5.2.1 Barriers to Cross-Border Voting

Cross-border share ownership of European public firrns hos increased dramatically in recent years. By the end of 2007, 37% of total market capitalization was owned by foreign investors, i.e. investors located in another (E.U. or non-E.U.) country than the country where the share is listed.1 As a result, any barriers to cross-border voting are likely to have a negative impact on the voting turnut at shareholder meetings.2 Indeed, the available data suggests that voting turnouts decrease in proportion to the increase in foreign ownership.3

We can distinguish two types of barriers to cross-border voting in Europe. The first type of barrier is caused by the existence of a broad variety of regulations and practices in European Union (E.U.) Member States with respect to the organization of shareholder meetings.4 As a result, while shareholders are legally entitled to vote, they may be prevented from doing so as a practical matter. For example, a French investor holding shares in a German firm headquartered in Berlin may be prevented from voting simply because he is unable to attend the shareholders' meeting in person and is not allowed to vote electronically or via proxy.

The second type of barrier to cross-border voting, which is the most relevant type of barrier for purposes of the following analysis, is caused by the fact that modern day securities holding systems have become highly complex5 This complexity is illustrated by Figure 1, which shows that there are often several financial intermediaries between the company and the investor:

This complexity creates a host of issues, one of which is that the person who is legally entitled to vote might turn out to be a financial intermediary instead of the investor who bears the risk of the investment (the "ultimate investor").7 This is the case, for example, in the relationship between the company and the investor depicted in Figure 1 as the second relationship from the lelt. In this relationship, three financial intermediaries are interposed between the company and the investor. From top to bottom, these are: (1) Necigef (the Dutch central securities depository, which is the Dutch equivalent of the U.S. Depository Trust & Clearing Corporation (DTCC)); (2) a so-called "Affiliated Institution" of Necigef (e.g., a Dutch bank); and (3) a Spanish bank. Pursuant to Dutch company law, Necigef forrnally qualifies as the shareholder, while pursuant to Dutch securities law, Necigef and the Dutch bank will have a statutory obligation to facilitate exercise of the voting right by the person holding a securities account with the Dutch bank.8 Thus, onder Dutch law, the Spanish bank will be legally entitled to vote the shares, not its client, the (presumably Spanish) investor.

Under these circumstances, whether the investor will nonetheless be able to vote is likely to depend on whether the Spanish bank is willing to cooperate, for example by accepting voting instructions. If there were any financial intermediaries interposed between the investor and the Spanish bank, the investor's ability to vote would likely depend not only on the willingness of the Spanish bank to accept voting instructions, but also on the willingness of each of the interposed financial intermediaries to pass on the investor's voting instructions to the Spanish bank. This is the kind of complexity inherent in some of the other relationships depicted in Figure 1.

Thus, it becomes clear that in cross-border situations, investors may be unable to vote their shares unless financial intermediaries are willing to cooperate. In theory, investors could contract with the relevant financial intermediaries to secure their cooperation. In practice, however, it may be difficult for investors to efficiently contract with each of the financial intermediaries concerned, especially for retail investors and even for institutional investors . 9

Can the removal of these barriers to cross-border voting be expected to increase voting turnouts? After all, collective action and free rider problems are commonly thought to cause rational apathy among shareholders. As Easterbrook and Fischel have noted, "[w]hen many are entitled to vote, none of the voters expects his votes to decide the contest. Consequently, none of the voters has the appropriate incentive at the margin to study the firm's affairs and vote intelligently."10 Shareholders may therefore often choose to remain passive, or to vote with their feet by selling their shares (taking the "Wall Street Walk"). However, collective action and free-rider problems notwithstanding, there are reasons to believe that the removal of barriers to cross-border voting can be expected to increase voting turnouts. Dirk Zetzsche has plausibly argued that institutional investors' propensity to vote depends primarily on the procedural costs of voting, that is, the costs involved with the technical process of exercising the vote.11 Since these costs are particularly high in the cross-border context, legal reforms aimed at lowering those costs will encourage foreign institutional investors to vote.12 In addition, such reforms may encourage voting by foreign retail investors. While those investors, for the reasons cited might rationally choose to remain passive, some might nevertheless choose to exercise their voting rights if they are enabled to do so, for example because they enjoy participating in the decision-making process.