Authorisations to issue shares and disapply pre-emption rights in the UK, Belgium and France: law, economics and practice

ABSTRACT

In this paper, I analyse the role of shareholder approval and pre-emption rights in protecting shareholders in share issuances by listed corporations in the UK, Belgium and France. In these countries, shareholder approval and pre-emption rights are in principle required for share issuances, but the general meeting can authorise the board of directors to issue shares and disapply pre-emption rights. Proxy advisors and institutional investors have adopted guidelines that signal that they strongly support pre-emption rights and shareholder approval of share issuances. However, I provide empirical evidence that these guidelines are often not followed in France and Belgium, especially for smaller corporations with high levels of insider ownership. I contrast this with the strong impact of the guidelines in the UK. I also offer explanations for these differences, as well as policy options that would give shareholders a larger say on the balance between flexibility and accountability regarding authorisations.

KEYWORDS:

• Share issuances
• equity finance
• authorisations
• shareholder protection
• pre-emption rights
• shareholder approval

Acknowledgments

The paper is based on a part of the author's doctoral thesis at the KU Leuven, which benefited from comments by Veerle Colaert, Marieke Wyckaert, Koen Geens, Hans De Wulf, John Armour and many other colleagues and friends throughout the years. I also want to thank the participants in the 2021 Bocconi-Oxford Young Corporate Law Scholars Workshop and the 2022 conference of the German Law and Economics Association for useful comments on this paper. The data discussed in this paper was collected with the help of Theo Monnens, a student of the master in law, econ-omics and business studies at the KU Leuven. I am very grateful to Theo for all his hard work on this project.

Disclosure statement

The author's current position as a visiting professor at the University of Antwerp is funded by donations from several private partners of the Jean-Pierre Blumberg Chair, including listed corporations (the topic of this paper) and lawyers that typically advise such corporations. See this link for an overview of these partners: https://www.uantwerpen.be/en/chairs/jean-pierre-blumberg/partners/. The author is also affiliated as a lawyer with Linklaters Belgium, a law firm that regularly advises listed corporations, including on the topic of this paper. None of these entities provided any comments on the topic of this paper.

Notes

1 See for example: Marco Ventoruzzo, ‘Issuing New Shares and Preemptive Rights: A Comparative Analysis’ [2013] Richmond Journal of Global Law & Business 517; Edward Rock and others, ‘Fundamental Changes’ in Reinier Kraakman et al. (eds), The Anatomy of Corporate Law. A Comparative and Functional Approach (OUP 2016) 180–83.

2 Second Directive Council 77/91/EEC on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent [1977] OJ L26/1.

3 Directive European Parliament and Council 2017/1132 relating to certain aspects of company law (codification) [2017] OJ L169/46.

4 See further in Section 2.

5 See further in Section 3.

6 See further in Section 2.

7 Gur Aminadav and Elias Papaioannou, ‘Corporate Control around the World’ [2020] Journal of Finance 1191, 1205.

8 Aminadav and Papaioannou (n 7).

9 This is the criticism from Lund on the article by Nili and Kastiel mentioned in the previous footnote: Dorothy Lund, ‘In Search of Good Corporate Governance’ [2022] Yale Law Journal Forum 854.

10 See for a discussion of the different agency problems: John Armour and others, ‘What is Corporate Law?’ in Reinier Kraakman et al. (eds), The Anatomy of Corporate Law. A Comparative and Functional Approach (OUP 2016) 2.

11 Jesse Fried and Holger Spamann, ‘Cheap-stock Tunneling Around Preemptive Rights’ [2020] Journal of Financial Economics 353.

12 Making this argument: Edward Rock and others, ‘Fundamental Changes’ in Reinier Kraakman et al. (eds), The Anatomy of Corporate Law. A Comparative and Functional Approach (OUP 2016) 181–82; Eilis Ferran and Look Chan Ho, Principles of Corporate Finance Law (OUP 2014) 109.

13 Jesse Fried, ‘Powering Preemptive Rights with Presubscription Disclosure’ in Luca Enriques and Tobias Tröger (eds), The Law and Finance of Related Party Transactions (CUP 2019) 80, citing Edward Rock and others, ‘Fundamental Changes’ in Reinier Kraakman et al. (eds), The Anatomy of Corporate Law. A Comparative and Functional Approach (OUP 2016) 182 (‘preemptive rights […] discourage controlling shareholders from acquiring additional shares from the firm at low prices’); Simeon Djankov and others, ‘The Law and Economics of Self-Dealing’ [2008] Journal of Financial Economics 430, 454 (‘in the absence of preemptive rights, insiders may expropriate minority shareholders by offering shares to related parties, or even to themselves, at below-market prices’).

