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Italian government back tracks on loyalty shares

Italy's Matteo Renzi-led government has back tracked on loyalty shares, which favoured controlling shareholders, but upset institutional investors
Press Association

A measure introduced by the Italian government to incentivise partial listing of family businesses and encourage long-term shareholdings has been amended after institutional investors raised concerns that it unfairly benefited controlling shareholders.

Last year the Matteo Renzi-led government allowed listed companies to introduce “loyalty shares”, which grant shareholders double voting rights if they hold stock for more than two years.

Three companies, all with controlling families behind them, took advantage of the scheme – drinks brand Campari, construction company Astaldi, and hearing aid giant Amplifon – despite protests from minority shareholders.

The family-controlled businesses had taken advantage of a deadline lasting until January, and one the government had been looking to extend, that allowed companies that were already listed to implement the mechanism with a simple majority.

However, following calls from international investors, as well as academics, lawyers and advisers, the government has declared that, as of February, companies must have a two-thirds majority to introduce the mechanism, the result being that minority investors are more likely to get a say.

A group of more than 100 institutional investors, which collectively manage assets of $8.8 trillion, rallied together to voice their concerns to prime minster Matteo Renzi and his government.

The 40-year-old leader, who was elected a year ago, has been eager to tidy up Italy’s corporate governance and boost foreign investment in the country, which last year slipped into its third recession since 2008.

Economy minister Pier Carlo Padoan said the government would not extend the voting measure for loyalty shares beyond January because it wanted to provide the certainty needed for investor confidence.

Sacha Sadan, director of corporate governance at Legal & General Investment Management, speaking on behalf of the institutional investors group, said the government’s responsiveness was positive.

“This decision sends a strong message to the markets that the Italian government is serious about attracting international investment and safeguarding good governance standards in line with global best practice,” Sadan said.

Professor of entrepreneurship and family business at Lancaster University Management School Alfredo de Massis said there were pros and cons to the mechanism and an equilibrium needed to be found.

“Loyalty shares are a sort of ‘tool’ to strengthen the power of controlling owners in their firms, isolating them from the influence of minority investors and the risk of take overs,” de Massis says. “But for this reason the loyalty shares make Italy hostile to foreign investors, which is what the country would need to re-launch the economy.”

Carla Topino, associate vice president for European and emerging markets at Glass Lewis, says the proxy advisory service is generally opposed to any mechanism that deviates from the “one share, one vote” principle.

Topino says it is good that the Italian government is trying to promote long-term ownership, but that there is little evidence to show that loyalty shares or similar mechanisms achieve this.

A particular concern for Glass Lewis was that Italian companies already listed could introduce the measure, changing the capital structure. In addition, existing shareholders did not have the right to withdraw from the company if they did not like the measure.

Mechanisms such as loyalty shares, which are also utilised in France, are part of a wider debate going on in Europe at the moment, Topino explained, which has been triggered in large part by the financial crisis.

“Shareholders and investors were accused of not engaging sufficiently with companies when they should have had concerns about some risky strategies – perhaps because the shareholder didn’t have a long-term view,” Topino said. 

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