Tackling Empty Voting in the EU: The Shareholders’ Rights Directive and the Revised Transparency Directive

Abstract:

The rise of the capital market creates new, less noticeable forms of holdings of shares. These holdings could be acquired with the aim of influencing a company’s decision-making process without the intention to hold shares for the long term. One of the forms is new vote buying which can appear either as empty voting or as hidden ownership.

Empty voting refers to voting by a shareholder without the corresponding financial interest in the company involved. The reverse situation is hidden ownership whereby a party is not the shareholder but is entitled to exercise influence and eventually vote as if he/she were a shareholder.

If a shareholder has an ownership interest in the company in which he/she votes, his/her voting would be aligned with the interests of the company. If a shareholder votes for a decision contrary to the company’s interest, it would affect his/her own economic interests because the shares could have been sold even before the shareholder’s meeting occurred.

There are many techniques that lead to empty voting. Those most commonly used are: borrowing shares, using equity swaps or buying shares on a date close to the record date and then selling them again right after the record date has elapsed. As a result, a person casting their vote at the general meeting might not be the ‘actual’ shareholder. The admissibility of these votes and their effects have been discussed in well-known judicial cases. Having noticed a rise of abusive situations created by using empty voting techniques at the EU level, the revised Transparency Directive set out to deal with these issues. It entered into force on 26 November 2013 with the deadline for implementation set at 26 November 2015.

However, since the Transparency Directive is a minimum harmonisation Directive, Member States have substantial liberty in its implementation which might lead to a divergent level of investor protection. Further, since the development of capital markets leads to the appearance of new forms of derivatives and other financial instruments which could create an ‘empty voting’ effect, EU Member States would be tempted to set rules that would, as far as possible, embrace all forms of empty voting in a so-called ‘catch all’ provision.

This paper aims to examine how national legislators of the EU Member States have dealt with the issue of empty voting in light of the solutions provided in the Shareholders Rights Directive of 2007 and in the revised EU Transparency Directive of 2013.