One share - one vote : a european rule?

In this paper, I tackle the question whether one share - one vote should become a European law rule. I examine, first of all, the economic theory concerning one share - one vote and its optimality, and the law and economics literature on dual class recapitalizations and other deviations from one share - one vote. I also consider the agency costs of deviations from one share - one vote and examine whether they justify regulation. I subsequently analyze the rules implementing the one share - one vote standard in the US and Europe. In particular, I analyze the self-regulatory rules of US exchanges, the relevant provisions of the European Takeover Directive (including the well known break-through rule), and the European Court of Justice's position as to golden shares (which also are deviations from the one share - one vote standard). I conclude that one share - one vote is not justified by economic efficiency, as also confirmed by comparative law. Also the European breakthrough rule, which ultimately strikes down all deviations from one share - one vote, does not appear to be well grounded. Only transparency rules appear to be justified at EU level as disclosure of ownership and voting structures serves a pricing and governance function, while harmonisation of the relevant rules reduces transaction costs in integrated markets

The European Model Company Law Act project

On 27 and 28 September 2007, a commission formed on the initiative of the authors held its first meeting in Aarhus, Denmark to deliberate on its goal of drafting a "European Model Company Law Act" (EMCLA). This project, outlined in the following pages, aims neither to force a mandatory harmonization of national company law nor to create a further, European corporate form. The goal is rather to draft model rules for a corporation that national legislatures would be free to adopt in whole or in part. Thus, the project is thought as an alternative and supplement to the existing EU instruments for the convergence of company law. The present EU instruments, their prerequisites and limits will be discussed in more detail in Part II, below. Part III will examine the US experience with such "model acts" in the area of company law. Part IV will then conclude by discussing several topics concerning the content of an EMCLA, introducing the members of the EMCLA Working Group, and explaining the Group's preliminary working plan

European Takeover Law: The Case for a Neutral Approach

This paper argues that in revising the Takeover Bid Directive, EU policymakers should adopt a neutral approach toward takeovers, i.e. enact rules that neither hamper nor promote them. The rationale behind this approach is that takeovers can be both value-creating and value-decreasing and there is no way to tell ex ante whether they are of the former or the latter kind. Unfortunately, takeover rules cannot be crafted so as to hinder all the bad takeovers while at the same time promoting the good ones. Further, contestability of control is not cost-free, because it has a negative impact on managers’ and block-holders’ incentives to make firm-specific investments of human capital, which in turn affects firm value. It is thus argued that individual companies should be able to decide how contestable their control should be. After showing that the current EC legal framework for takeovers overall hinders takeover activity in the EU, the paper identifies three rationales for a takeover-neutral intervention of the EC in the area of takeover regulation (pre-emption of “takeover-hostile,” protectionist national regulations, opt-out rules protecting shareholders vis-à-vis managers’ and dominant shareholders’ opportunism in takeover contexts, and menu rules helping individual companies define their degree of control contestability) and provides examples of rules that may respond to such rationales.Takeover Bid Directive, Board Neutrality, Mandatory Bid Rule, Market for Corporate Control

The new financial stability architecture in the EU

After the introduction of the euro in 1999, the debate on the financial stability architecture in the EU focused on the adequacy of a decentralised setting based on national responsibilities for preventing and managing crises. The Financial Services Action Plan in 1999 and the introduction of the Lamfalussy process for financial regulation and supervision in 2001 enhanced the decentralised arrangements by increasing significantly the level of legal harmonisation and supervisory cooperation. In addition, authorities adopted EU-wide MoUs to safeguard cross-border financial stability. In this context, the financial crisis has proved to be a major challenge to the ongoing process of European financial integration. In particular, momentous events such as the freezing of interbank markets, the loss of confidence in financial institutions, runs on banks and difficulties affecting cross-border financial groups, questioned the ability of the EU financial stability architecture to contain threats to the integrated single financial market. In particular, the crisis has demonstrated the importance of coupling to micro-prudential supervision a macro dimension aimed at a broad and effective monitoring and assessment of the potential risks covering all components of the financial system. In Europe, following the de Larosière Report, the European Commission has put forward proposals for establishing a European System of Financial Supervision and a European Systemic Risk Board, the latter body to be set up under the auspices of the ECB. While the details for the implementation of these structures still need to be spelt out, they should reinforce significantly – ten years after the introduction of the euro – the financial stability architecture at the EU level

