Professional Documents
Culture Documents
General Report
General Report
General Report
By:
Evanghelos Perakis
Professor of Law at the University of Athens1
Table of Contents
1. Introductory Chapter: The Subject Matter of this Report
1.1. The General Theme
1.2. "Shareholders", "Minority", "Rights"
1.3. Minority Rights and Minority Protection
1.4. Minority Shareholders and "Investors"
1.5. Why Minority Rights?
1.6. Plan
2. The General Limitations of the Majority Power the Foundations of the Minority
Rights
2.1. Equal Treatment of the Shareholders
2.2. Abuse of right "Abus de majorit"
2.3. Duty of Loyalty
2.4. The Interest of the Company ("intrt social")
2.5. Property Rights Vested Rights
2.6. "Pacta sunt servanda"
2.7. Minority Shareholders, Considered as Consumers
2.8. Fairness
2.9. Conclusive Remarks
3. General "Correcting" Remedies
3.1. The "Unfair Prejudice" Remedy ("Oppression of the Minority")
3.2. Right to Cause the Company to Sue its Directors - Derivative Action
3.3. Right to Challenge the Validity of Resolutions of the General Meeting
(or of the Board of Directors)
3.4. The "Existential Rights" of the Shareholders
4. Special Minority Rights
4.1. Information Rights
4.2. Special Audit
4.3. Rights Concerning the Conduct of Assemblies
4.4. Right to Directly Appoint or Request the Judicial Appointment of a
Company Officer Right to Request his Removal
4.5. Pre-emption Rights in Respect of Actual or Potential Share Capital
Increases
4.6. Right to Receive a Minimum Mandatory Dividend
4.7. Other
4.8. Conclusive Remarks on the Rights of Minority Shareholders
5. Some Special Issues
5.1. Limits to the Exercise of Rights Protecting Minority Shareholders
5.2. Minority Rights and Groups of Companies
E-mail: eperakis@otenet.gr
See Dine (England), X. The names of the national reporters are listed in Appendix I.
"un merveilleux instrument cr par le capitalisme moderne" (G.Ripert, Aspects juridiques du
capitalisme moderne, Paris 1951, no 46).
4
Cf. the interesting introductory remarks of the German reporter (Hopt).
3
upon some more general topics, such as the various principles that are used for the
minority protection. Therefore, the author of this report has chosen the present the
material provided by the national reporters in an organized way, and to add
information on some non-reported countries, notably the US. This report is therefore
intended to be a synthesis rather than an in-depth comparative research.
1.2. "Shareholders", "Minority", "Rights"
This general report shall focus on the "Rights of Minority Shareholders". The subject
matter of the discussion shall be determined by these three words. More specifically:
A. "Shareholders"
This report shall focus solely on companies limited by shares (joint stock company,
limited company, socit anonyme, sociedad anonima, Aktiengesellschaft, Naamloze
Vennootschap, societ per azioni, Aktieselskab, "Kabushiki Kaisha", etc. hereinafter
called "limited company"); it shall not consider association forms or partnerships
lacking the characteristics of a share-issuing company. Limited partnerships by shares
(socit en commandite par actions, Kommanditgesellschaft auf Aktien) shall not be
considered either, because of their minor significance worldwide. Listed and unlisted
companies shall both be considered, and some differences shall be highlighted, to the
extent possible. The same applies to public (not only listed companies, but also
companies with a liquid market for their shares) and private companies (or "privately
held" or "closed" or "closely held", or, in Australia, "proprietary"), and, if private, to
"small" and "big" companies.
Shareholders are the members of the company. Technically, they hold a participation
interest in its capital (equity holders), composed of relatively small units called "shares".
The rights accruing from each share are in principle the same for all shareholders. Such
rights are for example the right to be (and stay) member of the company, to collect a
dividend, to vote at shareholders' meetings, to recollect surplus on a winding-up.
However, special categories of shares are often provided for, especially the so-called
"preferred" shares (actions de priorit, Vorzugsaktien), with or without special voting
rights, which confer on the shareholder some additional rights (usually of a pecuniary
nature, such as priority to receive dividend, cumulative dividend, preferred payment of
the liquidation proceeds etc.). There are also jurisdictions, where shares are split into two
or more entitlements. One example is Switzerland, where the equity holders are opposed
to the "participants", a special category of shareholders without voting rights, who
subscribe to a special part of the capital ("Capital-participation", art. 656a ff. CO)5.
Another example is France, where "certificats d'investissement" and "certificats de droit
de vote" (art. L. 228-30 NCC) are two different titles, which together make up one
share. In a great number of countries "classes" of shares are also provided6, a term
denoting categories of shares, having some common characteristics. It is well known that
modern finance has invented many "hybrid" securities, which are difficult to categorize.
Minority rights are of course typical to common shares, but other types of corporate
securities may need protection against a majority power. This report will not deal with all
types of securities, and will focus on the typical rights that the law affords to minority
shareholders. It must be mentioned that "classes" of shares or shareholders having some
special individual status are often required to assent (unanimously, by majority, or
individually) to changes of their status.
B. "Minority"
By reference to "minority" rights, this report will cover rights afforded to shareholders
having a minority position. Some clarifications are needed here, for a better
understanding of what a "minority" can be.
1. Minority is a relational legal concept, whose definition needs the notion of majority.
Majority is often defined by reference to the voting power7, or to the capital prevalence8.
The two parameters do not necessarily coincide, as it is shown by such devices as the
non-voting shares, or, at the other extreme, shares with overwhelming power, such as the
much-disputed "golden share". Therefore "minority" is a floating concept.
2. The majority power is usually visible at general meetings. The general meeting is the
institutional gathering of shareholders. It is the "legislative" forum of the company,
where decisions are taken. It is often regarded as the "supreme" organ9 of the company,
although the laws vary in what concerns the division of power between this body and the
board of directors. The fact remains that the general meeting elects the board, approves
the accounts, amends the articles of association (the "articles"), and decides on major
matters of the company life.
The majority power in general meetings is defined by the rules regarding the passing of
resolutions. The usual majority is 50+% of the capital attending the meeting10. There are
variations to this rule, such as the English rule of the majority of the voting members
(but subject to the right of members "to demand a poll"11), the casting vote of the
chairman12, the "relative majority" provided for the election of officers13, and of course
any different provisions in the articles, which may increase the 50+% majority or limit
the maximum votes that each shareholder can cast, mainly in order to avoid excessive
concentration of power14.
It has been noted, that a higher majority gives a stronger legitimacy to resolutions15. This
would be in favor of high majority rates, but on the other hand would put the operation
7
Dine (England), II: "a minority shareholder is one who cannot exercise 51% of the voting power".
Gologina-Ekonomou (Greece), II, Katner (Poland), III 3.
9
So for example in Switzerland (art. 698 CO, "le pouvoir suprme").
10
Majority requirements go very often together with quorum requirements. However there are
exceptions, like Finland, where any present shares (even 1) can take decisions (see Kaisanlahti
(Finland), 2.1). The quorum is computed on the basis of shares represented. However in England the
presence of at least 2 persons is needed, except in the case of a single member company (Dine
(England) III).
11
See below 4.3(3) and accompanying footnote.
12
For example in Finland, Kaisanlahti (Finland), 2.1.
13
In Finland, again, see Kaisanlahti (Finland), 2.1.
14
See for example France (art. L. 225-125 NCC); Germany ( 134 I AktG); Switzerland (Trigo
Trindade/Bahar (Switzerland), II A 1); Denmark (art. 67 of the 1996 Act).
15
Karsten Schmidt, Gesellschaftsrecht, Kln/Berlin/Bonn/Mnchen, 1997, p. 458.
8
of the company in jeopardy. Therefore higher majority rates (like 2/3 or 3/4) are only
provided by the law for extraordinary decisions, like the amendment of the articles,
the merger, the division or the dissolution of the company, the issue of bonds, the
change of the company's nationality etc.16 Here again, the articles can increase the
percentages, but usually not up to unanimity17. Higher rates reach an extreme, when
unanimity is exceptionally needed by law. Examples usually include the increase of
shareholders' liability, the variation of any particular statutory rights granted to them18 or
the abolishment of "individual" rights (see below, 1.2(C)(2)). Another case of unanimity
is the so-called "plenary" general meeting, which can exceptionally meet and deliberate
without notice, if all shareholders are present and consent to it19, or the so-called "papermeetings" or "action by consent", when resolutions are taken without meeting20,21. The
majority rates define the powers of the majority in general meetings and the
corresponding blocking power of the minority22. It is clear that the higher the majority
rates the easier it is for a minority to block decisions.
3. The majority power is also exercised outside of shareholders' meetings. For example,
when the board is identified with the controlling shareholders, the majority power is
constantly exercised by the board itself. Conversely, minority protection and minority
rights do need a general meeting to materialize, although some minority rights can be
exercised outside of meetings.
16
See for example France (art. L. 225-96 NCC), Germany ( 179 AktG), Finland (FCA Ch. 9 Sc. 14 para.
1), Switzerland (art. 704 CO), Poland (art. 245 and 414 CCC). In England there are extraordinary and
special resolutions ("special" mainly being those by which the articles are altered): In these cases a
majority of the voting members is needed (CA 1985, s. 378 so also in Australia). - EC law provides
for a majority of at least 2/3 of the shares represented at the meeting in the cases of a suppression of the
pre-emption rights, a decrease of the capital, and a redemption of capital (Dir. 77/91/EEC, art. 40), a merger
(Dir. 78/855/EEC, art. 7) or a division (Dir. 82/891/EEC, art. 5).
17
See for example Switzerland (art. 704 CO).
18
For example, in France the increase of the capital by way of increasing the nominal value of each share
requires unanimity (art. L. 225-127 NCC). Similarly, in Switzerland the grouping of shares to a higher
nominal value requires the consent of the shareholder concerned (CO 623 II). In Germany every
shareholder must assent to a decision of the general meeting, by which additional obligations are imposed
upon him, or which makes a transfer of the shares dependent upon the consent of the company ( 181
AktG).
19
So for example in Greece, art. 26 III law 2190/1920; in Poland, art. 239 I and 404 I CCC, Katner
(Poland), VII 2.
20
So for example in the US under the MBCA 2001, 7.04, or in the Netherlands under s. 2:238(128) of
the Civil Code.
21
In the US "ultra vires" transactions, and fraudulent or wasteful transactions, can only be ratified by a
unanimous vote (see Hamilton, The Law of Corporations, St. Paul, Minn., 2000, p. 489;
Pinto/Branson, Understanding Corporate Law, New York 1999, 9.06[B]), while in the Netherlands
unanimity is required for a modification of the articles when these forbid their own modification (see
Timmerman/Doorman (Netherlands), no. 27). In Japan unanimous agreement of all shareholders is
required to release directors from their liability to the company (see Kawashima-Iwasaki (Japan), III 5).
22
Another possibility is to provide for an ordinary quorum and a simple majority, but then give an express
blocking power to certain minorities. Thus for example, in Germany the company can waive (or make a
compromise on) its claim for indemnification against the promoters and the members of the Vorstand or the
Aufsichtsrat only if the general meeting assents to it, but then a minority of 10% of the total capital has the
right to object ( 50, 93 IV, 116 AktG). Also, in Greece the company may waive its rights against directors
or compromise with them by resolution taken with simple majority, unless a minority of of the capital
represented at the meeting vetoes such actions (art. 22a 4 law 2190/1920), see Gologina-Ekonomou
(Greece), III 5, with other examples from Greek law 2190/1920. The difference is that this has to
expressly veto the action.
31
See on these rights for example Ripert/Roblot/Germain, Trait de droit commercial, 1-2, Paris
(2002, no. 1597.
38
Such individual rights are hardly "minority" rights. See for example D.Schmidt, Les droits de la
minorit dans la s.a., Paris 1970, no. 4.
39
See the Dutch report, Timmerman/Doorman (Netherlands), no. 71.
40
See the Greek report, Gologina-Ekonomou (Greece), X.
41
See the Japanese report, Kawashima-Iwasaki (Japan), IV 11.
42
Wymeersch/Jakhian/Caeymaex (Belgium), no. 38.
4. Legal rules introducing minority rights are usually of a mandatory nature. This is the
case of civil law countries43, but also of Japan44. American corporate law is mostly
enabling, and therefore the articles of a limited corporation can be tailored according
to the special circumstances and needs of the parties. Opting-out through the articles is
also sometimes possible (example: pre-emption rights in England), but even in such
situations "standard legal rules appear to have some bite"45. The problem touches upon
another topic of this Congress ("Mandatory and non-Mandatory Rules in Corporate
Law").
1.3. Minority Rights and Minority Protection
Minority rights are closely connected with, and are in fact part of the more general
theme of minority protection. The latter is a complex normative web, in which a variety
of methods are used in order to restrict the all-embracing power of the majority.
That the entire company law may be relevant to minority protection is beyond any
doubt. As a matter of fact, the rules regarding the structure, the operation and the
control of a limited company constitute a full set of checks and balances that, directly
or indirectly, can protect minority. Thus the rules on the raising and maintenance of
the capital, the duties of the board, the role of outside directors or the auditors, the
rules on the conduct of assemblies, the general rules on disclosure, accounting
standards and the "true and fair view" principle (especially when balance sheet law is
more shareholder than creditor-friendly), the legal controls of the provisions of the
articles are all, in one way or another, able to protect also minorities. But this report
will focus on minority rights, i.e. the part of the minority protection, which requires
some action to be taken by the shareholders themselves.
1.4. Minority Shareholders and "Investors"
Minority protection, even when it is granted by means of individual rights, focuses on
the relations within the company, rather than the market. Internal company relations
are the subject matter of company law. The capital market legislation, which in the
overwhelming majority of states is separated from company law (but keeps happily
the latter in motion), contains rules for the offer of securities to the public, stock
exchange transactions, supervision, insider trading, takeovers, the provision of
financial services, the liability of the market actors to third parties (for example
prospectus liability) etc. Moreover, special regulatory authorities have been created in
43
For example: The American Securities and Exchange Commission (SEC), the French Commission
des Oprations de Bourse (COB), the German Bundesaufsichtsamt fr den Wertpapierhandel (BAWe),
the Belgian Banking and Finance Commission (BFC), the Italian Consob, The British Financial
Services Authority (FSA), the Australian Securities and Investment Commission (ASIC), the Swiss
Commission fdrale des banques (but also Instance d'Admission la Bourse Suisse and Commission des
offres publiques d'acquisition), the Japanese Securities and Exchange Surveillance Commission (SESC),
the Hellenic Capital Market Committee etc.
47
See for example s. 225 ff. of the Financial Services and Markets Act 2000.
48
A good criticism to the "separation approach" has been made by Peter O. Mlbert, "Die
Aktiengesellschaft und der Kapitalmarkt der Anlegerschutz", General Report to the 2001 Annual
Congress of Greek Commercialists ("The limited company and the capital market the protection of
the investor", Rhodes, Nov. 2001), 2002, p. 1. See also Hopt (Germany), I.
49
See Schleifer/Vishny, A Survey of Corporate Governance, [1997] The Journal of Finance 52, 737783.
10
can be categorized under the same headings50. A striking difference of the two situations
is that removal of the board is a drastic solution to the first agency problem, but not
available for the second51.
Minority rights are mostly necessary where exit is not legally possible (therefore in
privately held companies) or, even if possible, is not a viable solution, either because the
value of the shares is depressed, or for personal or strategic reasons. Minority rights can
also be beneficial, because they make equity investments attractive; they keep the cost of
capital for the company low52; they contribute to a more efficient functioning of the
company itself (here the view of the minority as a "subsidiary" organ53 is relevant); they
help to prevent losses to the economy.
It is obvious that the kinds and the intensity of minority rights have to be adapted to
the various patterns of ownership in each country, the corporate culture, the economic
level, the financial techniques etc. For example, in a pattern of concentrated
ownership the main type of problem will be abuse of power by a dominant shareholder,
whereas in systems of dispersed ownership the problem will be rather expropriation by
the management and theft of the control premium. It is also obvious that protection of
minority does not need to come solely from company law. Other branches of law can
also be relevant, such as capital markets, securities and stock exchange law (this has
already been mentioned), competition or insolvency law. Corporate governance rules
and accounting standards are also essential, and so is the quality of enforcement of
rights. Finally, one should not forget the protective and disciplinary function of the
market itself, and in particular the prospect of a takeover54.
1.6. Plan
The balance of this report is organized in five chapters. In the next chapter (2) some
general notions and principles will be presented. They will contribute to a better
understanding of the minority rights, but can have a more general significance for the
protection of minority, as the global problem. The rights will be divided in two sets.
