One-share one-vote has long been the European Commission's mantra in establishing a level playing field for investors. The conventional wisdom was that a shareholder's influence should be aligned with their economic investment in and exposure to the company. But the success of the "FANG" stocks and the US governance model of giving ultimate control to founders while also selling shares and bringing in new investors has led to a rethink. In response, the European Commission recently proposed a draft directive on the issuance of shares with multiple voting rights in an IPO.
The idea is to make going public more attractive for privately held companies and founders by allowing the issuance of dual-class shares. New equity capital will be raised from outside investors who subscribe ordinary shares, while control via multiple voting rights remains with the equity-diluted founders as the "fittest leaders" with their unique skills, abilities and visions.
While this argument may be sound when a founder is at the top of their game at the IPO stage, it loses weight with the passage of time. If the history of capital markets teaches us one thing, it is that mean reversion erodes superiority. But this fact paired with a founder's ability to extract private benefits out of their control position may not be attractive to investors at all. That is why institutional investors are seeking reasonable mandatory sunset clauses on unequal voting rights, either linked to the passage of time, change of control, retirement from management positions or the crossing of a certain minimum ownership percentage.
While the German legislator has already issued a draft bill to liberalise the one-share one-vote principle, the discussions in Austria are still at an early stage. While multiple voting can bring together talented entrepreneurs and well-funded investors, the inherent risks will need to be mitigated and adequate sunset provisions will be crucial.
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