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: Institutional Shareholder Services -- Corporate Governance Blog

Analysis: European DefensesSubmitted by: Subodh Mishra, Publications

Investors in European companies may sharpen their focus on takeover defenses this year following a recent decision by Europe?s top regulator to pull back on plans to promote the principle of one-share, one-vote.

The future of European corporate takeover defenses--such as multiple voting rights, voting rights caps, and ?golden-shares?--has been a key focus of debate in recent months as governance watchers closely monitor the words and deeds of regulators, who, some argue, have taken an inconsistent approach to curbing their use.

For years, key European Union (EU) officials voiced support for investor efforts to promote the concept of one-share, one-vote, arguing the right was consistent with broader EU efforts to dismantle takeover defenses.

"The [c]ommission intends to undertake a study into the way in which the principle of one-share, one-vote can be translated into reality," Frits Bolkestein, head of the European Commission's (EC) Internal Markets, said in a 2004 speech. Ireland native Charlie McCreevy would succeed Bolkestein shortly after that speech, but the commitment remained, with McCreevy backing the right of one-share, one-vote during his own confirmation hearings.

In 2006, investors concerned with the widespread prevalence of takeover defenses on the continent again took heart when the European Court of Justice ruled against the use of ?golden share? takeover defenses--giving the holder veto rights over certain transactions--at Holland's dominant telecommunications provider and postal carrier, holding that the use of such defenses restricted the free movement of capital.

To investors, regulators were taking the right approach, despite ongoing calls (and actions) by politicians in some member states to allow for the use of poison pills and other defenses.

But that sentiment would begin to change this summer when a key EU official backed calls by politicians to implement defenses as foreign investors took equity positions in European aerospace giant EADS. The German and French governments sought to install a golden share at the company following equity purchases by a state-controlled Russian bank and the investment arm of the government of Dubai.

EU Trade Commissioner Peter Mandelson tacitly backed their calls, arguing such a defense was warranted on national security grounds, despite the European high court ruling that just one year earlier that had chastised the Dutch government for doing so.

More recently, those who now question regulators? commitment to dismantling corporate takeover defenses in Europe point to an October decision by McCreevy to back away from his long-held position on equal voting rights. Indeed, on Oct. 3, McCreevy told European lawmakers that he would no longer push companies to adopt a one-share, one-vote capital structure, leaving investors and other proponents of shareholder democracy frustrated.

?It's a shame that the capital markets integration project can?t muster the strength to take on entrenched positions,? noted Anne Simpson, executive director of the International Corporate Governance Network, on the heels of McCreevy?s announcement. McCreevy?s decision effectively sanctions companies? continued use of the most common defenses, dubbed ?control-enhancing mechanisms,? such as multiple voting rights and voting right limitations, which are common in markets ranging from France to Sweden.

In his comments to lawmakers, McCreevy said that shareholders should use their existing voting rights to push for better dialogue and enhanced transparency. But, he noted, a further layer of EU action is ?not the right way to go,? given that existing legislation now helps ensure transparency. McCreevy defended his reversal on the one-share, one-vote principle by citing the results of an EU-commissioned study, published in May, which found control-enhancing mechanisms had little effect on a company?s financial performance and governance.

Full post as published by Institutional Shareholder Services -- Corporate Governance Blog on January 04, 2008 (boomark / email).