Golden Share

Key takeaways

– A golden share is a special share that gives its holder enhanced control—typically a veto over certain corporate actions (for example, changes to the company’s charter, disposals of core assets, mergers or takeovers).
– Golden shares were widely used by governments during privatizations (notably in the UK in the 1980s) to retain strategic control over formerly state-owned companies.
– They can protect national-security, public-interest or strategic assets, but they are controversial: regulators (notably the European Union courts) have limited or struck down certain golden-share arrangements as disproportionate restrictions on the free movement of capital.
– For companies, investors and governments, golden shares materially affect governance, valuation and the ability to complete transactions; they require careful legal drafting and justification.

Understanding golden shares

Definition and mechanics
– A golden share is a single class (or a small class) of equity that confers special voting rights or veto powers beyond those of ordinary shares. Typical powers include the ability to block changes to the company’s articles/memorandum, block sales of specific assets, or prevent transfers of control.
– Structure varies: a golden share can be literal “one share” with veto power, or a class that controls a specified majority of voting rights (Investopedia notes examples where a golden share controls at least 51% of voting rights), or rights limited to specific actions and time frames.
– Legal steps for issuance: a company generally must pass the required special resolutions and amend its memorandum and articles of association to create a new share class and define its powers.

Typical motivations

– Protect strategic assets: governments may use golden shares to keep veto over sales of firms considered vital to national security, critical infrastructure, or public policy.
– Prevent hostile takeovers: private companies (or remaining state shareholders) can use golden shares to block takeovers they consider harmful.
– Preserve public policy or non-commercial objectives in privatized firms.

Legal and regulatory context

– Golden shares interact with company law, securities law and, for countries in economic unions, free movement-of-capital rules. In the EU, several golden-share arrangements have been challenged and limited on the grounds that they unjustifiably restrict the free movement of capital. The EU permits government measures to protect essential interests, but these must be proportionate and justified (see Advocate General opinion and related EU rulings cited below).

Pros and cons of golden shares

Pros
– Strategic protection: can prevent transfers of control that would put national security, essential services or critical know-how at risk.
– Political reassurance: enable governments to privatize while retaining a check over strategic decisions.
– M&A shield: can deter hostile bidders or preserve long-term business plans from short-term opportunistic buyers.

Cons

– Concentrated control: gives one party disproportionate control relative to ownership stake, which can undermine ordinary shareholders’ rights.
– Value impact: potential buyers/investors may discount the company’s value because control cannot be freely acquired; this may reduce liquidity and share price.
– Legal vulnerability: can be struck down or limited by courts or supranational regulators if not well-justified, creating legal uncertainty.
– Governance friction: can create conflicts between the golden-share holder and other shareholders, and can deter strategic partnerships.

Real-world examples

– Embraer S.A. (Brazil): Embraer’s golden share (held by the Brazilian government) gives the state veto power over certain transactions. When Boeing sought to buy Embraer’s commercial division in 2019, the arrangement—and the government’s golden-share power—were publicly discussed after the deal collapsed in 2020 (reported in financial media at the time). Source: Yahoo! Finance (Embraer coverage).
– British Airports Authority (BAA): After privatization, the UK government retained a golden share in the privatized airport operator. In 2003 an EU court process found government measures incompatible with EU law in that context; EU legal authorities (including opinions and rulings around that period) scrutinized whether the golden share was justified. Source: EUR-Lex (Opinion of Advocate General Ruiz‑Jarabo Colomer, Feb. 6, 2003).
– UK privatizations in the 1980s: The British government used golden shares as a way to privatize major companies while retaining a degree of control during a period of significant structural change (historical context summarized by Investopedia).

1. Define the objective clearly
– Identify the public-interest, national-security, or strategic commercial reason for the golden share.
– Determine whether the objective can be achieved by less intrusive measures (regulatory regimes, national-security reviews, golden-share alternatives).

2. Legal and regulatory assessment

– Obtain detailed legal advice on domestic company law and any supranational or international obligations (e.g., EU free-movement-of-capital rules).
– Check whether the proposed powers would be considered proportionate and justifiable under relevant precedent.

3. Draft precise and limited powers

– Limit the golden share’s veto to narrowly defined actions (for example: sale of core assets, change of control, disposal of critical IP).
– Include sunset clauses or periodic reviews to reduce the risk of overreach and to demonstrate proportionality.

4. Use proper corporate procedures

– Comply with required special resolutions and amend the company’s memorandum and articles of association according to corporate law.
– Ensure transparent disclosure to shareholders and regulators.

5. Stakeholder engagement and communications

– Consult major shareholders, institutional investors and relevant regulatory bodies early to reduce opposition.
– Publish a clear rationale and planned time horizon to provide market clarity.

6. Build challenge/appeal processes

– Create transparent governance and appeals processes (e.g., independent review or arbitration) for disputes over the golden share’s use.

Practical steps — for investors, bidders or other shareholders

1. Due diligence
– Identify whether a golden share exists and read its exact powers in the company’s constitutional documents.
– Assess whether the golden share covers the transaction types you propose (change of control, transfer of assets, amendments to articles).

2. Valuation and deal structure

– Adjust valuation assumptions and model a price discount if the golden share materially impedes control acquisition.
– Consider transaction structures that mitigate the golden-share obstacle (e.g., negotiated consent, government engagement, minority investments, asset-level deals).

3. Engagement and negotiation

– Open formal dialogue with the golden-share holder (often a government) early; a negotiated waiver or consent is often the lowest-cost path.
– Offer public-interest protections or commitments where appropriate (e.g., job guarantees, local investment) to address the holder’s concerns.

4. Legal remedies and risks

– Evaluate legal challenge options in the relevant courts or regulatory forums, keeping in mind precedent (e.g., EU case law) and the high evidentiary burden to show a golden share is unlawful.
– Be prepared for political and public-relations dimensions of any dispute.

Alternatives to golden shares

– Statutory regulatory powers: sector-specific laws (telecoms, defense, energy) that allow regulatory approval or national-security reviews for transactions.
– Shareholder agreements or veto rights negotiated with key shareholders.
– Golden boards or supermajority provisions that require broader consent for specific actions (less concentrated than a single golden share).
– State-owned “golden” stakes with ordinary veto rights negotiated as part of privatization (but without a single controlling golden share).

– Precise text: what powers are enumerated? Are they limited to particular transactions or open-ended?
– Duration and sunset clauses: is the golden share time-limited or reviewable?
– Scope of veto: does the veto apply to ordinary resolutions, special resolutions, or both?
– Regulatory exposure: are there domestic or supranational rules that could invalidate or limit the golden share?
– Precedent and practice: how have courts or regulators in the jurisdiction treated similar arrangements?

Conclusion

Golden shares are powerful governance tools that can protect strategic interests but also restrict market transactions and shareholder rights. They require careful legal drafting, strong justification and clear limitations to withstand regulatory and market scrutiny. Stakeholders (governments, companies and investors) should weigh alternatives, seek early engagement and prioritize transparency to minimize legal and commercial risk.

Sources

– Investopedia. “Golden Share.” https://www.investopedia.com/terms/g/goldenshare.asp. (Accessed Aug. 19, 2021.)
– Yahoo! Finance (coverage of Embraer/Boeing transaction reporting). “Embraer Shares Drop 15% After Boeing Deal Fails.” (Accessed Aug. 19, 2021.)
– EUR-Lex. “Opinion of Advocate General Ruiz‑Jarabo Colomer, Feb. 6, 2003.” (Accessed Aug. 19, 2021.)

Editor’s note: The following topics are reserved for upcoming updates and will be expanded with detailed examples and datasets.

What is a Golden Share?