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Rights of Minority Shareholders

General Report
Evanghelos Perakis
Professor of Law at the University of Athens1
Table of Contents
1. Introductory Chapter: The Subject Matter of this Report
1.1. The General Theme
1.2. "Shareholders", "Minority", "Rights"
1.3. Minority Rights and Minority Protection
1.4. 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
2.1. Equal Treatment of the Shareholders
2.2. Abuse of right "Abus de majorit"
2.3. Duty of Loyalty
2.4. The Interest of the Company ("intrt social")
2.5. Property Rights Vested Rights
2.6. "Pacta sunt servanda"
2.7. Minority Shareholders, Considered as Consumers
2.8. Fairness
2.9. Conclusive Remarks
3. General "Correcting" Remedies
3.1. The "Unfair Prejudice" Remedy ("Oppression of the Minority")
3.2. Right to Cause the Company to Sue its Directors - Derivative Action
3.3. 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 Rights
4.1. Information Rights
4.2. Special Audit
4.3. Rights Concerning the Conduct of Assemblies
4.4. Right to Directly Appoint or Request the Judicial Appointment of a
Company Officer Right to Request his Removal
4.5. Pre-emption Rights in Respect of Actual or Potential Share Capital
4.6. Right to Receive a Minimum Mandatory Dividend
4.7. Other
4.8. Conclusive Remarks on the Rights of Minority Shareholders
5. Some Special Issues
5.1. Limits to the Exercise of Rights Protecting Minority Shareholders
5.2. Minority Rights and Groups of Companies


5.3. Associations of Shareholders and the Maxim "nul ne plaide par

5.4. Minority Rights and the Type of the Company
5.5. Problems in the Exercise and Enforcement of the Rights of Minority
5.6. Complementary and Substitute Mechanisms
6. Final Chapter: Protection of the Minority and the Rule of Law
6.1. Reality Determines the Law
6.2. "Law Matters"
6.3. "Norms Matter"
Appendix I: National Reporters
Appendix II: Some Sources of Law and Abbreviations
Appendix III: Selected Bibliography

----------------- 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"2.
The truth is, however, that the idea of the limited company, as contract, institution,
"instrument"3, "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 rules4. 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

See Dine (England), X. The names of the national reporters are listed in Appendix I.
"un merveilleux instrument cr par le capitalisme moderne" (G.Ripert, Aspects juridiques du
capitalisme moderne, Paris 1951, no 46).
Cf. the interesting introductory remarks of the German reporter (Hopt).

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)5.
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 provided6, 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.

See Forstmoser/Meier-Hayoz/Nobel, Schweizerisches Aktienrecht, Berne, Staempfli 1996, p. 611:

"Das PS-Kapital bildet mit dem Aktienkapital zusammen das Grundkapital".
Classes of shares are almost invariably allowed in common law countries. They are not excluded by
EC law (cf. art. 3(e) of Dir. 77/91/EEC).

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 power7, or to the capital prevalence8.
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" organ9 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 meeting10. 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"11), the casting vote of the
chairman12, the "relative majority" provided for the election of officers13, 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 power14.
It has been noted, that a higher majority gives a stronger legitimacy to resolutions15. This
would be in favor of high majority rates, but on the other hand would put the operation

Dine (England), II: "a minority shareholder is one who cannot exercise 51% of the voting power".
Gologina-Ekonomou (Greece), II, Katner (Poland), III 3.
So for example in Switzerland (art. 698 CO, "le pouvoir suprme").
Majority requirements go very often together with quorum requirements. However there are
exceptions, like Finland, where any present shares (even 1) can take decisions (see Kaisanlahti
(Finland), 2.1). The quorum is computed on the basis of shares represented. However in England the
presence of at least 2 persons is needed, except in the case of a single member company (Dine
(England) III).
See below 4.3(3) and accompanying footnote.
For example in Finland, Kaisanlahti (Finland), 2.1.
In Finland, again, see Kaisanlahti (Finland), 2.1.
See for example France (art. L. 225-125 NCC); Germany ( 134 I AktG); Switzerland (Trigo
Trindade/Bahar (Switzerland), II A 1); Denmark (art. 67 of the 1996 Act).
Karsten Schmidt, Gesellschaftsrecht, Kln/Berlin/Bonn/Mnchen, 1997, p. 458.

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.16 Here again, the articles can increase the
percentages, but usually not up to unanimity17. 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 them18 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 it19, or the so-called "papermeetings" or "action by consent", when resolutions are taken without meeting20,21. The
majority rates define the powers of the majority in general meetings and the
corresponding blocking power of the minority22. 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.


See for example France (art. L. 225-96 NCC), Germany ( 179 AktG), Finland (FCA Ch. 9 Sc. 14 para.
1), Switzerland (art. 704 CO), Poland (art. 245 and 414 CCC). In England there are extraordinary and
special resolutions ("special" mainly being those by which the articles are altered): In these cases a
majority of the voting members is needed (CA 1985, s. 378 so also in Australia). - EC law provides
for a majority of at least 2/3 of the shares represented at the meeting in the cases of a suppression of the
pre-emption rights, a decrease of the capital, and a redemption of capital (Dir. 77/91/EEC, art. 40), a merger
(Dir. 78/855/EEC, art. 7) or a division (Dir. 82/891/EEC, art. 5).
See for example Switzerland (art. 704 CO).
For example, in France the increase of the capital by way of increasing the nominal value of each share
requires unanimity (art. L. 225-127 NCC). Similarly, in Switzerland the grouping of shares to a higher
nominal value requires the consent of the shareholder concerned (CO 623 II). In Germany every
shareholder must assent to a decision of the general meeting, by which additional obligations are imposed
upon him, or which makes a transfer of the shares dependent upon the consent of the company ( 181
So for example in Greece, art. 26 III law 2190/1920; in Poland, art. 239 I and 404 I CCC, Katner
(Poland), VII 2.
So for example in the US under the MBCA 2001, 7.04, or in the Netherlands under s. 2:238(128) of
the Civil Code.
In the US "ultra vires" transactions, and fraudulent or wasteful transactions, can only be ratified by a
unanimous vote (see Hamilton, The Law of Corporations, St. Paul, Minn., 2000, p. 489;
Pinto/Branson, Understanding Corporate Law, New York 1999, 9.06[B]), while in the Netherlands
unanimity is required for a modification of the articles when these forbid their own modification (see
Timmerman/Doorman (Netherlands), no. 27). In Japan unanimous agreement of all shareholders is
required to release directors from their liability to the company (see Kawashima-Iwasaki (Japan), III 5).
Another possibility is to provide for an ordinary quorum and a simple majority, but then give an express
blocking power to certain minorities. Thus for example, in Germany the company can waive (or make a
compromise on) its claim for indemnification against the promoters and the members of the Vorstand or the
Aufsichtsrat only if the general meeting assents to it, but then a minority of 10% of the total capital has the
right to object ( 50, 93 IV, 116 AktG). Also, in Greece the company may waive its rights against directors
or compromise with them by resolution taken with simple majority, unless a minority of of the capital
represented at the meeting vetoes such actions (art. 22a 4 law 2190/1920), see Gologina-Ekonomou
(Greece), III 5, with other examples from Greek law 2190/1920. The difference is that this has to
expressly veto the action.