The first set (3) will comprise the corrective remedies available to minority
shareholders. The common characteristics of these rights are, firstly, that intervention
of a court is needed, and, secondly, that the court will correct or redress a situation
that is illegal or unfair to minority shareholders (or, possibly, all shareholders). These
rights are rather of a "procedural" nature. The second set (4) will comprise rights
consisting in a direct action, which shareholders can take themselves ("self-executing"
rights, e.g. a right to directly appoint a director), or through judicial intervention (e.g.
when the court accepts a shareholders' request for a special audit); in both cases,
however, these rights provide some special assistance to shareholders, not by
redressing a situation or making good a wrong, but by causing an intervention in the
50
See the very interesting remarks of P.Davies, Introduction to Company Law, 2002, at p. 216, where
he presents the various strategies for regulating principal (shareholders)/agent (board) relations, i.e.
enhancing the principal's control ("affiliation", "appointment" and "decision" rights) and structuring the
agent's decisions ("setting agent incentives", "constraining agent decisions"). When it comes to the
principal (minority)/agent (majority) relations (at p. 217), the author applies the same strategies mutatis
mutandis, admitting, however, that in this context they are more complex.
51
See P.Davies, op.cit., p. 216.
52
Pertinently Timmerman/Doorman (Netherlands), no. 3; P.Davies, op.cit., p. 216.
53
D.Schmidt, Les droits de la minorit dans la s.a., 1970, no. 257 ff.
54
See P.Davies, op.cit., p. 214.
11
life of the company that helps the minority. These rights are rather of a "substantive"
nature. In the next chapter (5) various special issues regarding minority rights will be
discussed, while the last chapter (6) will be dedicated to some theoretical ideas about
minority rights and the rule of law and their possible impact on comparative law.
2. The General Limitations of the Majority Power the Foundations of the
Minority Rights
In this chapter an attempt will be made to present various ideas and principles, which are
often used in various law systems for the limitation of the majority power, and,
correspondingly, for the protection of the minority. They constitute the dogmatic or
ideological (or even practical) framework of such protection. These principles are no
rights per se. However, they define the legal environment, in which protection is granted,
showing thus that minority rights do not function in a vacuum, and also provide
assistance for a better understanding of minority rights and the conditions for their
exercise. For example, arguing on the abuse of the majority power is not by itself a right,
but can be a condition for the right of shareholders to rescind a resolution of the general
meeting. Similarly, equal treatment is a rule rather than a right, but unequal treatment
will give rise to such rights as a right to compensation, or to exit. Equal treatment and the
interest of the company can assist in balancing the granting of pre-emption rights against
their possible elimination by a majority decision.
It should be noted, however, that these ideas are not invariably supporting minority
shareholders; they are often double edged, and can also, under the circumstances, be
protective of the management and the company in general against the minority. For
example the duty of loyalty of the majority can find limits in the corresponding duty of
loyalty of the minority.
2.1. Equal Treatment of the Shareholders
Equality of shareholders is one of the most "popular" bases for the protection of
minority. Since the legal system has to ensure a "level playing field" allowing all
individuals to play by the same rules55, any discriminatory act against a shareholder goes
against the very mechanism of the limited company and can destroy shareholders'
expectations56. This principle transcends the opposition of majority and minority (as it
appears from the rule "one share-one vote", which is an important manifestation of
equality), and rather aims to ensure that the actions of the directors or of the
controlling shareholder do not unfairly discriminate between shareholders. Equal
treatment of shareholders, rather than equality of shareholders, marks an inherent
limit to the majority power57. Equal treatment may give rise to a positive claim, for
example to exercise a pre-emption right ("status positivus"), or to a right of resistance
against a preferential treatment of others ("status negativus")58. Equal treatment rules
can be found in statutes, case law or codes of best practices.
1. In the EC the principle of equality is usually believed to derive from art. 42 of Dir.
77/91/EEC, stating that: "For the purposes of the implementation of this Directive [the
55
Cheffins, Company Law Theory, Structure and Operation, Oxford 1997, p. 472.
On the latter see Cheffins, op.cit., p. 475.
57
Karsten Schmidt, Gesellschaftsrecht, 1997, p. 469.
58
Karsten Schmidt, op.cit., p. 471.
56
12
directive concerns capital maintenance and protection], the laws of the Member States
shall ensure equal treatment to all shareholders who are in the same position"59. This
provision has clearly a limited scope. When the ECJ was called to make a decision on
the "golden share", it thought that such a scheme contravened the rules on the free
movement of capital not art. 42 and equal treatment60. However, member states have
eagerly generalized the rule (or had already done so) and promoted it to a general
principle61. Thus in Germany, "shareholders are to be treated equally under equal
circumstances" ( 53a AktG 62). In the Netherlands, section 2:201(2) of the civil code
provides that "[a] company limited by shares must treat shareholders and holders of
depository receipts whose circumstances are equal in the same manner"63. According
to Prof. L.Timmermann and Mr. A. Doorman, the Dutch reporters, this rule is
considered to be "of the utmost importance for the protection of minority
shareholders"64. The same happens in Finland where equal treatment is considered to
be the mandatory "general standard"65, overriding other provisions, including the
business judgment rule66. This "general standard" does not bind only the general
meeting, but also majority shareholders, for example when the latter authorize the sale of
company's assets to themselves for a low price (a practice known as "tunnelling")67. In
some other countries equality is dispersed in various texts, although obviously as a
reflection of a general principle. For example in France no general provision exists,
but it is provided that the reduction of capital cannot violate equality of shareholders
(art. L. 225-204 NCC), or that the auditors have the duty to make sure that equality is
respected (art. L. 225-235 NCC).
2. Equal treatment is not considered to prohibit exceptions provided by the law, for
example preferred shares68, multiple voting rights69, special privileges70 or loyalty
bonuses71. Equality is also largely defeated, when the company's control is transferred
through a private sale. The question would be, whether the "control premium"
collected by a majority shareholder, who sells his controlling interest to an outsider,
should be shared, as a common asset, with the other shareholders. This question has
been negatively answered. Firstly, for efficiency reasons: In such a case, an equal
opportunity should be given to all shareholders to ratably sell their shares, but then
acquisitions would be stifled, or become very expensive and difficult72. Another
reason is that the rule of equal treatment binds the company and its organs not any
59
13
particular shareholder, who, as an individual, is not obliged to equally treat his fellow
shareholders, for example by purchasing shares from all shareholders on an equal basis73.
In such situations, a remedy might be found in the principle of loyalty between
shareholders, which, however, is not favorably accepted in all countries (see below, 2.3(3
and 4)).
Another exception to equal treatment is when equality is countered by other principles,
such as the "interest of the company". Thus, a "selective" distribution of information to
some strategic or institutional investors (or during a "broker's lunch"74) may be
permitted, if this is dictated by the best interests of the company75 or if information is not
equally necessary to all shareholders76. This can also legitimize disclosure by the board
to prospective buyers in spite of the board's duty of confidentiality77. In Switzerland, art.
706 CO provides that general meeting decisions can be rescinded when shareholders are
unequally treated, "without this being justified by the purpose of the company"78. Prof.
Trigo Trindade and Mr. Bahar, the Swiss reporters, refer to case law of the Swiss
Federal Court, which approves discriminatory treatment, "if this is an appropriate means
to reach a justified end"79, although such treatment must not exceed what is necessary
each time (principle of proportionality)80. In Germany it is also believed that unequal
treatment is not per se unlawful, if justified by the company's interests81, while in
England "fair" rather than "equal" treatment seems to be the rule82.
Finally, a "de minimis" rule is likely to apply. In England a minimal breach of equal
treatment is not taken into consideration. According to the British reporter, "if
discrimination is to be a ground for interference it will have to be some very clear,
perhaps vindictive discrimination that is alleged before the court will be moved to
upset the normal voting patterns of the company and declare a resolution invalid"83.
3. It is even considered, that equal treatment has practical disadvantages: It can bear
costs (for example in order to ensure that equal information reaches all shareholders); it
can be in conflict with measures able to transfer resources to more highly valued uses;
and it is not sufficient by itself to prevent practices that are equally harmful to all
shareholders84 (conversely shareholders may prefer a "larger pie", even if not shared
equally85).
4. It should be noted that in shareholders' democracy, equality is understood as
proportional to the capital held. However, this applies only to rights, which are
73
Katner (Poland), II 2.
See Cheffins, op.cit., p. 481.
75
This important topic is discussed by Timmerman/Doorman (Netherlands), no. 43. See also below,
2.4.
76
Trigo Trindade/Bahar (Switzerland), III F 2 a.
77
See in Germany for example Stoffels, ZHR 2001, 362, Mller, NJW 2000, 3452.
78
"une ingalit de traitement [] non justifi[e] par le but de la socit". Trigo Trindade/Bahar
(Switzerland), II B 2 b.
79
Trigo Trindade/Bahar (Switzerland), II B 2 b.
80
Trigo Trindade/Bahar (Switzerland), II B 2 a.
81
Hffer Aktiengesetz, 2002, 53a, 8.
82
See P.Davies, Introduction to Company Law, 2002, p. 233, 252.
83
Dine (England), III.
84
See on all this Cheffins, op.cit., p. 479-491. For example the restriction of pre-emption rights may
equally harm all shareholders, see Lutter, Klner Kommentar zum AktG, 2nd ed., 186, 59.
85
See Easterbrook/Fischel, op.cit., p. 119.
74
14
15
16
This ultimately means that under the circumstances there may be a unilateral duty of
loyalty102, when a shareholder either controls the company or influences its
management (this explains the German 117 AktG), or that all shareholders (in
accordance with the power they can exercise) are mutually bound by such a duty.
The German position is, especially after the "Girmes" decision of the Supreme Court
(BGH)103, that the duty of loyalty is owed both vertically (vis--vis the company) and
horizontally (vis--vis the other shareholders), and obliges the shareholders to
exercise their voting rights accordingly104.
5. Should auditors give special regard to the interests of minority shareholders? The
answer is negative105. However, in many countries auditors have the duty to inform the
general meeting about irregularities they have established not only in the accounts, but
also (in some countries106) in the general governance of the company. If requested, they
have also the duty to attend the general meeting and, often, answer questions asked by
the shareholders in connection with the audit they have conducted. In Greece, as prof.
Gologina-Ekonomou notes, auditors have the duty to report to the supervising
authority any irregularities they detect, consisting in a violation of the law or the
articles107.
2.4. The Interest of the Company ("intrt social")
1. Minority can be protected with the assistance of the notion of the "interest of the
company" ("intrt social"), which transcends the interests of any majority108. This can
be meaningful when and to the extent the interests of the company and those of
the minority are aligned in such a way, that the enforcement of the former serves also
the latter. On the other hand the interest of the company may in fact fix limits to
minority protection. An interesting example already mentioned (see above, 2.2) is
that in France a decision of the general meeting is considered to be abusive when two
conditions are met: That the decision is prejudicial to the minority, without this being
dictated by the interest of the company. This limits rather than provides protection. Also,
pre-emption rights can be eliminated when the interest of the company dictates it; or
selective information can be provided to third parties (although not to the minority) if the
interest of the company justifies such a measure, etc.
102
The provisions of this paragraph refer to a person, which has a position of influence in the company, and
which, by using this influence, manages to dictate some action to the management board (Vorstand), the
supervisory board (Aufsichtsrat), or another proxy of the company. If by reason of this behavior some
damage is caused to the company or its shareholders, the person holding this position of influence has the
duty to indemnify the company or the shareholders, as the case may be.
103
Decision of 20.3.1995, BGHZ 129, 136 (1995) = ZIP 1995, 819, cited by Hopt (Germany), I.
104
See Lutter, Treupflichten und ihre Anwendungsprobleme, ZHR 1998, 164; Henze, Treupflichten
der Gesellschafter Kapitalgesellschaftsrecht, ZHR 1998, 186. See also Hopt, Shareholders' rights and
remedies: A view from Germany and the Continent, Company Financial and Insolvency Review 2,
1997, 261-283, 275; Karsten Schmidt, Gesellschaftsrecht, 1997, p. 591.
105
Hopt (Germany), III; Dine (England), III; Fletcher (Australia), no 26; Kawashima-Iwasaki
(Japan), III 4.
106
For example in Finland, Kaisanlahti (Finland), 5.4.
107
Gologina-Ekonomou (Greece), III 4.
108
See for example in Switzerland art. 717 CO: "Les membres du conseil d'administration [] veillent
fidlement aux intrts de la socit". On the difficulty of definition see Trigo Trindade/Bahar
(Switzerland), II B 2 a.
17
2. All this is easy to say, but the question is of course to fix the precise content of the
interest of the company. In fact this question touches upon the roots of company law, and
the role of the company in society.
The majority opinion seems to be that company law primarily serves the interests of
shareholders, as the final risk-bearers, in the pursuance of the company's objectives109.
This obviously helps minority. Quite often, however, the interest of the company is given
a larger meaning to include a wide range of interests not only within the company (such
as those of employees110), but also around it, like the interests of creditors (especially on
the verge of insolvency111), suppliers, consumers, environment etc. ("stakeholders"). The
need to pursue and achieve a composition of all these interests, stressed by some "codes"
of corporate governance worldwide (including the 1999 code of OECD), gives a special
mission to the officers of the company, and imposes a balancing of their action
("inclusive approach"112). It has been mainly the work of the French "School of Rennes"
to expand the notion in order to include most of the interests connected with the
enterprise ("doctrine de l'entreprise")113. In such a case, shareholders (including
minority shareholders) lose the monopoly of the attention of the management.
According to what some French authors call "vision mdiane", the interest of the
company transcends individual shareholders and management, and identifies with the
interests of the intra-company community but excludes outside interests114. The issue is
revived in the context of the discussion regarding corporate social responsibility (CRS).
2.5. Property Rights Vested Rights
1. The share as property is a recurring theme, which has gained momentum not only in
times of expropriation by socialist governments or compulsory participation of the state,
but also when a majority manages to squeeze-out minorities. In such cases the national
constitutions, and the direct or indirect application of their provisions ("Drittwirkung"),
as well as international human rights conventions, come to rescue. Thus, for example in
Germany the share is considered to be "property" ("Eigentum") in the sense of art. 14 of
the Constitution115, while Greek courts have applied art. 1 of the First Protocol (1952) to
the Convention for the Protection of Human Rights and Fundamental Freedoms
(Rome, 1950) and treated the share as property116.
109
See for example Ripert/Roblot/Germain, op.cit., no. 1587-1; Wymeersch, Factors and Trends of
Change in Company Law, Int. and Comp.Corp.Law Review, 2000, 481, 487.
110
The German rules on the co-determination of employees are a manifestation of this large sense of
company's interest. See Hopt, Common Principles of Corporate Governance in Europe? The Clifford
Chance Millennium Lectures, Oxford 2000, p. 105, 118. See also in England s. 309 CA 1985 ("
include the interests of the employees in general, as well as the interests of its members") but the
provision is "a toothless requirement", see Dine, Company Law, 2001, p. 185; also P.Davies, op.cit., p.
271.
111
See Keay, The Duty of Directors to Take Account of the Creditors' interests: Has it any Role to
Play? JBL 2002, 379.
112
On the recent (2000) proposals of the UK DTI Company Law Review Committee, adopting the
"inclusive approach", see Dine, op.cit., p. 211.
113
See Paillusseau, Le droit moderne et la personnalit morale, RTDciv 1993, 705; Les fondements du
droit moderne des socits, JCP E 1995, I, 488. For the "enterprise model" in England see Dine, op.cit.,
p. 26.
114
See Cozian/Viandier/Deboissy, Droit des socits, 14 ed., 2001, no 432. On the distinction between
"intrt social" and "intrt commun des associs" see the same authors, no 434.
115
German Constitutional Court (BVefG) 20.9.1999 NJW 2000, 349; 23.8.2000 NJW 2001, 279.
116
See Greek Supreme Court ("Areios Pagos", plenary session) nos 40/1998, NoB 1999, 752; 8/1999
NoB 2000, 442.
18
19
On this section, as the basis for litigation by shareholders see Cheffins, op.cit., p. 455.
Cheffins, op.cit., p. 458-461. See also Gower's Principles of Modern Company Law (by P.Davis),
1997, p. 662: "there is a conflict here [in the matter of derivative actions] between proper recognition
of the contractual nature of the company's constitution and the traditional policy of non-interference by
the courts in the internal affairs of companies".
