The Use and Abuse of Investor Suits: An Inquiry into the Dark Side of Shareholder Activism

87 Pages Posted: 2 Jul 2009 Last revised: 28 Oct 2010

See all articles by Erik P. M. Vermeulen

Erik P. M. Vermeulen

Tilburg University - Department of Business Law; Philips Lighting - Legal Department; Tilburg Law and Economics Center (TILEC); European Corporate Governance Institute (ECGI); Kyushu University - Graduate School of Law

Dirk A. Zetzsche

Universite du Luxembourg - Faculty of Law, Economics and Finance; Heinrich Heine University Dusseldorf - Center for Business & Corporate Law (CBC)

Date Written: January 25, 2010

Abstract

This paper builds on the wide-ranging policy discussion on shareholder activism in Europe. It seeks to define which shareholder actions are useful in reducing managerial agency costs and which could be interpreted as frivolous or abusive. We develop a typology, comprising of a number of Abuse Indicators which may assist courts, investors and management in revealing suits that create unjustified and opportunistic shareholder litigation costs. Investors’ actions could be considered as abusive more often than not, if the actions are 1) filed by low-tier law firms that 2) represent professional and recurrent plaintiffs; 3) which hold a small rather than significant stake in the company’s stock; 4) the complaints on which the suits rely are of a boiler-plate/carbon copy/formalistic nature; 5) the key motivation of the suits are expected side benefits rather than the desire to enhance the value of the issue in which the plaintiff invested; and 6) the suits are lacking institutional backing by shareholder associations or government agencies. Drawing on two unique datasets, which involve cases respectively in the Dutch Inquiry Proceeding (‘Enquêterecht’) and the Rescission Suit in Germany (‘Anfechtungs- und Nichtigkeitsklage’), we hold that Dutch Inquiry Proceedings initiated in the years 2002 through 2008, which often results in a court-induced settlement, involved mostly ‘useful’ shareholder interventions to reduce managerial agency costs whereas the bulk of the German Rescission Suits filed between October 2005 and January 2009 - prior to the reform of the law on rescission suits that has come into force in Fall 2009 - were abusive.

Keywords: Investor Suits, Shareholder Activism, Inquiry Proceeding, Rescission Suit, Contest of Shareholder Resolutions, Shareholder Resolutions, Agency Costs, Managerial Agency Costs, Litigation Costs, Shareholder Agency Costs, Enquêterecht, Anfechtungsklage, Nichtigkeitsklage, Derivative Suits

JEL Classification: K11, K22, M14, G32, G34, G38, G18, D72, D74, D21, D23, D62

Suggested Citation

Vermeulen, Erik P.M. and Zetzsche, Dirk Andreas, The Use and Abuse of Investor Suits: An Inquiry into the Dark Side of Shareholder Activism (January 25, 2010). European Company and Financial Law Review, Vol. 7, No. 1; TILEC Discussion Paper No. 2010-001; CBC-RPS Paper No. 1/2010. Available at SSRN: https://ssrn.com/abstract=1428901

Erik P.M. Vermeulen

Tilburg University - Department of Business Law ( email )

Philips Lighting - Legal Department ( email )

Amstelplein 2
Amsterdam
Netherlands

Tilburg Law and Economics Center (TILEC)

Warandelaan 2
Tilburg, 5000 LE
Netherlands

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Kyushu University - Graduate School of Law ( email )

6-19-1, Hakozaki, Higashiku
Fukuoka, 812-8581
Japan

Dirk Andreas Zetzsche (Contact Author)

Universite du Luxembourg - Faculty of Law, Economics and Finance ( email )

Luxembourg, L-1511
Luxembourg

HOME PAGE: http://wwwen.uni.lu/recherche/fdef/research_unit_in_law/equipe/dirk_andreas_zetzsche

Heinrich Heine University Dusseldorf - Center for Business & Corporate Law (CBC) ( email )

Universitaetsstr. 1
D-40225 Düsseldorf
Germany
+49 211 81 15084 (Phone)
+49 211 81 11427 (Fax)

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