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 company23. 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" minority24.
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 value25 a method often adopted in public companies,
when shares are dispersed and percentages would be very difficult to reach26. The two
methods are often combined, on a "whichever-is-the-lower" basis27. 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")28.
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 shareholders29.
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 Means30 shareholders are dispersed
and the management is centralized (then all shareholders are virtually "minority

See Fletcher (Australia), no 27.

Gatti (Italy), 4 (b).
For example in Switzerland art. 697b and 699 CO; in Germany 120, 122, 142, 147 AktG.
Trigo Trindade/Bahar (Switzerland), I B 2 b, fn. 32.
For example in Germany 142 II 1, IV 1 AktG.
Ripert/Roblot/Germain, Trait de droit commercial, 1-2, Paris 2002, no. 1556-1;
Cozian/Viandier/Deboissy, Droit des socits, 14 ed., Paris 2001, no 448.
Wymeersch/Jakhian/Caeymaex (Belgium), no. 4.
Berle/Means, The Modern Corporation and Private Property, New York 1932, revised ed. 1968.

shareholders"31). 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 (crossholdings), as it was generally thought32. 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 promanagement and criticize less33.
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 shareholders34. 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
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-shareholders35. 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 problem36. In such cases the principles of good faith, loyalty and nonabuse 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.


Boros, Minority Shareholders' Remedies, Oxford 1995, p. 15.

According to La Porta/Lopez-de-Silanes/Schleifer/Vishny, Law and Finance, [1998] Journal of
Political Economy 106, 1113-55, "in the world as a whole [] the average ownership of the three
largest shareholders is 46 percent, with the median of 45 percent. Dispersed ownership in large public
companies is simply a myth". This is, according to the authors, "perhaps the single most surprising
finding of our paper". See also Gompers, How are Large Institutions Different from Other Investors?
Why do these Differences Matter? Harvard Institute of Economic Research Paper No. 1830 (abstract)
in; Claessens/Djankov/Fan/Lang,
Expropriation of Minority Shareholders: Evidence from East Asia, [2002] Journal of Finance, 57.
On the incentives and disincentives of institutional activism see Boros, op.cit., 31 ff.
Trigo Trindade/Bahar (Switzerland), I B 2 b.
"If a majority of the oppressed minority is not prepared to support the action it cannot go ahead."
Dine (England), IV.
See Habersack, Grenzen der Mehrheitsherrschaft in Stimmrechtskonsortien, ZHR 2000, 1.

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
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.)37. The problem is that, by
definition, these rights are available to all shareholders, whether having a majority or a
minority position38. 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"39; as "affirmative intervention" or "defensive rights"40; as rights to be exercised
ex ante (before the fact) or to be used ex post (after the fact)41; as "pecuniary" or
"membership" or even "quantifiable" and "non-quantifiable"42. Such categorizations
are very helpful, mainly for educational purposes. It is less certain, however, whether
they can are legally important.

See on these rights for example Ripert/Roblot/Germain, Trait de droit commercial, 1-2, Paris
(2002, no. 1597.
Such individual rights are hardly "minority" rights. See for example D.Schmidt, Les droits de la
minorit dans la s.a., Paris 1970, no. 4.
See the Dutch report, Timmerman/Doorman (Netherlands), no. 71.
See the Greek report, Gologina-Ekonomou (Greece), X.
See the Japanese report, Kawashima-Iwasaki (Japan), IV 11.
Wymeersch/Jakhian/Caeymaex (Belgium), no. 38.

4. Legal rules introducing minority rights are usually of a mandatory nature. This is the
case of civil law countries43, but also of Japan44. 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"45. The problem touches upon
another topic of this Congress ("Mandatory and non-Mandatory Rules in Corporate
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


For example Hopt (Germany), I; Dine (England), I; Timmerman/Doorman (Netherlands), no. 9;

Gologina-Ekonomou (Greece), I B.
Kawashima-Iwasaki (Japan), I 4; Zenichi Shishido, Legal Monitoring Systems in Japan: Legal
Possibilities and Current Practices, in: "Perspectives on Company Law: 2" (F.M.Patfield, ed.), Kluwer,
1997, p. 149, 160.
La Porta/Lopez-de-Silanes/Schleifer/Vishny, Law and Finance, [1998] Journal of Political
Economy 106, 1113.

many countries46 to enforce (together with courts) such a legislation. Various

Ombudsmen schemes are also put in place47.
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 stressed48.
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 practices49. It is obvious that the two types of agency (shareholders/board,
minority/majority) differ substantially, although the legal strategies for dealing with them

For example: The American Securities and Exchange Commission (SEC), the French Commission
des Oprations de Bourse (COB), the German Bundesaufsichtsamt fr den Wertpapierhandel (BAWe),
the Belgian Banking and Finance Commission (BFC), the Italian Consob, The British Financial
Services Authority (FSA), the Australian Securities and Investment Commission (ASIC), the Swiss
Commission fdrale des banques (but also Instance d'Admission la Bourse Suisse and Commission des
offres publiques d'acquisition), the Japanese Securities and Exchange Surveillance Commission (SESC),
the Hellenic Capital Market Committee etc.
See for example s. 225 ff. of the Financial Services and Markets Act 2000.
A good criticism to the "separation approach" has been made by Peter O. Mlbert, "Die
Aktiengesellschaft und der Kapitalmarkt der Anlegerschutz", General Report to the 2001 Annual
Congress of Greek Commercialists ("The limited company and the capital market the protection of
the investor", Rhodes, Nov. 2001), 2002, p. 1. See also Hopt (Germany), I.
See Schleifer/Vishny, A Survey of Corporate Governance, [1997] The Journal of Finance 52, 737783.


can be categorized under the same headings50. 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 second51.
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 low52; they contribute to a more efficient functioning of the
company itself (here the view of the minority as a "subsidiary" organ53 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 takeover54.
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

See the very interesting remarks of P.Davies, Introduction to Company Law, 2002, at p. 216, where
he presents the various strategies for regulating principal (shareholders)/agent (board) relations, i.e.
enhancing the principal's control ("affiliation", "appointment" and "decision" rights) and structuring the
agent's decisions ("setting agent incentives", "constraining agent decisions"). When it comes to the
principal (minority)/agent (majority) relations (at p. 217), the author applies the same strategies mutatis
mutandis, admitting, however, that in this context they are more complex.
See P.Davies, op.cit., p. 216.
Pertinently Timmerman/Doorman (Netherlands), no. 3; P.Davies, op.cit., p. 216.
D.Schmidt, Les droits de la minorit dans la s.a., 1970, no. 257 ff.
See P.Davies, op.cit., p. 214.


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 rules55, any discriminatory act against a shareholder goes
against the very mechanism of the limited company and can destroy shareholders'
expectations56. 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 power57. 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")58. 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

Cheffins, Company Law Theory, Structure and Operation, Oxford 1997, p. 472.
On the latter see Cheffins, op.cit., p. 475.
Karsten Schmidt, Gesellschaftsrecht, 1997, p. 469.
Karsten Schmidt, op.cit., p. 471.