129
20
130
21
22
23
24
156
25
(e) In Israel an oppression remedy was introduced in 1981 and is included in s. 191 of
the New Israeli Companies Law (2000). It is known as "the alternative remedy to
dissolution"161.
(f) In civil law countries, the oppression remedy does not practically exist. Only
exceptionally, the court can decide that further action be taken on the evidence collected
by means of a special audit. This happens for example in the Netherlands, where the
10% of the capital can apply for a special audit ("inquiry"). If it appears from the
inquiry made that there has been a case of misconduct, the court may decide to take
certain measures, such as the suspension or nullification of resolution of a company
organ, a suspension or dismissal of a director, the temporary appointment of directors,
the temporary derogation from such provisions of the articles of association as the
court considers necessary, the temporary transfer of shares to a nominee, and finally
the winding-up of the company162. Also in Belgium, an "oppressed"163 shareholder
may, for "valid reasons", institute a legal action for the forced purchase of his shares
by the shareholders to whom such valid reasons relate164.
3. The most critical problem concerning the choices of the court in an oppression case is
the legal uncertainty, which is present even when the powers of the court are
exhaustively enumerated by the law. An analysis of what the court may do or not do is
often made in the literature, mainly in an effort to understand and to categorize the
possible choices. It is often admitted, however, that even understanding the general lines
is not easy165. In a very interesting part of the Canadian report166, an attempt is made to
define the role of equity, which commands the oppression remedy. One possibility,
argues prof. Raymonde Crte, following Prof. Cheffins167, is to apply the model
developed by the economic analysis of law regarding the hypothetical negotiation by
the parties. Here, it will be important to determine what the parties would have
initially agree under the best conditions, i.e. if they had perfect information, faced no
transaction costs, and were confident that their agreement would be performed as
arranged168. This approach, based on parameters of efficiency and value
maximization, allows Mme Crte to make a critical analysis of some Canadian caselaw. She points mainly to the fact that a correct application of the "hypothetical
negotiation" approach should not refer solely to the circumstances prevailing at the
time of the transaction, but should also take into account the evolution of the
expectations of the parties, if they based their agreement on certain premises, such as
the continuation of the business, without excluding the possible deterioration of their
relations. In this respect courts should not be confined to relief granted to petitioner as
member, but could also make orders on the buyout of the petitioner's shares by other
shareholders or even the dissolution of the company. On these matters see also below,
3.4(D) and 6.1(A).
161
See Danziger, Judicial appointment of investigators and the disclosure of information as a remedy
against oppression, Int. and Comp.Corp.Law Review, 1999, 349.
162
Timmerman/Doorman (Netherlands), no. 49.
163
The term is not used by the law, but it comes to this.
164
Wymeersch/Jakhian/Caeymaex (Belgium), no. 55.
165
Crte (Canada), no 3.2.
166
Crte (Canada), no 3.2.
167
Cheffins, Company Law Theory, Structure and Operation, Oxford 1997.
168
Crte (Canada), no 3.2.
26
3.2. Right to Cause the Company to Sue its Directors - Derivative Action
Directors incur civil liability to the company. Company law envisages civil liability
incurred also by other persons, such as managers, the members of the organ of
supervision, auditors etc. In this report civil liability will be discussed only in respect of
directors. The question, which is of interest here, refers to "indirect damages", i.e. loss
suffered by the company and not directly by the shareholders. If the loss is suffered
directly by the shareholders (as for example, when dividends have not been paid, when
shareholders have been deprived of their pre-emption rights169, when requested
information has not been provided170 or misleading statements made by the company
have had an adverse effect on the value of the shares), a right to directly sue the directors
or the company itself is available. In such a case a protection of minority issue does not
arise, although it may be of interest to shareholders to exercise a class action, wherever it
is permitted171.
As a matter of principle, shareholders cannot sue directors for indirect damages on their
own. But this is not the best policy when the board is identified with a majority, or when
the "esprit de corps" prevents the board from suing their fellow directors. The whole
system of corporate liability can then fail. The remedy in this instance would be to allow
shareholders either to oblige the company to sue, or, in a much more efficient manner, to
exercise the company's rights themselves ("derivative action"). These are in principle
two mutually excluding possibilities172.
A. Right to Cause the Company to Sue its Directors
In some countries, shareholders have the right to demand that the company institutes
proceedings against directors. This demand can be made either within the general
procedures described above under 3.1 (mainly as part of an oppression remedy) or as an
independent petition.
(a) For example in England the court may order the company to do some specified act
(and therefore also, to sue its directors) upon petition of a member, under CA 1985, s.
451(2)(b). Similarly in Australia, within an "oppression" action the court may order the
company to institute proceedings in the name of the company173.
(b) In Germany the institution of an action against the members of either the
management board (Vorstand) or the supervisory board (Aufsichtsrat) or even the
persons who are liable to the company under 117 AktG, is initiated at the request of
either the general meeting or a 10% minority. The shareholders must have held their
shares for at least three months. In both cases the general meeting can appoint a special
representative to conduct the litigation, but a 10% minority or shareholders with shares
of a nominal value of at least 1m euros can request the court to appoint a different person
(147 I, II AktG). However, if there are strong reasons to believe that the company has
suffered damage by improprieties or gross violation of the law or the articles, a special
169
See "Areios Pagos" (Greek Supreme Court, plenary session) 14/1999 EpiskED 1999, 735.
Gologina-Ekonomou (Greece), IV 1.
171
On this very important point see for the US Hamilton, The Law of Corporations, p. 556 ff. Class
action is not possible everywhere (impossible in Finland, Kaisanlahti (Finland), 8.5).
172
For example in Japan, when the derivative action was introduced in 1950, the right to cause the
company to sue its directors was abolished. Kawashima-Iwasaki (Japan), IV 4.
173
Fletcher (Australia), no 39.
170
27
See for example Reichert/Weller, Haftung von Kontrollorganen, ZRP 2002, 49.
See Gologina-Ekonomou (Greece), IV 4.
176
Giertz (Sweden), conclusion.
177
Gatti (Italy), 4 (g).
178
Timmerman/Doorman (Netherlands), no. 60.
179
See Gologina-Ekonomou (Greece), V 1. However, in Greece this remains an interpretative issue,
where authors tend to allow it, though not the courts.
180
But in Germany the introduction of the derivative action is seriously proposed (see for example
Ulmer, ZHR 1999, 290, Bayer, NJW 2000, 2609).
181
See Gower's Principles of Modern Company Law (by P.Davis), 1997, p. 665.
175
28
29
190
30
derivative procedure with more modern, flexible and accessible criteria for
determining whether a shareholder should be able to pursue the action"196.
In Canada, the rule in Foss v. Harbottle is also considered to incorporate the principle
of the distinct legal personality of the company, the rule "nul ne plaide par procureur",
and the majority rule197. In Canada the derivative action198 is not freely available, but
must be allowed by the court. The CBCA (s. 239 subs. 1) enumerates the conditions
for a "complainant" (in the large sense of s. 238, including directors and third parties)
to apply to a court for leave to bring a derivative action. This is permitted even when
" an alleged breach of a right or duty owed to the corporation [] has been or may
be approved by the shareholders of such body corporate" (s. 242), but, in granting
leave, the court can take into account any ratification199. The court must be satisfied,
first, that the complainant has given notice to the directors of the corporation of his
intention to apply for a derivative action, if the directors do not bring an action
themselves, second, that the complainant is acting in good faith, and finally, that a
derivative action appears to be in the interests of the corporation200.
The serious difficulties and uncertainties of the derivative action have induced the
Australian legislator to try to clarify the landscape (Part 2F.1A of CA 2001)201. The
purpose of the Australian reform of 2001, despite academic skepticism, has been to
"assist minority shareholders by reducing the procedural difficulty to mounting a
derivative action and providing the petitioner with access to company funds to
maintain the action"202. The derivative action can be exercised by any member of the
company, but also by "officers" (the employees being such), if such persons obtain
leave of the court. The leave is granted under five conditions, namely that: (a) the
company remains inactive203; (b) the applicant is acting in good faith; (c) the action is
ostensibly in the best interests of the company; (d) there is a serious question to be
tried; (e) the applicant gave the company written notice of intention to, and reasons
for, applying, at least 14 days before the application, or the court is satisfied that it is
appropriate to grant leave even though this requirement has not been met204. The court
will have to be satisfied that the action is not frivolous or vexatious. In order to
ascertain the merits of the case, it can, as a preliminary measure, appoint independent
investigators. When this happens, it can already cause some concern in the company,
but it can also expose the applicant to considerable financial risk, without certainty
about the allocation of costs, even if the action is successful205.
In the US the derivative action is always a hot issue, mainly as a consequence of its
possible misuse or abuse by entrepreneurial lawyers, who first detect a corporate wrong
196
The English Law Commission Report 246, Shareholder Remedies (1997), no 6.15.
Crte (Canada), no 2.
198
In the Canadian report (French text) the term "action oblique" is used. This term should not be
confused with the "action oblique", denoting an action taken by a creditor against a debtor of his debtor
(cf. art. 1166 of the French civil code).
199
Crte (Canada), no 3.1.
200
See Crte (Canada), no 3.1.
201
For a discussion of the problems being considered before 2001 see de Vere Stevens, Should we Toss
Foss?: Toward an Australian Statutory Derivative Action, Australian Business Law Review 1997, vol.
25, p. 127.
202
Fletcher (Australia), no 53.
203
But ratification does not bar the action, Fletcher (Australia), no 56.
204
Fletcher (Australia), no 55.
205
Fletcher (Australia), no 61, 63.
197
31
and then find a shareholder to maintain the litigation. The collection of attorney fees
seems to be an important element, and the various schemes of fees (contingency fees or
"lodestar method", where fees are charged on an hourly basis206) may in fact command
the initiation and the development of the cases. A derivative action is permitted if the
shareholder was a shareholder when the act or omission complained of took place
("contemporaneous ownership requirement")207, and "fairly and adequately represents
the interests of the corporation"208 (MBCA 7.41). MBCA, as revised in 2001, has two
special features. The first is that a suit is acceptable only after a "demand" has been
addressed to the corporation to take appropriate action, and 90 days have expired, unless
the shareholder has been notified earlier that the demand has been rejected by the
corporation or unless irreparable injury to the corporation would result by waiting for
the expiration of the 90-day period (MBCA 7.42). Some state statutes provide that a
demand can be "excused", mainly under the "futility exception", i.e. when the board, to
which a demand is addressed, is biased and therefore not expected to give the demand a
fair hearing209. The second feature is the "litigation panels" (independent directors of the
corporation or a panel appointed by the court), authorized to make a "business" judgment
on whether the litigation is in the best interests of the corporation. If the judgment of the
panel is made in good faith after a reasonable inquiry has been conducted and is
negative, the court dismisses the action (MBCA, 7.44). This is a major device for
boards to counter derivative litigation. The court may order the corporation to pay the
plaintiff reasonable expenses incurred in the proceedings, if it finds that these have
resulted in a substantial benefit to the corporation (MBCA, 7.46).
5. It is obvious from the above that the derivative action has received a great deal of
attention (and media publicity) in common law countries. One reason is the industry of
legal fees. Another reason is that many basic issues, like standing, screening, and cost
allocation are to a great extent judged by the courts rather than fixed by pre-established
rules. An additional feature is that the derivative action is often interwoven with other
remedies, such as the oppression remedy (the English example has been mentioned
already).
6. Finally, in Japan attention is given to the moral aim of the action to supervise and
correct management. The derivative action is possible if the company has been asked
and failed to institute the proceedings itself. Then, any shareholder who has been holding
shares for at least 6 months can bring the suit for damages suffered by the company (s.
267 of the commercial code). The number of derivative suits has been growing during
the last decade and directors have become increasingly nervous210. Safe harbor rules
have been developed. Business judgment has been one211. A recent law (2001) offered
two additional shields212: A maximum amount of liability was fixed (for a non-executive
director the limit is the amount of a two-year remuneration; for an executive director a
four-year remuneration and for a chief executive director a six-year remuneration).
Second, the board of auditors in a large company (i.e. whose capital is in excess of
206
Including the idea that the shareholders should "auction-off the suit" see de Vere Stevens, loc.cit.,
p. 131.
207
See Pinto/Branson, Understanding Corporate Law, New York 1999, 14.03[B].
208
See Pinto/Branson, op.cit., 14.03[E].
209
On the practices of "demand refused", "demand accepted" and "demand excused", and the confusion
created, see Pinto/Branson, op.cit., 14.05, who also criticize ABA for making demand all important.
210
Kawashima-Iwasaki (Japan), V 1.
211
Kawashima-Iwasaki (Japan), V 1.
212
Kawashima-Iwasaki (Japan), V 1 d.
32
100 million yen) plays a similar role of the "litigation committee" of the American
law.
7. Derivative proceedings have many other facets, mainly of a procedural nature. Such
issues cover for example the alignment of the parties as plaintiffs or defendants, the
treatment of multiple proceedings, the res judicata, the possibility of the court to stay the
proceedings, the security to be provided for expenses, etc.
3.3. Right to Challenge the Validity of Resolutions of the General Meeting (or of the
Board of Directors)
The resolutions of the general meeting are subject to many conditions of validity,
including of course compliance with the law and the articles of association, both in
what regards their contents and their procedural correctness (invitation of
shareholders to the general meeting, entitlement to attend, a detailed agenda, debate
requirements, voting etc.). All this is an extremely complicated topic, on which many
of the national reporters offer precious information and insight. It is however,
interesting to note that in most countries general meeting resolutions (or resolution of
the board of directors) can also be challenged if they are abusive, and especially if
they gravely violate the interests of, or oppresses the minority without this being
justified by the interest of the company (see above, under 2.2 and 3.1). There is often
a statutory provision to this effect, or the rule has been developed by the courts, as in
France213, Belgium214 or Greece215.
Whatever the reason of invalidity, it is important that all shareholders, and especially
those of the minority, be able to invoke it. When resolutions are null and void this
right belongs generally to any interested party, including of course shareholders. In
such a case a minority protection element cannot be detected. However, in many
countries nullity is provided only for cases of serious violations (although seriousness
is defined each time by national standards), while for ordinary defects a right of
annulment (rescission) is rather given, and voidability becomes the rule216. In such
cases the right of each shareholder to ask for annulment is again usually provided
(ex. in Germany 245 AktG ; Switzerland art. 706 CO; Australia CA 2001 s. 233(1)
(f)); the Netherlands, s. 2:15 of the Civil Code; France217; Italy art. 2377 of the Civil
Code; Japan s. 247(1) of the commercial code; Finland218). However, this rule is not
absolute: Sometimes nullity is only relative, in which case only some shareholders
can invoke it219, while in some instances this may depend on whether a shareholder
had opposed the decision at the meeting220. Finally, there are examples when
voidability is the exception (Greece, art. 35c law 2190/1920221), or the right of
213
33
34
usually holding about 90% of the capital of a listed company228, to squeeze-out the
minority. This usually (but not necessarily229) follows a takeover. Mandatory bids
(whereby a majority shareholder is obliged to buy shares from minority shareholders
who wish to sell for a full consideration) are a tool of protection of minority rather
than of the dominant shareholder.
2. The "right" to be a member is not considered in the same manner everywhere. In
many civil law countries, the problem is often addressed in terms of property protection
(see above 2.5). But even then, exclusionary techniques are not generally outlawed. In
Germany, for example, the dissolution of a company, the transfer of its assets to an entity
controlled by the majority shareholders and the elimination, in this manner, of the
minority ("bertragende Auflsung"), has not been considered by the Constitutional
Court to infringe the right of property, provided that full indemnity is received230. The
highest Court said in clear terms that art. 14 of the German Constitution does not
prohibit an exclusion of a shareholder against his will.
3. In common law countries the problem is rarely discussed in terms of property.
Elimination devices are rather considered as cases of "oppression", "freeze-outs" or
"squeeze-outs" (see above, 3.1(2)) and treated accordingly. "Expropriation
technology" or "removal-engineering" includes devices having a lesser impact than
straightforward elimination; still, they can radically frustrate the position and
be squeezed-out! See Timmerman/Doorman (Netherlands), no. 64. Also in Poland there is a possibility
to a forced buyout of shares representing 5% of the capital, if this is decided at a general meeting by no
more than 5 shareholders holding at least 90% of the capital, on the condition that proceedings initiated by
minority shareholders hinder the operation of the company and management of its affairs and becomes
burdensome to the majority (art. 418 CCC). The excluded shares must be deposited by their holders and
appraised. See Katner (Poland), VIII C. In Switzerland clauses in the articles providing for the possibility
to expel a shareholder, or establishing a priority of redemption in case of a decrease of capital are of
dubious legality, see Trigo Trindade/Bahar (Switzerland), III A 2. On the contrary, under Australian
law, an amendment to the articles by the majority of the general meeting that allows the majority to
expropriate shares is valid if made for a proper purpose and is not oppressive to the minority members.
