One share – One vote, le nouveau St. Graal? Viviane de Beaufort, ESSEC.

1. One share – One vote, le nouveau St. Graal? Viviane de Beaufort, ESSEC. ECMI, 7th December 2006 ,ONE SHARE-ONE VOTE – A means for corporate control,

2. Is the « one share one vote » rule subject to the jurisdiction of the European Commission ? 1/ the European Commission potential intervention is questionable as the debate for the takeover directive took place within the European Parliament. The European Parliament adopted the subsidiarity principle, hence it agreed not to harmonize target companies' defensive tactics at the European level. This opting outarticle leaves room to members states to regulate this issue as long as transparency is observed. According to the parliament’s study commissions reports it seems that the parliament did not want that : « the hereinafter directive governs the basic member states corporate structures as to ownership and control.

3. 2/ Given the article 44.2 and the subsidiarity principlethe legitimacy of the European Commission in this case is undoubtedly compromised. The main basis for Community legislation aiming at harmonizing corporate law to protect shareholders and stakeholders is article 44.2. It has not been established that harmonizing the corporate law practices is necessary (see comparative table communication 2). The European Public Interest is the only ground of European Intervention. The ECJ invokes :des «demanding situation» (C.J.C.E., 20 February 1979, Rewe-Zentral AG (Cassis de Dijon), aff. 120/73, rec. p. 649) or «compelling » (C.J.C.E., 4 December 1986, Commission c/ France, aff. 220/83, rec. p. 3663.), that are irrelevant in our case.

4. 3/ On the merits, the One share-one vote rule violates the right to private property, clashing with article 295 or the EC treaty The right to private property is recognized by the article 295 of the EU treaty, the article 17 of the Charter of fundamental rights of the European Unionand the 1st protocol of the European Court of Human Rights. Indeed the divestment of multiple voting rights would lead to an unwarranted expropriation that should not be covered by the public order exception as generally provided by General Principles of Law CEE. : CJCE C44/79 HAUERV. LANDREULAND6PFALZ This expropriation will be deemed without fair compensation. How can we compensate a loss of control rights? Moreover the expropriation is not justified by the company’s interest. In its latest update, the 2nd directive only provide for a right of «Squeeze out» and «mandatory repurchase» in registered corporations, except in cases provided for under the 13th directive. [1] DIRECTIVE 2006/68/CE of the European Parliament and Council of 6 september 2006 amending the directive 77/91/CEE as to immatriculation of public companies and their capital structure.

5. The rule and its caveats: market equilibrium 4/ It is generally admitted that if most of member states have adopted the One Vote One Share principle as a principle, there is room for severance between control and ownership as long as it is in the best interest of the company. The DEMINOR report (march 2005 commissioned by the Association of British insurers - www.deminor-rating.com) and a Comparison of legal frameworks used in corporae governance codes of EM + USA clearly show a huge diversity of devices used by companies: Shares wihtout voting rights, with multiple votes, with double vote when kept for a certain amount of time, golden shares, priority shares…. = Being owner does not necessary mean being in charge in all Member States.

6. Is the strict One share One vote rule relevant in this context? The corporate and stock market regulations are undergoing major evolution nowadays, leading to a« shareholder democracy » in the European union : -Project of directive as to non resident rights setting clear rules as to proxies , voting from abroad etc. -Amendments to corporate law directives (4th, 7th and 8th) -Recommendation as to directors liability -Art. 10 of the takeover directive as to voting and governance structures follows the same trend. These are positive acquired rights as to transparency and flexibility of the market regulation.

7. Ongoing efforts without dogmatism Is it possible to transpose the one man one vote principle in corporate Law? Given the very diverse ownership structure and shareholders diverse access to capital, goals and their involvement it seems impossible to transpose it. The law should focus only on blatant unequal situations while strengthening minority shareholders rights and transparency.

8. Risks of such dogmatic approach Such a diversity of regulations does not favor Foreign Direct Investment and the one share – one vote rule limits management freedom ( Morck, Shleifer et Vishny (1988). Trying to avoid the «One share, one vote» is therefore perceived as a loss in potential performance of companies and of the stock market itself. This recurrent approach that does not take into account other management control/performance factors fails to explain why dissociation devices and exceptions to the general rule are so popular in companies.

9. Studies and expert Point Of View According to G. Ferarrini[[1] « OS– OV: A EUROPEAN RULE? Law WP N°. 58/2006, January 2006, the strict application of the one share-one vote could hamper recapitalization process in companies: willing to be publicly traded will lead to an uncontrolled loss of power. Therefore flexibility should be observed. Yi Zhang highlights the fact that no studies managed to link dual share systems and companies’ performances. According to past studies it even seems that the market reacted positively to such dual class share systems. Khachaturyan, considers that the evolution of derivative market will soon make the one share one vote rule outdated as it calls for severance between voting rights and property rights. Its economic efficiency is challenged since building long term relationship and trust between shareholders and company has virtuous effects, therefore dissociation of voting and property rights can be justified.

10. Aiming to better transparency and minority rights. In countries where the corporate governance framework is well defined, majority shareholders are encouraged to manage the company according to its best interest, paying more attention to the management itself rather than potential important profits that might steam from the activities. Opting for flexibility in the stock market regulation and improving transparency at the European level are clearly set goals in order to deregulate the market. Setting minority protection rights to higher standards at the European level.