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"59. 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 treatment60. However, member states have
eagerly generalized the rule (or had already done so) and promoted it to a general
principle61. Thus in Germany, "shareholders are to be treated equally under equal
circumstances" ( 53a AktG 62). 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"63. 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"64. The same happens in Finland where equal treatment is considered to
be the mandatory "general standard"65, overriding other provisions, including the
business judgment rule66. 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")67. 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 shares68, multiple voting rights69, special privileges70 or loyalty
bonuses71. 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 difficult72. Another
reason is that the rule of equal treatment binds the company and its organs not any

See for example Katner (Poland), II 1.

See ECJ decisions of 4 June 2002 in cases C-483/99 (Commission v. France), C-367/98
(Commission v. Portugal) and C-503/99 (Commission v. Belgium).
See Timmerman/Doorman (Netherlands), no 41.
But this provision confirmed what was already law in force. See Karsten Schmidt, op.cit., p. 469;
Hffer Aktiengesetz, 2002, 53a, 1.
See Timmerman/Doorman (Netherlands), no 12.
See Timmerman/Doorman (Netherlands), no 41.
See Kaisanlahti (Finland), 3.1.
See Kaisanlahti (Finland), 3.2.
See Kaisanlahti (Finland), 3.1.
But equality may still play an important role in two senses: That all preferred shareholders are equal.
See in Switzerland Trigo Trindade/Bahar (Switzerland), II A 1; in France Ripert/Roblot/Germain,
op.cit., no. 1550.
See for example in Germany 25 I AktG.
Such as the double votes or a 10% dividend bonus for shareholders keeping their registered shares
for at least two years, see in France art. L. 225-123 and L. 232-14 NCC. In Germany multiple voting
rights are not allowed, 12 II AktG).
Easterbrook/Fischel, The Economic Structure of Corporate Law, Cambridge Ma./London 1996, p.
127; Pinto/Branson, Understanding Corporate Law, New York 1999, 10.04.


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 basis73.
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"74) may be
permitted, if this is dictated by the best interests of the company75 or if information is not
equally necessary to all shareholders76. This can also legitimize disclosure by the board
to prospective buyers in spite of the board's duty of confidentiality77. 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"78. 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"79, although such treatment must not exceed what is necessary
each time (principle of proportionality)80. In Germany it is also believed that unequal
treatment is not per se unlawful, if justified by the company's interests81, while in
England "fair" rather than "equal" treatment seems to be the rule82.
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"83.
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
shareholders84 (conversely shareholders may prefer a "larger pie", even if not shared
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

Katner (Poland), II 2.
See Cheffins, op.cit., p. 481.
This important topic is discussed by Timmerman/Doorman (Netherlands), no. 43. See also below,
Trigo Trindade/Bahar (Switzerland), III F 2 a.
See in Germany for example Stoffels, ZHR 2001, 362, Mller, NJW 2000, 3452.
"une ingalit de traitement [] non justifi[e] par le but de la socit". Trigo Trindade/Bahar
(Switzerland), II B 2 b.
Trigo Trindade/Bahar (Switzerland), II B 2 b.
Trigo Trindade/Bahar (Switzerland), II B 2 a.
Hffer Aktiengesetz, 2002, 53a, 8.
See P.Davies, Introduction to Company Law, 2002, p. 233, 252.
Dine (England), III.
See on all this Cheffins, op.cit., p. 479-491. For example the restriction of pre-emption rights may
equally harm all shareholders, see Lutter, Klner Kommentar zum AktG, 2nd ed., 186, 59.
See Easterbrook/Fischel, op.cit., p. 119.


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
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")87. 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 laws88. 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 Japan89, 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"90 (see below,
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 them91.
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",

Cf. Timmerman/Doorman (Netherlands), no. 41.

Trigo Trindade/Bahar (Switzerland), II B 2 a; in France, see D.Schmidt, Les droits de la minorit
dans la socit anonyme, Paris 1970, no. 191 ff., Cozian/Viandier/Deboissy, Droit des socits, 14 ed.,
Paris 2001, no 441; Gologina-Ekonomou (Greece), I B (for Greece see in particular N.Rocas, The
limits of the power of the majority in the law of limited companies, Athens 1971, in Greek);
Timmerman/Doorman (Netherlands), no 13; Wymeersch/Jakhian/Caeymaex (Belgium), no. 46;
Kawashima-Iwasaki (Japan), V 2.
See for example art. 281 of the Greek civil code.
Kawashima-Iwasaki (Japan), V 2.
Germain (France), no. 26; Ripert/Roblot/Germain, op.cit., no. 1587-1; D.Schmidt, Les droits de la
minorit dans la s.a., 1970, no. 204; Cozian/Viandier/Deboissy, op.cit., no 441.
Schleifer/Vishny, A Survey of Corporate Governance, [1997] The Journal of Finance 52, 737-783,


or "tunneling" funds out of the company92, has contributed to a high degree of

sophistication, and it has been observed93 that German (but in general, European) courts
are a bit behind94.
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 rule95, but in France loyalty is believed to be due to both
the company and the shareholders96. 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-shareholder97.
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
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 articles99. 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"100, or more generally, according to the larger or smaller
part and influence a shareholder has of or in the corporation101. 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.

See Johnson/La Porta/Lopez-de-Silanes/Schleifer, Tunnelling, NBER Working Paper 7523,, National Bureau of Economic Research, Cambridge MA, 2000.
Hopt, Shareholders' rights and remedies: A view from Germany and the Continent, Company
Financial and Insolvency Review 2, 1997, 261-283, 266.
Johnson/La Porta/Lopez-de-Silanes/Schleifer (Tunnelling) argue that tunneling is more likely to
be tolerated in French civil law countries. See also Enriques, The Law on company's directors' selfdealing: A comparative analysis, Int. and Comp.Corp.Law Review, 2000, 297. According to the author,
"self-dealing regulation is more sophisticated and has more bite in the UK and in the US".
See in England Gower's Principles of Modern Company Law (by P.Davis), 1997, p. 599; See
P.Davies, Introduction to Company Law, 2002, p. 231; in Switzerland see art. 717 I CO, Trigo
Trindade/Bahar (Switzerland), II A 2.
Cozian/Viandier/Deboissy, Droit des socits, 14 ed., 2001, no 387.
See Cass. 27.2.1997 JCPE 1996, II, 838.
See Crte (Canada), no 2; Kawashima-Iwasaki (Japan), III 1; Trigo Trindade/Bahar
(Switzerland), II A 1; Dine (England), III; Fletcher (Australia), no 25. See also P.Davies, op.cit., p.
220. In Belgium the matter is unclear, see Wymeersch/Jakhian/Caeymaex (Belgium), no. 10.
Dine (England), III.
Kaisanlahti (Finland), 3.1; see also Karsten Schmidt, Gesellschaftsrecht, 1997, p. 472 ("...die
Intensitt dieser Pflichtbindung ist allerdings von der Gre und Aufgabe des Verbandes und von der
Art der Mitgliedschaft abhngig").
Hopt (Germany), I; See in Greece Marcou, EEmpD 2002, 1, 39; Spyridonos, The rights of the
minority in the limited company, Athens 2001, p. 574 (in Greek).


