Golden shares, also known as “special shares,” are a type of share in a company that grants the shareholder special powers or rights, often including veto power over certain decisions. These shares are typically held by a government or a public authority and are used to maintain control over certain strategic industries or companies, particularly during or after privatization processes.
Golden Share
Golden shares are a unique class of shares that grant their holders special rights, often exceeding those held by ordinary shareholders. Primarily, these rights include the power to veto certain significant actions of a company, giving golden share holders—often governments—control over strategic decisions regardless of their equity stake. Golden shares are frequently used by governments to maintain oversight in industries of national importance, balancing corporate privatization with public interest.
Key Features of Golden Shares
Veto Power: The defining feature of a golden share is its veto power, which allows holders to block decisions made by the company’s board or shareholders. Commonly, veto rights apply to decisions regarding mergers, changes in company bylaws, asset sales, and other high-stakes corporate actions that could impact national interests.
Strategic Control: Golden shares serve as a control mechanism for governments to retain influence over companies in critical sectors, such as defense, telecommunications, and energy. When state-owned enterprises are privatized, golden shares ensure that decisions affecting national security or public welfare remain under governmental oversight.
Limited Scope and Duration: Golden shares often come with limited rights and may be set to expire after a defined period. For instance, veto power may be restricted to certain categories of decisions and may be reviewed or phased out over time, allowing for a gradual transition to full private control.
Minority Ownership with Disproportionate Control: Unlike ordinary shares, where voting rights correlate with the number of shares held, golden shares allow holders to exercise significant control while holding only a single or limited number of shares. This disproportionate power enables strategic oversight without requiring substantial capital investment.
Examples and Applications of Golden Shares
Golden shares have been employed worldwide, particularly in sectors deemed essential to national security or infrastructure. Here are a few notable examples:
- UK Aerospace Industry: The UK government holds golden shares in defense contractors like BAE Systems and Rolls-Royce. These shares provide veto power over key decisions, such as mergers or asset sales, ensuring that critical defense capabilities remain under domestic control.
- Telecom Italia (Italy): During the privatization of Telecom Italia, the Italian government retained a golden share to safeguard the national communications infrastructure. This allows Italy to veto decisions that could compromise national interests in its telecommunications sector.
- Petrobras (Brazil): The Brazilian government holds a golden share in Petrobras, the state-controlled oil giant, granting it veto rights over strategic actions, including changes in the company’s headquarters, name, or corporate objectives.
These examples highlight the role of golden shares in maintaining national oversight over companies crucial to economic stability and national security, even after privatization.
Legal Challenges and Controversies
Golden shares have faced legal scrutiny, especially within the European Union, where they can conflict with the principles of market freedom. According to the EU’s rules on free movement of capital, golden shares can restrict investment flows by deterring foreign stakeholders who may face additional limitations due to government veto rights.
European Court of Justice (ECJ) Rulings: The ECJ has ruled against golden shares in several notable cases, citing conflicts with EU treaty provisions. In cases such as Commission vs. Portugal, Commission vs. France, and Commission vs. Belgium, the court deemed golden shares to be restrictions on free movement of capital. These rulings underscore the EU’s commitment to ensuring market openness and competition, even when governments argue for strategic control over certain assets.
Balancing Control with Market Freedom: For governments, the challenge lies in preserving control over critical assets without infringing on the legal and economic frameworks that promote free markets and competition. Countries with golden shares in place often navigate complex legal landscapes to justify their use, balancing national interests with adherence to international trade and investment regulations.
Pros and Cons of Golden Shares
Golden shares come with distinct advantages and disadvantages that reflect the tension between government control and market freedom.
Advantages:
- National Security Protection: Golden shares allow governments to shield strategic industries from foreign influence, protecting assets vital to national security.
- Public Interest Safeguard: Privatized companies in sectors like utilities and telecommunications can remain aligned with public needs and national objectives.
- Stability in Key Industries: Golden shares can prevent destabilizing corporate actions, such as hostile takeovers, that could disrupt long-term investments or planning.
Disadvantages:
- Market Distortion: The uncertainty created by government veto power may deter investment, as investors may avoid companies where ownership does not align with control.
- Legal Conflicts: As seen in the EU, golden shares can conflict with international trade agreements and regional regulations, leading to legal battles.
- Risk of Inefficiency: Government intervention in corporate decisions can sometimes lead to inefficiencies, potentially reducing competitiveness and innovation within the company.
Future Trends and Evolving Role of Golden Shares
As industries evolve and new technologies emerge, the sectors where governments may seek to use golden shares could expand beyond traditional areas like defense and utilities. Cybersecurity, artificial intelligence, and telecommunications are becoming increasingly vital to national security, and governments may pursue golden shares to safeguard these fields as well.
Furthermore, globalization has intensified the debate around golden shares. While some governments view them as essential for national security, international bodies like the EU and the World Trade Organization advocate for minimizing these interventions to foster global investment and economic integration.
Conclusion
Golden shares provide governments with a mechanism to retain strategic control over privatized companies, ensuring that industries critical to national security or public interest remain protected. However, they also present challenges, particularly concerning legal compliance and market freedom. The role of golden shares continues to evolve as governments strive to strike a balance between protecting national assets and adhering to global economic principles.
Key takeaways
- Control Through Minimal Ownership: Golden shares allow holders to exercise veto rights over key corporate decisions, maintaining influence over strategic companies without large equity stakes.
- National Security and Public Interest: Governments use golden shares to oversee decisions in sectors deemed essential to national stability, such as defense and energy.
- Legal and Market Tensions: In regions like the EU, golden shares can conflict with free-market principles, necessitating a careful balance between strategic oversight and compliance with broader economic frameworks.
- Examples Across Countries: The UK, Italy, and Brazil illustrate diverse applications of golden shares, demonstrating how governments protect national interests across different sectors.
- Future Directions: The scope of golden shares may expand to include emerging fields like cybersecurity and AI, reflecting changing national priorities.
Further Reading:
Types Of Share Capital
Equity Share Capital (Ordinary Share Capital)
Preferred Shares