14 See, for example: Marco Ventoruzzo, ‘Issuing New Shares and Preemptive Rights: A Comparative Analysis’ [2013] Richmond Journal of Global Law & Business 517, 520; Eilis Ferran and Look Chan Ho, Principles of Corporate Finance Law (OUP 2014) 107; Louise Gullifer and Jennifer Payne, Corporate Finance Law: Principles and Policy (Hart 2015) 135.

15 Jesse Fried and Holger Spamann, ‘Cheap-Stock Tunneling Around Preemptive Rights’ [2020] Journal of Financial Economics 353.

16 I discuss this issue in a separate article: Tom Vos, ‘The transaction structure of rights offerings in France and Belgium’, working paper on file with the author. It is also discussed in Section 6.4 of my doctoral thesis: Tom Vos, Shareholder protection in share issuances. A comparative law and economics approach (unpublished doctoral thesis KU Leuven 2021).

17 Ronald J Gilson, ‘Controlling Shareholders and Corporate Governance: Complicating the Comparative Taxonomy’ [2006] Harvard Law Review 1641, 1651.

18 Zohar Goshen and Assaf Hamdani, ‘Corporate Control and Idiosyncratic Vision’ [2016] Yale Law Journal 560, 560 and 566.

19 Luca Enriques and Paolo Vulpin, ‘Corporate Governance Reforms in Continental Europe’ [2007] Journal of Economic Perspectives 117, 122.

20 Luca Enriques and Matteo Gatti, ‘Creeping Acquisitions in Europe: Enabling Companies to be Better Safe than Sorry’ [2015] Journal of Corporate Law Studies 55, 63.

21 Compare, for example, the arguments against takeover defences generally: Lucian Bebchuk, ‘The Case Against Board Veto in Corporate Takeovers’ [2002] University of Chicago Law Review 973; Paul Davies, Klaus Hopt and Wolf-Georg Ringe, ‘Control Transactions’ in Reinier Kraakman et al. (eds), The Anatomy of Corporate Law. A Comparative and Functional Approach (OUP 2016) 207; with some of the arguments against takeover defences: Martin Lipton, ‘Takeover Bids in the Target’s Boardroom’ [1979] Business Lawyer 101, 108 and 113–16; Zohar Goshen and Richard Squire, ‘Principal Costs: A New Theory for Corporate Law and Governance’ [2017] Columbia Law Review 767, 817.

22 A pre-emption right is essentially an option for the minority shareholder, which only has value as long as the market price of the shares is above the issue price. See: DTI, Pre-Emption Rights: Final Report. A study by Paul Myners into the impact of shareholders’ pre-emption rights on a public company’s ability to raise new capital’ (URN 05/679, February 2005) 11.

23 Michael C Jensen, ‘Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers [1986] American Economic Review 323. According to Jensen, free cash flows are cash flows in excess of those required to fund all valuable projects of the corporation.

24 For sources that (implicitly or explicitly) make this argument, see: Alain Couret, Le droit préferentiel de souscription de l’actionnaire (unpublished doctoral thesis, Université de Toulouse 1978) 176–77; Julian Franks, Colin Mayer and Luc Renneboog, ‘Who Disciplines Management in Poorly Performing Companies?’ [2001] Journal of Financial Intermediation 209; Eilis Ferran, ‘Legal Capital Rules and Modern Securities Markets – The Case for Reform, as Illustrated by the UK Equity Markets’ in Klaus Hopt and Eddy Wymeersch (eds), Capital Markets and Company Law (OUP 2003) 121–22; DTI, Pre-Emption Rights: Final Report. A study by Paul Myners into the impact of shareholders’ pre-emption rights on a public company’s ability to raise new capital’ (URN 05/679, February 2005) 12; Eilis Ferran and Look Chan Ho, Principles of Corporate Finance Law (OUP 2014) 106; Louise Gullifer and Jennifer Payne, Corporate Finance Law: Principles and Policy (Hart 2015) 138; Paul Davies and Sarah Worthington, Gower’s Principles of Modern Company Law (10th edn, Sweet & Maxwell 2016) 813.

25 Julian Franks, Colin Mayer and Luc Renneboog, ‘Who Disciplines Management in Poorly Performing Companies?’ [2001] Journal of Financial Intermediation 209, 244 (‘managers have incentives to drop pre-emption rights to allow equity issues to be made to new shareholders at a discount to the equilibrium price, thereby diluting existing shareholder wealth. The discount would be in exchange for implicit or explicit agreements to new shareholders to leave existing management in place’).