This ultimately means that under the circumstances there may be a unilateral duty of
loyalty102, 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)103, 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 accordingly104.
5. Should auditors give special regard to the interests of minority shareholders? The
answer is negative105. 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 countries106) 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
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 majority108. 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.


The provisions of this paragraph refer to a person, which has a position of influence in the company, and
which, by using this influence, manages to dictate some action to the management board (Vorstand), the
supervisory board (Aufsichtsrat), or another proxy of the company. If by reason of this behavior some
damage is caused to the company or its shareholders, the person holding this position of influence has the
duty to indemnify the company or the shareholders, as the case may be.
Decision of 20.3.1995, BGHZ 129, 136 (1995) = ZIP 1995, 819, cited by Hopt (Germany), I.
See Lutter, Treupflichten und ihre Anwendungsprobleme, ZHR 1998, 164; Henze, Treupflichten
der Gesellschafter Kapitalgesellschaftsrecht, ZHR 1998, 186. See also Hopt, Shareholders' rights and
remedies: A view from Germany and the Continent, Company Financial and Insolvency Review 2,
1997, 261-283, 275; Karsten Schmidt, Gesellschaftsrecht, 1997, p. 591.
Hopt (Germany), III; Dine (England), III; Fletcher (Australia), no 26; Kawashima-Iwasaki
(Japan), III 4.
For example in Finland, Kaisanlahti (Finland), 5.4.
Gologina-Ekonomou (Greece), III 4.
See for example in Switzerland art. 717 CO: "Les membres du conseil d'administration [] veillent
fidlement aux intrts de la socit". On the difficulty of definition see Trigo Trindade/Bahar
(Switzerland), II B 2 a.


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 objectives109.
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 employees110), but also around it, like the interests of creditors (especially on
the verge of insolvency111), 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"112). 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")113. 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 interests114. 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 Constitution115, 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 property116.

See for example Ripert/Roblot/Germain, op.cit., no. 1587-1; Wymeersch, Factors and Trends of
Change in Company Law, Int. and Comp.Corp.Law Review, 2000, 481, 487.
The German rules on the co-determination of employees are a manifestation of this large sense of
company's interest. See Hopt, Common Principles of Corporate Governance in Europe? The Clifford
Chance Millennium Lectures, Oxford 2000, p. 105, 118. See also in England s. 309 CA 1985 ("
include the interests of the employees in general, as well as the interests of its members") but the
provision is "a toothless requirement", see Dine, Company Law, 2001, p. 185; also P.Davies, op.cit., p.
See Keay, The Duty of Directors to Take Account of the Creditors' interests: Has it any Role to
Play? JBL 2002, 379.
On the recent (2000) proposals of the UK DTI Company Law Review Committee, adopting the
"inclusive approach", see Dine, op.cit., p. 211.
See Paillusseau, Le droit moderne et la personnalit morale, RTDciv 1993, 705; Les fondements du
droit moderne des socits, JCP E 1995, I, 488. For the "enterprise model" in England see Dine, op.cit.,
p. 26.
See Cozian/Viandier/Deboissy, Droit des socits, 14 ed., 2001, no 432. On the distinction between
"intrt social" and "intrt commun des associs" see the same authors, no 434.
German Constitutional Court (BVefG) 20.9.1999 NJW 2000, 349; 23.8.2000 NJW 2001, 279.
See Greek Supreme Court ("Areios Pagos", plenary session) nos 40/1998, NoB 1999, 752; 8/1999
NoB 2000, 442.


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)117. Conversely, profit expectations have not been
considered as "property"118.
On the other hand, share as property means that expropriation is not allowed. In this
connection, the Finnish reporter119 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)120. 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 resolutions121. 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 idea122. 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 possibilities123. 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 excluded124,
unless the law125 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 veto126. 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 Gatti127, the problem is not to stick to standardized individual rights

See the above BVefG of 20.9.1999.

See the above BVefG of 23.8.2000.
Kaisanlahti (Finland), 2.2.
The reference is made to the decision of the High Court of Australia in Gambotto v WCP Ltd (1995)
182 CLR 432, cited also by Fletcher (Australia), no. 67.
Trigo Trindade/Bahar (Switzerland), II B 1 a.
Art. 706 CO. Trigo Trindade/Bahar (Switzerland), II B 1 a.
See Easterbrook/Fischel, The Economic Structure of Corporate Law, 1996, p. 134.
Hamilton, The Law of Corporations, p. 611.
For example in the US MBCA 10.04.
Hamilton, op.cit., p. 613.
Gatti (Italy), 2.


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"128. 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 action129.
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

On this section, as the basis for litigation by shareholders see Cheffins, op.cit., p. 455.
Cheffins, op.cit., p. 458-461. See also Gower's Principles of Modern Company Law (by P.Davis),
1997, p. 662: "there is a conflict here [in the matter of derivative actions] between proper recognition
of the contractual nature of the company's constitution and the traditional policy of non-interference by
the courts in the internal affairs of companies".


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"130.
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 policy131. 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
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 rule133.
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 authorities134.
2.8. Fairness
Fairness (often combined with legitimate expectations135) is a notion that is more familiar
to common law than to civil law countries. Fairness is considered "to defy precise
categorization"136, 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


See generally Boros, Minority Shareholders' Remedies, 1995, p. 64 ff.; Daigre/Sentilles-Dupont,

Pactes d'actionnaires, Paris 1995; Perakis, Voting agreements, Athens 1976 (in Greek).
See for example Ripert/Roblot/Germain, Trait de droit commercial, 1-2 (2002), no. 1386.
Cozian/Viandier/Deboissy, Droit des socits, 14 ed., 2001, no 11.
See Dine (England), X: "there is no doubt that the courts attitude to minority shareholders is
driven by the perception that they have entered into a consensual arrangement of their own free will
and have therefore taken the risk of an unfavorable outcome".
Cf. s. 5 of the Financial Services and Markets Act 2000.
See Gower, op.cit., p. 742; Boros, Minority Shareholders' Remedies, 1995, p. 135.
Hamilton, op.cit., p. 484.


needs particular treatment137. "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"138.
Like the abuse of right, fairness (whether "procedural" or "substantive"139) 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 1985140, or for the windingup 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 resolutions141. 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"142.
Fairness and predictability are competing principles. Civil law countries have
generally a stronger inclination for the latter than common law countries do143.
Fairness and efficiency are also competing, although occasionally the first can assist
the second144.
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 relationship145. 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

See Easterbrook/Fischel, The Economic Structure of Corporate Law, 1996, p. 110.

