Loyalty Voting Rights in Belgium: Nothing More than a Control-Enhancing Mechanism?

Abstract 27In 2019, Belgium joined the European trend and allowed listed companies to adopt loyalty voting rights, i.e. double voting rights for shareholders who have held their shares for more than two years. The stated goals were to combat short-termism by rewarding long-term shareholders and to encourage IPOs by allowing founders to retain control over the corporation with a smaller participation. Our paper analyzes these rationales from a conceptual perspective, describes the Belgian legal framework for loyalty voting rights, and presents novel empirical evidence on the use of loyalty voting rights in Belgium. We argue that the Belgian legal framework is designed to favour controlling shareholders and other insiders. In addition, our empirical data supports the view that loyalty voting rights mainly function as a control-enhancing mechanism, as loyalty voting rights are almost exclusively used by insiders. This is not necessarily a problem, in our view, as controlling shareholders may be able to help combat the short-termism problem where it would exist. However, loyalty voting rights also increase the incentives for insiders to extract private benefits of control by creating a wedge between cash flow rights and voting rights. We find that this wedge in our Belgian sample has been on average 11 percentage points. In addition, our evidence finds that the votes of insiders were often sufficient to adopt loyalty voting rights, and that non-insiders on average vote against loyalty voting rights. This highlights the risk of making it too easy to introduce loyalty voting rights in the midstream. The arguments for allowing loyalty voting rights are the strongest when they are introduced at the IPO stage, but so far, none of the Belgian corporations with loyalty voting rights have introduced them at the IPO. We conclude that loyalty voting rights are nothing more than a control enhancing mechanism. This raises the questions: why not allow other types of control enhancing mechanisms, such as dual class share structures? And why not treat the midstream introduction of loyalty voting rights with a similar level of protection as the midstream introduction of dual class share structures? We fail to see the policy reasons for this wide divergence.28