Loyalty share under Spanish companies law

Law 5/ 2021, which came into force on 3 May 2021, has introduced the concept of loyalty shares for Spanish listed companies.

Law 5/ 2021 transposes into Spanish law Directive (EU) 2017/828 of the European Parliament and of the Council of 17 May 2017, aimed at incentivising long-term investments in listed companies. However, loyalty shares were ultimately excluded from such Directive as a consequence of the amendments approved by the European Parliament. In this regard, the introduction of loyalty shares for Spanish listed companies follows a similar path to other European continental countries (France’s Loi Florange, Italy’s Decreto de Competitivitá, Belgium and the Netherlands).

Loyalty shares must be expressly recognised in the relevant by-laws (otherwise no loyalty shares would exist for such listed companies) and refer to shares held without interruption by the same shareholder for at least two years.

Loyalty shares carry a double vote (i.e. double the number of votes compared with their nominal value), so this new legal concept applicable to listed companies implies a dissociation of capital and voting rights and constitutes an alteration of the rule of “one share, one vote”.

As expressly stated in the explanatory statement of Law 5/ 2021, loyalty shares are being introduced in Spanish legislation as a way of incentivising long-term investments and reducing short-term pressures on the management of listed companies, given that long-term investments are supposed to encourage greater involvement of shareholders in corporate governance, which is deemed to be in the best interest of a company. Thus, the Spanish legislator understands that short-term investments are not in the best interest of listed companies and add pressure on the management of listed companies, resulting in a negative impact on stock market sustainability and volatility. As we will see at the end of this article, some legal authors and market experts do not entirely agree with this analysis.

Brief review of the legal regime for loyalty shares

Requirements for the recognition of loyalty shares

There are certain requirements for a share of a listed company to be deemed a loyalty share:

• The concept of loyalty shares must be expressly stated in the by-laws of the relevant listed company. Reinforced majorities are required for the amendment of by-laws in this regard (60 per cent or 75 per cent of the share capital, depending on the quorum of the GSM). Therefore, the recognition of loyalty shares is an option, and not an obligation, for listed companies.

• The continuance of the loyalty share regime in the by-laws must be confirmed by the GSM once five years have elapsed from the initial approval of the regime. On the other hand, the loyalty share scheme can be terminated at any time by the GSM (by an absolute or two-thirds majority depending on the quorum).

• The relevant share must be held without interruption by the same shareholder for at least two consecutive years from the registration of such share in the special registry book for double-voting shares. In this regard:
  
  • The two-year term can be increased in the by-laws, but not reduced.
  • The two-year period (or longer if so stated in the by-laws) starts to run from the registration of the relevant shares in the special registry book for double-voting shares created by new Law 5/ 2021. Therefore, the loyalty share regime has no retroactive effect (except for private companies deciding to go public), so that shares owned by a shareholder opting for loyalty shares need to be registered in the special registry book and need to be held without interruption by that same shareholder for at least two consecutive years from such registration.
  • The relevant shareholder has the right, but not the obligation, to request its registration in the special registry book as owner of the relevant shares. Any transfer of such shares must be notified to the company.

Other relevant legal aspects of loyalty shares

Other relevant aspects of the regulation on loyalty shares are as follows:

• Loyalty shares are not treated differently to other shares in that the transfer of loyalty shares entails that such shares are no longer deemed loyalty shares and, therefore, do not grant a double vote to the new owner (there are some exceptions to this rule, for example, in the case of intra-group or mortis causa transfers).

• Double votes of loyalty shares are taken into account in calculating the quorum at the GSM and for the purposes of voting majorities. On the other hand, any limitations stated in the by-laws on the maximum number of votes to be issued by a shareholder are also applicable to loyalty shares.

• Information on loyalty shares:
  
  • The relevant company shall provide the information recorded in the special registry book for double-voting shares to any shareholder who requests it.
  • Information on double-voting shares existing at any given time, and any registered shares pending compliance with the loyalty period, shall be included on the listed company’s website. Such information shall also be shared with the Spanish securities market regulator (CNMV).

• Double-voting rights of loyalty shares will be taken into account in relation to the takeover bids regime (and also regarding the obligation to notify significant stakes in listed companies according to Spanish Securities Market Law). Thus, it could be the case that a potential acquirer of listed shares does not reach the 30 per cent threshold of share capital, but, through prior holding of loyalty shares (and, if applicable, regular shares) and the potential new acquisition of shares, it reaches 30 per cent of the voting rights (the threshold required to launch a takeover bid). Nevertheless, such takeover bid will not be necessary if:
  
  • The 30 per cent threshold is reached exclusively due to the change in the total number of voting rights of the company resulting from the existence of shares with loyalty voting rights; and
  • Within three months of the date on which the 30 per cent threshold for voting rights has been exceeded, either the relevant shareholder sells the number of shares necessary to reduce the excess of voting rights to below 30 per cent, or the loyalty voting rights exceeding 30 per cent of the voting rights of the company are waived.

Impact of loyalty shares in Spanish listed companies

As highlighted above, the main purpose of the introduction of loyalty shares for Spanish listed companies is to encourage long-term investments and the involvement of long-term shareholders in the management of the company.

Nevertheless, some scholars and economists have been highly critical of the introduction of loyalty shares in the Spanish market given that, in their view, (i) there is no evidence that long- term investments are either more beneficial to the interest of the company in the long term or imply a greater involvement in the management of the company; and (ii) the majority of stakes in Spanish listed companies are already held by a few long-term investors (and not dispersed as in, for instance, US-listed companies). On top of this, given the current shareholding structure of most Spanish listed companies, the loyalty share regime could in fact help to increase the power of the current long- term majority shareholders of such companies.

In any case, given this new concept of loyalty shares, when investing in a listed company, the investor should carefully check the company’s by-laws in order to verify whether the existence of loyalty shares is expressly provided for therein. In this respect:

• If loyalty shares are provided for in the by-laws, it is advisable:
  
  • To review the information on loyalty shares included on the company’s website and, if possible, request a copy of the special registry book of loyalty shares; and
  • When the prospective investment is a long-term investment, to request registration in the special registry book of loyalty shares so that the two-year term (or longer term, if applicable) starts to run.

• If loyalty shares are not provided for in the by-laws, the shareholding structure of the company together with the required majorities to approve the loyalty share regime should be analysed in order to advance any potential change in the voting structure.

Authors: Francisco Vázquez Oteo and Jorge Vázquez