Lord Hoffmann in ONeill v Phillips [1999] BCC 600, cited by Dine (England), VI.
See the distinction in Cheffins, op.cit., p. 142.
Order on application of company member 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 the members. See
Cheffins, op.cit., p. 149. See below.
Timmerman/Doorman (Netherlands), no. 8.
Timmerman/Doorman (Netherlands), no. 41.
See Johnson/La Porta/Lopez-de-Silanes/Schleifer, Tunnelling, NBER Working Paper 7523,, National Bureau of Economic Research, Cambridge MA, 2000.
See Cheffins, op.cit., p. 158.
See Hffer Aktiengesetz, 2002, 53a, 2: "erscheint fraglich ob dem Gleichbehandlungsgrundsatz
neben der Treupflicht berhaupt noch selbstndige Bedeutung zukommt".


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.146 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 care147. Secondly, because it is available when a certain conduct "falls short of
actual illegality"148, 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"149. The term has a close relationship with two other notions: The squeeze146

La Porta/Lopez-de-Silanes/Schleifer/Vishny, Law and Finance, [1998] Journal of Political

Economy 106, 1113-55.
The oppression remedy is thought to be the remedy by which the principle of non-interference has been
put "en veilleuse" (see Crte (Canada), no 3.2).
The English Law Commission Report 246, Shareholder Remedies (1997), no 2.2.
See Hamilton, op.cit., p. 658. For England and Australia see Boros, op.cit., p. 117.


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 majority150. 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"151.
This does not mean, however, as Lord Hoffmann has put it152, "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
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"153. It becomes
clear that in closely held companies this remedy is more important and efficient than in
public companies154.
(b) In Australia, the oppression remedy is a versatile relief155, available to any member
when (a) the conduct of the company's affairs, (b) an actual or proposed act or

See Hamilton, op.cit., p. 668, 650.

Slade J in Re RA Noble (Clothing) Ltd [1983] BCLC 273, cited by Dine (England), VI.
In ONeill v Phillips [1999] BCC 600, cited by Dine (England), VI.
See Law Commission Report 246 (1997), p. 2.
Cheffins, Company Law Theory, Structure and Operation, Oxford 1997, p. 463; P.Davies,
Introduction to Company Law, 2002, p. 292.
Fletcher (Australia), no 78.


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)156. 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 minority157. 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"158.
(c) In Canada, the intention of the new federal law has been to provide for a flexible
and generous remedy159. 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 make160.
(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".


Fletcher (Australia), no 74.

See for details Fletcher (Australia), no 79.
Fletcher (Australia), no 77.
Crte (Canada), no 3.2.
S. 241(3) CBCA: "In connection with an application under this section, the court may make any
interim or final order it thinks fit including, without limiting the generality of the foregoing, (a) an
order restraining the conduct complained of; (b) an order appointing a receiver or receiver-manager;
(c) an order to regulate a corporation's affairs by amending the articles or by-laws or creating or
amending a unanimous shareholder agreement; (d) an order directing an issue or exchange of
securities; (e) an order appointing directors in place of or in addition to all or any of the directors then
in office; (f) an order directing a corporation, subject to subsection (6), or any other person, to
purchase securities of a security holder; (g) an order directing a corporation, subject to subsection (6),
or any other person, to pay to a security holder any part of the moneys paid by him for securities; (h)
an order varying or setting aside a transaction or contract to which a corporation is a party and
compensating the corporation or any other party to the transaction or contract; (i) an order requiring
a corporation, within a time specified by the court, to produce to the court or an interested person
financial statements in the form required by section 155 or an accounting in such other form as the
court may determine; (j) an order compensating an aggrieved person; (k) an order directing
rectification of the registers or other records of a corporation under section 243; (l) an order
liquidating and dissolving the corporation; (m) an order directing an investigation under Part XIX to
be made; and (n) an order requiring the trial of any issue".


(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
(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 company162. Also in Belgium, an "oppressed"163 shareholder
may, for "valid reasons", institute a legal action for the forced purchase of his shares
by the shareholders to whom such valid reasons relate164.
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 easy165. In a very interesting part of the Canadian report166, an attempt is made to
define the role of equity, which commands the oppression remedy. One possibility,
argues prof. Raymonde Crte, following Prof. Cheffins167, 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
arranged168. This approach, based on parameters of efficiency and value
maximization, allows Mme Crte to make a critical analysis of some Canadian caselaw. 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).


See Danziger, Judicial appointment of investigators and the disclosure of information as a remedy
against oppression, Int. and Comp.Corp.Law Review, 1999, 349.
Timmerman/Doorman (Netherlands), no. 49.
The term is not used by the law, but it comes to this.
Wymeersch/Jakhian/Caeymaex (Belgium), no. 55.
Crte (Canada), no 3.2.
Crte (Canada), no 3.2.
Cheffins, Company Law Theory, Structure and Operation, Oxford 1997.
Crte (Canada), no 3.2.


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 rights169, when requested
information has not been provided170 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 permitted171.
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 possibilities172.
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 company173.
(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

See "Areios Pagos" (Greek Supreme Court, plenary session) 14/1999 EpiskED 1999, 735.
Gologina-Ekonomou (Greece), IV 1.
On this very important point see for the US Hamilton, The Law of Corporations, p. 556 ff. Class
action is not possible everywhere (impossible in Finland, Kaisanlahti (Finland), 8.5).
For example in Japan, when the derivative action was introduced in 1950, the right to cause the
company to sue its directors was abolished. Kawashima-Iwasaki (Japan), IV 4.
Fletcher (Australia), no 39.


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 inefficient174.
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)175. 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-incentive176, 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 possible177.
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
Netherlands178 or Greece179 seem to care more about an effective exercise of the action
by the company, rather than the establishment of individual mechanisms180. 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 standi181 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

See for example Reichert/Weller, Haftung von Kontrollorganen, ZRP 2002, 49.
See Gologina-Ekonomou (Greece), IV 4.
Giertz (Sweden), conclusion.
Gatti (Italy), 4 (g).
Timmerman/Doorman (Netherlands), no. 60.
See Gologina-Ekonomou (Greece), V 1. However, in Greece this remains an interpretative issue,
where authors tend to allow it, though not the courts.
But in Germany the introduction of the derivative action is seriously proposed (see for example
Ulmer, ZHR 1999, 290, Bayer, NJW 2000, 2609).
See Gower's Principles of Modern Company Law (by P.Davis), 1997, p. 665.


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"182). 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
action183. 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 Bouloc184. 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)185. 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)186. 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 required187. 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 plaintiff188. Another feature is that all litigation
costs are borne by the shareholders, unless the company has obtained funds as a
consequence of the action189. Finally, a Belgian derivative action ("action de

1843 2 Hare 461. Dine (England), IV.

Hmard/Terr/Mabilat Socits commerciales, II, Paris 1974, no. 1202.
Cass.crim. 12.12.2000 ("Alain Gniteau"), Rev.Soc. 2001, 865, note Bouloc.
Trigo Trindade/Bahar (Switzerland), IV A 2 b.
Gatti (Italy), 4 (g).
Kaisanlahti (Finland), 8.2.
The rationale of pro-rata recovery is that "if the wrongdoers own a substantial amount of shares, and
if the damages are paid to the corporate treasury, the recovery flows in part to the wrongdoers" (see
Pinto/Branson, Understanding Corporate Law, New York 1999, 14.02[E]).
Kaisanlahti (Finland), 8.2.


