One of the novelties introduced by the reform of the Capital Companies Act (LSC) by Law 5/2021, of 12 April, concerns loyalty shares in listed companies. These are known as loyalty shares in the legal systems of our neighbouring countries. Loyalty shares are voting rights granted to shareholders who hold their shares for a minimum period of two consecutive years from the date of registration in the share register. The company’s articles of association will regulate this type of share.
This right shall apply to investors who have placed their investment through financial intermediaries, provided they can prove their ownership for the required minimum holding period.
One of the reasons behind the law and the transposition of EU Directive 2017/828 for the incorporation of this figure in Spain is to encourage the long-term involvement of investors in listed companies. This way, directors will have sufficient shareholder stability to meet their company management objectives, reducing short-term pressures.
Effects of loyalty shares
- Minority shareholders in listed companies, investment funds among them (Collective Investment Institution), usually condition their investments on short-term profits. The introduction of loyalty shares is discouraging their investment
- In practice, the use of loyalty shares is not just by companies with dispersive capital but also by companies with dominating shareholders who intend to reinforce, through double voting, their authority over the company. Let us not forget that minority shareholders tend to attach little importance to the voting rights attached to the shares
- The legislator has introduced loyalty shares to avoid Spanish companies falling into the temptation of moving their companies to more flexible neighbouring jurisdictions when faced with questions of plural or preferential voting among shareholders
- The introduction of loyalty shares is facilitating the companies to go public, reversing the trend of recent years. The founding shareholders can use this right to preserve their control within the company.
In summary, the incorporation of loyalty shares in the bylaws of public limited companies will increase their stability and, therefore, the probability that the beating heart of the business, the management, will achieve their objectives in the long term.
Álvaro Gómez Fernández
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