Spanish loyalty shares proposal progresses despite opposition

Head of national supervisor throws his weight behind the idea — as an option

Despite the opposition from investors and other stakeholders, the proposal by the Spanish government to introduce so-called loyalty shares might go ahead if the view of the securities supervisor prevails in the teeth of widespread opposition.

The National Securities Market Commission (Comisión Nacional del Mercado de Valores, or CNMV) has advocated for a pragmatic view in favour of the option to give double voting rights to investors who hold shares for two years in a row.

The Ministry of the Economy floated the idea on the back of the consultation to transpose the updated EU Shareholder Rights Directive into Spanish law, which closed on July 12.

Granting long-term shareholders additional voting rights has been interpreted as one of the measures to achieve the directive’s stated aim: the “encouragement of long-term shareholder engagement”.

The idea is opposed, for different reasons, by numerous players.

They include: the International Corporate Governance Network (ICGN), whose members represent $34trn in assets under management; proxy advisory firms Glass Lewis and Corporance; the Association of Spanish Issuers; Morrow Sodali; law firm Gomez-Acebo & Pombo; the Spanish directors institute (Instituto de Consejeros-Administradores). See earlier RI coverage here.

However, the opinion of the CNMV, which also advises the ministry, might carry additional weight.

Before and after the consultation, CNMV President Sebastián Albella said that the one-share-one-vote principle should apply — in an ideal world.

But at a public event in June, he said “we live – and compete – in the world we live in”.

And, addressing lawyers at Madrid’s bar association in September, Albella reiterated this position, saying that loyalty shares should be “on the menu” highlighting that the idea is not compulsory but an option.He underlined that the proposal, as it stands, still requires qualified majority voting and quorums from shareholders to pass, and once it has been adopted, can also be revoked.

Veteran Spanish journalist and commentator José Antonio Navas, who refers to L-shares as “ginseng shares” for their reputed health benefits, has pointed out that the CNMV and the Spanish Stock Exchange want to be an attractive listing destination, particularly for big privately held corporates with founder-controlled shareholdings. Among them are listing hopefuls are oil firm Cepsa, banks Ibercaja and WiZink, or retailer El Corte Inglés.

Meanwhile, Rick Fleming, the US Securities and Exchange Commission’s first Investor Advocate, told the ICGN conference in Miami last week that dual-class shares are a recipe for disaster.

Fleming said the SEC tried to ban the creation of super-voting share classes, although that effort was met with defeat in the courts.

He said added that although stock exchanges aim to profit from IPO listings, they “need to step up and reassert their role as self-regulatory organisations”.

“They have an important role to play as guardians of market integrity, and the weakening of corporate governance in publicly-traded companies is not a hidden hazard, but one that stares us right in the face.”

Institutional investors tend to fiercely oppose L-shares and consider them a variation of the dual class shares structures that diminish shareholder rights. However, their apparent willingness to buy stock in firms like Facebook, Uber or Alphabet’s Google, has been criticised, not least by the late Professor Lynn Stout.

She would ask in her writings: “Why not just avoid buying stock in companies that limit shareholder power in the first place?”