Rights of Minority Shareholders

Rights of Minority Shareholders

General Report

By:

Evanghelos Perakis

Professor of Law at the University of Athens

Table of Contents

1. Introductory Chapter: The Subject Matter of this Report1.1. The General Theme1.2. "Shareholders", "Minority", "Rights"1.3. Minority Rights and Minority Protection1.4. 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 Rights2.1. Equal Treatment of the Shareholders2.2. Abuse of right "Abus de majorit"2.3. Duty of Loyalty2.4. The Interest of the Company ("intrt social")2.5. Property Rights Vested Rights2.6. "Pacta sunt servanda"2.7. Minority Shareholders, Considered as Consumers2.8. Fairness2.9. Conclusive Remarks 3. General "Correcting" Remedies3.1. The "Unfair Prejudice" Remedy ("Oppression of the Minority")3.2. Right to Cause the Company to Sue its Directors - Derivative Action3.3. 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 Rights4.1. Information Rights4.2. Special Audit4.3. Rights Concerning the Conduct of Assemblies4.4. Right to Directly Appoint or Request the Judicial Appointment of a Company Officer Right to Request his Removal4.5. Pre-emption Rights in Respect of Actual or Potential Share Capital Increases4.6. Right to Receive a Minimum Mandatory Dividend4.7. Other4.8. Conclusive Remarks on the Rights of Minority Shareholders 5. Some Special Issues5.1. Limits to the Exercise of Rights Protecting Minority Shareholders5.2. Minority Rights and Groups of Companies5.3. Associations of Shareholders and the Maxim "nul ne plaide par procureur"5.4. Minority Rights and the Type of the Company5.5. Problems in the Exercise and Enforcement of the Rights of Minority5.6. Complementary and Substitute Mechanisms 6. Final Chapter: Protection of the Minority and the Rule of Law6.1. Reality Determines the Law6.2. "Law Matters"6.3. "Norms Matter"Appendix I: National ReportersAppendix II: Some Sources of Law and AbbreviationsAppendix III: Selected Bibliography

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1. Introductory Chapter: The Subject Matter of this Report

1.1. The General Theme

In the matter of protection of minority shareholders the differences between the various legal systems are numerous. Whether they are also fundamental is open to debate. In any case, the whole issue is quite intricate, as there are no complete or coherent national "systems" of minority protection, and the relevant material is not easy to collect and compare. As prof. Janet Dine (the UK reporter) notes, "minority shareholders rights provide great fun for academics and some rich pickings for lawyers but are otherwise a fairly incoherent mess".

The truth is, however, that the idea of the limited company, as contract, institution, "instrument", "mechanism", or just "vehicle", has been promoted by all capitalistic economies in the world and its variables are less important than its constants. The idea of protection of minority is also a common objective. Social norms may contribute to protection, but it is clearly the law that is most decisive. The law can operate preventively (for example through disclosure requirements), but this, if alone, is insufficient. The problems created by the majority rule need to be addressed by general remedial rights of the minority (such as the remedy against oppression) or special rights of shareholders to intervene in the company's life (such as the right to call an extraordinary general meeting).

The object of this report, vast as it is, does not allow for an elaborated dogmatic comparison of the national minority protection rules. Such an exercise might go too far, because it would shift the focus from the minority rights themselves, to the peculiarities of the national systems which generate them, and in which they exist and are exercised. On the other hand it would not be possible to focus on practical aspects of the minority rights, firstly because information on how the systems work in practice is not available, and secondly because the practical method would not touch 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). 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 provided, 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 power, or to the capital prevalence. 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" organ 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 meeting. 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"), the casting vote of the chairman, the "relative majority" provided for the election of officers, 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 power.It has been noted, that a higher majority gives a stronger legitimacy to resolutions. This would be in favor of high majority rates, but on the other hand would put the operation 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. Here again, the articles can increase the percentages, but usually not up to unanimity. 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 them 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 it, or the so-called "paper-meetings" or "action by consent", when resolutions are taken without meeting,. The majority rates define the powers of the majority in general meetings and the corresponding blocking power of the minority. 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.

4. Minority is not only a floating legal concept; it is also a fact depending on contingency. No member or share of a company are born or are bound to remain in a minority position. Anybody is potentially a majority or a minority shareholder. It is significant that in some jurisdictions, like the US, Canada or France, the term "minority" is hardly mentioned in the law. This, it is argued by Dr. Keith Fletcher, can be of a "procedural" assistance to the minority shareholders, since the latter are dispensed from proving that in any particular case they are indeed in such a position or that the other party controls the company. The fact that minority can be only a contingent concept is described in a colorful way by prof. Serafino Gatti. Referring to some provisions of the Italian Civil Code and art. 148 (II) of the TUIF, whereby the articles of the company may or must (respectively) contain provisions for the appointment of auditors by the "minority", the reporter shows the artificiality of the concept degenerating in practice to agreed-upon splits of the majority into several small groups or the final prevalence of the "bigger" minority.5. There are several methods for determining minority rights. There may be rights granted to shareholders holding a certain minimum percentage of the capital, as for example 1/20 (=5%) or 1/10 (=10%), etc. Some rights are granted to shareholders having shares of a minimum nominal value a method often adopted in public companies, when shares are dispersed and percentages would be very difficult to reach. The two methods are often combined, on a "whichever-is-the-lower" basis. Sometimes things become more complicated: For example in England the right to receive notice of any resolution, which is intended to be moved at a meeting or a statement about the matter referred to in any proposed resolution, is granted to any shareholders representing 1/20 of the voting rights or to not less than 100 members holding shares in the company on which an average sum, per member, of at least 100 has been paid up (s. 376(2) CA 1985)!A 50% stake could hardly constitute a "minority", although in some circumstances the ensuing deadlock could justify remedies similar to those granted to minorities. A deadlock, if abusively caused, is often considered unacceptable ("abus d'galit").