26 Bernard S Black and John C Coffee, Jr., ‘Hail Britannia? Institutional Investor Behavior under Limited Regulation’ [1994] Michigan Law Review 1997, 2037 (‘companies know that if they attempt a coercive, deep discount offer, they are likely to face a shareholder revolt at the next annual meeting, and investment bankers know that a coercive rights offering will alienate their best customers’); Julian Franks, Colin Mayer and Luc Renneboog, ‘Who Disciplines Management in Poorly Performing Companies?’ [2001] Journal of Financial Intermediation 209, 228 (‘senior management at the largest fund managers in the United Kingdom informed us that although they might intervene where there was very poor performance, in the face of management opposition, they were likely to avoid confrontation because they disliked the consequent publicity and the costs of organizing other shareholders. However, it was a different story when the poorly performing company required new financing: ‘it comes to a crunch when companies raise additional finance’ or ‘it all unpicks when a company needs money.’).

27 See for such arguments, for example: John Armour and others, ‘Private Enforcement of Corporate Law: An Empirical Comparison of the United Kingdom and the United States’ [2009] Journal of Empirical Legal Studies 687; Martin Gelter, ‘Why Do Shareholder Derivative Suits Remain Rare in Continental Europe?’ [2012] Brook Journal of International Law 843; John Armour, Henry Hansmann and Reinier Kraakman, ‘Agency Problems and Legal Strategies’ in Reinier Kraakman et al. (eds), The Anatomy of Corporate Law. A Comparative and Functional Approach (OUP 2016) 41–42.

28 Zohar Goshen and Richard Squire, ‘Principal Costs: A New Theory for Corporate Law and Governance’ [2017] Columbia Law Review 767.

29 Noting this problem, for example: Louise Gullifer and Jennifer Payne, Corporate Finance Law: Principles and Policy (Hart 2015) 130; Eilis Ferran and Look Chan Ho, Principles of Corporate Finance Law (OUP 2014) 110–11.

30 Stephen Bainbridge, ‘Director Primacy and Shareholder Disempowerment’ [2006] Harvard Law Review 1735, 1745; Frank Easterbrook and Daniel Fischel, The Economic Structure of Corporate Law (Harvard University Press 1991) 66–67; Sanford Grossman and Oliver Hart, ‘One Share – One Vote and the Market for Corporate Control’ [1988] Journal of Financial Economics 175; Bernard S Black, ‘Agents Watching Agents: The Promise of Institutional Investor Voice’ [1992] UCLA Law Review 811, 821–22; Bernard S Black, ‘Shareholder Passivity Reexamined’ [1990] Michigan Law Review 520, 526–29.

31 See, for example: Edward Rock and others, ‘Fundamental changes’ in Reinier Kraakman et al. (eds), The Anatomy of Corporate Law. A Comparative and Functional Approach (OUP 2016) 182: Marco Ventoruzzo, ‘Issuing New Shares and Preemptive Rights: A Comparative Analysis’ [2013] Richmond Journal of Global Law & Business 517, 518 and 521.

32 Under the EU Prospectus Regulation, rights offerings will normally constitute an offer to the public in the member states where the corporation is listed, and will therefore require a prospectus, unless one of the exemptions to the prospectus requirement applies, for example if the corporation has fewer than 150 investors who are not qualified investors or if the issuance is sufficiently small. See: Charles Howarth and Amy Waddington, ‘Private placements’ in Raj Panasar and Philip Boeckman (eds), European Securities Law (OUP 2021) 235; Marie-Laurence Tibi, ‘France’ in Raj Panasar and Philip Boeckman (eds), European Securities Law (OUP 2021) 767–68.

33 Charles Cardon, ‘L’augmentation du capital par placement privé issue de l’ordonnance du 22 janvier 2009’ [2009] RTDF 45, 51–52.

34 See, for example: Michael C Jensen, ‘Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers [1986] American Economic Review 323, 324 (‘The control function of debt is more important in organizations that generate large cash flows but have low growth prospects, and even more important in organizations that must shrink’). See also: Richard A Brealy, Stewart C Myers and Franklin Allen, Principles of Corporate Finance (13th edn, McGraw-Hill 2020) 500.

35 See, for example: Harry DeAngelo, Linda DeAngelo and René M Stulz, ‘Seasoned Equity Offerings, Market Timing, and the Corporate Lifecycle’ [2010] Journal of Financial Economics 275 (finding evidence in support of the lifecycle theory that young firms with low operating cash flows issue shares to fund investments, while more mature firms pay out dividends and fund investment internally, although the lifecycle theory cannot explain all share issuances).

36 Article 7:177 Belgian Companies Code; article L225-129 French Commercial Code; section 549 and 551 of the UK Companies Act.

37 Peter Böckli and others, ‘The Consequences of Brexit for Companies and Company Law’ (2016) University of Cambridge Faculty of Law Research Paper No. 22/2017 <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2926489>.

38 Article 7:177 iuncto article 7:153 Belgian Companies Code; article L225-129 iuncto L225-96 French Commercial Code.

39 Section 551(8) iuncto section 282 UK Companies Act and section 571 iuncto section 283 UK Companies Act, respectively.

40 This possibility has been implemented by the following provisions: section 549 and 551 UK Companies Act; articles L225-129-1 and L225-129-2 French Commercial Code; article 7:198 Belgian Companies Code.