This test will be satisfied where the continued shareholding of the minority was detrimental to the
continuation of the business and expropriation was a reasonable means of curing the problem. Fletcher
(Australia), nos 67, 91. The relevant case is Gambotto v WCP Ltd, decision of the High Court of
Australia in (1995) 182 CLR 432, see Fletcher (Australia), no. 67. But the Finnish reporter
(Kaisanlahti (Finland), 2.2) stresses that such an amendment of the articles would not be allowed in
Finland.
228
In England, after the offeror has acquired 90% of the shares, he may give notice under s. 429 CA
1985 entitling and binding him to acquire the remaining shares. Under the new (2001) German Public
Offers Act (bernahmegesetz), a 95% majority can squeeze-out the minority against compensation, see
Hopt (Germany), VI; Krause, Das neue bernahmegesetz, NJW 2002, 705. Similarly in Belgium, art.
513 BCC, see Wymeersch/Jakhian/Caeymaex (Belgium), no. 56. In Switzerland a squeeze-out is
permitted following a takeover ("annulation des titres restants"), if the new majority shareholder holds
at least 98% of the capital, see Trigo Trindade/Bahar (Switzerland), III A 2. In the Netherlands s.
2:201a(92a) of the civil code gives the possibility to a shareholder with 95% of the capital to obtain
through court proceedings the squeeze-out of the 5%, see Timmerman/Doorman (Netherlands), no.
64. In Finland the statutory threshold for a squeeze-out is 90%, then the majority owner has the right to
buy out the rest of the shares at a "fair price". In Australia the threshold for a compulsory acquisition is
also 90%.
229
For example, in Germany in the case of "annexation" ("Eingliederung") of a company by another ("the
main company", "Hauptgesellschaft"), which holds at least the 95% of the former ( 320 AktG), the
minority shares can be acquired by the main company ( 320a AktG), while the excluded shareholders
have the right to receive a fair indemnity, consisting in shares of the main company or cash ( 320b AktG).
This does not happen following a takeover.
230
BVerfG 23.8.2000 NJW 2001, 279.
35
expectations of the minority to the point that the latter have no choice but to surrender.
For example the following "squeeze-out" techniques are discussed by Dr. Keith
Fletcher, the Australian reporter231: (a) Withholding information about the company's
affairs; (b) Dismissal of minority members from executive positions; (c) Appointment
of additional directors to reduce the minority's influence at board level; (d)
Distribution of profits by way of salary paid to majority members as executive
officers, rather than by way of dividend paid to members; (e) Diversion of business
away from the company to other entities controlled by the majority; (f) Amendment of
the constitution in terms unfavorable to the minority; (g) Allotment of share capital to
dilute the minority's holding; (h) Preferring associates of the majority in business
transactions; and (i) Conferring benefits on the majority by way of such perquisites as
retirement allowances and directors' fees.
In common law countries, the adverse consequences of expropriation can be
addressed with the assistance of the general oppression remedies (including
annulment of decisions and exit rights), and the exercise of derivative suits. However,
to the extent that they are not unethical, squeeze-out and freeze-out techniques are not
necessarily outlawed. They may even be occasionally favored for efficiency purposes,
when the elimination of a minority can enhance management efficiency and spare the
company from confrontational relations232. In such cases the main problem is the
fairness of the compensation paid to the eliminated shareholders, rather than the
validity of the action against them. It is worth noting, however, that the same logic is
also occasionally followed in civil law countries, such as in the decision of the
German Constitutional Court (mentioned above, no 2)233.
B. Right to Oppose Major Structural Changes of the Company
A connected matter is the right of minority shareholders to oppose structural changes of
the company that are detrimental to them, such as mergers, divisions, divestiture of big
assets, etc. Shareholders have various rights in such cases, for example a right to claim
that a decision of the general meeting is required (so the German "Holzmller" doctrine
for the transfer of major assets234), information or compensation rights, a right to apply
for the rescission of the decision, etc.
Reversal v. compensation is again the most critical dilemma. For example under EC law,
in cases of mergers minority shareholders who are disappointed with the share
exchange ratio approved by the general meeting can apply to the court for the merger
to be declared void, although at the same time they must challenge the validity of the
decision of the general meeting (so the 3rd EC Directive 78/855/EEC (art. 22 I b)).
But in some Member states, notably in Germany, a special procedure has been set up
for the compensation in cash of shareholders who complain, instead of annulment of
the decision (see 15 UmwG). Also in common law countries compensation, rather
than reversal of the changes, is the most frequent remedy. Thus, "cash-out" mergers, i.e.
mergers where cash is used as consideration, are permitted, but courts can review the
fair value of the shares lost (although this may be detrimental to minority
231
36
shareholders235). Under some case-law, the business purpose of the merger (which
cannot be just the elimination of the minority) has also to be considered236.
C. Right of Exit
There are cases where a shareholder realizes that staying in the company and seeking to
improve his position is no longer a realistic option, and chooses to "exit" rather than
"voice" his grievances.
1. Leaving the company is a complicated issue. It means, first of all, that a shareholder
can try to find another person to whom the shares are sold. Transferability of shares is
typical to all limited companies, at least as a principle (the articles of association may
often restrict it, at least in non-listed companies), but actual possibility to transfer is
another matter, depending on whether there is a market for the shares. If there is, mainly
when the company is listed, the decision to transfer ("Wall Street option") can easily
materialize. If there is not, the shareholder may be seriously "locked in". Then, the right
to leave the company becomes important. It means that somebody else (another
shareholder or the company itself) is obliged to buy the shares in question: Either
because that party is contractually obliged to do so (but normally a company does not
have the right to buy its own shares), or because the law grants shareholders exit rights.
A necessary corollary is the need for appraisal and the indemnification of the exiting
shareholder, and usually (if the company buys out) a capital decrease.
2. Civil law countries do not normally provide for exit rights237, either as a consequence
of the closed-end character of the limited company, or because of the rules on the
maintenance of the capital or for other reasons (for example because the duty of loyalty
requires shareholders to stay rather than to go238).
On the contrary, common law countries object less to exit rights: Not only in order to
cope with current compatibility problems between shareholders, but also because such
countries permit freeze-outs to a much greater extent than civil law countries, where
protection of property considerations prohibit in principle expropriation. Capital
maintenance principles are also less strict and oppose less exit techniques. Exit is thus
for example possible in England in oppression situations, i.e. following an order of the
court under CA 1985 ss. 459 ff. As a matter of fact, one of the possibilities of the
court is to order "the purchase of the shares of any members of the company by other
members or the company itself and, in the case of a purchase by the company itself,
the reduction of the company's capital accordingly"239. Exit may be also provided for
in the articles240.
235
37
3. Exit is often permitted in both civil and common law countries when some major
events occur, such as mergers or divisions241, or when majority shareholders have
infringed some rule or standard of conduct. Such events can be described in abstract
terms, as it happens in Canada242, the Netherlands243 or Japan244, or make a list, as in the
US245. The linkage to infringement shows that exit is here perceived as a remedy246. Exit
is also connected with takeovers ("sell-out")247. Finally, exit may be a possibility when a
company migrates from a country to another. For the moment this is not a real
possibility. But the proposed 14th EC Company Law directive allows the Member
states to introduce legislation for the "appropriate protection for minority members
who oppose the transfer" (art. 7), such as a right to have their shares purchased by the
company248.
D. Right to Apply for the Dissolution of the Company
Killing the company is a draconian measure, and, therefore, not a freely available option.
In fact all countries limit the right to apply for it249.
1. In some countries the right of shareholders to ask for the judicial dissolution of the
company is altogether excluded, as in Greece250. In other countries it depends upon the
241
See for example EC Dir 82/891/EEC, article 5 2: "Where shares in the recipient companies are
allocated to the shareholders of the company being divided otherwise than in proportion to their rights
in the capital of that company, Member States may provide that the minority shareholders of that
company may exercise the right to have their shares purchased. In such case, they shall be entitled to
receive consideration corresponding to the value of their shares. In the event of a dispute concerning
such consideration, it must be possible for the consideration to be determined by a court". Member
states have complied (example Greece, art. 84 2 law 2190/1920). In Italy an exit right is provided in
favor of dissenting shareholders in cases of modification of the objects or the form of the company, or of
the transfer of its seat outside of Italy (art. 2437 of the Civil Code), or, for listed companies, in case of
merger of division if the dissenting shareholders are going to receive non-listed shares (art. 131 of TUIF).
See Gatti (Italy), 4 (h).
242
CBCA, s. 190 ("fundamental changes"). See Crte (Canada), no 3.3.
243
S. 2:343 of the Civil Code ("when the shareholders' rights or interests are prejudiced by the
conduct of one or more co-shareholders to such an extent that the continuation of the shareholding can
no longer reasonably be expected of him"). See Timmerman/Doorman (Netherlands), no. 65.
244
In case of resolutions would "fundamentally change the company". See Kawashima-Iwasaki
(Japan), VI b.
245
In the US minority shareholders who are adversely affected by certain types of transactions (for example
mergers, exchange of shares, disposition of assets, and other adverse amendments) are entitled to dissent
and ask for an appraisal of their shares. The relevant legislation (MBCA Chapter 13: Appraisal Rights)
institutes a very complicated procedure and if the steps and technicalities are not scrupulously observed
by the shareholders (for example notice of the intent to demand payment - 13.21) the exit rights may
be lost. For the appraisal the court determines the "fair value of the shares". The revision of Chapter 13
in 1999 has refined the "market exception", under which the appraisal right does not exist when the
shares are listed on the NYSE or the AMEX or there is a liquid market for it ( 13.02(b)(1)). In such a
case the shareholders may easily dispose of their shares, without need of appraisal. For the "stock
market exception" see Easterbrook/Fischel, The Economic Structure of Corporate Law, 1996, p. 149.
246
See P.Davies, Introduction to Company Law, 2002, p. 229.
247
In England, following a takeover, where the bidder holds 90% of the shares, a non-assenting
shareholder can require the offeror to buy his shares (s. 430A CA 1985). The same happens in Finland,
see Kaisanlahti (Finland), 8.6. See also Germain (France), no. 28.
248
See Bisacre, The Migration of Companies within the EU and the proposed 14th Company Law
Directive, Intern.&Comp.Corp.Law Journal 2001, 251, 267.
249
This right is often criticized. Hamilton, The Law of Corporations, St. Paul, Minn., 2000, p. 370,
proposes instead an auction off of the business to the highest bidder.
250
Gologina-Ekonomou (Greece), IV 7.
38
251
Art. 1844-7 of the French Civil Code. See Ripert/Roblot/Germain, op.cit., no. 1101.
Art. 736 no 4 CO.
253
Sec. 406-2 of the commercial code, Kawashima-Iwasaki (Japan), IV 7.
254
Wymeersch/Jakhian/Caeymaex (Belgium), no. 33.
255
The "landmark" case is Ebrahimi v. Westbourne Galleries Ltd [1973] AC 360 (House of Lords),
cited by Dine (England), VI 8.
256
Dine (England), VI.
257
It is however clear that a systematic preference for the general remedies instead of the winding-up
cannot be detected. In Re R.A. Noble & Son (Clothing) Ltd [1983] BCLC (cited by Dine (England), VI)
the judge dismissed the petition for s.459 relief and made an order for the winding up of the company
on the just and equitable ground.
258
Cheffins, Company Law Theory, Structure and Operation, Oxford 1997, p. 464. That the phrase
just and equitable "encompasses oppression of the minority" see P.Davies, op.cit., p. 237.
259
Hamilton, op.cit., p. 371.
260
"cette formulation inspire de lequity telle que pratique par les cours de common law donne une
latitude au juge suisse dont il na gure lhabitude. Cependant, ce jour, il nexiste pas de cas de
jurisprudence dans lequel un juge suisse a us de la possibilit de recourir une autre mesure
adquate", Trigo Trindade/Bahar (Switzerland), IV A 5 fn 408.
252
39
plaintiff, order the company to redeem the shares held by the applicant at a reasonable
price (Ch. 13 Sc. 3)261.
3. Conversely, even in some common law countries, it is possible that the court has
not an option to convert dissolution into other, milder measures. Thus, in Australia
winding up may be sought when directors act selfishly, in case of oppression, and,
generally, when this measure is "just and equitable". But then the court may only
order the winding up, not other measures, although the court may reject the petition, if
some other remedies are available262.
What one can clearly see is that many of the remedial rights are closely connected and
communicate with the general oppression remedy, allowing thus an interaction if not a
continuum between them.
4. Special Minority Rights
The general remedial rights, taken separately or in conjunction, may offer the minority
shareholders some powerful weapons for improving their position in the company, or
securing a smooth exit. However, the great degree of discretion exercised by the court,
typical in common law countries, is rarely allowed in civil law jurisdictions. In these
countries, some special pre-programmed possibilities of the shareholders are more usual.
These may be independent from court action, but even when such action is needed, the
conditions are clearly determined, so as to avoid excessive discretion. It has to be noted
that special rights exist also in common law countries, in addition to the general
remedies, described above. The list of the rights, which are mentioned below, is not
exhaustive.
4.1. Information Rights
Company disclosure is a powerful tool that protects investors (future shareholders
included) and the market in general. The main addressees, however, are those who are
knowledgeable about the corporate account complexities and are able to understand
them and act upon them. These persons are the institutional investors and the credit
institutions. This is often mentioned as a de facto exception to the equal treatment of
shareholders263.
1. It is not possible to make a comparative presentation of the methods and the extent of
company disclosure. The matter is closely related to the drawing and presentation of the
corporate accounts. Some general rules are common to most jurisdictions. This is the
result of the widespread use of the international accounting standards (IAS), while in
Europe a high degree of harmonization has been achieved through the first, fourth and
seventh company law directives. Many common rules relate also to disclosure to be
made by listed companies, such as prospectuses, the periodic account statements, major
holdings, etc. Disclosure is also essential and invariably imposed in cases of mergers,
divisions, and conversions. Disparities may exist, even within the same jurisdiction,
261
40
having mainly to do with the type of the company (whether listed or not listed, "public"
or "private", "small" or "large" etc.), but a high degree of disclosure is generally to be
expected everywhere.
2. In the context of this report, it is essential to point to the additional possibilities of
information given to minority or individual shareholders. This information is required
for example for a better exercise of the voting rights or in order to know whether staying
in the company continues to be an interesting option. Information is considered to be a
"fundamental member right"264 in general, and the "most basic right of the minority"265,
in particular. It has even been submitted that information rights can be occasionally more
drastic than direct rights266. Besides, information is also a prerequisite for a better
exercise of the latter. Some examples can highlight the kind of information that
shareholders may request and obtain.
(a) As a rule, minority shareholders may request information, which can help for a better
understanding and assessment of the items on the agenda. Thus for example in Germany
every shareholder has the right to obtain from the management board (Vorstand)
information relating to the items on the agenda of a general meeting ( 131 I AktG).
Such information is given only at the shareholders' meeting. It is mainly useful when it
relates to mismanagement, although this is not expressly stated in the law267. The
Vorstand can refuse to supply information in some cases, for example when the
requested information is likely to be materially harmful to the company ( 131 III AktG).
If information is not supplied, the court orders the board to supply it even outside the
general meeting ("specific performance"268, 132 AktG). In Switzerland, every
shareholder has the right to obtain at the general meeting information from the directors
on the affairs of the company and from the auditors on the auditing they have conducted,
if this is necessary for the exercise of the shareholder's rights and does not create the risk
that business secrets of the company are revealed (art. 697 CO)269. If information has
been unduly withheld the court decides (art. CO 697 IV).
Similar rules exist in Sweden (CA ch. 9, s. 22)270, in France (art. L. 225-108 NCC), in
Belgium271, in Finland272 and in Poland (art. 428 CCC)273. In Greece the right to request
information depends on the percentage of the minority. A 5% ("small") minority has the
right to request information in connection with the agenda of the meeting and also about
any sums or other benefits that have been paid to directors during the last two years,
while a "big" minority (1/3 of the total capital) can request information regarding the
affairs of the company in general. In both instances the board can refuse to give such
information on the basis of serious grounds. The dispute can be settled by the court (art.
39 4-6 law 2190/1920)274.