6. Does the size of minority matter? A first answer is that in fact some laws take the size into account by giving more extensive rights to a bigger minority. For example Greek law gives more extensive information rights to a minority of 1/3 than to a minority of 1/20. On the other hand the Belgian reporters make a distinction between "structural" and "occasional" minority shareholders.A more difficult aspect of the issue would be the impact of large groups of shareholders upon the control of the management. This is a basic question of corporate governance. In the pattern of Berle and Means shareholders are dispersed and the management is centralized (then all shareholders are virtually "minority shareholders"). There is now evidence, however, that concentration of power to large institutions (state, families, banks, institutional investors etc.) is of a high degree worldwide, and not only in certain countries, like Germany (banks) and Japan (cross-holdings), as it was generally thought. In fact large shareholders, despite their greater exposure to risk and the non-availability of the so-called "portfolio" benefits (diversification of investments), are undoubtedly more powerful, even if they do not own the majority of the capital. Large shareholders are more prepared and willing to exercise their rights; they are usually better informed; they are more likely to make alliances with (or buy-out) other shareholders and exercise collective pressure (therefore they tend to become majority); they are less likely to be squeezed-out; they are also big enough to depress prices, when they sell. But they are often pro-management and criticize less.

Company law rarely makes any distinction between shareholders, whether they are ordinary or institutional. Special rules are rather found in the securities legislation. For example in Switzerland, pension funds are obliged to enunciate the rules that they are going to follow as shareholders. This shows that there is an issue of protecting dispersed minority shareholders against the great minority blocks. If the latter become "majority" (not necessarily in mathematical terms), the general protection rules are applicable.7. This observation leads us to another form of minority, namely the minority of the minority. It refers to situations where a shareholder alone is not able to reach the percentages required by the law for taking some action, and needs the cooperation of fellow co-shareholders. Then some shareholders may refuse to cooperate or later disassociate and seek to cancel the action taken. Then we may witness an interesting clash, namely the one between minorities. Protection of the minority within a voting trust is also a problem. In such cases the principles of good faith, loyalty and non-abuse may provide assistance.

C. "Rights"

"Rights" are the legal powers that minority shareholders have to intervene in the affairs of the company. Together with the blocking possibilities of the minority (when a minority can prevent resolutions from being passed), the rights can measure the real impact of the minority power in the company.

1. In principle, rights of the minority are exercisable by minority shareholders, holding a prescribed amount of capital, as described above ("minority rights in narrow sense").

2. The main question is how to treat "individual" or "personal" rights that every shareholder is entitled to exercise (for example the right to collect a dividend or to vote, the preferential right to subscribe to new shares, etc.). The problem is that, by definition, these rights are available to all shareholders, whether having a majority or a minority position. However, they will be presented in this report together with the minority rights in narrow sense, for two reasons: Firstly, because in some countries, certain rights are granted to all shareholders, while in other countries the same are granted to minorities in a narrow sense. For example, in Germany information rights can be exercised by any shareholder, when information is needed for a correct understanding of the items on the agenda ( 131 AktG), but in Greece the same information can be requested only by a minority (1/20 of the capital). In Switzerland every shareholder can apply to the general meeting for the institution of a "special control", while in other jurisdictions (such as France or Italy) the same right is treated as a minority right. In Italy (only with regard to listed companies) and in Finland a derivative action can be instituted by a 5% or a 1/3 minority, respectively, while in many other countries, where such an action is permitted, it can be instituted by any shareholder. Secondly, because minority protection in limited companies is normally one single issue, difficult to divide.

It is clear, however, that in a report about minority protection, the presentation of individual rights should be limited only to those rights, which have an anti-majority or anti-director component. For example, the right to receive a dividend is indiscriminately given to all shareholders, but the right to receive a minimum dividend is clearly oriented at protecting shareholders against arbitrary choices of the majority. Also, the right to transfer shares or the right to vote is not specifically designed to protect minorities.It is another problem whether stronger shareholders' rights make minority rights less necessary. This has been particularly observed in respect of the right to a minimum dividend, which has been found to exist where shareholders' rights are generally weak (see below 4.6). One can argue, however, that this may be true with respect to all minority rights and not only the right to a minimum dividend.3. Minority rights are often listed under various headings, for example, as "negative participation rights", "normalizing participation rights" or "positive participation rights"; as "affirmative intervention" or "defensive rights"; as rights to be exercised ex ante (before the fact) or to be used ex post (after the fact); as "pecuniary" or "membership" or even "quantifiable" and "non-quantifiable". Such categorizations are very helpful, mainly for educational purposes. It is less certain, however, whether they can are legally important.