41 Stefan Grundmann, European Company Law (Intersentia 2012) 236.

42 Section 570 UK Companies Act 2006; article L225-129-2, subsection 3 iuncto article L225-135 and following French Commercial Code; article 7:200, 1° Belgian Companies Code.

43 Article 7:202 of the Belgian Companies Code. This provision also limits the size of the issuance to 10% of capital and requires an issue price that is at least equal to the bid price. In addition, it limits the duration of the authorization to three years.

44 Article L233-32, I of the French Commercial Code.

45 Article 21 of the Takeover Code limits the use of defensive measures in general (including share issuances) in response to a takeover bid. See also: article 7:201 Belgian Companies Code (prohibition for authorisations with regard to the issuance of subscription rights, shares with multiple voting rights, shares in exchange for a contribution in kind by a 10% shareholder or a new class of shares); article L225-147 French Commercial Code (with regard to shares issued in exchange for contributions in kind, with some exceptions in article L22-10-53 French Commercial Code). In the UK, the Listing Rules also require shareholder approval for certain share issuances, for example, for share issuances to related parties (LR 11) or for share issuances at a discount higher than 10% (LR 9.5.10), with exceptions for rights issues.

46 Article 7:199 Belgian Companies Code; section 551(3) and (4) UK Companies Act 2006.

47 Article L225-129-2 French Commercial Code (the so-called ‘délégation de competence’). The general meeting can also decide on the share issuance itself but delegate the modalities of implementation to the board of directors, a ‘délégation de pouvoir’ (article L225-129-1 iuncto article L225-129 French Commercial Code). The latter delegation is valid for five years. In practice, however, listed corporations in France always opt for a shorter, but more general authorization, as appears from the empirical research described in Section 5.2.

48 Article L225-138, III French Commercial Code.

49 This requirement has been implemented by the following provisions: Article 7:188 Belgian Companies Code; article L225-132 French Commercial Code; section 561 UK Companies Act.

50 Article L225-132, subsection 3 French Commercial Code; article 7:189, subsection 4 Belgian Companies Code; section 561(2) UK Companies Act. However, corporations can disapply pre-emption rights and grant shareholders extra-statutory non-transferable pre-emption rights. See for France: Renaud Mortier, Opérations sur capital social (LexisNexis 2015) 236–37 and 244–47; Alain Couret and Hervé Le Nabasque, Valeurs mobilières. Augmentations de capital. Nouveau régime. Ordonnances des 25 mars et 24 juin 2004 (Editions Francis Lefebvre 2004) 122–26. See for Belgium: Marieke Wyckaert and Joris De Wolf, ‘Transacties met verbonden partijen in genoteerde vennootschappen na SRD II’ [2020] Bank en Financieel Recht 247, 257. See for the UK: Louise Gullifer and Jennifer Payne, Corporate Finance Law: Principles and Policy (Hart 2015) 136.

51 See also the implementation in the following provisions: article 7:191 Belgian Companies Code; article 7:193 Belgian Companies Code; article L225-135 French Commercial Code; article L225-138 French Commercial Code; section 571(6) UK Companies Act; UK Listing Rule 13.8.2.

52 Stefan Grundmann, European Company Law (Intersentia 2012) 239–40. See also: ECJ 19 November 1996, Case C-42/95 Siemens AG v. Henry Nold [1996] ECR I-06017-I (holding that member states may also grant pre-emption rights when shares are issued in exchange for a contribution in kind and that they may subject the disapplication of pre-emption rights to additional conditions).

53 See, for example: article 7:193 Belgian Companies Code (voting prohibition for 10% shareholders in whose favour pre-emption rights are disapplied); article 7:200, 2° Belgian Companies Code (voting prohibition for directors who are a de facto representative of a counterparty in a non-pre-emptive share issuance); article 7:97 Belgian Companies Code (voting prohibition for directors who are ‘involved’ in a transaction with a related party, which includes non-pre-emptive share issuances to related parties); article L225-138 French Commercial Code (voting prohibition for shareholders in whose favour pre-emption rights are disapplied); UK Listing Rule 11.1.7 (voting prohibition for shareholders who participate in related party transactions, which includes non-pre-emptive share issuances to related parties).

