative targets in particular SMEs (with some measures directly addressed at them), the (indirect) impact on employment is likely to be particularly relevant. Today, SMEs in the EU provide for employment of around 100 million people, account for more than half of the EU GDP and play a key role in adding value in every sector of the economy 36 . Importantly, they make up 99.8 % of EU companies 37 . Provided with a better-tailored and wider access to financing, these companies will now be able to grow at a faster pace, with positive implications for employment across the EU. As such, it is expected that the measures, as part of a wider package to facilitate SMEs’ access to capital market finance, will positively impact the EU labour market and increase economic cohesion.
This proposal is likely to have an indirect positive impact on digitalisation, by providing wider and more diversified sources of funding for capital-intense projects and companies, including those focusing on digitalisation and innovation.
The impact assessment concludes that the proposed ‘package’ of measures will contribute to the overarching CMU goal of facilitating access to capital markets for companies. This package of measures will support companies listed on EU trading venues, by reducing their administrative burden and by enabling improved liquidity. However, the impact assessment also underlines that the regulatory measures included in this initiative would not, on their own, necessarily lead to an increased number of public listings in the EU, the latter being dependent on many different factors.
• Regulatory fitness and simplification
No administrative cost impacts related to the ‘one in, one out’ approach have been identified, even though some adjustment costs are expected to arise from this initiative. Minimum direct adjustments costs for companies may arise so as to ensure that a listing is structured in accordance with the new rules and more specifically, with the investor protection safeguards in place.
• Fundamental rights
This proposal respects fundamental rights and freedoms laid down in the Charter of the Fundamental Rights of the European Union. The free movement of persons, services and establishment constituting one of the basic rights and freedoms protected by the Treaty on the European Union and the Treaty on the Functioning of the European Union is relevant for this initiative.
The proposal affects the right to privacy and protection of personal data of certain shareholders and persons exercising voting rights in the company, as well as holders of securities with special control rights. The provision requiring disclosure of the identity of those shareholders and persons aims at strengthening investor confidence and facilitating informed investment decision-making, thereby enhancing both investor protection and market efficiency. Since the investor can be any member of general public, this information should be publicly available. The provision does not go beyond what is necessary to protect the interests of investors to make well-informed decisions and to guarantee investors’ trust. Furthermore, the proposal requires disclosure of personal data only in relation to those shareholders and persons that have significant decision making power or may otherwise exercise control rights in the company. In the absence of such disclosure, investors would not be able to take fully-informed investment decisions.
4. BUDGETARY IMPLICATIONS
This initiative is not expected to have any noteworthy impact on the EU budget.
5. OTHER ELEMENTS
• Implementation plans and monitoring, evaluation and reporting arrangements
An evaluation is envisaged 5 years after the implementation of the measure and according to the Commission’s better regulation Guidelines. The objective of the evaluation will be to assess, among other things, how effective and efficient the Directive has been in achieving the policy objectives and to decide whether new measures or amendments are needed. Member States shall provide the Commission with the information necessary for the preparation of that evaluation.
• Detailed explanation of the specific provisions of the proposal
Article 1 sets out the subject matter. Article 1, in particular, sets out that this Directive only concerns the adoption of multiple-vote share structures by companies seeking listing on an SME growth market in one or more Member States for the first time.
Article 2 sets out the definitions used in this Directive, including ‘company’, ‘multiple-vote share structures’, ‘multiple-vote shares’ and ‘SME growth market’.
Article 3 clarifies that this Directive is a minimum harmonisation Directive and that Member States may adopt or retain national provisions that allow companies to adopt multiple-vote share structures in situations not covered by this Directive.
Article 4 lays down the principle that Member States must ensure that companies may adopt multiple-vote share structures when they seek admission to trading of their shares on an SME growth market for the first time. Article 4 also ensures that Member States leave flexibility to companies to adopt multiple-vote share structures before seeking the admission of their shares to trading. In those cases, Member States have a possibility to set out that the enhanced voting rights associated to multiple vote shares, can only be used after the admission to trading has occurred.
Article 5 sets out the obligation for Member States to ensure the fair and equal treatment of shareholders and provide for the adequate protection of the interests of the company and of the shareholders that do not hold multiple-vote shares by introducing appropriate safeguards. For this purpose, Article 5 provides for a minimum level of harmonisation in relation to safeguards by requiring Member States to include certain safeguards listed in the Article. Article 5 also lists additional safeguards that Member States may consider to that end.
Article 6 sets out disclosure requirements for companies that adopted multiple-vote share structures that apply both at the point of admission to trading of the company’s shares and then recurrently on an annual basis. This includes information relating to the structure of the company’s share capital, the characteristics of the multiple-vote shares as well as the presence of other control-enhancing mechanisms in the company.
Article 7 contains a provision on the review of this Directive.
Article 8 contains provisions on the transposition of the Directive.
Article 9 includes the date as of when this Directive enters into force.
Article 10 sets out the addressees of this Directive.