4. Legal rules introducing minority rights are usually of a mandatory nature. This is the case of civil law countries, but also of Japan. 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". 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 many countries to enforce (together with courts) such a legislation. Various Ombudsmen schemes are also put in place.

According to the traditional view, the capital market legislation has the task to protect investors rather than shareholders, the latter being covered by company law. This view is, however, more and more challenged and the cooperation and interaction of the two systems is rather stressed.

Although the author of this report had initially intended to measure minority protection also under the various capital market laws, and in fact invited national reporters to give relevant information, it eventually transpired that this would burden this general report excessively. For this purpose capital market legislation will be considered only to the extent that it gives rights to minority shareholders. On the other hand, the general protection that shareholders may have as a result of the general provisions of the capital market legislationand which may indirectly give protection to minorities, will not be considered. However, the term investor may be used occasionally to denote minority shareholders.1.5. Why Minority Rights?

There are various answers to this question. The most obvious are those connected with the ethical dimension of the problem. Minority is the "weakest link". It lives in a complex, difficult and sometimes unfriendly environment. Protection compensates minority for various deficiencies and the lack of equality.

In terms of economic analysis the minority problem is an "agency" and oversight problem. Investors delegate the power to manage their money to somebody else who are prone to opportunistic behavior, i.e. selfish management, diversion of profits or commitment to unprofitable projects. The agent is the board, as it happens in a typical Berle and Means company, with dispersed ownership. The "separation of ownership from control" vests the board with the ultimate power over the company and the investors' money. But ownership may also be concentrated in large blocks of shareholders, who appoint or are identified with the management. The problem then is protection against a majority or even against great blocks of minority shareholders, who are able to influence the management or extract benefits for themselves under discriminatory practices. It is obvious that the two types of agency (shareholders/board, minority/majority) differ substantially, although the legal strategies for dealing with them can be categorized under the same headings. 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 second.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 low; they contribute to a more efficient functioning of the company itself (here the view of the minority as a "subsidiary" organ 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 takeover.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 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 rules, any discriminatory act against a shareholder goes against the very mechanism of the limited company and can destroy shareholders' expectations. 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 power. 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"). 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 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". 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 treatment. However, member states have eagerly generalized the rule (or had already done so) and promoted it to a general principle. Thus in Germany, "shareholders are to be treated equally under equal circumstances" ( 53a AktG ). 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". 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". The same happens in Finland where equal treatment is considered to be the mandatory "general standard", overriding other provisions, including the business judgment rule. 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"). 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 shares, multiple voting rights, special privileges or loyalty bonuses. 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 difficult. Another reason is that the rule of equal treatment binds the company and its organs not any 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 basis. 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") may be permitted, if this is dictated by the best interests of the company or if information is not equally necessary to all shareholders. This can also legitimize disclosure by the board to prospective buyers in spite of the board's duty of confidentiality. 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". 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", although such treatment must not exceed what is necessary each time (principle of proportionality). In Germany it is also believed that unequal treatment is not per se unlawful, if justified by the company's interests, while in England "fair" rather than "equal" treatment seems to be the rule.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".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 shareholders (conversely shareholders may prefer a "larger pie", even if not shared equally).

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 susceptible to be proportionally apportioned, such as the right to vote or to collect a dividend; it does not apply to other indivisible rights, such as the right of information.

2.2. Abuse of right "Abus de majorit"

The prohibition of abuse of the majority power is a strong and almost universal limit to the majority rule ("abus de majorit"). It derives from good faith, social considerations, ethical precepts incorporated in the law, or constitutionally protected rights of economic freedom. It is a special manifestation of a general rule regarding prohibition to exercise rights in an abusive manner, sometimes expressly enshrined in national laws. The term is not always used in these words (cf. for example in France the "dtournement du pouvoir", having administrative law connotations), but the essence remains that the judge can stop action where certain limits are exceeded.

The problem is of course that finding each time where the limits lie is a difficult and sometimes dangerous task. In order to avoid undue judicial interventions court practice helps to establish guidelines. In some countries, like Japan, such practice does not exist. French courts are on the contrary more familiar with the notion. For an "abus de majorit" two elements are required: The decision of the general meeting must be prejudicial to the minority, without being dictated by the "intrt social" (see below, 2.4).

2.3. Duty of Loyalty

One of the best means of protection of the company "as a whole" is the duty of loyalty of the directors and other officials of the company, a duty that, together with the duty of care, determine the functions of the board. The duty of loyalty (or fiduciary duty) of the management is part of the consideration received by investors when entrusting their money to them.