54 See for the UK: Listing Rule 9.5.10 (maximum discount of 10% for share issuances that are not a rights issue with transferable rights, unless a higher discount is specifically approved by shareholders). See for France: articles L225-136 and R22-10-32 French Commercial Code. However, for a limit of 10% of capital per year, the general meeting can authorise the board to decide on a share issuance with a higher discount (article L22-10-52, subsection 2 French Commercial Code). In addition, the 10% limit to the discount does not apply when shares are issued to one or more persons designated by name or to categories of persons sharing certain characteristics (article L225-138 French Commercial Code). This arguably allows corporations to circumvent the limit to the discount. See: Stéphane Torck, ‘Position AMF sur les offres de titres financiers par placement privé: la voie de la raison’ [2012] Droit des sociétés 168, para 3; Renaud Mortier, Opérations sur capital social (LexisNexis 2015) 252–53; Michael Loy, ‘L’augmentation de capital sans droit préférentiel de souscription par placement privé (Ordonnance n° 2009-80 du 22 janvier 2009)’ [2009] JCP E 1766, para 8. See also further in Section 5 about this possibility of circumvention.

55 Explanatory Statement on the New Belgian Companies Code, Parliamentary Proceedings Chamber of Representatives (2017-2018), nr. 3119/001, 260.

56 Article L225-136 iuncto article L225-138 French Commercial Code.

57 The Investment Association, ‘Share Capital Management Guidelines’ (July 2016) <https://www.theia.org/sites/default/files/2019-06/20160701-SCM-Share-Capital-Management-Guidelines.pdf> (hereinafter ‘Share Capital Management Guidelines’).

58 See for a more detailed discussion of the difference between rights issues and open offers: Seth Armitage, ‘Discounts in Placing Pre-renounced Shares in Rights Issues’ [2007] Journal of Business Finance & Accounting 1345; Eilis Ferran and Look Chan Ho, Principles of Corporate Finance Law (OUP 2014) 116–17 and 124–25.

59 Pre-Emption Group, ‘Disapplying pre-emption rights. A statement of principles’ (2015) <https://www.frc.org.uk/medialibraries/FRC/FRC-Document-Library/Preemption%20Group/Revised-PEG-Statement-of-Principles-2015.pdf> (hereinafter ‘Pre-emption Guidelines’).

60 Charles Howarth and Amy Waddington, ‘Private Placements’ in Raj Panasar and Philip Boeckman (eds), European Securities Law (OUP 2021) 236.

61 Part 2A, paragraph 4 of the Pre-emption Guidelines.

62 ISS, ‘Continental Europe – Proxy Voting Guidelines – Benchmark Policy Recommendations’ (12 March 2021), 17–18 <https://www.issgovernance.com/file/policy/active/emea/Europe-Voting-Guidelines.pdf>; Glass Lewis, ‘Guidelines. An Overview of the Glass Lewis Approach to Proxy Advice. France’ (2021), 18–19 <https://www.glasslewis.com/wp-content/uploads/2020/11/UK-Voting-Guidelines-GL.pdf?hsCtaTracking=76856133-1eee-4e4c-b972-823beec7dfa8%7Cd5c0d76d-1d22-4947-bdcf-2e91b6b21322>; Proxinvest, ‘Principes de gouvernement d’entreprise et Politique de vote 2021’ (January 2021) 65–66 <https://www.proxinvest.com/wp-content/uploads/2021/01/Politique_de_vote_Proxinvest_2021.pdf> ; AFG, ‘Recommandations sur le gouvernement d’entreprise’ (January 2021), 7 <https://www.afg.asso.fr/wp-content/uploads/2021/01/afg-tref-gouve-210119web.pdf>.

63 Blackrock Investment Stewardship, ‘Proxy voting guidelines for European, Middle Eastern, and African securities’ (January 2021), 9–10 and 22 <https://www.blackrock.com/corporate/literature/fact-sheet/blk-responsible-investment-guidelines-emea.pdf>; Vanguard Funds, ‘Summary of the Proxy Voting Policy for UK and European Portfolio Companies’ (1 December 2020), 10 <https://about.vanguard.com/investment-stewardship/portfolio-company-resources/INEUPOL_122020.pdf>; State Street Global Advisors, ‘Proxy Voting and Engagement Guidelines. Europe’ (March 2021), 6 <https://www.ssga.com/library-content/pdfs/ic/proxy-Voting-and-engagement-guidelines-europe.pdf>.

64 ISS, ‘Continental Europe – Proxy Voting Guidelines – Benchmark Policy Recommendations’ (12 March 2021), 17 <https://www.issgovernance.com/file/policy/active/emea/Europe-Voting-Guidelines.pdf>; Blackrock Investment Stewardship, ‘Proxy Voting Guidelines for European, Middle Eastern, and African Securities’ (January 2021), 9–10 and 12 <https://www.blackrock.com/corporate/literature/fact-sheet/blk-responsible-investment-guidelines-emea.pdf>; Vanguard Funds, ‘Summary of the Proxy Voting Policy for UK and European Portfolio Companies’ (1 December 2020), 10, <https://about.vanguard.com/investment-stewardship/portfolio-company-resources/INEUPOL_122020.pdf>; State Street Global Advisors, ‘Proxy Voting and Engagement Guidelines. Europe’ (March 2021), 6 <https://www.ssga.com/library-content/pdfs/ic/proxy-Voting-and-engagement-guidelines-europe.pdf>

65 Glass Lewis, ‘Guidelines. An Overview of the Glass Lewis Approach to Proxy Advice. Belgium’ (2021), 13 <https://www.glasslewis.com/wp-content/uploads/2020/12/Belgium-Voting-Guidelines-GL.pdf?hsCtaTracking=caa2141d-4296-4d70-b1b0-555f8c9109fb%7C367fa4c2-c9d8-4a10-a453-566158125328>.