264
41
(b) Sometimes the right to be informed is not confined to the items coming before a
meeting. For example in France art. L. 225-115 NCC, as amended by the law on NRE,
provides that each shareholder is entitled to obtain, on top of the annual accounts and
reports, information on the amounts paid to the "best remunerated" persons, the shares
of "parrainage" and of "mcnat", as well as the list of the contracts concluded with
directors in the ordinary course of business. This right can now be enforced through
an "injonction de faire", by which the court orders the board to supply the information
or appoints a "mandataire" who will supply it (new art. L. 238-1 NCC, added by the
law on NRE). There is also a right of a 5% minority, exercisable twice per year, and
independently of any meeting, to submit written questions on any matter, which is
likely to affect negatively the continuation of the company's business (art. L. 225-232
NCC).
3. A particular problem of equal treatment arises when the board gives information
either to shareholders selectively or to third parties outside the meeting. In Germany, if
information is given directly to specific shareholders, the same information must be
provided at a meeting to other shareholders who make a request, even if this is not
connected to the items put on the agenda ( 131 IV AktG)275. In Poland, as prof. Katner
notes, the board may give information also outside of a general meeting, but in this case
such information must be disclosed to the next general meeting276. The problem is
further discussed in the Dutch and the Swiss reports277. But it is pertinently noted that it
is better for the shareholders to improve the general level of information rather than
claim information that others have received outside meetings278.
4. A special problem already mentioned relates to the possibility of the board to
refuse information if this can be detrimental to the company. In some countries in such a
case information can simply be denied or referred to the court279. An interesting
alternative exists in Finland, where, in case of doubt, the board can provide the
information to the auditors, who then submit to the Board a written statement on the
matter. Such statement is a public document and has to be sent to the shareholder who
asked for the information as well as be made available to other shareholders280.
5. Laws in the various countries are not uniform as to whether auditors can or indeed
must provide information to shareholders who make a request. German law excludes
such an obligation ( 176 AktG), but Swiss and Greek laws accept it (art. 697 CO, art. 37
law 2190/1920)281.
6. Inspection of the books and records. A right of shareholders to inspect the books of the
company, in person or by expert proxy, is recognized only subject to conditions. This is
275
Hopt (Germany), IV 1.
Katner (Poland), VIII C.
277
Timmerman/Doorman (Netherlands), no. 43; Trigo Trindade/Bahar (Switzerland), III F 2 a.
278
Hopt (Germany), IV 1.
279
For example in the Netherlands (s. 2:217(107) of the Civil Code), although with the proviso that
information will not be given "if this conflicts with a substantial interest of the company" (see
Timmerman/Doorman (Netherlands), no. 46). In Greece information can be denied upon serious
grounds (art. 39 law 2190/1920). In Belgium (art. 540 BCC) the questioning right does not extend to
information, which could "prejudice the company's, shareholders' or employee's rights", see
Wymeersch/Jakhian/Caeymaex (Belgium), no. 14.
280
Kaisanlahti (Finland), 5.3.
281
See Kokkinis in DikAE (Perakis, ed.), vol. 5, Athens 2002, p. 235.
276
42
understandable, not only for the "Trojan horse" fear, but also for the need to avoid
unnecessary harassment and disruption of the company's life. The possibility to inspect
is often designed as conditional upon authorization of the general meeting or the
board282. The court can however intervene and allow inspection283. Confidentiality
must be observed284. In some countries, notably in Sweden and Finland, the right of
inspection is stronger in smaller companies, with 10 or fewer shareholders285. On the
other hand, a special right of shareholders to inspect certain documents is provided for
in case of mergers and divisions. In such cases, shareholders can inspect at least the
documents regarding the merger (or the division) at the registered office of the
company, at least one month before the date fixed for the general meeting, which has
to decide on the draft terms of merger or division (art. 11 of the EC Directive
78/855/EEC, art. 9 of Dir. 82/891/EEC).
4.2. Special Audit
A special audit, as an investigation and disclosure mechanism, is also a powerful weapon
in the hands of the minority, complementing the information rights. Not a remedy itself,
it can be the prelude to real remedies, such as the derivative action, the oppression
remedy, the exit, or even the judicial dissolution of the company. In common law
countries a shareholders' right to a special audit is not invariably provided286, but even
when it is not, the abovementioned remedies can replace to a large extent the special
audit. In most countries, special audit is recognized as a right of minority287, although its
conditions, the applicants or the investigative extent may differ. It is observed that the
impact of the right to ask for an audit, because of its preventive effect, is greater than
what appears from its actual use288.
1. The applicants are determined in various ways: In some countries (Canada,
Switzerland) the right to apply is individual. In other countries the applicants are defined
in terms of minority percentages (Japan 3%, France 5%, Italy 10% (5% for listed
companies), Sweden and Finland 1/10 of the shares or 1/3 of the shares represented at
282
See for example Australia, Fletcher (Australia), nos 29 ff.; Switzerland: CO 697 III, IV. See also
16.02 MBCA: A shareholder of a corporation is entitled to inspect the books and records of the
company, if he makes a demand "in good faith and for a proper purpose" (for the "proper purpose" see
Pinto/Branson, Understanding Corporate Law, New York 1999, 5.04[G]). In Japan a right of
inspection, independently of meetings, is granted to a 3% minority. The board can refuse to allow access to
the books in certain situations, mainly when this is obviously unnecessary for the exercise of the
shareholders' rights, or the inspection would harm the company, when the applicants are competitors, or
intend to make a profit out of the information they will so collect, and when the application is submitted not
in an appropriate time. Kawashima-Iwasaki (Japan), IV 1; Okushima, The Shareholders' Right to
Supervise and Correct Management of a Corporation, in: Law in Japan, vol. 27 (2001), p. 17.
283
Examples: US, MBCA 16.04; Switzerland, art. 697 IV; Japan, s. 293 of the commercial code.
284
Example: Switzerland: CO 697 III.
285
Giertz (Sweden), no. 4.1.1; Kaisanlahti (Finland), 5.3.
286
This is apparently the case in the US and also in Australia, Fletcher (Australia), no 31 at least in
the form available in the other countries. But in Canada (s. 229 CBCA) and in England (s. 431 ff. CA
1985) a right to request a special investigation does exist.
287
Finland, FCA Ch. 10 Sc. 14; France, art. 226 Law of 1966 (= 225-231 NCC); Germany, 142 ff
AktG; Greece, art. 40 of law 2190/1920; Italy, art. 2408 and 2409 of the Civil Code and 128 of TUIF);
Netherlands, section 2:345 of the Civil Code; Poland, art. 223 CCC; Japan, section 294 of the
commercial code; Sweden, CA, ch. 11, s. 21; Switzerland, 697a CO; Belgium, art. 168 BCC.
288
Hopt (Germany), IV 2.
43
the meeting, Poland 1/10, Greece 5% or 1/3), or percentages combined with the amount
of shares held289.
2. The special audit is usually ordered by the court, but in some jurisdictions this is done
by an administrative authority. This happens for example in England, where the
inspectors are appointed by the Secretary of State (s. 431 CA 1985) and in Qubec (by
the "inspecteur gnral des institutions financiers")290, as well as in the Nordic
countries, where the "examiner" is appointed by the County Administration (in
Sweden, CA, ch. 11, s. 21)291 or the Provincial Administration Board (in Finland, FCA
Ch. 10 Sc. 14 Para. 1) 292).
3. In most countries, the law prescribes in more or less general terms the circumstances,
which can lead to an audit. In Germany the special auditors (Sonderprfer) are
appointed when, in the context of the formation of the company or the management of
its affairs, it appears that the law or the articles of association have been gravely
violated or there are signs of improprieties. Concerning the management, this
minority right is restricted to events that took place within the last five years ( 142
AktG). In Italy the petitioners must allege "grave irregularities" ("gravi irregolarit")
(art. 2408 and 2409 of the Civil Code and 128 of TUIF)293. In the Netherlands the
inquiry is ordered if there are well-founded reasons for doubting the correctness of the
policy (minority-related reasons include violation of rules protecting minority,
deadlock in the management, insufficient or incorrect information provided to
minority shareholders)294. In Greece a minority of 1/20 can request a special audit, if it
establishes that violations of the law or the articles may have occurred, while a bigger
minority of 1/3 may also apply, arguing that the affairs of the company are apparently
not being conducted in a prudent and honest manner (art. 40 of law 2190/1920)295. In
Japan the special audit is ordered when it is suspected that the affairs of the company
are being conducted in bad faith or in breach of any law, ordinance, or article of
incorporation (section 294 of the commercial code)296. In Belgium indications are
necessary that the interests of the company "are or threaten to be seriously
prejudiced"297. Sometimes the law is not specific about the triggering events, but this
gap is filled by case law or the authors. For example in France an "expertise de
minorit" is ordered if the petitioner shows that there has been irregularities in the
management or at least there are indications that the specific "opration de gestion" is
likely to be against the interest of the company a condition not mentioned in the
law298.
289
44
4. Shareholders have not always a direct access to special audit. In some countries some
conditions have to be met, such as the exhaustion of other means of information299, a
negative decision of the general meeting300, or at least notice given to the company301.
5. The persons appointed one or more to carry out the auditing are as a rule
independent, and sometimes chosen from a list302. Their mission is usually limited: It
is often prescribed by the appointing authority, and refers to specific acts of
management303. Therefore, it does not extend to the general state of the company's
affairs304. The appointed persons have the right to inspect the books and records of the
company and obtain information from its officers and employees (or even officers of
affiliated companies305). At the end of their work they have to prepare a report, which
they submit to various persons and authorities306, but usually to the authority that
appointed them. The court may order that the cost of the special audit be borne by the
company (so for example in France).
6. In some jurisdictions the report may serve as the basis of further measures The
Dutch case is interesting (see above, 3.1(2)(f)).
299
45
7. As it has been noted, in common law countries special audit may be achieved with
the assistance of the oppression procedures and remedies. In England the investigation
provided for by s. 432(2) CA 1985, is ordered if it appears that there are
circumstances suggesting that the company's affairs are being or have been conducted,
mainly, "in a manner which is unfairly prejudicial to some part of its members" or
that "the company's members have not been given all the information with respect to
its affairs which they might reasonably expect". In Canada (s. 229 CBCA) the court
must be convinced that there has been intent to defraud any person, oppression or
unfair prejudice to or unfair disregard of the interests of shareholders, or that the
corporation was formed for a fraudulent or unlawful purpose or is to be dissolved for
a fraudulent or unlawful purpose, or that persons concerned with the formation,
business or affairs of the corporation or any of its affiliates have in connection
therewith acted fraudulently or dishonestly307.
4.3. Rights Concerning the Conduct of Assemblies
General provisions regarding the conduct of general meetings may protect the
minority, in the sense that they aim to ensure that all shareholders can participate
effectively, make their voice heard, vote, and be given the opportunity to exercise any
minority rights available to them. Protective rules are also those which require the
publication of the invitation or a personal invitation to shareholders, the drawing of an
agenda and the availability of some explanatory material (including proposals of
decisions to be taken), the posting at the company's premises of a notice with the list
of shareholders intending to participate, or indeed a full list of shareholders, as well as
the rules granting a right to obtain some basic documentation (including the annual
accounts, the report of the board and the auditors) or other material relevant to the
agenda. Of particular importance are national rules regarding proxy voting308. The
possibility to vote by mail309, to use electronic systems, allowing a meeting to take
place simultaneously in different places310 and other systems of modern technology,
may facilitate attendance of shareholders. Although all the above are not provided for
(at all or in the same manner) in the various countries, one can detect a tendency to
uniformity. In addition, there are several minority rights relating to the conduct of
assemblies.
1. That a general meeting be called. The most common right is the possibility of a
minority to request that a general meeting be called to discuss some particular items.
This is often a minority right (in terms of a percentage of the capital or a minimum
number of shares), but in some instances also an individual one. Sometimes (and quite
normally) it is easier to request that an annual (ordinary) general meeting be called to
approve the accounts and elect auditors and officers, than an extraordinary meeting311. It
307
46
is even easier to ask the board to add items on the agenda of a general meeting, which is
already about to be convened or has already been convened312. The applicants have to
address a petition to the board, but if the latter does not take action, the court can call the
meeting itself or authorize the applicants to proceed themselves. A similar right (for
example in Germany) is to post counter-proposals to the proposals of the board on the
items on the agenda. According to 126 AktG such counter-proposals have, save
exceptional cases, to be brought by the board to the attention of the general meeting.
those shareholders may be called, or to conduct the meeting in the manner prescribed by the by-laws
and this Act, or if for any other reason a court thinks fit, the court, on the application of a director, a
shareholder entitled to vote at the meeting or the Director, may order a meeting to be called, held and
conducted in such manner as the court directs" (CBCA s. 144). In the US a 10% of the votes eligible to
be cast on an issue can request a special meeting describing the purpose for which it is to be held
(MBCA 7.02(a)(2)). However, any shareholders can obtain a court order for a meeting, "if an annual
meeting was not held within the earlier of 6 months after the end of the corporation's fiscal year or 15
months after its last annual meeting" (MBCA 7.03(a)(1)). - In the EC most of the countries provide
for a minority right to ask the company to call a general meeting. In France a general meeting can be
requested in case of urgency by any interested party ("tout intress"), otherwise by a 5% minority or
an association of shareholders provided in art. L. 225-120 NCC and is ordered by the court, which
appoints a "mandataire" (art. L. 225-103 NCC). In Germany a request to call a general meeting can be
made also by a 5% minority. The request is addressed to the management board (Vorstand). If the
meeting is not called the court authorizes the applicants to convene it themselves, at the expense of the
company ( 122 AktG). In Greece a 5% minority is also sufficient (art. 39 law 2190/1920). In the
Netherlands a 10% minority can call the general meeting, if so authorized by the court, and provided
that the company was previously summoned (s. 2:220(110) of the Civil Code). But for the mandatory
general meetings every shareholder alone can proceed (s. 2:222(112) of the c.c.). In Finland a 10%
minority has also the possibility to request the calling of a extraordinary meeting (FCA Ch. 9 Sc. 6
Para. 2). In Italy a 20% minority is needed (for listed companies 10%). Failing convocation, the judge
orders it through a "decree", by which the chairman is also appointed (art. 2367 of the c.c., 125 TUIF).
In Belgium a general meeting is convened at the request of a minority representing 1/5 of the capital
(art. 532 BCC). In England, a single member can require the holding of an annual general meeting
(AGM) of a private company (which may otherwise elect not to hold one) and, in the event of default,
the Secretary of State may direct the holding of such a meeting (s. 366A CA 1985). Also members
representing not less than 10% of the total voting rights may require the holding of an extraordinary
general meeting (s. 368(1) CA 1985). The same applies to the new Societas Europaea ("SE", Reg.
2157/2001), where a 10% minority can apply for a meeting (art. 55). If the meeting is not called within
a month, the competent judicial or administrative authority orders that the meeting be convened or
authorizes the requesting shareholders to convene the meeting themselves. - In Switzerland,
shareholders representing 10% of the capital may request the calling of a general meeting (art. 699 III
CO); if the board does not comply, the court calls the meeting itself (art. 699 IV CO). Japan: 3% of the
capital (if they are have been shareholders for at last 6 months) may request a general meeting (s. 237 of
the commercial code). This is a self-executing right, with no necessity to seek court approval. In Poland,
shareholders of 10% can request that an extraordinary general meeting be called or that some new items are
placed on the agenda. Otherwise the court can authorize the requesting shareholders to call the general
meeting themselves. For Spain see art. 100.2 L.S.A. For Portugal see art. 375 C.S.C.
312
In Sweden and in Finland the right to put matters before a meeting due to be held belongs to each
shareholder. In other countries a minority is required. For example in France a 5% minority is needed
(art. L. 225-105 NCC), in Germany a 5% minority or shareholders holding shares of a nominal value of
500,000 euros ( 122 II AktG), whereas in Switzerland the proposal is accepted if made by
shareholders with shares having a nominal value of 1 million SF (art. 699 III CO). Regarding the SE, a
10% minority can request that one or more additional items be put on the agenda of any general meeting
(Regulation, art. 56). In Australia, 100 members or a 5% minority at a general meeting may require a
company to circulate notice of a resolution they propose to move (CA, s 249N), or a statement
concerning a resolution or any other matter that may properly be considered at a general meeting (CA,
s 249P). In Poland a minority of 10% is needed. In Japan 1% of the capital or 300 shares may make the
47
48
articles may provide otherwise (s. 256-3 of the commercial code)321. Also in Poland, for
the election of the supervisory organ a 1/5 minority may request "voting by groups"
(art. 385 CCC)322.