1. By virtue of this duty, directors are not allowed to create and/or hide conflicts of interests, to act despite them, to misappropriate corporate funds, to enter into prohibited or unfair self-dealings or "insider" dealings, to extract excessive salaries and extra bonuses, to treat shareholders in a discriminatory manner (equal treatment flows also from the duty of loyalty). They cannot oppose hostile takeover bids on the basis of their personal interests. The discussion on certain aspects of the duty of loyalty in some countries (mainly the US), such as transfer pricing, diverting "corporate opportunities", or "tunneling" funds out of the company, has contributed to a high degree of sophistication, and it has been observed that German (but in general, European) courts are a bit behind.

2. The duty of loyalty is useful to minority shareholders, because they may thus expect that the management of the company will not aim at the personal interests of the board. Of particular importance is this duty when it binds the management not only vis--vis the company in general, but also vis--vis each shareholder. That the duty is owed to the company alone seems to be the rule, but in France loyalty is believed to be due to both the company and the shareholders. The duty to the latter is then a direct duty and not only a reflection of the loyalty to the company. For example, if a board member has purchased the shares of a shareholder, and immediately after he sells them at a profit, he is liable to pay damages to the ex-shareholder.

3. The next problem is whether the duty of loyalty binds also shareholders ("aktienrechtliche Treupflicht"). It is often said that, as a matter of principle, shareholders, taken individually, have only one obligation, namely the obligation to pay the price of their shares. They have no other duties, for example they do not have to vote in accordance with the company's interests, ignoring their own, to refrain from competing with the company or to take into account the interests of their fellow shareholders.

4. This rule is however constantly revisited. In some countries it is provided by law that the majority must act "bona fide for the benefit of the company" for example in England, when the general meeting takes a "special resolution" for the alteration of the articles. In order to determine the intensity of such a duty, a sliding scale is often used, whereby loyalty "accentuates proportionally as the number of shares and votes the majority owns increases", or more generally, according to the larger or smaller part and influence a shareholder has of or in the corporation. The type of the company (in closely held companies or "quasi partnerships" personal relations between shareholders are the main characteristic) has also to be taken into account. This ultimately means that under the circumstances there may be a unilateral duty of loyalty, 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), 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 accordingly.5. Should auditors give special regard to the interests of minority shareholders? The answer is negative. 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 countries) 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 articles.

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 majority. 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.

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 objectives. 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 employees), but also around it, like the interests of creditors (especially on the verge of insolvency), 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"). 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"). 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 interests. 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 Constitution, 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 property.Protection of the share as a property is interesting at two levels: Firstly, it determines, according to countries, the amount of protection available to shareholders as "owners", as well as the limits of their property (mainly on the basis of social or practical considerations). For example pre-emption rights can be restricted in favor of employees. Also, the right to speak at a meeting has been considered in Germany as part of the proprietary rights attaching to the shares, but at the same time limits were fixed to its exercise (not endless speeches). Conversely, profit expectations have not been considered as "property".

On the other hand, share as property means that expropriation is not allowed. In this connection, the Finnish reporter cites an Australian case in which the court considered an amendment of the articles, whereby expropriation of shares would be permitted, even under strict conditions (mainly against a competing shareholder). The court did not exclude it altogether, as it would have happened in Finland, where unanimity of all shareholders would be required.

2. A similar concept is the principle of vested rights ("droits acquis"). This principle was accepted in Switzerland as a defense before 1991 (art. 646 CO), and covered mainly the right to be a member, voting rights, the right to receive a dividend or the proceeds of liquidation, as well as the right to challenge general meeting resolutions. However, following the reform of 1991 the law now refers to resolutions by which the rights of shareholders are "abolished or restricted in a unfounded manner" ("dune manire non fonde") or those by which shareholders suffer a damage not justified by the object of the company ("un prjudice non justifi par le but de la socit"). Vested rights are a rather abandoned idea. The problems of the vested rights concept is the difficulty with which the latter is conciliated with the majority principle, but also with efficiency considerations. In the US, vested rights were thought to prohibit expropriation, but were "jettisoned" in favor of freeze-out possibilities. The MBCA makes it clear that: "A shareholder of the corporation does not have a vested property right resulting from any provision in the articles of incorporation, including provisions relating to management, control, capital structure, dividend entitlement, or purpose or duration of the corporation". In this way, the power of the majority to drastically alter or amend the position of minority shareholders is not excluded, unless the law makes an alteration conditional upon the consent of the affected class of shares ("voting by classes"), but there, again, the alteration is possible by a majority decision. It is then a "class veto" not individual shareholder veto. Variation may also be possible without the consent of shareholders within a reorganization scheme (for example in the US see MBCA 10.08). Therefore, as it is rightly stressed by prof. Serafino Gatti, the problem is not to stick to standardized individual rights of the minority, that cannot be impaired, but to strike a circumstantial balance between the legitimate use by the majority of its power to run the company and the expectations of the minority that such right will not be abusively used.2.6. "Pacta sunt servanda"

The enforcement of the association contract in favor of minority shareholders is another means of minority protection. The essence of the idea is that shareholders can rely on the articles as a contract and invoke them when a breach is committed. At the same time it is also a warning to them to take care and insert appropriate clauses that would protect best their interests.