66 ISS, ‘Continental Europe – Proxy Voting Guidelines – Benchmark Policy Recommendations’ (12 March 2021), 27 <https://www.issgovernance.com/file/policy/active/emea/Europe-Voting-Guidelines.pdf>; Glass Lewis, ‘Guidelines. An Overview of the Glass Lewis Approach to Proxy Advice. Belgium’ (2021), 13 <https://www.glasslewis.com/wp-content/uploads/2020/12/Belgium-Voting-Guidelines-GL.pdf?hsCtaTracking=caa2141d-4296-4d70-b1b0-555f8c9109fb%7C367fa4c2-c9d8-4a10-a453-566158125328>; Glass Lewis, ‘Guidelines. An Overview of the Glass Lewis Approach to Proxy Advice. France’ (2021), 20–21 <https://www.glasslewis.com/wp-content/uploads/2020/11/UK-Voting-Guidelines-GL.pdf?hsCtaTracking=76856133-1eee-4e4c-b972-823beec7dfa8%7Cd5c0d76d-1d22-4947-bdcf-2e91b6b21322>; Proxinvest, ‘Principes de gouvernement d’entreprise et Politique de vote 2021’ (January 2021), 65–66 <https://www.proxinvest.com/wp-content/uploads/2021/01/Politique_de_vote_Proxinvest_2021.pdf>; AFG, ‘Recommandations sur le gouvernement d’entreprise’ (January 2021), 7 <https://www.afg.asso.fr/wp-content/uploads/2021/01/afg-tref-gouve-210119web.pdf>; Blackrock Investment Stewardship, ‘Proxy Voting Guidelines for European, Middle Eastern, and African Securities’ (January 2021), 22–23 <https://www.blackrock.com/corporate/literature/fact-sheet/blk-responsible-investment-guidelines-emea.pdf>; State Street Global Advisors, ‘Proxy Voting and Engagement Guidelines. Europe’ (March 2021), 7 <https://www.ssga.com/library-content/pdfs/ic/proxy-Voting-and-engagement-guidelines-europe.pdf>

67 Louise Gullifer and Jennifer Payne, Corporate Finance Law: Principles and Policy (Hart 2015) 137; Eilis Ferran and Look Chan Ho, Principles of Corporate Finance Law (OUP 2014) 125; Paul Davies and Sarah Worthington, Gower’s Principles of Modern Company Law (10th edn, Sweet & Maxwell 2016) 812 (arguing that the Pre-emption Guidelines constitute ‘a ‘strong’ default rule whose alteration creates a significant hurdle for the management of the company’.

68 Proxy advisors are firms that generally offer research and voting advice to institutional shareholders. A list of proxy advisors in the UK can be found on the website of the FCA: https://www.fca.org.uk/markets/primary-markets/proxy-advisors. See for the voting guidelines: ISS, ‘United Kingdom and Ireland Proxy Voting Guidelines’ (19 November 2020), 26 <https://www.issgovernance.com/file/policy/active/emea/UK-and-Ireland-Voting-Guidelines.pdf>; Glass Lewis, ‘Guidelines. An Overview of the Glass Lewis Approach to Proxy Advice. United Kingdom’ (2021), 36–37 <https://www.glasslewis.com/wp-content/uploads/2020/11/UK-Voting-Guidelines-GL.pdf?hsCtaTracking=76856133-1eee-4e4c-b972-823beec7dfa8%7Cd5c0d76d-1d22-4947-bdcf-2e91b6b21322> Another proxy advisor, Minerva Analytics, does not publish voting guidelines, as its clients have bespoke voting policies, but it also takes the Pre-emption Guidelines as the starting point. E-mail conversation with Sarah Wilson (CEO of Minerva Analytics), 25 May 2021, on file with the author.

69 Pre-Emption Group, ‘Monitoring Report May 2017’, 11 <https://www.frc.org.uk/medialibraries/FRC/FRC-Document-Library/Preemption%20Group/170512-PEG-monitoring-report.pdf>; Pre-Emption Group, ‘Monitoring report May 2016’, 12 <https://www.frc.org.uk/medialibraries/FRC/FRC-Document-Library/Preemption%20Group/PEG-Monitoring-Report.pdf>

70 Pre-Emption Group, ‘Monitoring Report May 2017’, 3, 6 and 8 <https://www.frc.org.uk/medialibraries/FRC/FRC-Document-Library/Preemption%20Group/170512-PEG-monitoring-report.pdf>.

