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law, economics and practice – Corporate Finance Lab



Paper in the Journal of Corporate Law Studies

In Europe, shareholder approval and pre-emption rights have traditionally fulfilled an important role in protecting shareholders in listed corporations against excessive dilution in share issuances. However, these protections also make it costlier and slower to raise capital through share issuances. That is why countries generally allow shareholders to authorize the board of directors to issue shares without shareholder approval and without pre-emption rights – within certain limits. The protection offered by pre-emption rights and shareholder approval therefore depends on the extent to which shareholders are willing to approve authorizations to issue shares and disapply pre-emption rights. 

In a paper recently published in the Journal of Corporate Law Studies, I provide new empirical evidence on the flexibility of such authorizations in practice in French and Belgian listed corporations. Proxy advisors and (associations of) asset managers have adopted guidelines on the maximum size for authorizations – typically 50% of legal capital for authorizations to issue shares with pre-emption rights, and 10% of legal capital for authorizations to issue shares without pre-emption rights (although Glass Lewis is more flexible for Belgium, with thresholds of 100% and 20%, respectively). 

However, my evidence shows that these guidelines are often not followed in Belgium and France. Outside the BEL 20, Belgian corporations almost never respect the 50% limit recommended by ISS. In addition, for authorizations to disapply pre-emption rights, 55% of Belgian corporations do not observe the 20% limit (recommended by Glass Lewis) and 69% do not observe the 10% limit (recommended by ISS). Even in the BEL 20, 47% of corporations do not observe the 10% limit and 27% do not observe the 20% limit.

The guidelines of institutional investors seem to be respected more often than in Belgium. For example, in the CAC 40, the largest index in France, there are no corporations that do not respect the 50% limit for general authorizations and only 4 corporations that do not respect the 10% limit for authorizations to disapply pre-emption rights. Outside the CAC 40, compliance with the guidelines is less common: 28% of corporations do not respect the 50% limit and 67% of corporations do not respect the 10% limit.

These empirical findings stand in stark contrast with the situation in the UK, where previous research has found that the Pre-emption Guidelines and Share Capital Management Guidelines (which impose similar restrictions on authorizations) are widely observed by UK corporations.

I also provide empirical evidence through a multiple regression model that authorizations are generally more flexible in corporations with high levels of insider ownership, corporations with a smaller market capitalization, and Belgian corporations. I offer several potential explanations for these differences. 

First, higher insider ownership generally makes it easier for insiders to control the vote in the general meeting and force through more flexible authorizations that benefit them. This does not necessarily mean that high levels of insider ownership are inefficient, as controlling shareholders may also have benefits. 

Second, small corporations may have more flexible authorizations than large corporations because small corporations generally receive less attention from investors, activists, the media and research analysts. Alternatively, it may be that smaller corporations have higher capital needs, and therefore need more flexible authorizations. 

Finally, the difference between Belgium and France could be explained by differences in the legal framework. Authorizations in Belgium are almost invariably given for the maximum period allowed by the law, five years. In France, the law imposes a shorter maximum duration on authorizations of 26 months. If shareholders can vote more often on authorizations, they have more opportunities to hold insiders accountable, which could explain the stricter authorizations in France. In addition, French law requires that shareholders vote on separate resolutions for authorizations for share issuances with pre-emption rights and authorizations for share issuances without pre-emption rights, while this is not the law or market practice in Belgium. Separate votes for pre-emptive and non-pre-emptive authorizations can ensure that shareholders are not coerced into voting for excessive authorizations for non-pre-emptive share issuances out of an unwillingness of voting against any form of authorization for the corporation, which would likely be inefficient. The lack of separate votes can explain why only 8 of 84 Belgian corporations have adopted stricter authorizations for non-pre-emptive share issuances than for pre-emptive share issuances.

The paper also analyzed whether authorizations to issue shares could be used as a takeover defense. Here, a similar picture emerges: despite the fact that the guidelines of proxy advisors and asset managers generally oppose takeover defenses, more than 40% of Belgian corporations and 28% of French corporations have an authorization to issue shares that can be used as a takeover defense. Again, such takeover defenses are more common in corporations with high levels of insider ownership and corporations with a smaller market capitalization. Institutional ownership is also significantly negatively associated with the likelihood of adopting an authorization that can be used as a takeover defense. The difference between Belgium and France is no longer statistically significant, however. A possible explanation is that the default rule in Belgium is that authorizations to issue shares cannot be used as a takeover defense, while the default rule is the opposite in France. This difference in the default rule may be enough to counterbalance the general trend of more flexible authorizations in Belgium than in France.

The empirical analysis in the paper was not designed to test whether the currently adopted authorizations are too flexible or too strict. Nevertheless, I do believe that the differences in the legal framework identified between Belgium and France could inspire policy proposals that give shareholders a larger say in the flexibility of authorizations to issue shares and disapply pre-emption rights. For example, the legal rule in France that requires a shareholder vote every two years and a separate shareholder vote on the authorization to disapply pre-emption rights could also be introduced in Belgium. It is possible that such reforms will not be effective in reducing the size of authorizations, either because shareholders believe the current flexible authorizations are efficient, or because a controlling shareholder makes it impossible for other shareholders to have an impact on the shareholder vote anyway. Even in that case, these policy proposals would be relatively harmless, as the costs of implementing them are limited: management may need to spend some extra effort in convincing shareholders that the authorization is justified, but the authorization can simply be approved during the annual general meeting that would have to be organized anyway. In addition, corporations would retain the possibility to adopt more flexible authorizations if this is efficient, provided that they can convince a sufficient number of shareholders of this. 

That is why I argue that these low-cost proposals can help to empower shareholders to decide how the balance between flexibility and accountability should be struck with regards to authorizations to issue shares.

Tom Vos

Visiting professor at the Jean-Pierre Blumberg Chair
University of Antwerp;
Attorney at Linklaters LLP;
Voluntary Scientific collaborator at the KU Leuven

Author: Tom Vos

Tom Vos is a visiting professor at the Jean-Pierre Blumberg Chair of the University of Antwerp, where he conducts research and teaching in the field of corporate governance. He is also affiliated as voluntary scientific collaborator with the Jan Ronse Institute (KU Leuven). His current research interest is short-termism in corporate governance.
View all posts by Tom Vos




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