Another way for the minority to obtain representation in the board is direct appointment,
if permitted by the articles. In Germany the articles may provide that a specific
shareholder or any person holding specific registered shares may directly appoint one or
more (up to 1/3 of the total number of the) members of the supervisory board
(Aufsichtsrat 101 AktG). Similarly, in Greece, art. 18 3 of law 2190/1920
provides that the articles of association may entitle a particular shareholder to directly
appoint up to 1/3 of directors. In both countries, however, a 1/10 minority can apply to
the court for the removal of the persons so appointed upon serious grounds323. Similarly,
in Switzerland the articles may provide that categories of shares or specific minority
shareholders have the right to elect representatives in the board (art. 709 CO)324, while in
Spain a system of "proportional representation" is available (art. 137 L.S.A. and R.D.
821/1991).
2. The appointment by the minority of other officers is more rare. A provision that a 10%
minority can require that the court appoint liquidators is to be found in Poland (Article
463 2 of CCC)325. The appointment of auditors by a minority is also rare. Exceptions
are Italy (art. 2368 of the Civil Code and 148 TUIF)326, and the Nordic countries327.
3. The reverse problem is also interesting, i.e. the possibility for a minority to cause the
removal of unfriendly or incompetent officers, liquidators or auditors. The case of
Germany and Greece, as regards the removal of directors directly appointed by
shareholders has already been mentioned. In the USA a shareholder may apply to the
court for the removal of a director, in cases of fraudulent conduct, gross abuse, or
intentionally inflicted harm on the corporation, and provided that the court considers
that such a removal would be in the best interest of the corporation. This remedy is
meaningful when the director has sufficient voting power to prevent his own
removal328 and is permitted if the shareholder complies with the requirements of the
derivative action (MBCA (2001) 8.09). A similar remedy exists in Japan, when the
general meeting has refused to remove a dishonest director. In such a case a 3%
minority may apply to the court for the removal of a director within thirty days after
the general meeting (Sec.257-3 of the commercial code)329. Auditors can also be
removed from office by the court in France "pour juste motif" or in case of impediment
at the request of a 5% minority (art. L. 225-230 and 225-233 NCC). A similar
possibility exists in Germany, where a 10% minority can apply to the court to replace
the auditor for some reason relating to his person (HGB 318 III).
321
Kawashima-Iwasaki (Japan), IV 10; Okushima, The Shareholders' Right to Supervise and Correct
Management of a Corporation, in: Law in Japan, vol. 27 (2001), p. 17, 19.
322
Katner (Poland), V 2.
323
103 III AktG (also shareholders with shares with a nominal value of 1m euros), art. 18 4 law
2190/1920.
324
Trigo Trindade/Bahar (Switzerland), I B 2 b.
325
Katner (Poland), VII 5.
326
Gatti (Italy), 4 (b).
327
Sweden (CA, ch. 10 s. 9, Giertz (Sweden), no 4.2.3), Finland (FCA Ch. 10 Sc. 1 Para. 4, Kaisanlahti
(Finland), 5.4), Denmark (art. 61a of the 1996 Act).
328
Hamilton, op.cit.,, p. 236.
329
Kawashima-Iwasaki (Japan), IV 10.
49
In the US the courts are less generous to shareholders whose participation is diluted by an unfair
allocation of new issues (see Hamilton, op.,cit., p. 202), but in that case oppression can be remedied
under the general rules.
331
Kawashima-Iwasaki (Japan), IV 6.
332
Art. 29 I Dir. 77/91/EEC "Whenever the capital is increased by consideration in cash, the shares
must be offered on a pre-emptive basis to shareholders in proportion to the capital represented by their
shares". Derogations are permitted "to the extent that such derogations are necessary for the adoption
or application of provisions de-signed to encourage the participation of employees, or other groups of
persons defined by national law, in the capital of undertakings" (art. 41).
333
See for example France (art. L. 225-132 NCC); Germany ( 186 AktG but see Hopt, IV 6 for the
1994 amendment), England (CA 1985 s. 89 ff.); Kaisanlahti (Finland), 3.3; Gologina-Ekonomou
(Greece), IV 6 (for Greece see also Panagiotou, The pre-emptive right in Greek company law, Int. and
Comp.Corp.Law Review, 2001, 449); Giertz (Sweden), no. 4.2.2; Wymeersch/Jakhian/Caeymaex
(Belgium), no. 32.
334
ECJ C-381/89, 24.3.92, ECR 92, I-2111 = ZEuP 95, 633, Sindesmos Melon Evangelikis Ekklisias.
See also ECJ C-134/91 and C-135/91, 12.11.92, ECR 92, I-5699, Kerafina.
335
For example in England pre-emption rights can be excluded by the memorandum or articles of a private
company (Dine (England), IV). See also Gower's Principles of Modern Company Law (by P.Davis),
1997, p. 309, who find this possibility "unfortunate".
336
In the US the MBCA (2001) provides that: "The shareholders of a corporation do not have a
preemptive right to acquire the corporation's unissued shares except to the extent the articles of
incorporation so provide" ( 6.30 a). The usual provision in the statutes is that "the corporation elects
to have preemptive rights'' (or words of similar import) ( 6.30 b). It is noted, however, that even when
the articles do not allow pre-emption rights, equitable principles may limit the power of the company to
issue and allocate new shares on an unfair or oppressive basis (Hamilton, op.cit., p. 197).
337
Trigo Trindade/Bahar (Switzerland), III B.
50
measure339. In Finland (FCA Ch. 4 Sc. 2 Para. 2) there must be some "weighty
financial reason of the company", for example issue to employees 340, while in
Switzerland (652b II CO) some "juste motif" must be present341, considered with
objective criteria, such as the acquisition of the business by a buyer342 or the participation
of employees343. It is often stressed that an important parameter is the price paid by the
third parties, which has to reflect the actual value of the participation acquired by the
newcomer, including the hidden reserves344. In England the board must justify the
amount to be paid for the equity securities to be allotted (CA 1985 s. 95(5)). The
principle of proportionality is also considered to apply. Consequently the limitation of
the pre-emption rights makes more sense in public companies345.
4. A possible complication may arise when full pre-emption rights are allowed, but the
majority increases the capital at a time when minority shareholders are not in funds to
subscribe. In such cases the general rules regarding a possible majority abuse can
apply346.
5. Situations similar to the capital increase and the risk of dilution are present also in
other cases, such as the disposal by the company of its own shares347, the reduction of
capital348 or buy-backs taking place outside public markets349. But national laws do not
contain adequate rules in all such instances.
4.6. Right to Receive a Minimum Mandatory Dividend
Provided that a correctly drawn up balance sheet shows profits, shareholders expect to
receive a minimum dividend and prevent the formation of excessive reserves.
Therefore, the meaning of a right to a minimum dividend is that shareholders are
entitled to receive some income independently of the will of the majority.
338
Trigo Trindade/Bahar (Switzerland), III B (within limits fixed by the general meeting);
Kaisanlahti (Finland), 3.3. See also art. 29 V Dir. 77/91/EEC: "5. The laws of a Member State may
provide that the statutes, the instrument of incorporation or the general meeting, acting in accordance
with the rules for a quorum, a majority and publication set out in paragraph 4, may give the power to
restrict or withdraw the right of pre-emption to the company body which is empowered to decide on an
increase in subscribed capital within the limit of the authorized capital. This power may not be granted
for a longer period than the power for which provision is made in Article 25 (2)".
339
See Art. 29 I Dir. 77/91/EEC "4. The right of pre-emption may not be restricted or withdrawn by the
statutes or instrument of incorporation. This may, however, be done by decision of the general meeting.
The administrative or management body shall be required to present to such a meeting a written report
indicating the reasons for restriction or withdrawal of the right of pre-emption, and justifying the
proposed issue price. The general meeting shall act in accordance with the rules for a quorum and a
majority laid down in Article 40. Its decision shall be published in the manner laid down by the laws of
each Member State, in accordance with Article 3 of Directive 68/151/EEC."
340
Kaisanlahti (Finland), 3.3.
341
Trigo Trindade/Bahar (Switzerland), III B.
342
Trigo Trindade/Bahar (Switzerland), III B.
343
Trigo Trindade/Bahar (Switzerland), III B.
344
Trigo Trindade/Bahar (Switzerland), III B.
345
Trigo Trindade/Bahar (Switzerland), III B.
346
Trigo Trindade/Bahar (Switzerland), III B.
347
But it is generally accepted that the rules on preemptive rights do not need to apply (Trigo
Trindade/Bahar (Switzerland), III B).
348
Trigo Trindade/Bahar (Switzerland), III B, Fletcher (Australia), no 42 ("selective capital
reduction").
349
Kaisanlahti (Finland), 6.2.
51
350
52
Other special rights also exist, such as the right to rectify shareholders' registries362, to
discharge members of the board by individual voting363, or even to apply for
admission to official listing364.
4.8. Conclusive Remarks on the Rights of Minority Shareholders
In chapters 3 and 4, an overview was made of the shareholders rights available in the
reported countries. The "remedial rights", presented in chapter 3, and the "special
minority rights", presented in this chapter, compose a program of minority protection,
with several interesting aspects. Diversity is the first aspect, and is readily observable:
Minority rights do not constitute a coherent system. Much depends upon the principles
that are most accepted in each national law, for example if prevalence is given to equal
treatment, property considerations, fairness, protection or the corporate "interests" and
the like. The second aspect is a lack of clear orientation, regarding their development.
Some of the rights tend to expand, for example information, while some of them tend to
shrink, for example derivative suits. One could say that when a higher degree of court
intervention is needed, or the business judgment rule is restricted, rights generally tend to
shrink. A third aspect is the distinction of rights. Here the world is divided, as usual, into
common law countries in which the general remedial rights are frequently provided,
and civil law countries in which remedial rights are rare. In the latter the special rights
can compensate for the absence of equitable remedies, but only in part.
To be fair, if one sticks to the practical purposes of the rights and their end result,
similarities and predictability, at least for some of them, become obvious. For example,
one might expect that under any law shareholders may apply for additional information
at meetings, ask for a general meeting to take place, or exercise pre-emption rights. A
warning should be made though, that such rights may not be all provided for by the law,
but only by the articles (therefore prior advice is necessary, before entering the
company), or that they may be granted only to shareholders with minimum participation
rights (good relations with fellow shareholders may be therefore necessary), or that some
prior action has to be taken.
5. Some Special Issues
5.1. Limits to the Exercise of Rights Protecting Minority Shareholders
A first issue is the possible limits to the exercise of minority rights. The very existence
of such rights means that a portion of the majority power is shifted into the hands of a
minority. This automatically creates a reverse agency problem, which also needs to be
addressed365.
362
See for example in Canada, CBCA s. 243: "If the name of a person is alleged to be or to have been
wrongly entered or retained in, or wrongly deleted or omitted from, the registers or other records of a
corporation, the corporation, a security holder of the corporation or any aggrieved person may apply
to a court for an order that the registers or records be rectified" (Crte (Canada), no 3.3).
363
In Germany the annual discharge of the members of the Vorstand or the Aufsichtsrat, collectively, is
given by the general meeting. However, shareholders representing 10% of the capital or holding shares of a
nominal value of 1m euros can request that a separate vote be taken for an individual member ( 120 I
AktG).
364
See Gologina-Ekonomou (Greece), IV 8 it is, however, a debated issue whether this is actually
feasible.
365
See P.Davies, Introduction to Company Law, 2002, p. 218.
53
For those who see minority rights as "functional" ("droits fonctionnels"), in the sense
that they have to be exercised in the interest of all shareholders and the company, by a
minority acting as a "subsidiary organ" of the latter366, the limits are obvious: Such
rights are permitted only in so far as their exercise is beneficial to the community of
shareholders. However, these views are not largely adhered to, and a selfish exercise
of the rights is not excluded. For practical purposes minority rights are defensive
rights not rights for the general welfare.
1. The problem is rather how to stop abuse of rights and strike suits, i.e. minority
action or opportunistic litigation in order to harass the company, blackmail, seek
revenge or act for competitors. Such action may be under the circumstances highly
detrimental to the company, cause enormous trouble when resolutions are reversed by
being declared void, cause general disruption, generate loss of time or costs, even
cause the company's paralysis or breakdown. In this connection reference might also
be made to "greenmailing", "kamikaze" or "greedy" capitalism, to predatory or
"professional" shareholders ("les soldats du droit des socits"367, "raberische
Aktionre"368), i.e. persons holding very small participations (maybe two shares), or
who purchase them in order to apply for a special audit, to institute a derivative action
or to seek redress from oppression.
2. The law itself often sets special thresholds for the access to certain rights.
Sometimes shareholders have to show that they are not "newcomers" or just "picked
up" for the job i.e. they are in possession of their shares already for some time to
warrant that they are serious; or they have to block their shares while rights are being
exercised; or the court may order a different measure that the one requested; or the
law prohibits the exercise of certain minority rights when the minority is represented
in the board369, or when the applicants have not voted against a general meeting
resolution; or there are various conditions and red tape aiming at preventing abuses,
such as the "screening" or the litigation committees in derivative actions. Addressing
the problem on a case-by-case basis is rather the English attitude370.
3. The duty of loyalty (wherever admitted, as in Germany) is an eligible general clause,
which can be conveniently used to prevent excesses. It is praised as "more specific" than
the abuse principle371. However, owing to the national difficulties in accepting a general
duty of loyalty between shareholders, the prohibition of abuse is a more frequent
366
For example D.Schmidt, Les droits de la minorit dans la s.a., 1970, no. 15.
Cozian/Viandier/Deboissy, op.cit., no 767, with examples.
368
Bayer NJW 2000, 2613.
369
For example the rights of information and special audit in Greece (art. 39 5 and 40 3 of law
2190/1920).
370
See the English Law Commission Report 246, Shareholder Remedies (1997), p. 5: "Shareholders
should not be able to involve the company in litigation without good cause, or where they intend to
cause the company or the other shareholders embarrassment or harm rather than genuinely pursue the
relief claimed. Otherwise the company may be "killed by kindness" or waste money and management
time in dealing with unwarranted proceedings. The importance of this principle increases if the
circumstances in which the individual shareholders can bring derivative actions are enlarged.
Nuisance or other litigation of this nature has to be identified on a case by case basis. This means that
the requisite control has to be exercised by the courts, with increased powers if necessary". See also
Hopt, Shareholders' rights and remedies: A view from Germany and the Continent, Company Financial
and Insolvency Review 2, 1997, 261-283, 267.
371
Hopt (Germany), VI. See also Karsten Schmidt, Gesellschaftsrecht, 1997, p. 594.
367
54
limitation372 (in the author's view the criteria of "reasonableness and fairness", used in
Dutch company law373, are not substantially different from abuse). In Germany the
principle of proportionality (Verhltnismigkeitsgrundsatz) is also a measure for
setting limits to the exercise of rights, for example the right to speak at general
meetings374.
4. A similar problem arises when the minority blocking power is misused (negative
abuse, "abus de minorit"), i.e. where a minority prevents some vital actions from
being taken, such as the increase of the capital, or the prorogation of the duration of
the company. Is such cases the prohibition of abuse375 (or here again the duty of
loyalty376) can provide assistance. A special and difficult problem here is whether the
court should be given the power to replace the dissenting (or missing) votes of the
minority shareholders, and convert them into positive votes ("dcision valant vote").
Both views have been held377, but generally, compensation seems to be more easily
accepted, while in France a possibility of the court to appoint a "mandataire", who
will vote for the minority is a form of a milder court intervention378.
5.2. Minority Rights and Groups of Companies
The position of minority shareholders in groups of companies ("outside" shareholders,
"auenstehende Aktionre") is a very important and difficult topic. When groups are
formed, minority shareholders lose, as a rule, the control premium (see above 2.1(2)),
while distribution of power is conveniently made among the members of the
controlling group. Following the formation of the group, the company operates as part
of the "single economic unit" for the benefit of the group as a whole379.
1. Some national laws cope with group situations through fiduciary principles,
restitution mechanisms (mainly damages or liability for the debts of dependent
companies), exit rights, and piercing of the corporate veil, before or after insolvency.
German corporate law is the most cited legal system with a special treatment for the
groups of companies ( 15 ff., 291 ff. AktG).
2. The principle is that in most countries minority protection is afforded to the
shareholders of each particular company. This is the case of France380, Switzerland381,
and probably Australia382, where, however, existing remedies (mainly the "Part 2F.1"
372
55
relief, dealing with oppression and the derivative action) have been used to address
some group problems383. It must be mentioned that in all such countries consolidated
accounts are drawn up and made available to the shareholders of the companies of a
group384.