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 company190.
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"191. 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)192; 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 wrong193. 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 disincentive194. 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)195.
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


Wymeersch/Jakhian/Caeymaex (Belgium), no. 43 ff.

Dine (England), IV.
This will be more easily proved in closely held companies, see Cheffins, op.cit., p. 465.
There are two instances mainly when ratification is not allowed: (a) Where the act complained of is
"ultra vires" or illegal (see s. 35 CA 1985), (b) Where there is a "fraud on the minority". Dine
(England), IV. It is interesting to note that the English Law Commission Report 246, Shareholder
Remedies (1997), no 1.13, has recommended that "More modern, flexible and accessible criteria for
leave to bring a derivative action would replace the current fraud on the minority exception".
Dine (England), IV.
Dine (England), IV. In view of the obstacles of the derivative litigation, s. 459 is a sensible
alternative. See Gower, op.cit., p. 704; Cheffins, op.cit., p. 345.


derivative procedure with more modern, flexible and accessible criteria for
determining whether a shareholder should be able to pursue the action"196.
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 rule197. In Canada the derivative action198 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 ratification199. 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 corporation200.
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)201. 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"202. 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 inactive203; (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 met204. 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 successful205.
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

The English Law Commission Report 246, Shareholder Remedies (1997), no 6.15.
Crte (Canada), no 2.
In the Canadian report (French text) the term "action oblique" is used. This term should not be
confused with the "action oblique", denoting an action taken by a creditor against a debtor of his debtor
(cf. art. 1166 of the French civil code).
Crte (Canada), no 3.1.
See Crte (Canada), no 3.1.
For a discussion of the problems being considered before 2001 see de Vere Stevens, Should we Toss
Foss?: Toward an Australian Statutory Derivative Action, Australian Business Law Review 1997, vol.
25, p. 127.
Fletcher (Australia), no 53.
But ratification does not bar the action, Fletcher (Australia), no 56.
Fletcher (Australia), no 55.
Fletcher (Australia), no 61, 63.


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 basis206) 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")207, and "fairly and adequately represents
the interests of the corporation"208 (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 hearing209. 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
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 nervous210. Safe harbor rules
have been developed. Business judgment has been one211. A recent law (2001) offered
two additional shields212: 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

Including the idea that the shareholders should "auction-off the suit" see de Vere Stevens, loc.cit.,
p. 131.
See Pinto/Branson, Understanding Corporate Law, New York 1999, 14.03[B].
See Pinto/Branson, op.cit., 14.03[E].
On the practices of "demand refused", "demand accepted" and "demand excused", and the confusion
created, see Pinto/Branson, op.cit., 14.05, who also criticize ABA for making demand all important.
Kawashima-Iwasaki (Japan), V 1.
Kawashima-Iwasaki (Japan), V 1.
Kawashima-Iwasaki (Japan), V 1 d.


100 million yen) plays a similar role of the "litigation committee" of the American
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
France213, Belgium214 or Greece215.
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 rule216. In such
cases the right of each shareholder to ask for annulment is again usually provided
(ex. in Germany 245 AktG ; Switzerland art. 706 CO; Australia CA 2001 s. 233(1)
(f)); the Netherlands, s. 2:15 of the Civil Code; France217; Italy art. 2377 of the Civil
Code; Japan s. 247(1) of the commercial code; Finland218). However, this rule is not
absolute: Sometimes nullity is only relative, in which case only some shareholders
can invoke it219, while in some instances this may depend on whether a shareholder
had opposed the decision at the meeting220. Finally, there are examples when
voidability is the exception (Greece, art. 35c law 2190/1920221), or the right of

Germain (France), no. 26.

Del Marmol, Protection des actionnaires minoritaires en droit belge, volution rcente, Etudes
offertes a R.Houin, Paris 1985, p. 169, 171; Wymeersch/Jakhian/Caeymaex (Belgium), nos 27, 45.
See N.Rocas, The limits of the power of the majority in the law of limited companies, Athens 1971.
So for example in Germany ( 241, 243 AktG); in the Netherlands (s. 2:15 of the Civil Code).
Germain (France), no. 22 ff.; Cozian/Viandier/Deboissy, Droit des socits, 14 ed., 2001, no 490
("tout intress").
Kaisanlahti (Finland), 8.1.
See for example in France Germain (France), no. 25; Cozian/Viandier/Deboissy, loc.cit.
See for example in Germany 245 AktG.
First, when a resolution was taken without requested information having been provided, and second,
when a balance sheet has been approved, which conceals profits, and as a result deprives shareholders
of their minimum mandatory dividend (art. 35b law 2910/1920 see Gologina-Ekonomou (Greece),


annulment is given only to shareholders holding a minimum percentage (in Greece:

1/20 of the capital222).
3.4. The "Existential Rights" of the Shareholders
In order to complete the list of remedial rights, it would not be inappropriate to mention
here some general "existential" rights of the shareholders, namely the right to be a
member of the company, the right to oppose major changes of the corporate structure
that risk to affect the essence of their membership, exit rights, and the right to seek the
dissolution of the company in certain extreme cases. The reason why these rights are
listed under this heading needs an explanation. The right to oppose changes and the right
to seek dissolution are remedial by nature. However, the matter is less clear in respect of
the right to be a member and the exit right. But the right to be a member is examined
here only insofar as it is a right to oppose squeeze-outs and freeze-outs therefore as a
defensive right. The right to exit can be both: It is a substantial right, when a shareholder
is in no position to find a purchaser for his shares (mainly when the "Wall Street Option"
is not available), and uses a legal option wherever available to be bought out by the
company or another person. The same, however, is a remedial right when a court
chooses, in case of oppression, to allow the exit of the applicant. The choice to include
these rights here is generally supported by the fact that the general oppression remedy
may include most of these judicial possibilities.
A. The "Right" to Be and Remain a Member of the Company
The right to be (and stay) a member of the company223 is not a "minority right" by
itself. However, membership can be the target of various devices used by the
management or the majority, in order to eliminate or exhaust a minority. The problem
is then how to oppose such devices and that necessitates remedial action.
1. First of all, the elimination of a minority is possible if the exclusion of a
shareholder is permitted by law. Usually it is not224, unless there are special reasons,
such as fraud in the registration of a person as shareholder225, when the shares
subscribed to have not been fully paid up226 or when exclusion is the natural
consequence of a capital reduction. However, in some jurisdictions exclusion is
permitted on more general grounds, taking into account the nuisance caused by
minority shareholders227. Another possibility is the right of a majority shareholder,
IV 3 d).
Gologina-Ekonomou (Greece), V 2.
"Droit de faire partie de la socit", see for example Ripert/Roblot/Germain, Trait de droit
commercial, 1-2 (2002), no. 1599.
For example in Japan (Kawashima-Iwasaki (Japan), VI c), Finland (Kaisanlahti (Finland), 2.2), or
Greece. Also not in France, but the articles may allow the "exclusion" on specific grounds, in which
case the company must either provide a purchaser or buy back the shares itself. See
Ripert/Roblot/Germain, op.cit, no. 1601; Cozian/Viandier/Deboissy, op.cit., , no 397, 399, 898.
For example in Switzerland, see Trigo Trindade/Bahar (Switzerland), III D.
For example in Germany and Greece, when the articles have provided for a payment of the capital
by installments, if the payment is not made within the time limits the shares if the defaulting
shareholder may be cancelled (see 64 AktG and art. 12 2 of Greek law 2190/1920, see GologinaEkonomou (Greece), VI).
This is not frequent, but there are some examples: In the Netherlands, shareholders holding at least
1/3 of the capital can apply for the exclusion of any other shareholder, who, by his conduct, prejudices
the interests of the company to a non-tolerable extent (s. 2:336 of the civil code). Even the majority can


