Golden shares: Getting tarnished?
The European Court of Justice (ECJ) has recently ruled that the UK government's golden share in the airports operator, BAA plc, is contrary to the EU principle of the free movement of capital. It also ruled against the Spanish government for holding golden shares in a number of privatised companies including Repsol and Telefónica.
What are golden shares, exactly?
Back in the heyday of privatisations in the 1980s and early 1990s, the government took interests known as golden or special shares in recently privatised companies where it felt it needed to protect a business from takeover, for example, on national security grounds or, as a temporary measure, to allow the management time to adjust to the private sector. The resolution creating the share would have been passed when the company was still in government ownership.
Typical golden share powers include the relevant Secretary of State (as holder of the share) having the right to restrict shareholdings in the company to 15%. A number of golden shares also include powers over the disposal of material assets.
Are there many left?
The number of golden shares held by the UK government in privatised companies has reduced over the years but those that remain could still be significant, particularly where they enable a Secretary of State to block takeovers, as in BAA. There are currently 24 companies with golden shares, including BAE Systems, Rolls-Royce, British Energy plc and NATS (the national air traffic control system).
What are the legal objections?
The European Commission has been increasingly concerned that golden shares restrict EC Treaty provisions that guarantee freedom of establishment (Article 52) and free movement of capital (Article 73b). Last year, in a precursor to the BAA judgment, the ECJ found against the French and Portuguese governments for golden share arrangements. In July 2000, the Italian government was also taken to task for its shares in the ENI energy group and Telecom Italia.
So what did the ECJ decide in BAA's case?
The ECJ specifically objected to the Secretary of State for Transport's rights enshrined in BAA's articles of association to have prior approval in relation to certain key decisions such as the winding-up or disposal of an airport and to prevent the acquisition of more than 15% of the voting shares in the company. The ECJ rejected the government's arguments that access to the market is not affected by its share, and that the articles are governed by private company law and not by public law.
Does this signify the end of golden shares?
Not necessarily. In both the BAA case and last year's decision on the French and Portuguese governments, the ECJ indicated that government influence in companies could be justified where they supply services that are in the public interest or are strategic services. But the Commission is likely to continue to come down heavily on governments with interests in companies that do not satisfy these criteria. It is certainly having more success fighting off restrictions against takeovers in this arena than it is in the ongoing deadlock over the proposed takeover directive.
Joanna Morris, PLC.
A summary of the ECJ judgment in Cases C-463/00 and C-98/01 is available at http://europa.eu.int/cj/en/actu/communiques/cp03/aff/cp0337en.htm. Information on the government's golden or special shares is available at www.hm-treasury.gov.uk/Documents/Enterprise_and_Productivity/Public_Enterprise_Partnerships/ent_pep_sspeintro.cfm.