A Statutory Buy-Out Right in SMEs - An Important Corporate Governance Mechanism and Minority Protection?

COMPANY LAW AND SMEs, Mette Neville & Karsten Engsig Sørensen, eds., Thomson Reuters, 2010

Nordic & European Company Law Working Paper No. 10-03

Posted: 16 Nov 2010 Last revised: 24 Nov 2010

See all articles by Mette Neville

Mette Neville

Aarhus University - Center for Small and Medium Sized Enterprises, Aarhus BSS, Department of Management

Date Written: January 1, 2010

Abstract

It is well known that conflicts between shareholders are the Achilles heel of small and medium sized companies. The risks and consequences of such conflicts have generally resulted in the adoption of company law mechanisms for dissolution or redemption where those in control have abused their power, for example by oppressing the minority shareholders or by gaining private pecuniary benefits (opportunistic behaviour). However, many conflicts between shareholders have nothing to do with oppressing a minority shareholder or gaining private pecuniary benefits. Empirical studies show that very often conflicts between shareholders concern disputes about the strategic development of the company, for example about growth. Traditionally it is assumed that the primary interest of all shareholders is profit maximisation, and that in companies with concentrated ownership the minority shareholder will, as a rule, enjoy the shared benefits of control.

But as shown in this contribution, owner-managed small and medium sized enterprises (SMEs) do not to live up to this assumption. The business objectives of SMEs are very different from those of listed companies, so that for example growth, high profits and salaries often have a lower priority than control and independence. This means that there is great potential for conflicts between shareholders and for inefficient management of the company. As there is little or no market for shares in SMEs, and especially not for a minority shareholding in an SME where there is an existing conflict between the shareholders, the shareholders are often locked into the company without the possibility of switching their investment and involvement to another, more rewarding company. From a corporate governance perspective it is relevant to discuss whether there is a need to create default rules giving minority shareholders a possibility of putting pressure on the controlling shareholder(s), who is often the manager of the company, to improve performance, for example by giving the shareholders a right to exit at will. The relevance of this discussion is supported by the fact that there has been a paradigm shift in company law thinking, so that greater emphasis is now being put on the idea of making legislation more business-friendly, by focusing on the needs of business in relation to the different types of companies that are the frameworks for business activities, instead of focusing on the prevention of abuse. In this contribution the focus is on resolving conflicts in SMEs. Using a number of empirical studies, on the one hand there is a review of the special risks of conflicts in SMEs, and on the other hand there is a review of the most common kinds of conflicts and their possible consequences. Some examples are given on how companies legislation in different countries regulates conflicts, and it is stated that the existing rules do not give sufficient protection to the parties in connection with different kinds of conflicts. It is argued that there is a need for an expanded exit right, and a proposal is made for the introduction of a default rule in the form of a statutory buy-out right.

Keywords: SMEs, small and medium sized companies, small and medium sized enterprises, conflicts, corporate governance, minority protection, exit right, buy-out right, regulation, default rules

JEL Classification: K22

Suggested Citation

Neville, Mette, A Statutory Buy-Out Right in SMEs - An Important Corporate Governance Mechanism and Minority Protection? (January 1, 2010). COMPANY LAW AND SMEs, Mette Neville & Karsten Engsig Sørensen, eds., Thomson Reuters, 2010, Nordic & European Company Law Working Paper No. 10-03, Available at SSRN: https://ssrn.com/abstract=1709954 or http://dx.doi.org/10.2139/ssrn.1709954

Mette Neville (Contact Author)

Aarhus University - Center for Small and Medium Sized Enterprises, Aarhus BSS, Department of Management ( email )

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