usually holding about 90% of the capital of a listed company228, to squeeze-out the
minority. This usually (but not necessarily229) follows a takeover. Mandatory bids
(whereby a majority shareholder is obliged to buy shares from minority shareholders
who wish to sell for a full consideration) are a tool of protection of minority rather
than of the dominant shareholder.
2. The "right" to be a member is not considered in the same manner everywhere. In
many civil law countries, the problem is often addressed in terms of property protection
(see above 2.5). But even then, exclusionary techniques are not generally outlawed. In
Germany, for example, the dissolution of a company, the transfer of its assets to an entity
controlled by the majority shareholders and the elimination, in this manner, of the
minority ("bertragende Auflsung"), has not been considered by the Constitutional
Court to infringe the right of property, provided that full indemnity is received230. The
highest Court said in clear terms that art. 14 of the German Constitution does not
prohibit an exclusion of a shareholder against his will.
3. In common law countries the problem is rarely discussed in terms of property.
Elimination devices are rather considered as cases of "oppression", "freeze-outs" or
"squeeze-outs" (see above, 3.1(2)) and treated accordingly. "Expropriation
technology" or "removal-engineering" includes devices having a lesser impact than
straightforward elimination; still, they can radically frustrate the position and
be squeezed-out! See Timmerman/Doorman (Netherlands), no. 64. Also in Poland there is a possibility
to a forced buyout of shares representing 5% of the capital, if this is decided at a general meeting by no
more than 5 shareholders holding at least 90% of the capital, on the condition that proceedings initiated by
minority shareholders hinder the operation of the company and management of its affairs and becomes
burdensome to the majority (art. 418 CCC). The excluded shares must be deposited by their holders and
appraised. See Katner (Poland), VIII C. In Switzerland clauses in the articles providing for the possibility
to expel a shareholder, or establishing a priority of redemption in case of a decrease of capital are of
dubious legality, see Trigo Trindade/Bahar (Switzerland), III A 2. On the contrary, under Australian
law, an amendment to the articles by the majority of the general meeting that allows the majority to
expropriate shares is valid if made for a proper purpose and is not oppressive to the minority members.
This test will be satisfied where the continued shareholding of the minority was detrimental to the
continuation of the business and expropriation was a reasonable means of curing the problem. Fletcher
(Australia), nos 67, 91. The relevant case is Gambotto v WCP Ltd, decision of the High Court of
Australia in (1995) 182 CLR 432, see Fletcher (Australia), no. 67. But the Finnish reporter
(Kaisanlahti (Finland), 2.2) stresses that such an amendment of the articles would not be allowed in
In England, after the offeror has acquired 90% of the shares, he may give notice under s. 429 CA
1985 entitling and binding him to acquire the remaining shares. Under the new (2001) German Public
Offers Act (bernahmegesetz), a 95% majority can squeeze-out the minority against compensation, see
Hopt (Germany), VI; Krause, Das neue bernahmegesetz, NJW 2002, 705. Similarly in Belgium, art.
513 BCC, see Wymeersch/Jakhian/Caeymaex (Belgium), no. 56. In Switzerland a squeeze-out is
permitted following a takeover ("annulation des titres restants"), if the new majority shareholder holds
at least 98% of the capital, see Trigo Trindade/Bahar (Switzerland), III A 2. In the Netherlands s.
2:201a(92a) of the civil code gives the possibility to a shareholder with 95% of the capital to obtain
through court proceedings the squeeze-out of the 5%, see Timmerman/Doorman (Netherlands), no.
64. In Finland the statutory threshold for a squeeze-out is 90%, then the majority owner has the right to
buy out the rest of the shares at a "fair price". In Australia the threshold for a compulsory acquisition is
also 90%.
For example, in Germany in the case of "annexation" ("Eingliederung") of a company by another ("the
main company", "Hauptgesellschaft"), which holds at least the 95% of the former ( 320 AktG), the
minority shares can be acquired by the main company ( 320a AktG), while the excluded shareholders
have the right to receive a fair indemnity, consisting in shares of the main company or cash ( 320b AktG).
This does not happen following a takeover.
BVerfG 23.8.2000 NJW 2001, 279.


expectations of the minority to the point that the latter have no choice but to surrender.
For example the following "squeeze-out" techniques are discussed by Dr. Keith
Fletcher, the Australian reporter231: (a) Withholding information about the company's
affairs; (b) Dismissal of minority members from executive positions; (c) Appointment
of additional directors to reduce the minority's influence at board level; (d)
Distribution of profits by way of salary paid to majority members as executive
officers, rather than by way of dividend paid to members; (e) Diversion of business
away from the company to other entities controlled by the majority; (f) Amendment of
the constitution in terms unfavorable to the minority; (g) Allotment of share capital to
dilute the minority's holding; (h) Preferring associates of the majority in business
transactions; and (i) Conferring benefits on the majority by way of such perquisites as
retirement allowances and directors' fees.
In common law countries, the adverse consequences of expropriation can be
addressed with the assistance of the general oppression remedies (including
annulment of decisions and exit rights), and the exercise of derivative suits. However,
to the extent that they are not unethical, squeeze-out and freeze-out techniques are not
necessarily outlawed. They may even be occasionally favored for efficiency purposes,
when the elimination of a minority can enhance management efficiency and spare the
company from confrontational relations232. In such cases the main problem is the
fairness of the compensation paid to the eliminated shareholders, rather than the
validity of the action against them. It is worth noting, however, that the same logic is
also occasionally followed in civil law countries, such as in the decision of the
German Constitutional Court (mentioned above, no 2)233.
B. Right to Oppose Major Structural Changes of the Company
A connected matter is the right of minority shareholders to oppose structural changes of
the company that are detrimental to them, such as mergers, divisions, divestiture of big
assets, etc. Shareholders have various rights in such cases, for example a right to claim
that a decision of the general meeting is required (so the German "Holzmller" doctrine
for the transfer of major assets234), information or compensation rights, a right to apply
for the rescission of the decision, etc.
Reversal v. compensation is again the most critical dilemma. For example under EC law,
in cases of mergers minority shareholders who are disappointed with the share
exchange ratio approved by the general meeting can apply to the court for the merger
to be declared void, although at the same time they must challenge the validity of the
decision of the general meeting (so the 3rd EC Directive 78/855/EEC (art. 22 I b)).
But in some Member states, notably in Germany, a special procedure has been set up
for the compensation in cash of shareholders who complain, instead of annulment of
the decision (see 15 UmwG). Also in common law countries compensation, rather
than reversal of the changes, is the most frequent remedy. Thus, "cash-out" mergers, i.e.
mergers where cash is used as consideration, are permitted, but courts can review the
fair value of the shares lost (although this may be detrimental to minority


Fletcher (Australia), nos 88 ff.

