Loyalty shares now available for Spanish listed banks as a CET 1 instrument
The 2021 reform of the Spanish Companies Act means that Spanish listed companies are now entitled to create loyalty shares, an instrument that has already existed in other European jurisdictions (including France, Italy and the Netherlands). Although the popularity of this instrument in Spanish markets is yet to be proved, the legislative reform brought in by Spanish legislator has ensured that loyalty shares are also available for banks and that they are not excluded from the outset.
Loyalty shares – their basis as a CET 1 instrument
The reason Spanish loyalty shares can be used as a CET 1 instrument is that they have been designed as shares with increased voting rights rather than as shares with increased dividends. In particular, Spanish loyalty shares confer double voting rights to shares held by a shareholder for a continuous period of at least two years (which bylaws could increase) and only for those shareholders opting in to those rights. In addition to that, these shares will have the same rights and obligations as ordinary shares, and technically, won’t, in fact, be considered a separate class of shares.
As a result, loyalty shares will fall within the criteria for a CET 1 instrument as set out under the Capital Requirements Regulation (CRR). In this regard, CRR does not restrict differentiated voting rights in CET 1 instruments; instead it states that differentiated voting rights are the one valid justification for differentiated distributions to CET 1 instruments [1]. It does not, however, expressly require that differentiated voting rights are actually remunerated, as it would be the case with the Spanish loyalty shares (which accrue the same dividends as ordinary shares).
The EBA’s view
The EBA has expressly (although somehow reluctantly) accepted the qualification of this type of loyalty shares as a CET 1 instrument in its 2019 CET1 report (attached below). In particular, it recognises their benefits in terms of incentivising long-term holding of capital instruments and the stability of the shareholding base of a bank.
That said, the EBA does raise concerns on whether loyalty shares (particularly if a few single shareholders control the bank) could negatively affect the governance of the institution or hinder its recapitalisation.
Our view
In our view supervisory tools should be sufficiently strong to monitor these risks in the same way as they do with respect to institutions which do not have loyalty shares.
In line with the EBA recommendation to increase the level of scrutiny of these risks under the qualifying holding rules, Spanish law expressly provides that any additional votes conferred by loyalty shares will be counted towards the application of qualifying holding rules. This means that the ECB could prevent any acquisition or relevant increase of a qualifying holding resulting from the automatic increase of voting rights by shareholders who have opted in for loyalty shares. Any opposition from the ECB will, of course, have to be managed by the relevant shareholder by either:
(i) selling shares;
(ii) giving up, partially or wholly, the increased voting rights attached to the loyalty shares; or
(iii) undertaking not to exercise any voting rights in excess of the relevant threshold.
Moreover, it is worth noting that Spanish law also requires that the existence of loyalty shares is ratified by a qualified majority of the general meeting every five years (this protection is further strengthened by the fact that, after the 10th year, the extra votes conferred to loyalty shares are excluded from the vote - i.e., they are counted as ordinary shares) and, in addition, such ratification can be revoked by the general meeting at any time.
[1] Article 28(4), Capital Requirements Regulation ((EU) 575/2013)