1. The contractual element of the company is particularly stressed in common law countries. As s. 14 CA 1985 puts it, "[] the memorandum and articles, when registered, bind the company and its members to the same extent as if they respectively had been signed and sealed by each member, and contained covenants on the part of each member to observe all the provisions of the memorandum and of the articles". In the English Law Commission Report 246, Shareholders Remedies (1997), no 1.9, it is said that: "A member is taken to have agreed to the terms of the memorandum and articles of association when he became a member, whether or not he appreciated what they meant at the time. The law should continue to treat him as so bound unless he shows that the parties have come to some other agreement or understanding, which is not reflected in the articles or memorandum. Failure to do so will create unacceptable commercial uncertainty. The corollary of this is that the best protection for a shareholder is appropriate protection in the articles themselves".It is stressed, however, that the contractual element should not be taken too far, and in particular to allow any litigation, as in the case of any other contract. The reason is that such litigation can cause disruption to the company's affairs, but also that those managing the company must be allowed the necessary discretionary powers to decide without the continuous risk of corrective action.

2. A connected matter is the possibility for minority shareholders to enter into private "pooling agreements" or "shareholders agreements" (not incorporated in the articles) providing for a more specific protection. Such agreements may contain various provisions, such as restrictions of the powers of the board, the distribution of dividends, the manner of selection of directors or their removal, the exercise of voting rights, the transfer to one or more shareholders of the authority to exercise corporate powers, the dissolution of the company at the request of a shareholder, and generally the exercise of corporate powers (see in the US MBCA 7.31). In principle, such provisions may not be part of the articles. But in the US there is a certain degree of osmosis of articles and shareholders' agreements. In a spirit of deregulation, shareholders' agreements may complement the articles and also (mainly if they are signed by all shareholders), be "effective among the shareholders and the corporation even, though it is inconsistent with one or more other provisions" [of the MBCA] ( 7.32(a)). For this reason such agreements have to appear "conspicuously" on the share certificates ( 7.32(c)). However, in most other jurisdictions shareholders' agreements are vis-a-vis the company but also future purchasers of the shares "res inter alios actae".

3. Although in civil law countries the formation of a limited company is made by contract (except in case of a one-person company), the contractual element is not stressed as much as in common law countries. One of the consequences of legal personality is that the new entity is "institutionalized" in a way that transcends private will, and strongly marked by rules of public policy. Therefore shareholders do not often seek protection on the basis of the contract, and rely instead on the law. However, this may change: The French theory of "institution" has been created at a time when freedom of contract was an undisputed principle, while today some more flexible and deregulated forms of company have largely "de-institutionalized" the company.

4. It is important to note that the contractual basis can also be turned against minority shareholders. Minority shareholders have agreed to enter a contract with the company and the other shareholders, and have to live with majority decisions regarding the management, as well as the exercise of the majority powers under the business judgment rule.

2.7. Minority Shareholders, Considered as Consumers

Treating shareholders as consumers is a widespread idea, especially in listed companies. Information asymmetries, weaker bargaining position and dependence but also the great number of investors in listed companies are common characteristics of investors and consumers alike and make the need of protection obvious. The idea suggests the possibility to use similar methods of protection: Additional information, court assistance in cases of oppression, class actions. Investors are also treated as consumers by the regulatory authorities.2.8. Fairness

Fairness (often combined with legitimate expectations) is a notion that is more familiar to common law than to civil law countries. Fairness is considered "to defy precise categorization", but it generally commands that the interests of each party must be taken into account and given the proper weight. Fairness may transcend equality, whenever the latter may lead to injustice or when it appears that a particular situation needs particular treatment. "Unfairness may consist in a breach of the rules or in using the rules in a manner which equity would regard as contrary to good faith".

Like the abuse of right, fairness (whether "procedural" or "substantive") can provide a tool for judging the appropriateness of many acts and dealings of the managers, but also of the majority shareholders or the assembly. For example in English law, fairness is the commanding criterion for the remedy under s. 459 CA 1985, or for the winding-up of the company, when it appears that this is just and equitable (Insolvency Act 1986 s. 122(1)(g)). In the US shareholders must be given a fair and reasonable opportunity to exercise preemptive rights to acquire unissued shares ( 6.30 MBCA); the rules for the conduct of the meeting must be "fair to shareholders" ( 7.08 MBCA); directors have a duty "to deal fairly with the corporation and its shareholders" ( 8.31 MBCA). Fairness together with reasonableness is also a basic concept in the Netherlands (basically a civil law country). It constitutes a parameter for such issues as the conduct of the persons concerned with the organization of the company (including the majority shareholder) or the legality of general meeting resolutions. It is even argued that: "From a company law point of view, equality and freedom of contract are not principles that take precedence over the principles of reasonableness and fairness, but can and should be seen either as resulting principles (equality) or principles that may never conflict with the demands of reasonableness and fairness".

