Duty of Loyalty of Shareholders - A Possible Remedy for Conflicts in SMEs?

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

Nordic & European Company Law Working Paper No. 10-01

46 Pages Posted: 16 Nov 2010 Last revised: 12 Jun 2012

See all articles by Karsten Engsig Sørensen

Karsten Engsig Sørensen

Aarhus University – Aarhus BSS, Department of Law

Date Written: January 1, 2010

Abstract

In most European jurisdictions it is discussed whether shareholders must observe a duty of loyalty towards the company and/or towards other shareholders. This paper traces the origin and evolution of a more general duty of loyalty in Germany, Denmark, the UK and the USA. Even though the duty is not so well developed in Denmark and the UK, it does appear that both in theory and in practice there are reasons for believing that such a duty of loyalty can develop. In order to assess what such a duty of loyalty can lead to in terms of duties for shareholders, it is natural to look at the practice in Germany and the USA, where the duty has been in existence for many years, and whether there is a comprehensive case law. One of the areas where the duty of loyalty is most easily accepted and its impact is most obvious is in the case of SMEs. Therefore the consequences of such a duty of loyalty in the typical SME is illustrated and analysed. Among other things, it can be seen that the duty has meant that shareholders can be subject to a prohibition on competition with the company and a prohibition on usurping the company’s corporate opportunities. To the extent that there is trading between the company and a shareholder, the shareholder must ensure that such transactions are carried out on market terms. Finally, there can be a duty of confidentiality and a duty to inform fellow shareholders about certain circumstances.

Keywords: Duty of loyalty, shareholder conflicts, freeze-outs, deadlocks, corporate opportunity, SME, closed company

JEL Classification: K22

Suggested Citation

Sørensen, Karsten Engsig, Duty of Loyalty of Shareholders - A Possible Remedy for Conflicts in SMEs? (January 1, 2010). COMPANY LAW AND SMEs, Mette Neville & Karsten Engsig Sørensen, eds., Thomson Reuters, 2010, Nordic & European Company Law Working Paper No. 10-01, Available at SSRN: https://ssrn.com/abstract=1709944 or http://dx.doi.org/10.2139/ssrn.1709944

Karsten Engsig Sørensen (Contact Author)

Aarhus University – Aarhus BSS, Department of Law ( email )

Bartholins Allé 16, Building 1410, Room 246
DK-8000 Aarhus C
Denmark

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