Rewarding Long-Term Shareholders: European And US Loyalty Share Programmes

Loyalty share programmes, or programmes that encourage shareholders to hold their shares for longer periods of time, have been gaining traction in Europe, but for a number of reasons they remain uncommon in the United States.

"Long-term oriented shareholders, who hold on to their shares during the difficult but critical time the company is facing [will thus be rewarded]." This is how the CEO of Michelin explained the motivation behind the issuance of loyalty shares by his company in 1991. Loyalty shares (typically in the form of additional shares or dividends) that reward shareholders who hold shares for a certain period of time, and other similar programmes, have become increasingly popular in European countries as a way to incentivise long-term shareholding.

They are now slowly making their way into the United States but there are a number of issues US companies should be aware of before launching such a programme.

EUROPEAN LOYALTY SHARE PROGRAMMES

Rewarding long-term shareholding has been subject to regulation by the European Union since 2007 when the European Parliament passed Directive 2007/36/EC to regulate the exercise of certain rights of shareholders in listed companies. The Directive provides a limited framework for encouraging a higher level of monitoring and engagement by institutional investors and asset managers, and leaves these issues in the hands of the individual EU Member States.

France offers several mechanisms to support long-term shareholding, the latest having been implemented in March 2014 with the adoption of the Loi Florange. French listed companies must automatically grant double voting rights to shareholders who hold their shares in registered form for at least two years, and non-listed companies may grant double voting rights to shareholders who hold their shares in registered form for the same period.

Listed and non-listed French companies may also issue L-warrants to certain shareholders, or grant loyalty dividends under certain conditions. These loyalty schemes have been implemented by many major French listed companies, such as L'Oréal, Electricité de France and Crédit Agricole (as a loyalty dividend), or Vivendi, Engie, and Air France KLM (as double voting rights).

Other European countries have adopted similar mechanisms. The Netherlands permits companies to grant multiple voting rights to certain categories of shareholders if the companies register their shares in a Loyalty Register. This scheme was...