Fairness and predictability are competing principles. Civil law countries have generally a stronger inclination for the latter than common law countries do. Fairness and efficiency are also competing, although occasionally the first can assist the second.2.9. Conclusive Remarks

The above principles are the most common legal tools for the protection of minority worldwide and the determination of minority rights. One thing, which became apparent from the above presentation, is that these principles are quite unstable. They do not constitute a uniform and consistent set of principles, under which the virtues of the management or the exercise of the majority power can be judged. In fact, some of these principles, if applied on a given situation, can occasionally give different results. For example, the interest of the company and equal treatment are not always serviced simultaneously, for example when pre-emption rights are curtailed. Equal treatment and duty of loyalty have an unclear relationship. Also, property protection considerations may be repulsive to squeeze-outs, even if permitted by the interest of the company. The same will happen with the duty of loyalty, which is more likely to be overlooked if certain self-dealings prove to be beneficial to the company's interest. On the other hand, some of these principles may be appropriate for a certain pattern of corporate ownership, and not for all. For example, the duty of loyalty is a good tool for checking the behavior of the board (therefore it is more interesting when shares are dispersed), while the prohibition of abuse is an appropriate means to limit the power of the majority (this is likely to be the case in economies with concentrated ownership). Last but not least, some of these principles are more familiar to common law systems (for example fairness), and other to civil law systems (for example property protection).

One can conclude, therefore, that there are no solid bases, upon which minority rights and, in general, minority protection, are to be built. However, the study of principles is useful, because principles constitute the ideological or dogmatic or practical ingredients for minority protection and can therefore provide assistance for a better understanding of the minority rights in each country or group of countries.

3. General "Correcting" Remedies

In this chapter an attempt will be made to present certain rights available to shareholders that do not have a particular substantial content, but are rather remedies, by which the courts (or possibly other authorities) are requested to intervene and correct an illegal situation or a situation that affects negatively and unfairly the interests of the minority. These remedies are mostly of a procedural nature.

3.1. The "Unfair Prejudice" Remedy ("Oppression of the Minority")

This is protection granted by a court following a petition for relief filed by individual shareholders or specific minorities. The "oppression" of the minority remedy is a classic equitable remedy, which was first provided in s. 210 of the English Companies Act 1948, and is thought to be a broad, open-ended remedy, typical of common law countries. La Porta et al. have shown that common law countries "have the highest (92%) incidence of laws protecting oppressed minorities".1. This remedy is extremely interesting for at least three reasons: Firstly, because it constitutes an intervention of the court into the affairs of a company, and this requires great care. Secondly, because it is available when a certain conduct "falls short of actual illegality", and therefore the petitioner does not need to prove a violation of legal rules; and thirdly, because it gives the court a very wide discretion as to whether and what kind of relief it will grant a course of action well in the habits and training of common law judges.

2. Oppression of minority is defined generally as the "conduct by controlling shareholders that deprive a minority shareholder of legitimate expectations concerning roles in the corporation, including participation in management and earnings". The term has a close relationship with two other notions: The squeeze-out, which includes techniques to eliminate or reduce minority interests in the company, and the freeze-out, which includes techniques, by which minority shareholders are prevented from receiving financial return from the company and are thus forced to liquidate their investment on terms favorable to the majority. It seems that freeze-outs and squeeze-outs may be (at least occasionally) cases of oppression. On the other hand, the powers of the court if oppression is established are usually very broad and, according to countries, can include the annulment of resolutions of the general meeting, the permission given to the applicant to file a lawsuit against directors, the appraisal of his shares and, in extreme cases, the dissolution of the company. Therefore, oppression is a general remedy and, to some degree, can replace, or be combined with the other remedies examined in this chapter.

(a) In England, under the present legislation (CA 1985, ss. 459-461), a member of the company may apply to the court for an order on the ground that the company's affairs are being or have been conducted "in a manner which is unfairly prejudicial to the interests of its members generally or of some part of its members". A discriminatory treatment is therefore not required, and an unfair treatment of all shareholders is sufficient. The test of unfairness is "whether a reasonable bystander observing the consequences of their conduct would regard it as having unfairly prejudiced the petitioner's interests". This does not mean, however, as Lord Hoffmann has put it, "that the court can do whatever the individual judge happens to think fair. The concept of fairness must be applied judicially and the content which it is given by the courts must be based upon rational principles".

If unfairness is established, the court may make such order as it thinks fit, for example: "(a) Regulate the conduct of the company's affairs in the future, (b) require the company to refrain from doing or continuing an act complained of by the petitioner or to do an act which the petitioner has complained it has omitted to do, (c) authorize civil proceedings to be brought in the name and on behalf of the company by such person or persons and on such terms as the court may direct, (d) provide for 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". In the practice the remedy under s. 459 is more often used "where there is a breakdown in relations between the owner-managers of small private companies and one of them is prevented from taking part in management. The dissatisfied shareholder can obtain a variety of types of relief but the most popular is a court order requiring the majority shareholder(s) to purchase his shares". It becomes clear that in closely held companies this remedy is more important and efficient than in public companies.