71 For the collection of the data, I am indebted to Theo Monnens, a research assistant who worked under my supervision.

72 The so-called ‘Gereglementeerde vastgoedvennootschap’ (GVV)/’sociétés immobilières réglementées’ (SIR). These corporations are governed by the Law of 12 May 2014 ‘betreffende de gereglementeerde vastgoedvennootschappen’ [concerning regulated real estate corporations’], Belgian Official Journal 30 June 2014. For example, article 26 of that law stipulates that regulated real estate corporation can only issue shares on a pre-emptive basis (although the statutory pre-emption rights may be replaced by extra-statutory pre-emption rights that are not transferable and have a shorter exercise period), except within the framework of the authorized capital for an amount of 10% of share capital per 12 months.

73 The closed-end investment fund is Quest for Growth, a so-called ‘privak’/‘pricafs’, which invests in non-listed corporations and growth corporations. Such a corporation is subject to the Royal Decree of 10 July 2016 ‘met betrekking tot de alternatieve instellingen voor collectieve belegging in niet-genoteerde vennootschappen en in groeibedrijven’ [concerning alternative funds for the investment in non-listed corporations and growth corporations], Belgian Official Journal 4 August 2016. Article 7 of that decree states that a private investment corporation can, in principle, only issue shares on a pre-emptive basis (although the statutory pre-emption rights may be replaced by extra-statutory pre-emption rights that are not transferable and have a shorter exercise period).

74 See on the Nyrstar restructuring: ‘Beurswaakhond vraagt Nyrstar vereffening uit te stellen’ (De Tijd, 2 June 2020).

75 More specifically, I excluded the following corporations for this reason: Vallourec, Air France – KLM, Compagnie des Alpes, Technicolor and Latécoère.

76 In some cases, the amount of the authorization as a percentage of share capital is not mentioned, in which case this information was obtained from other sources, such as the annual report, the universal registration document or the minutes of the general meeting.

77 Of the 130 French corporations with an authorisation, 55 (42%) stipulate a lower percentage for private placements. In 34 of these corporations (62%), the lower percentage was 20% of share capital, which is the legal maximum for authorisations to issue shares through a private placement (Article L225-136 iuncto article L225-138 French Commercial Code – see above in Section 3).

78 I also ran the regressions with the aggregate institutional ownership at the moment of data collection (July 2022) instead of my measure of the historical aggregate institutional ownership. This change does not materially affect the results.

79 This classification was developed in the following article: Eugene F. Fama and Kenneth R. French, ‘Industry Costs of Equity’ [1997] Journal of Financial Economics 153.

80 The statistical significance is stronger when fewer control variables are added to the model. The small sample makes it more difficult to detect statistically significant results when adding more control variables.

81 See generally about the incentives of institutional investors to monitor their portfolio corporations: Lucian Bebchuk, Alma Cohen and Scott Hirst, ‘The Agency Problems of Institutional Investors’ [2017] Journal of Economic Perspectives 89.

82 See, for example: James Stock and Mark Watson, Introduction to econometrics (Pearson 2020) 230–31. However, in all of the models, the Variance Inflation Factor (VIF) is significantly below 10, typically considered to be an indication of problematic multicollinearity.

83 The database that I use, S&P Capital IQ Pro, unfortunately does not contain historical aggregates of institutional ownership, so I had to aggregate the data manually from the current largest 200 institutional investors in the corporation. However, this introduces some noise in the measurement of institutional ownership.

84 Recall that the default rule is different in Belgium and in France: in Belgium, authorisations can only be used as a takeover defence if they allow this explicitly; in France, authorisations can be used as a takeover defence unless provided otherwise. See above in Section 3.

85 Angrist and Pischke argue that a linear probability model (essentially an OLS regression with a binary dependent variable), as is used here, is more appropriate and easier to interpret in many circumstances than a probit model. See: Joshua Angrist and Jörn-Steffen Pischke, Mostly Harmless Econometrics: An Empiricist’s Companion (Princeton University Press 2009) 94–107. In any case, the results are very similar if a probit model is used.

86 See for empirical evidence on shareholder structures: Gur Aminadav and Elias Papaioannou, ‘Corporate Control Around the World’ [2020] Journal of Finance 1191, 1205.

87 Adriana De La Cruz, Alejandra Medina and Yung Tang, ‘Owners of the World’s Listed Companies’ (17 October 2019), OECD Capital Markets Series, 37 <http://www.oecd.org/corporate/Owners-of-the-Worlds-Listed-Companies.htm>.

