Although dual class voting structures have been around since the early 20th century, opinions remain divided on their merits.
Supporters argue that a company should be protected from the pressure of investors in order to foster its long-term thinking. Relying on powerful founding stories, such as Steve Jobs starting Apple in a garage and Mark Zuckerberg creating Facebook from his dorm room, those in favour of dual class voting structures argue that it is the founders' vision that drove the companies to success and, therefore, it is only right that voting power remains with them. For this reason, dual class voting has globally gained increasing popularity in initial public offerings, especially in the tech sector.
Those in opposition claim that dual class shares violate the principles of corporate democracy and that company founders and managers should be held accountable to investors.
A common interpretation of the Companies Law has been that companies may issue only two categories of shares that are different in terms of the patrimonial rights attached to them. As such, a joint-stock company would have:
- a regular category of shares – the so-called "ordinary shares", which give shareholders equal voting rights based on the "one share equals one vote" principle; and
- preferential shares, which do not grant voting powers to their holders but give them priority in the distribution of dividends.
Inspired by Silicon Valley's mythologising of founders and their own founders' ability to steer businesses forward, Romanian key players have also started to explore dual voting shares in the hopes that Romanian corporate law will leave room for them.
The modern way of interpreting the Companies Law relies on a court decision of the High Court of Cassation and Justice dating back to 2011, which recognises the possibility of companies issuing dual class voting shares.
While many doubt the Court's interpretation, Romania's highest forum in dispute settlement acknowledged that shareholders of non-listed joint-stock companies are actually entitled not only to limit the number of votes of shareholders, but also to grant multiple voting rights to one share. The Court reached this conclusion by relying on rather scarce and general provisions of the Companies Law, which sets out the basic principle of "one share equals one vote" and also allows shareholders to derogate from this rule.
Concerned about potential abuses against investors' rights, some practitioners have already taken a position against the Court's rather simple interpretation, raising a number of arguments as to why the Companies Law should be read differently. These counterarguments boil down to an intuitive and rational approach that the law could not have tacitly introduced such a concept, where other jurisdictions have been far more diligent in regulating them.
As local players grow and have been inspired to internationalise by successful fundraising stories abroad, the topic of dual class voting shares in Romanian companies is only beginning. Investors will be urged to remain vigilant against founders' and managers' increased tendency to insulate themselves from shareholders. Consequently, the courts will soon be called upon to find interpretations that stand not only the test of semantics, but also that of corporate democracy and governance risks.
The increasing emphasis on technology, innovative trends, creativity of the founders and the constant chase for the next big unicorn company has put a strain on laws created or inspired by last century's concepts. Dual class voting shares continue to spark debates and seek a response to the overarching question: are they bad for the company or for democracy?
For further information on this topic please contact Mădălina Neagu or Cristina Enaga at Schoenherr by telephone (+40 21 319 67 90) or email ([email protected] or [email protected]). The Schoenherr website can be accessed at www.schoenherr.eu.
An earlier version of this article was published in Roadmap22.