(b) In Australia, the oppression remedy is a versatile relief, available to any member when (a) the conduct of the company's affairs, (b) an actual or proposed act or omission by or on behalf of the company, or (c) a resolution or proposed resolution of members or a class of members is either contrary to the interests of the members as a whole or oppressive to, unfairly prejudicial to, or unfairly discriminatory against a member or members (CA 2001, s. 232). In such situations, the court has various possibilities: It can order that the company be wound-up or that the company's constitution be modified or repealed in various ways as to protect the company and the minority. Intervention of the court ill require a careful "balancing exercise to assess whether the advantage to the company from pursuing this corporate objective in this manner outweighs the disadvantage imposed upon the petitioner and others falling within the same category".(c) In Canada, the intention of the new federal law has been to provide for a flexible and generous remedy. S. 241 CBCA allows an action when an act or omission of the corporation, the carrying out of the business of the corporation or the exercise of the powers of the directors of the corporation have an effect "that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer". Then "the court may make an order to rectify the matters complained of". The court can choose any redress that it thinks fit, but s. 241(3) CBCA contains an interesting non-exhaustive list of the orders the court may make. (d) In the US oppression gives the court narrower powers. It is, according to the MBCA ( 14.30(2)), a reason of judicial dissolution. There in only one more possibility: In 14.34 it is provided that: "In a proceeding under section 14.30(2) to dissolve a corporation that has no shares listed on a national securities exchange or regularly traded in a market maintained by one or more members of a national or affiliated securities association, the corporation may elect or, if it fails to elect, one or more shareholders may elect to purchase all shares owned by the petitioning shareholder at the fair value of the shares. An election pursuant to this section shall be irrevocable unless the court determines that it is equitable to set aside or modify the election".

(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".

(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 company. Also in Belgium, an "oppressed" shareholder may, for "valid reasons", institute a legal action for the forced purchase of his shares by the shareholders to whom such valid reasons relate.

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 easy. In a very interesting part of the Canadian report, an attempt is made to define the role of equity, which commands the oppression remedy. One possibility, argues prof. Raymonde Crte, following Prof. Cheffins, 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 arranged. This approach, based on parameters of efficiency and value maximization, allows Mme Crte to make a critical analysis of some Canadian case-law. 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).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 rights, when requested information has not been provided 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 permitted.

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 possibilities.

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 company.(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 representative is appointed by the court to institute the proceedings, at the request of a 5% minority or shareholders with shares of a nominal value of at least 500,000 euros. But even then the institution and the following up of the proceedings, depending on the prospects of success, are left to the good judgment of the appointed representative ( 147 III AktG). The German rules are criticized as inefficient.

In a similar way, Greek law makes a distinction between willful misconduct and negligence: When the damage was caused by willful misconduct, the company is obliged to sue. In case of negligence the company may do it, but is again obliged to sue if the general meeting so decides, or shareholders who became such at least three months in advance and represent 1/3 of the capital make a relevant request. In both cases, if the company does not proceed with filing the action against the directors, the court, at the request of a 1/3 minority, appoints a special representative of the company, who will conduct the litigation (art. 22b and 22c of law 2190/1920). Also in Sweden, a 1/10 of all shares represented at the meeting can request the company to sue its directors (CA, ch. 15, s. 7), but if the action is unsuccessful the shareholders who requested the litigation have to pay the cost. This is clearly a counter-incentive, as Ms. Giertz reports. Finally, in Italy the general meeting can decide on the institution of an action against the board if so voted by 1/5 of the total capital. The same percentage can block a waiver of the action by the company or a compromise (art. 2393 of the Civil Code). But if the company is listed, a derivative action is possible.

B. Derivative Action

As it has been already mentioned, this action is a minority remedy, which allows one or more shareholders to take the liability case against the directors in their hands, and do what the company does not do, i.e. sue them directly for the damage they caused to the company. However, the shareholder(s) will request payment of the damages to the company and not to themselves. As it was said above, such action is independent from the right of shareholders to sue for a direct damage.

1. Many jurisdictions do not allow a derivative action. Germany, for example, the Netherlands or Greece seem to care more about an effective exercise of the action by the company, rather than the establishment of individual mechanisms. However, the derivative action is gaining momentum, and by now many countries provide that every shareholder or a minority can sue.