88 Yaron Nili and Kobi Kastiel, ‘The Corporate Governance Gap’ [2022] Yale Law Journal 782 (providing novel empirical evidence on various corporate governance provisions in the US for a large sample of both small and large corporations and finding that smaller corporations have not moved away from provisions that entrench insiders to the same extent as larger corporations have; Nili and Kastiel do not study authorisations to issue shares; however, as such provisions are not used in the US to discipline insiders, their explanations of the corporate governance gap remain relevant).

89 Asaf Eckstein, ‘The Rise of Corporate Guidelines in the Unites States, 2005–2021: Theory and Evidence’ [2022] Indiana Law Journal (forthcoming), 7 <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3705140#> (finding that larger corporations in the US are more likely to reference corporate governance guidelines of (associations of) institutional investors in their proxy statement).

90 See for an empirical study of shareholder proposals in several countries, including Belgium and France: Viktor Verheyden, ‘When Shareholders Use Their Rights to Convene Meetings and to Submit Proposals. A Comparative and Empirical Analysis of Activism in Four EU Member States’ [2020] Tijdschrift voor Rechtspersoon en Vennootschap – Revue pratique des sociétés 975.

91 See for a similar argument that more frequent votes give shareholders more power to hold managers accountable, but with regard to director elections: Lucian Bebchuk, ‘The Myth of the Shareholder Franchise’ [2007] 675 Virginia Law Review 695–96.

92 Cass. com. (FR) 25 September 2012, Bulletin Joly Sociétés 2012, 847, note Renaud Mortier; Position-recommendation AMF DOC-2020-06, ‘Guide d’élaboration des prospectus et information à fournir en cas d’offre au public ou d’admission de titres financiers’ (29 April 2021), 87 <https://www.amf-france.org/sites/default/files/private/2021-04/2020-06.pdf>

93 Separate resolutions are provided for by the template resolutions drafted by the Pre-Emption Group: Pre-Emption Group, ‘Template Resolutions for the Disapplication of pre-Emption Rights Complying with the Pre-Emption Group’s Statement of Principles’, 4 <https://www.frc.org.uk/medialibraries/FRC/FRC-Document-Library/Preemption%20Group/PEG-Template-resolution-for-disapplication-of-pre-emption-rights.pdf>.

94 Pre-Emption Group, ‘Monitoring Report May 2017’, 4 <https://www.frc.org.uk/medialibraries/FRC/FRC-Document-Library/Preemption%20Group/170512-PEG-monitoring-report.pdf>.

95 Article 7:202 of the Belgian Companies Code.

96 Yaron Nili and Kobi Kastiel, ‘The Corporate Governance Gap’ [2022] Yale Law Journal 782.

97 Dorothy Lund, ‘In Search of Good Corporate Governance’ [2022] Yale Law Journal Forum 854.

98 This is the position taken by Dorothy Lund, at least with regard to passive institutional investors: Dorothy Lund, ‘In Search of Good Corporate Governance’ [2022] Yale Law Journal Forum 854. See also in more detail: Dorothy Lund, ‘The Case Against Passive Shareholder Voting’ [2018] Journal of Corporation Law 493.

99 See for this argument: Lucian Bebchuk, Alma Cohen and Scott Hirst, ‘The Agency Problems of Institutional Investors’ [2017] 89 Journal of Economic Perspectives 102–3. See for empirical evidence: Gerald F Davis and E Han Kim, ‘Business Ties and Proxy Voting by Mutual Funds’ [2007] Journal of Financial Economics 552 (finding that fund families with more pension-related business ties to corporations vote more often with management with regard to shareholder proposals in general); Rasha Ashraf, Narayanan Jayaraman and Harley E Ryan, JR., ‘Do Pension-Related Business Ties Influence Mutual Fund Proxy Voting? Evidence from Shareholder Proposals on Executive Compensation’ [2012] Journal of Financial and Quantitative Analysis 567 (finding that fund families with more pension-related business ties to corporations vote more often with management with regard to votes on executive compensation); Dragana Cvijanovi, Amil Dasgupta and Konstantinos E Zachariadis, ‘Ties That Bind: How Business Connections Affect Mutual Fund Activism’ [2016] Journal of Finance 2933 (providing empirical evidence in the US between 2003 and 2011 that mutual fund families with business ties to the corporation (through the management of pension plans) vote more often with management on shareholder proposals in closely contested votes); Lucian Bebchuk and Scott Hirst, ‘Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy’ [2019] Columbia Law Review 2091 (providing evidence that the three biggest index funds tend to vote with management in say-on-pay votes, much more often than more actively managed funds do and more often than proxy advisors recommend).

Additional information

Funding

This work was supported by Fonds Wetenschappelijk Onderzoek.

Notes on contributors

Tom Vos

Tom Vos, a researcher and visiting professor at the Jean-Pierre Blumberg Chair in corporate governance of the University of Antwerp, a voluntary scientific collaborator at the Jan Ronse Institute for Company and Financial Law of the KU Leuven and an attorney at Linklaters LLP (Belgium).