3. There are countries, however, where the usual minority rights, notably the right to
request a special audit, are expressly extended to cover group situations. For example in
France, following the recent law NRE (15.5.2001), the special audit ("expertise de
minorit") can relate also to the affairs of subsidiaries. In such a case, the request for the
audit must be examined on the basis of the "interest of the group" (art. L. 225- NCC). In
Germany, special audit can be ordered at the request of a shareholder regarding the
business relations of the company with a controlling company or another company of
the same group ( 315 AktG 385). In England, inspectors appointed under CA 1985, s.
431 or 432 have also the right, when necessary, to investigate the affairs of a subsidiary
or a holding company, or the subsidiary of its holding or the holding of its subsidiary
(CA 1985, s. 433)386. In Canada, under s. 229 CBCA, at the request of any shareholder
or a director, the court can issue an order for an investigation to be made in the
corporation and any of its affiliated corporations. In Japan, an "exclusive inspector"
can extend his audit, where necessary, to the affairs of subsidiaries387.
4. Other rights can be also adapted to group situations. In Canada, the derivative action
can be initiated for damages suffered by a subsidiary388. There is now an analogous
possibility in France under recent case law389. In Germany, Sweden and Finland the right
of shareholders to be informed extends to the company's relations with other companies
within the group390. In Japan a 3% minority in the controlling company can apply to
the court for leave to inspect the books and records of a subsidiary, while any
shareholder can inspect and copy the minutes of the board, the articles, and the
register of shareholders of subsidiaries with the approval of the court, when it is
necessary for the exercise of the shareholders' rights391.
5. The most rare and complex (but also most interesting) case is the German model of
groups, where outside shareholders are protected against the change of the corporate
structure, which was the basis of their expectations392. In general, a minority exceeding
25% can block an "Unternehmensvertrag", i.e. an agreement whereby, through various
means, such as the management ("Beherrschungsvertrag") or the taking of the profits of
a company by another ("Gewinnabfhrungsvertrag"), a dependency relation is created
( 291 ff. AktG). Moreover, the management of each company has to submit a detailed
report to the general meeting, explaining the details of the agreement and the
383
56
57
companies) are allowed to represent the interests of their members in the company and
exercise the minority rights provided for by the law. Membership in such associations is
possible for shareholders holding registered shares for at least two years (art. L. 225-120
NCC). They are very active ("machines procs"397), as in the US. In Italy an
shareholders' association must have no fewer than fifty physical persons as members
institutional investors are therefore excluded each of whom must own no more
than 0.1% of the voting shares398.
A similar but different problem is the frequent holding of shares through intermediaries.
There is definitely a need of protection of those persons behind the legal title of
nominees or custodians and a problem of integrity of the register of members. But
technically these are no minority protection issues.
5.4. Minority Rights and the Type of the Company
An interesting matter would be to compare minority rights in various types of
companies: Big and small, public and private, listed and not listed companies, etc. Some
national reporters note that in all situations the corporate structure is the same and that
minority rights are also similar399 ("one-size-fits-all" system). It is often stressed,
however, that the unitary regime of minority rights and protection in all companies
(despite differences, which are exceptional rather than the rule) is a major defect of the
protection system400.
On the other hand, minority rights and protection are often modified or remodeled to suit
one category of companies or another. For example appraisal and exit rights are not
needed in listed companies, as they are in non-listed, where "voice" is more essential. A
requirement that certain rights are exercisable not only by a percentage of the capital
(which is very unlikely to be reached), but also by shares of a total minimum value, suits
mainly listed companies401. A system of forwarding communications to shareholders
and also a system of proxies are appropriate in the case of public companies. On the
other hand some rights are more extensive in the case of privately held companies.
The Swedish and Finnish example of a stronger right to inspect books in smaller
companies (with 10 or fewer shareholders) has been mentioned402.
5.5. Problems in the Exercise and Enforcement of the Rights of Minority
There is no doubt that shareholders have a monitoring role in the company ("watchdog"
role) and that it is beneficial for them but also for the company and the fellow
shareholders that such rights and deriving influence are effectively exercised. But, as
397
Cozian/Viandier/Deboissy, Droit des socits, 14 ed., 2001, no 766. See also Germain (France),
no. 15.
398
Gatti (Italy), 4 (e).
399
For example: Dutch company law hardly contains any provisions that differentiate between listed
and unlisted companies, see Timmerman/Doorman (Netherlands), no. 57. In the US the legal model
of the company is considered to be "an idealized model that is not tailored specifically either for the
close corporation or the publicly held corporation". Hamilton, The Law of Corporations, St. Paul,
Minn., 2000, p. 3. Wymeersch/Jakhian/Caeymaex (Belgium), no. 41.
400
See for example Ripert/Roblot/Germain, op.cit., no. 1385; Trigo Trindade/Bahar (Switzerland),
I, B, 1; Spyridonos, The rights of the minority in the limited company, Athens 2001, p. 583 (in Greek).
401
This is envisaged in Germany, for example for the special audit. See Hopt (Germany), IV 2.
402
Giertz (Sweden), no. 4.1.1; Kaisanlahti (Finland), 5.3.
58
noted recently by the "High Level Group of Company Law Experts", appointed by the
European Commission, "[e]xercise of influence by shareholders presupposes that it is,
indeed, possible to influence the company and, in addition, appears attractive for
shareholders to do so"403.
The general question whether the rights and the influence of the minority "appear
attractive" and are effectively used, has to be negatively answered. In almost all national
reports it is stressed that more often than not, minority rights are toothless they do not
bite. Shareholders' "passivity", "inactivity", "apathy" or "absentisme" is thought to be
the main reason for this. Even in the form of "rational apathy", i.e. reluctance to take
action that would involve costs and would benefit free-riders404, the low interest of
shareholders is a common phenomenon in the world, bearing similarities with political
indifference and high electoral abstention.
What produces apathy? Some answers, as given by national reporters:
1. High cost. As always, "there is no such thing as a free lunch". The association of the
exercise of minority rights with high cost is a big incentive for passivity405. This is worse
when the exercise of such rights bears no immediate personal benefit, as in the case of
derivative suits406. Therefore, litigation is economically sensible, where "the plaintiff
has deep pockets, a major investment to protect or can see no other way of recovering
anything from the situation"407, but also where attorneys can assume the risk and the
expense. The latter depends very much on the methods of computation of attorney fees.
The legislator can provide that the cost of the exercise of minority rights, including
litigation, will be borne, in whole or in part, by the company, but this may lead to the
other extreme, mainly to frivolous actions, blackmail, and tensions408. A very careful
ad-hoc allocation of the cost by the court is therefore necessary.
Another source of (non-recoverable) costs is the "collective action" problem. These costs
are generated when shareholders are dispersed, and they have to communicate with each
other in order to make the exercise of the rights effective or indeed possible409.
2. Time consuming action, judicial bureaucracy and the role of the courts. The
shortcomings of the legal system in general may cause the feeling that the effects of
judicial action are produced only too late, and therefore the exercise of rights is pointless.
This issue is connected with the role of the courts, and how much they can interfere in
the company's affairs410. It is clear that courts have a major role to play in common law
countries, where the general protective schemes, such as the oppression remedies or the
403
See "A Modern Regulatory Framework for Company Law in Europe: A Consultative Document of
the High Level Group of Company Law Experts", 3.1, I, at
http://europa.eu.int/comm/internal_market/en/company/company/modern/index.htm.
404
Pinto/Branson, Understanding Corporate Law, New York 1999, 5.04[1]. See also Hopt,
Shareholders' rights and remedies: A view from Germany and the Continent, Company Financial and
Insolvency Review 2, 1997, 261-283, 265.
405
Dine (England), X; Kaisanlahti (Finland), 8.5; Trigo Trindade/Bahar (Switzerland), IV A 1 a;
Katner (Poland), IX.
406
Dine (England), IV; Germain (France), no. 20; Kawashima-Iwasaki (Japan), IV 1; Kaisanlahti
(Finland), 7.2; Crte (Canada), Introd.
407
Fletcher (Australia), no 120.
408
Crte (Canada), Introd.
409
See P.Davies, Introduction to Company Law, 2002, p. 140.
410
See Hopt, loc.cit., p. 269.
59
winding-up, if this is "just and equitable", require a great deal of judicial talent and
insight. It is therefore understandable, that an "active case management by the courts"
has been advocated in England, in such matters as the security for costs, the power of
the court to dismiss claim without any prospect of success, the adjournment to
facilitate alternative dispute resolution mechanisms (ADR), the determination of how
facts are to be proved (including the exclusion of irrelevant issues), and cost
sanctions411. But it is clear that a better judicial education and a good management of
cases would be necessary everywhere.
3. Obscurity and complexity of the law/lack of experience and familiarity with the
marketplace. This point cannot be over-emphasized.
4. Burden of proof. This is an important disincentive, owing to the asymmetries in the
possession of information and evidence. An interesting solution is the reversal of the
burden of proof in some cases, as provided by Australian law. In Australia, ASIC or
some affected party can ask the court to enjoin the company or its officers from taking
some action, which would contravene the law. Where such a request is made with
regard to the fairness of a capital reduction, the prejudices to creditors in a share buyback, the effects of financial assistance to acquire company shares, or insolvency
arising from those actions, the court is required to assume that a breach has occurred,
unless the company can prove otherwise (CA 2001, s. 1324(1B)412. A recommendation
for the adoption of "presumptions" is also made by the English Law Commission413.
5. Lack of strategy and difficulty to make contractual arrangements. The simple
intention to exercise minority rights is not enough. Even in a system of effective
minority protection, a "blind" suit may be fruitless or have adverse consequences for
those who filed it. Pressure on the management is not efficient, if a strategy is not fixed
and the means are not carefully chosen. In other words, a plan of action is needed each
time to select what minority rights will be exercised, when, and against whom. Minority
shareholders may also select to temporize, to group, to create voting trusts, to ally with
or sell shares to potential hostile raiders etc. As a preventive measure, shareholders may
insist in signing proper agreements (amendments to the articles, shareholders
agreements, employment agreements etc.) or agreements for the settlement of disputes
(including ADR). But all this is not easy for common shareholders, especially in public
companies.
6. Unfriendly predisposition of the management. Minority has a special status in the
company. Even when it is not a friend, it is not necessarily the enemy of the
management. As prof. Michel Germain notes, minority is "the active conscience of the
collective interest"414. This, however, is a normative rather than a factual observation.
411
The English Law Commission Report 246, Shareholder Remedies (1997), no 2.2 and ff.
Fletcher (Australia), no 82.
413
"We recommend that there should be legislative provision for presumptions in proceedings under
sections 459-461 that, in certain circumstances, (a) where a shareholder has been excluded from
participation in the management of the company, the conduct will be presumed to be unfairly
prejudicial by reason of the exclusion; and (b), if the presumption is not rebutted and the court is
satisfied that it ought to order a buy out of the petitioners shares, it should do so on a pro rata basis".
The English Law Commission Report 246, Shareholder Remedies (1997), no 3.30. Presumptions
should also apply for non-listed companies, see no 3.39.
414
Germain (France), no. 27.
412
60
In fact the management usually sees minority as a nuisance that should simply
disappear. This creates problems of communication and understanding.
7. Hostile minority groups. This is often the case, when the management conspires with
certain shareholders, in order to divide minority and avoid or disrupt minority action. A
problem of equal treatment and abuse is obviously involved here, but by the time it is
resolved action will have been frustrated.
8. Impossibility to bridge information asymmetries, because of privileged information
possessed by certain big (institutional) investors. Personal contacts and technology
account a great deal for the gap415.
9. Informed shareholders = insiders. An adverse consequence of obtaining
information (either because a shareholder obtains inside information from the
management, or because he is represented in the board) is that shareholders are no
longer legally able to trade. This may discourage a minority from pressing the
management to give information.
10. General attitude to minority problems. Sometimes the weakness of minority does
not come from the majority, but from a social indifference, or preference to the
interests of the company or the shareholders in general or even the company's
workforce. This is particular the case of Japan. According to prof. KawashimaIwasaki416, "minorities have to fight unsupported, because reinforcements may not be
sent". Etc.
5.6. Complementary and Substitute Mechanisms
In view of the above difficulties, many efforts are being made today to improve
company law, to give shareholders incentives to participate in the life of the company,
to make general meetings more popular and use the technology to bridge distance and
communication gaps. In this connection the proposals made by the Expert Group will
have a major impact417.
Another course for the protection of minority might be to set in motion other parallel
mechanisms that would assist minority or secure the necessary action by other means.
The following are some examples:
1. The most obvious parallel mechanism is the various capital market and supervision
authorities (SEC and the like), which have already been mentioned (see above, 1.4).
Their mission is to protect the investing public in general, but their intervention is
beneficial to all shareholders who do not belong to the controlling groups. In some
instances, the interests of the minority are specifically taken into account. For example in
England (CA 1985, s. 431), the Secretary of State may appoint one or more inspectors
to investigate the affairs of the company and to report on them in such manner as he
415
See Cheffins, Company Law Theory, Structure and Operation, Oxford 1997, p. 479 ff.
Kawashima-Iwasaki (Japan), XI.
417
See the above Consultative Document, 3.2. - Of particular importance is, in the author's opinion, the
views taken and the proposals made in the report of the English Law Commission (Report 246,
Shareholder Remedies, 1997). Regarding proposals made by the Deutsche Schutzvereinigung fr
Wertpapierbesitz e.V. see Hocker, Minderheitenschutz und Rechte der Aktionre in Europa, in:
Festschrift fr Bezzenberger, Berlin/New York 2000, p. 147.
416
61
may direct, on the application of the company itself, if the court orders it or on the
application of members of the company (see above, 4.2(2)). The investigation is
ordered if it appears that there are circumstances suggesting that the company's affairs
are being or have been conducted, mainly, "in a manner which is unfairly prejudicial
to some part of its members" or that "the company's members have not been given all
the information with respect to its affairs which they might reasonably expect" (CA
1985, s. 432(2)). Another example is Australia, where ASIC investigations, although
not expressly a minority right, are broadly similar and may be initiated upon
shareholder complaints418.
2. Another supplementary mechanism for the protection of minorities is to allow third
parties to exercise the same rights that minority shareholders might (but do not
actually) exercise. This presupposes or even creates a convergence of interests. For
example in Australia some executive officers can also exercise the derivative action
against the board419. In the Netherlands the Advocate General or an association of
employees may apply for a special audit420. In France, following the recent law NRE
(15.5.2001), the special audit ("expertise de minorit") can be requested also by the
attorney general, the "comit d'entreprise", and, for listed companies, by the COB (art.
L. 225-231 NCC).
3. The refusal of company registrars to accept registration of deeds that may be
detrimental to a minority ("Registersperre") may also be a supplementary mechanism.
But this is possible only exceptionally421.
6. Final Chapter: Protection of the Minority and the Rule of Law
At the end of this report, it is not easy to summarize or to conclude. Similarities and
differences between countries and between legal systems cannot be quantified with
precision, much more so, that the number of jurisdictions presented in this report is
relatively small (despite the importance of those presented), and general conclusions
are bound to be superficial. That minority rights are protected everywhere would be a
rather pedant conclusion. That the system is in most countries ineffective is less
pedant, but also commonplace. Whether in such countries protection should be
generally stronger than it is today is a very intricate problem. Firstly, because the
majority as well has to be safeguarded against over-protection of the minority.
Secondly, because the matter depends very much on the talents of the courts and also
the extent of protection that a minority actually needs: "A" minority rather than
"minority", because the needs may dramatically differ from case to case. Thirdly,
because minority protection is sometimes a false problem, hiding clashes of personal
interests, as it often happens in proxy fights, class actions, oppression suits etc.
To close with such an agnostic conclusion would not be appropriate. Instead, the
author would like to present some views and theories concerning the function of the
rule of law, which in his opinion, can greatly enrich the debate about the amount of
protection needed and the possible convergence of the systems. The question to ask
418
62
would be the following: Are the rules of law regarding minority protection determined
by the structure of the economy and the general conditions of each country (including
concentration of ownership, level of income etc.), and/or dictated by the practical needs
of the transacting parties? Or do the rules themselves determine the economy?
6.1. Reality Determines the Law
For the rights of minority shareholders two schools would be interesting: The economic
analysis of law and the "path dependencies".