2. The derivative action is often discussed as a matter of civil procedure, because it involves an important issue of locus standi and has a remedial character, in what concerns both minority and the company itself. However, one should bear in mind that through the derivative action certain basic principles of company law are disapplied, like the legal personality, non-intervention by the courts, allocation of entitlements and the majority rule (in common law countries most of these principles are embodied in the "rule in Foss v. Harbottle"). Therefore, the procedural difficulties are reflections of issues of substantive law.3. One should note that in general, European laws are relatively laconic, when "designing" the derivative action. In France the action "ut singuli" is available to all shareholders (art. 225-252 NCC). Art. 225-253 makes clear that the articles cannot make the action dependent upon a previous opinion or authorization of the general meeting. The latter is also unable to make any decision whereby the action would be extinguished. Such action is generally thought to be "subsidiary" to the action of the company ("ut universi"), and that it can be exercised only where the company itself fails to take action. It is not very clear, however, what this may mean in the details. In a recent decision the Cour de Cassation (Supreme Court) had to try a case where a shareholder had exercised an action "ut singuli", while the company itself intervened in the proceedings. The action was rejected, and the company did not appeal. The court of appeal rejected the appeal of the shareholder on the grounds that by choosing not to appeal the company showed that it was inclined to stop the proceedings. However, the Supreme Court reversed this decision and accepted the appeal of the shareholder, a pronouncement found "excessive" by the commentator Bernard Bouloc. In Switzerland, a shareholder is entitled to sue directors for the damage they caused to the company, without any previous consent by the latter. Defendants cannot oppose to the plaintiff any discharge given to them by the general meeting (but the action has to be filed within six months from such a discharge), unless he had consented to it. Once the company goes bankrupt, the shareholders are entitled to sue only on subsidiary basis (art. 757 and 758). The court may freely allocate the costs to the plaintiff or the company, depending on the good faith of the former to the extent that such costs are not borne by the defendant himself (art. 756 CO). A few provisions regulate also the matter in Italy, where a derivative action is available only for listed companies. However, the Italian derivative action is a minority right, since a 5% of the capital is needed for the institution of the proceedings. Shareholders constituting such a minority must hold shares for at least 6 months and also appoint a common representative. The company must be duly notified. If the action is successful, the company is ordered to pay the expenses (art. 129 of the TUIF). In Finland, a derivative action can be exercised by a minority of 1/3 of the share capital or 1/3 of the shares represented at the general meeting, if the majority has decided not to bring an action (FCA Ch. 15 Sc. 6). A minimum time of holding shares is not required. A Finnish peculiarity is that when payment of the damages is made, the court may order a "pro-rata recovery", i.e. that a part of the sum collected goes to the plaintiff. Another feature is that all litigation costs are borne by the shareholders, unless the company has obtained funds as a consequence of the action. Finally, a Belgian derivative action ("action de minorit") was introduced in 1991 and is available to shareholders of 1% or holding shares of 1.250.000 euros, who have not approved the discharge from liability (art. 562 BCC). The shareholders-plaintiffs must unanimously appoint a special proxy, who will conduct the proceedings. After the action has been filed the company may no longer settle with the defendants (art. 563 BCC). If the action is allowed costs of the plaintiffs are reimbursed by the company.Despite the relative simplicity of the "European" derivative action, the above review shows that some critical problems are already spotted and addressed: How to distinguish a direct from a derivative action; whether shareholders need to obtain some (court?) authorization, before they venture into the action ("screening"); how to avoid "fishing expeditions" by persons, who purchase one share only to become plaintiffs; whether the company can avoid the action by ratifying the wrongful acts committed by the defendant; and of course, how to allocate litigation costs. These issues are also discussed in other, mainly common law countries. However, in some of these countries further issues are raised, such as the conditions for instituting the action, the need to make a previous "demand", or at least to give previous notice to the company, the institution of the so-called "litigation committees", which can dismiss the action, the setting of maximum liability of the board members, etc. Such issues expand the whole issue enormously and sometimes make it a tormenting problem, but also a hot issue in terms of attorneys' professional activity and fees.

4. In England, where the rule in Foss v. Harbottle was born (1843), the derivative action "is fraught with difficulties". The main conditions for its exercise are mainly the following: That the alleged wrongdoers are "in control" of the company (and therefore prevent it from suing); that the action is brought bona fide for the benefit of the company for wrongdoings, for which no other remedy is available and not for an ulterior purpose; and that the company suffered a wrong of such a magnitude, that it would be unfair to permit the general meeting to ratify the wrong. The plaintiff must prove the wrongdoing against the company by those controlling it. High cost of litigation (with no direct benefit to the plaintiff) is always a disincentive. A derivative action can be also provided in the context of an "unfair prejudice" procedure: When the court is persuaded that it must take action under s. 459 CA 1985, it can (inter alia) "authorise civil proceedings to be brought in the name and on behalf of the company by such person or persons [note: including the petitioner shareholders] and on such terms as the court may direct" (s. 461(2)(c) CA 1985). The whole structure of the derivative action in England has been criticized as archaic and complicated, and the English Law Commission has made proposals for "a new derivative procedure with more modern, flexible and accessible criteria for determining whether a shareholder should be able to pursue the action".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 rule. In Canada the derivative action 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 ratification. 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 corporation.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). 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". 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 inactive; (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 met. 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 successful.

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 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 basis) 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"), and "fairly and adequately represents the interests of the corporation" (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 hearing. 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 nervous. Safe harbor rules have been developed. Business judgment has been one. A recent law (2001) offered two additional shields: 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 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 France, Belgium or Greece.

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 rule. In such cases the right of each shareholder to ask for annulme