The Shareholders’ Duty Not to Abuse Rights
Published in Shareholders’ Duties, Hanne S. Birkmose (ed.), Kluwer Law International, 2017
14 Pages Posted: 13 Feb 2018
Date Written: 2017
The issue of a shareholders’ duty not to abuse its rights is not widely discussed in academic literature. The main reason is that company law has traditionally been more concerned with the duties owed by the directors and managers to the company than with the duties owed by shareholders to the company or to other shareholders. Since majority shareholders are frequently the company’s directors or managers, their duties to the company or the other shareholders are often dealt with in those capacities, rather than as majority shareholders. However, there is no reason why a majority or minority shareholder should not be subject to civil liability if it abuses its rights and causes damage to the company and/or the other shareholders. Civil liability for the abuse of shareholder rights is recognized by courts in many Member States. Moreover, because such abuse of rights can lead to civil liability or nullification of shareholder resolutions arising out of general meetings, courts play a major role in curbing such shareholder abuses. Courts intervene also to appoint, as a specific remedy, a shareholder’s representative to vote the shares. Typically, the courts’ case law is based either on general principles of civil law, such as the duty to act in good faith, or on general principles of company law, such as the duty of loyalty or the principle of equal treatment of shareholders.
Because leaving it up to the courts to deal with abuse of shareholder rights provides less-than-perfect protection from such abuse, as the outcome of court proceedings is always uncertain, specific regulations are frequently found in the Member States’ company law, which tend to reduce the need for, and the scope of, the application of general principles on the abuse of rights. For instance, in many cases in which there is a risk of abuse of the shareholder right to vote (e.g., in related-party transactions) the national law or regulations of the Member States deals with that risk by suspending the right to vote. Also, detailed regulations on groups in several Member States (e.g., Germany, Italy, and the Czech Republic) are designed to protect minority shareholders from a controlling shareholder abusing its right to vote. There are also some Member States (i.e., Finland and Germany) that include regulations on the compulsory distribution of a minimum dividend, which is also designed to protect minority shareholders from a controlling shareholder refusing to vote in favour of a dividend in order to reduce the value of the shares and force the minority shareholder to sell them at a large discount (i.e., ‘starving out the minority’). Plundering the company through abusive related-party transactions or endangering the company by excessive dividends are also commonly covered by national criminal and insolvency laws. Therefore, the shareholder duty not to abuse rights is often dealt with through rules, rather than by a general principle left for judges to apply. Nevertheless, since there is a need for flexibility in the management of companies – and not all conflicts of interest can be regulated in order to protect the shareholders – there is still room for abusive behaviours that national courts will then have to tackle.
To date, the shareholder duty not to abuse rights is addressed in Member States through legislation or case law; there is no directive or regulation, as such, at the European Union (EU) level on that shareholder duty. However, there are provisions in various EU directives that are designed to prevent abuses by the majority shareholder that apply the principle of equality, such as the second directive 77/97 on the maintenance and alteration of capital requirements of public limited liability companies.
There are two reasons for this lack of interest at the EU level. First, the EU legislature is more concerned with increasing shareholders’ rights than with fighting potential abuses. For example, the Directive of 11 July 2007 on the exercise of certain rights of shareholders in listed companies (SRD) created new political rights for shareholders in the general meeting and the 2013 proposal of a directive amending the SRD as regards the encouragement of long-term shareholder engagement creates new rights for shareholders in listed companies, especially regarding related-party transactions. While that proposal does include some shareholder duties, especially institutional investors and asset managers who are incentivized to vote in order to promote a long-term view of the company, it does not include any specific provisions on shareholder abuses of their rights. The second reason is that the European legislature leaves it to the Member States to deal with civil liability, which is not addressed in directives, even in a limited manner. In the 2000 Dionysio Diamantis v. Elliniko Dimosio case, which dealt with the second company law directive, the European Court of Justice accepted that the Member States may take some steps to combat abuse of rights.Despite the EU’s cautious approach, there has been at least one call for the European legislature to create a shareholder duty not to abuse their rights. A 2012 study commissioned by the EU Parliament, drafted by a French law firm familiar with the French concepts of abus de majorité and abus de minorité, recommended prohibiting abuses of both majority and minority shareholder status at the EU level.
Shareholder rights that are the most likely to be subject to abuses are the rights to vote in the shareholder meetings and to receive information before, during, and after those meetings. Although most abuses are perpetrated by majority shareholders against minority shareholders, there are also cases of minority shareholders abusing their rights in order to extract money from the company or the other shareholders by making claims or demands that, due to their nuisance cost, are easier to pay than to incur the additional expenses necessary to address them. Most Member States have developed case law that tries to curb shareholder abuse of voting rights at the general shareholder meeting (I) and, to a more limited extent in terms of cases, abuse of the right to information (II).
Keywords: Shareholder, duties, abuse, rights
JEL Classification: K22
Suggested Citation: Suggested Citation