A. The Law Mimics the "Hypothetical Bargaining Model"
1. Unless driven by reputation of the managers or excessive optimism, people are
normally not willing to invest in companies, unless they are offered an acceptable level
of protection. The Law and Economics school would see here a contractual solution to
the agency problem. This is in line with the "Coase Theorem"422, which would assume
that investors, as the best judges of their own welfare, might agree with managers or
controlling shareholders on a minimum level of protection. If full information was
available, contracts were enforceable and no transaction costs were involved (as it
happens in a "perfect Coasian world"), most legal regulations regarding minority
protection would be unnecessary, because the parties themselves would be in a position
to know and agree on what to do.
2. It is common knowledge that the world is "imperfectly Coasian". It would not be
realistic to rely on the possibility of every investor to negotiate an enforceable contract
about the control that he would retain over the management. A complete agreement
would not be possible anyway, because the management should retain "residual control
rights", i.e. the power to make decisions in circumstances not contractually foreseen423. A
"free-rider" problem may also discourage shareholders from seeking to enter into any
contract. Besides, such contracts may occasionally not be fully enforceable, or the
business judgment rule may prevent courts from intervening, or individual shareholders
may not be willing or sufficiently informed to seek enforcement, or there are mandatory
rules, disallowing private contracts etc. But even when none of the above happens, it
would not be practical for the management to abide by a bundle of contracts, not
necessarily identical. Therefore, predictability and equality require a single status of the
minority shareholders, and that can be achieved only through legal protection424. This
does not mean that the actual negotiation and contractual arrangements are abandoned,
but a state intervention is considered as justified.
3. Economic analysis, however, stresses the idea that the "hypothetical bargaining
model", i.e. what transactors would agree to under ideal contracting conditions, can
provide assistance for the development of welfare-maximizing legal rules, because
lawmakers will try to mimic the results of such a free bargaining, in order to
accommodate most company participants, and lower the cost of contracting425. As
pointed out by Brian R. Cheffins, "[t]he state can perform a 'gap filling' function and
422
Coase, The Problem of Social Cost, The Journal of Law and Economics 3 (Oct. 1960), 1-44. See
also The Firm, the Market and the Law, The University of Chicago Press, 1988. See also
Easterbrook/Fischel, The Economic Structure of Corporate Law, 1996.
423
Schleifer/Vishny, A Survey of Corporate Governance, [1997] The Journal of Finance 52, 737-783.
424
For the insufficiency of private contracting see La Porta/Lopez-de-Silanes/Schleifer/Vishny,
Investor Protection and Corporate Governance, [2000] Journal of Financial Economics, 58, 3-27.
63
ensure that cases are resolved in accordance with terms which match what parties
would have bargained for, acting rationally and under ideal conditions"426. In this
perspective the above author argues that members of closely held companies are in a
better position to litigate than if a company is widely held427. In fact, the expectations
shared by minority shareholders in closely held companies are more intense and more
intricate than those, which exist in public companies, and disappointment ends up in
litigation rather than exit. "Consequently, it is easier to make a case for intervention on
the basis of a gap-filling rationale when such enterprises are involved"428.
Although the above author cautions against a massive court intervention in the affairs of
the company429, one can say that the "hypothetical bargaining model" and the "gapfilling" rationale are proper to common law systems, where courts have a wider
discretion and are more energetic in terms of adapting the rules to the circumstances of
the case. The Canadian report has an interesting part on these powers of the courts430.
Therefore this method has some comparative law relevance, but it is interesting mainly
because it suggests patterns for legislative convergence.
B. "Path Dependencies"
Several authors (notably Mark Roe431) have argued that differences in the corporate
governance between countries, such as patterns of ownership or shareholders' rights,
are caused by certain determinants, called "path dependencies". These are on the one
hand the corporate structures of an economy of each country, in the sense that earlier
structures influence subsequent choices, and on the other hand the corporate rules.
The latter are themselves influenced by the economy's initial pattern of corporate
structures. These restraints set barriers to any approximation of laws, European
harmonization or indeed the globalization. It is obvious that the theory of "path
dependencies" can support a fruitful comparative approach to the national systems of
minority protection. For example prof. Klaus J. Hopt lists among the German
national path dependencies the co-determination of employees, the concentration of
ownership in the hands of banks, and the law of groups of companies432.
6.2. "Law Matters"
In "sharp contrast" to the economic analysis and in partial contrast to the pathdependence idea, some more recent studies try to reverse the picture, and prove that
legal rules are the basic determinants of the financial and corporate environment
425
Cheffins, Company Law Theory, Structure and Operation, Oxford 1997, p. 129, 264 ff.;
Easterbrook/Fischel, The Economic Structure of Corporate Law, 1996, p. 34.
426
Cheffins, op.cit., p. 466.
427
Cheffins, op.cit., p. 463 ff.
428
Cheffins, op.cit., p. 470.
429
Cheffins, op.cit.
430
Crte (Canada), no 3.2.
431
See Roe, Strong Managers, Weak Owners, The Political Roots of American Corporate Finance,
Princeton 1994; Bebchuk/Roe, A Theory of Path Dependence in Corporate Ownership and
Governance, [1999] Stanford Law Review 52, 127. For German "path dependencies" see Hopt,
Common Principles of Corporate Governance in Europe? The Clifford Chance Millennium Lectures,
Oxford 2000, p. 105, 118.
432
Hopt, Corporate Goernance: Aufsicht oder Markt? berlegungen zu einem internationalen und
interdisziplinren Thema, in: Max Hachenburg, Dritte Gedchtnisorlesung 1998, Heidelberg 2000, p.
9, 14 ff.
64
65
3. The promoters of the legal approach to corporate governance argue that emphasis on
the legal rules "stands in sharp contrast to the traditional 'law and economics'
perspective on financial contracting"440. They propose three "crucial principles" of
reform: The first is that "legal rules do matter". The second is that "good legal rules
are the ones that a country can enforce". The third is that "government regulation of
financial markets may be useful when court enforcement of private contracts or laws
cannot be relied upon". "Functional convergence" may also be needed, as suggested by
John C. Coffee Jr.441.
4. It is not easy to make an assessment of the data used by the above authors, nor to
claim a better understanding of the international system of minority protection. It is
legitimate, however, to make some comments.
(a) The first comment concerns the shareholders rights that have been taken into account
by the above authors. In "Legal Determinants of External Finance" and in "Law and
Finance", these rights have been: (a) Voting rights under the "one-share-one-vote"
system; (b) rights that support the voting mechanism against interference by the insiders
("anti-director" rights), i.e. right to vote by mail, no shares blocked before the meeting,
cumulative voting, mechanism to be used against oppression (including derivative suits,
judicial venue to challenge management decisions or exit right), (c) the right to call an
extraordinary general meeting; (d) finally, the right to a mandatory dividend.
At first sight these rights appear to make a good sample. However, some important rights
are missing, which might make a difference. These are, for example, pre-emption rights
(which are not a solid part of the Anglo-American system of protection)442, or the right to
request a special audit, more "voice" than "exit"-oriented, which, again, is generally not
available in the US, but quite important and actively proposed in Europe443.
(b) On the other hand, a qualitative assessment of the rights seems to be missing. Rights
bearing the same name may not be the same everywhere, and a method of yes/no
regarding their existence is not sufficient. If one takes the example of the derivative suit,
one can compare the red tape accompanying such a suit in the US with the relatively free
exercise of the "action ut singuli" in France. Although practice may be different in these
two countries, it may be questionable if the US can merit the "perfect 5" awarded to it by
La Porta et al., for the anti-director rights, while France gets "the worst legal
protection" mark. Another example is the possibility of judicial review of management
decisions (also included in the anti-oppression mechanisms by La Porta et al.), which
may be more extensive in countries where the business judgment rule is less applied than
in the US. Therefore saying "yes" to the question if such a possibility exists hides the
intensity of the judicial control. Procedures and enforcement also matter, as pointed out
440
66
by Babchuk and Roe: "Principles are important, but the 'devil is in the details', and
implementation counts a great deal. Two countries may be hostile to self-dealing in
principle, but their overall legal treatment of self-dealing might differ greatly because of
differences in the procedures that corporations must follow in approving a self-dealing
transaction, in the nature and timing of the disclosures that the firm or the controller
must make, in the incentives that public investors or plaintiffs' lawyers have to sue, in
the procedures that such suits have to follow, in the standards of scrutiny that courts use,
in the level of deference that court give to the insiders' judgment, in the extent to which
an effective discovery process is available, and in the ways in which evidence will be
brought and considered"444.
(c) Furthermore: One may find that a right exists in one country but not in another.
However, this may not be the whole story, since other rights can replace the missing one.
For example, oppressed minority mechanisms are reported to exist in England, but not to
Finland. But the Finnish reporter, Dr. Timo Kaisanlahti445, finds this to be "the most
puzzling [outcome] of the study of La Porta et al." from a Nordic point of view.
Another example might be the constitutional protection of shares as property rights,
frequent in civil law, infrequent in common law countries, which can add strength to
the available protection. Similarly, the missing obligation to deposit shares before a
meeting can be occasionally offset by other requirements, such as the need to have
been in possession of shares for a minimum time period.
(d) Another remark is that rights are part of the law of minority protection therefore of
the total sum of checks and balances (see above, 1.3) and that the latter also matters.
For example a system of disclosure and transparency, as well as a system of general
reporting of major events affecting the life of the company can greatly reduce
asymmetries and assist minorities. A good functioning of the market can make the Wall
Street option easier and thus prevent litigation. The interpretation and application of
general principles of law (such as good faith or prohibition of abuse) are not only
connected with "rights". Another example can be drawn from differences in corporate
culture: The efforts of foreign raiders in Japan, and the battles about the exercise of
minority rights by greenmailers have often failed or been despised, because raiders
have not given proper regard to the non-confrontational way of doing business in
Japan446. The problem of "path dependencies"447 has to be also mentioned here.
(e) A comparative work on minority protection might detect similarities, hidden by
differences in semantics. For example, while efficiency is a main characteristic of the
common law world, this is not ignored everywhere else. The German Constitutional
Court (BVerfG) has been sensitive to efficiency requirements (without saying the word)
when, at the level of property protection, it considered that it is not unlawful for the
majority to squeeze-out minority (see above, 3.4(A)(2)).
(f) Another problem is connected with the observation made by prof. Paul Davies, when
he supported the thesis that: "the law addresses the agency problems of minority
shareholders as against majority shareholders less effectively than it does the agency
444
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problems of the shareholders as a class against the board"448. This seems to mean that in
countries with concentrated ownership the law has a more difficult task, than in countries
with dispersed shareholders. If this is so, the findings of La Porta et al. might be
reversed, in the sense that it is not poor laws that produce concentration, but
concentration that makes laws work poorly. This might be an interesting proposition to
explore.
(g) In the author's view, the most serious reservation against the findings of La Porta et
al. is the following warning of comparative law methodology, as stated by Zweigert and
Ktz: "The comparatist can rest content if his researches through all the relevant
material lead to the conclusion that the systems he has compared reach the same or
similar practical results, but if he finds that there are great differences or indeed
diametrically opposite results, he should be warned and go back to check again
whether the terms in which he posed his original question were indeed purely
functional, and whether he has spread the net of his researches quite wide enough"449.
I am afraid that a "step back" is really messing in the abovementioned studies.
5. Despite all this, the author of this report would agree that common law has indeed
certain aspects that make minority protection more efficient. Not necessarily in the sense
that in common law countries protection is "better", and that in civil law countries
(especially of French tradition) it is "worse". This would need a much more extensive
analysis, for evaluating the actual need of protection, as already mentioned. But there are
definitely one or two reasons that make common law minority rights stronger.
(a) Some critical aspects of the law, such as the duty of loyalty of the management, are
more protective in common law countries (see above, 2.3(1)). But the single most
important protection tool, i.e. the general oppression remedy, is almost unknown in civil
law countries. This remedy is by nature "equitable" and contains a long list of judicial
powers available to a competent and wise court. This list includes such corrective action
as rescission of corporate acts unfair to the minority, regulation of the company's affair in
the future (positively or negatively), authorization to sue directors or other persons,
appointment of a provisional director, orders for the purchase of shares of certain
members by other members, even the dissolution of the company. A court has therefore a
lot of possible choices. For example, an oppression remedy may be followed by a
derivative action, the dissolution of the company, the appraisal of the applicants'
shares or other measures. Oppression remedies communicate also with other rights,
which are otherwise independent, such as again the right to file a derivative suit or
exit rights (the latter are almost unknown in civil law countries). There is thus a
"continuum", which gives flexibility and efficiency. Ideally, the oppression remedy can
be seen as a "general clause" for the protection of the minority, which in civil law
countries is felt as "missing"450. La Porta et al. (who compose a bundle of "antidirector rights") do not seem to praise this characteristic of the common law systems.
(b) A second advantage of common law countries (noted by La Porta et al.), is their
judiciary, which, although generally reluctant to intervene in the company's affairs451, as
448
68
in all other jurisdictions, is more eager to assume its responsibilities in dealing with ad
hoc business problems. According to John C. Coffee Jr.452, common law judges apply a
"smell test", to feel if unprecedented conduct constitutes a violation of the fiduciary duty
or contradicts fairness and is unfair to outside investors. The oppression remedies are
tailored for this judiciary. Civil law judges may also be able to do this, as the Finnish
reporter argues453, but they are admittedly not trained for this nor always assisted by
the "bright line rules" of the law454. In any case, as La Porta et al. observe, the role of
courts, important as it is, should not be necessarily overestimated, as courts may be promanagement and not pro-shareholders455.
(c) However, for many other differences of the two systems it is difficult to say if they
ultimately assist minority or the management. For example common law often favors
compensation against detrimental action rather than the reversal of the latter, while in
civil law countries the opposite is more usual (see for example above, 3.4(B)). But it
is debatable whether this is a favor or not to minority.
6. In fact gray, rather than black and white, is the dominant color. John C. Coffee Jr.
notes456 that it would be a mistake to think of common law and civil law countries as
completely homogenous groups; that common law countries themselves have converged
much more at the level of securities regulations, than at the level of substantive corporate
law; and that civil law countries protect shareholders more efficiently against the forms
of abuse that were well-known in systems of concentrated ownership, than against
abuses that typically characterize systems of dispersed ownership.
7. The personal feeling of the author of this report is that the merits of the findings of La
Porta et al. are less in the field of comparative law and more in two other directions:
The first is the association of shareholders protection with efficiency and growth, with a
clear "race to the top" corollary. The second is the proposition that "Legal rules matter".
Although it is difficult to say whether these propositions might be separated from the
comparative conclusions, they have an obvious significance of their own. One should
expect the discussion to go on.
6.3. "Norms Matter"
A very interesting reaction came by John C. Coffee Jr.457, who proposed an alternative
criterion to good minority protection, associated not with legal rules, but with norms, as
instruments of social control. The association of low crime rates with a high level of
social cohesion and the lowest level of social and political disruption might explain the
good records of Scandinavian countries in minority shareholders protection (although
not in the US, where crime is high).
452
John C. Coffee Jr., Privatization and Corporate Governance: The Lessons from Securities Market
Failure, October 1999, Columbia Law School, Center for Law and Economics Studies, New York.
Working Paper No. 158.
453
Kaisanlahti (Finland), 1.1 at least for Finland.
454
That this is a deficiency is often felt in civil law countries, example Greece, Spyridonos, op.cit., p.
624.
455
La Porta/Lopez-de-Silanes/Schleifer/Vishny, Investor Protection and Corporate Governance,
[2000] Journal of Financial Economics, 58, 3-27.
456
John C. Coffee Jr. , Privatization etc., loc.cit.
457
John C. Coffee Jr. , Do Norms Matter?: A Cross-Country Examination of the Private Benefits of
Control, January 2001. Columbia Law and Economics Working Paper No. 183. Abstract in
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=257613.
69
One can wonder if a "mobile system" of legal rules and social norms could be a more
advanced idea: When law is weaker, social norms have to be stronger (this is already
proposed by Coffee), but also vice-versa.
70
71
72
14. Sweden: Companies Act 1975, Annual Accounts Act, the Book-keeping Act.
15. Switzerland: Code des Obligations (CO, 1911), major revision in 1991, but also Stock
Exchange legislation (1995). Codes of Corporate Governance, especially for listed
companies, such as the Swiss Code of Best Practice (2001). Decisions of the Takeover
Commission (Commission des Offres Publiques d'Acquisition) and of the Commission
fdrale des Banques.
16. US: In the absence of national report, the Model Business Corporation Act, 3rd revised
edition (2001) (MBCA 2001, elaborated by the American Bar Association, ABA) has
been considered, as a representative legislation.
17. Also various EC legislative materials, such as Regulations and Directives.
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