Regulating financial market infrastructures

This paper focuses on the impact of financial market infrastructures (FMIs) and of their regulation on the post-crisis transformation of securities and derivatives markets. It examines, in particular, the role that trading and post-trading FMIs, and their new regulatory regime, are playing in the expansion of ‘public’ securities and derivatives markets, and the progressive shrinkage of ‘private’ markets (which broadly coincide with the ‘unregulated’ or ‘less regulated’ over-the-counter (OTC) markets). The paper provides an overview of the policy approaches underlying the international crisis-era reforms to FMIs, and focuses on the dichotomy between the ‘systemic risk’ and ‘transaction costs’ approaches to financial markets and FMIs regulation. By reviewing the current move from ‘private’ markets to ‘public’ markets internationally, and with respect to the EU and US regimes, we analyze the role of trading infrastructures as liquidity providers, both in the securities markets and in the derivatives markets. And, shifting the focus to post-trading infrastructures – central clearing houses (CCPs), central securities depositories (CSDs), and trade repositories (TRs) – we address their role in supporting financial stability and market transparency. We conclude by identifying how regulators are now more deeply involved in FMIs’ governance and operation. We argue that such policy approach resulted in regulatory initiatives which move in the direction of increasing the systemic scope of FMIs, introducing elements of publicity in private markets, and calling for higher public supervision. - This paper is a draft chapter for a forthcoming volume, "The Oxford Handbook on Financial Regulation," edited by Eilís Ferran, Niamh Moloney, and Jennifer Payne, (Oxford University Press)

Sustainability and Executive Compensation

Over the last few decades, executive pay has undergone several major reinterpretations, which have affected both its design and regulation. Our chapter provides an overview of the trajectory of executive pay, including the recent trend toward integration of sustainability and ESG targets in compensation packages. Our chapter also provides empirical evidence as to the prevalence of ESG-linked executive pay in public listed companies. Analysing a sample of 8.649 publicly traded firms covering 58 countries in the period 2002-2021, we show that a growing number of listed firms include drivers involving sustainable performance in their executive remuneration packages. However, we identify notable differences associated with sector and country characteristics in this regard. For example, we find that, in countries with better government features, firms are more likely to adopt ESG-linked compensation. Overall, our empirical analysis presents a mixed picture. Some of our findings could be consistent with the idea that ESG-linked compensation exacerbates the agency problem of executive pay. We cannot, however, rule out the possibility that such compensation provides a powerful incentive towards more sustainable corporate practices in the future

Economics, Politics, and the International Principles for Sound Compensation Practices: An Analysis of Executive Pay at European banks

In this Article, we submit that the compensation structures at banks before the financial crisis were not necessarily flawed and that recent reforms in this area largely reflect already existing best practices. In Part I we review recent empirical studies on corporate governance and executive pay at banks and suggest that there is no strong support for regulating bankers\u27 compensation structures. We also argue that detailed regulation of incentives would subtract essential decisionmaking powers from boards of directors and make compensation structures too rigid. In Part II we note that political support for regulating bankers\u27 pay has been strong and led to reforms promoting long- term incentives to executives on the assumption that short-term incentives were a cause of the crisis. The Financial Stability Board Principles for Sound Compensation Practices (the Principles\u27) follow this trend, at the same time representing a political compromise between the various interest groups concerned. They pick up traditional compensation criteria from pre-crisis best practices, adapting them to the post-crisis setting, while leaving some flexibility in pay structures. We suggest that a certain degree of flexibility should be kept when implementing the Principles in national jurisdictions. In Part III we analyze the regulatory developments concerning executive pay at banks in Europe and find variations in the implementation of the Principles. We also show that remuneration policies at large European banks are converging toward the international Principles, while varying in the implementation of individual standards. However, recent EU reforms may change the situation considerably by imposing detailed requirements as to pay structures in the financial sector. The analysis in Parts I, II, and III speaks directly to this issue by explaining why historic baselines will prove effective in certain applications but decidedly problematic in others

The redistributive impact of public and private social expenditure

Most analyses of social protection are focussed on public arrangements. However, social effort is not restricted to the public domain; all kinds of private arrangements can be substitutes to public programs. In fact, in several countries there has been a shift from public towards private social arrangements. OECD-data indicate that accounting for private social benefits has an equalising effect on levels of social effort across a number of countries. This suggests that public and private social expenditures are complementary to some extent. But their distributional effects differ. In all OECD countries, the social protection system causes a more equal distribution of incomes. Indeed, using cross-country data, we find a negative relationship between public social expenditures and income inequality and a positive relationship between public social expenditure and income redistribution. But we do not find a significant positive relationship between private social expenditures and income inequality or income redistribution. Consequently, changes in the public/private-mix in the provision of social protection may affect the redistributive impact of the welfare state.Social Protection, Private Social Expenditure, Income Distribution