In a new paper, I examine the potential of sunset clauses – legal provisions that automatically phase out enhanced voting rights over time or upon certain events – to mitigate the imbalances and entrenchment risks associated with tenure-based voting structures, especially in jurisdictions like Italy, where ownership tends to remain concentrated.

As EU policymakers seek to deepen capital markets and promote long-term investment, tenure voting structures have gained traction as tools to reward loyalty – but not without governance risks. Sunset clauses, in this context, emerge as a promising mechanism to align European governance models with investor protection and market integrity.

This framework is grounded in a novel dataset of 412 Italian listed firms over the 2013–2022 period and simulates the slow, deliberate dimming of tenure voting shares – illuminating how power might be rebalanced. I argue for a hybrid design of sunset clauses, one that binds control not just to time limits, but also to the size of economic stakes.

The paper addresses several key questions that any steward of shareholder democracy must confront. Can sunset clauses effectively prevent control from lingering long past its usefulness? Are temporal limits alone sufficient, or should control diminish when economic commitment does? And how might these mechanisms be tailored to function in civil law jurisdictions, far from the Delaware courts where dual-class debates have flourished?

These questions are especially urgent in a new era of corporate governance. For years, scholars have warned that tenure voting, while designed to reward long-termism, risks cementing control in ways that no longer serve shareholders or markets. Sunset clauses emerge as a sort of countermeasure.

Lessons from the Field

The Italian market, with its blend of frequent family ownership and detailed governance disclosures, serves as fertile terrain for empirical exploration. To date, few empirical studies have examined the practical effects of sunset clauses in civil law systems. My paper fills that gap with a novel dataset of Italian listed firms, offering jurisdiction-specific insights with broader relevance for EU governance reform.

Of the 412 companies analyzed, 68 had adopted loyalty shares. These were not the scrappy newcomers of the economy, but large, mature firms. Through simulations spanning five years, the paper finds that introducing sunset clauses would not cause seismic shifts, but rather gradual recalibrations. The analysis employs a simulation framework in which loyalty shares decay incrementally over a five-year horizon, allowing for the dynamic reallocation of voting power across shareholder classes. This is complemented by a classification of firms by size and maturity – based on total assets, ROA, and capital expenditures per share – to assess different impacts across corporate life cycles. In addition, a logistic regression explores the relationship between ownership concentration and the likelihood of adopting loyalty shares, identifying statistically significant patterns that inform the policy relevance of ownership-based sunset clauses.

Ownership concentration fades gently, and financial metrics remain largely stable.

Interestingly, firms adopting loyalty shares do not do so when ownership is absolute. Rather, adoption peaks at around 50–60 percent control. Loyalty shares, then, act as a shield for controlling shareholders, and sunset clauses gently lower it.

The simulations tell a quiet but compelling story. In large and very large firms, sunset clauses lead to incremental dilution of voting control – approximately 0.16–0.20 percentage points per year. Not enough to spark corporate unrest, but sufficient to open the gates to broader participation. For smaller firms, the impact is minimal, affirming the sensitivity of the mechanism. Power fades not with a bang, but with grace.

From Time to Ownership: Reimagining the Sunset

Temporal sunsets – where voting enhancements expire after five, seven, or 10 years – have become common in U.S. IPOs. Yet time, as scholars like Bebchuk and Kastiel argue, is a crude compass. Founders may linger long after their stake has diminished, ruling in name but not in investment. So, ownership-based sunset clauses, which terminate voting privileges when economic commitment drops below a threshold, offer a more responsive model.

This can be particularly effective in Italy, where loyalty shares cluster around companies with high but not dominantownership. A clause pegged to 10–15 percent ownership could ensure that enhanced rights reflect skin in the game, not legacy. It is a shift from counting years to counting gold.

But the road to such reforms is fraught. Ownership thresholds must be carefully calibrated. Disclosure must be rigorous, lest families hide behind pyramids and related parties. And cultural change towards transparency, proportionality, and active investor stewardship must precede or accompany legal reform.

Policy Reflections: A Realm Rebalanced

The policy implications of this work are profound, and timely. In a European Union seeking deeper capital markets and stronger investor trust, sunset clauses could offer a soft governance innovation – voluntary, flexible, and symbolically potent. A five-year sunset, the paper argues, strikes the right balance: aligned with business cycles, steady in effect, and adaptable across firms.

Moreover, combining time-based and ownership-based triggers may yield a hybrid model that is both principled and pragmatic. In this architecture, control expires not when the clock chimes arbitrarily, but when it no longer reflects the economic and strategic reality of the firm. Such a system honors the initial need for stability – especially in innovation-heavy or family-driven companies – while acknowledging that no reign should be eternal.

Conclusion

This paper contends that sunset clauses do not lead to the fall of order, but to its renewal. They are not designed to punish control, but to temper it, to tether it to purpose rather than perpetuity.

When bounded by meaningful expiration, loyalty shares can coexist with the principles of democratic governance. Ownership-based sunset clauses, in particular, provide a more flexible and just design: They allow control to ebb not merely with time, but with the waning of real economic stakes.

This study contributes to the evolving discourse on corporate governance by forging a bridge between theory and practice—between the abstract ideals of shareholder democracy and the empirical realities of modern control structures. It offers a vision in which power is not seized nor lost, but entrusted, then returned. In doing so, sunset clauses not only safeguard shareholder democracy – they help restore legitimacy to corporate governance systems built for dynamic, accountable, and sustainable capital markets.

This post comes to us from Professor Maria Lucia Passador at Bocconi University – Department of Law. It is based on her recent article, “Sunset Clauses in Tenure Voting Structures: When Corporate Power Faces the Inevitable Twilight,” available here.