Pinto/Branson, Understanding Corporate Law, New York 1999, 10.03[A].
BVerfG of 23.8.2000 NJW 2001, 279.
BGH 83, 122 = NJW 1982, 1703. See also 179a AktG.


shareholders235). Under some case-law, the business purpose of the merger (which
cannot be just the elimination of the minority) has also to be considered236.
C. Right of Exit
There are cases where a shareholder realizes that staying in the company and seeking to
improve his position is no longer a realistic option, and chooses to "exit" rather than
"voice" his grievances.
1. Leaving the company is a complicated issue. It means, first of all, that a shareholder
can try to find another person to whom the shares are sold. Transferability of shares is
typical to all limited companies, at least as a principle (the articles of association may
often restrict it, at least in non-listed companies), but actual possibility to transfer is
another matter, depending on whether there is a market for the shares. If there is, mainly
when the company is listed, the decision to transfer ("Wall Street option") can easily
materialize. If there is not, the shareholder may be seriously "locked in". Then, the right
to leave the company becomes important. It means that somebody else (another
shareholder or the company itself) is obliged to buy the shares in question: Either
because that party is contractually obliged to do so (but normally a company does not
have the right to buy its own shares), or because the law grants shareholders exit rights.
A necessary corollary is the need for appraisal and the indemnification of the exiting
shareholder, and usually (if the company buys out) a capital decrease.
2. Civil law countries do not normally provide for exit rights237, either as a consequence
of the closed-end character of the limited company, or because of the rules on the
maintenance of the capital or for other reasons (for example because the duty of loyalty
requires shareholders to stay rather than to go238).
On the contrary, common law countries object less to exit rights: Not only in order to
cope with current compatibility problems between shareholders, but also because such
countries permit freeze-outs to a much greater extent than civil law countries, where
protection of property considerations prohibit in principle expropriation. Capital
maintenance principles are also less strict and oppose less exit techniques. Exit is thus
for example possible in England in oppression situations, i.e. following an order of the
court under CA 1985 ss. 459 ff. As a matter of fact, one of the possibilities of the
court is to order "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"239. Exit may be also provided for
in the articles240.


Bebchuk/Kahan (Adverse Selection and Gains to Controllers on Corporate Freezeouts, in:

"Concentrated Corporate Ownership" (R.Morck, ed.), 2000, p. 247-259), point to fact that the power of
the controlling shareholder to freeze-out and to set the freeze-out price equal to the pre-freezout market
price, will depress the pre-freezout market price of the minority shares.
Pinto/Branson, Understanding Corporate Law, New York 1999, 10.03[B] and [C].
Hopt (Germany), VI; Trigo Trindade/Bahar (Switzerland), III D; Gologina-Ekonomou (Greece),
VI; Kawashima-Iwasaki (Japan), VI a; Germain (France), no. 28.
Cf. Timmerman/Doorman (Netherlands), no. 69.
S. 233(1)(d) and (e) CA 2001 provide equivalent remedies to the UK provision.
For example in Australia, Fletcher (Australia), no 85.


3. Exit is often permitted in both civil and common law countries when some major
events occur, such as mergers or divisions241, or when majority shareholders have
infringed some rule or standard of conduct. Such events can be described in abstract
terms, as it happens in Canada242, the Netherlands243 or Japan244, or make a list, as in the
US245. The linkage to infringement shows that exit is here perceived as a remedy246. Exit
is also connected with takeovers ("sell-out")247. Finally, exit may be a possibility when a
company migrates from a country to another. For the moment this is not a real
possibility. But the proposed 14th EC Company Law directive allows the Member
states to introduce legislation for the "appropriate protection for minority members
who oppose the transfer" (art. 7), such as a right to have their shares purchased by the
D. Right to Apply for the Dissolution of the Company
Killing the company is a draconian measure, and, therefore, not a freely available option.
In fact all countries limit the right to apply for it249.
1. In some countries the right of shareholders to ask for the judicial dissolution of the
company is altogether excluded, as in Greece250. In other countries it depends upon the

See for example EC Dir 82/891/EEC, article 5 2: "Where shares in the recipient companies are
allocated to the shareholders of the company being divided otherwise than in proportion to their rights
in the capital of that company, Member States may provide that the minority shareholders of that
company may exercise the right to have their shares purchased. In such case, they shall be entitled to
receive consideration corresponding to the value of their shares. In the event of a dispute concerning
such consideration, it must be possible for the consideration to be determined by a court". Member
states have complied (example Greece, art. 84 2 law 2190/1920). In Italy an exit right is provided in
favor of dissenting shareholders in cases of modification of the objects or the form of the company, or of
the transfer of its seat outside of Italy (art. 2437 of the Civil Code), or, for listed companies, in case of
merger of division if the dissenting shareholders are going to receive non-listed shares (art. 131 of TUIF).
See Gatti (Italy), 4 (h).
CBCA, s. 190 ("fundamental changes"). See Crte (Canada), no 3.3.
S. 2:343 of the Civil Code ("when the shareholders' rights or interests are prejudiced by the
conduct of one or more co-shareholders to such an extent that the continuation of the shareholding can
no longer reasonably be expected of him"). See Timmerman/Doorman (Netherlands), no. 65.
In case of resolutions would "fundamentally change the company". See Kawashima-Iwasaki
(Japan), VI b.
In the US minority shareholders who are adversely affected by certain types of transactions (for example
mergers, exchange of shares, disposition of assets, and other adverse amendments) are entitled to dissent
and ask for an appraisal of their shares. The relevant legislation (MBCA Chapter 13: Appraisal Rights)
institutes a very complicated procedure and if the steps and technicalities are not scrupulously observed
by the shareholders (for example notice of the intent to demand payment - 13.21) the exit rights may
be lost. For the appraisal the court determines the "fair value of the shares". The revision of Chapter 13
in 1999 has refined the "market exception", under which the appraisal right does not exist when the
shares are listed on the NYSE or the AMEX or there is a liquid market for it ( 13.02(b)(1)). In such a
case the shareholders may easily dispose of their shares, without need of appraisal. For the "stock
market exception" see Easterbrook/Fischel, The Economic Structure of Corporate Law, 1996, p. 149.
See P.Davies, Introduction to Company Law, 2002, p. 229.
In England, following a takeover, where the bidder holds 90% of the shares, a non-assenting
shareholder can require the offeror to buy his shares (s. 430A CA 1985). The same happens in Finland,
see Kaisanlahti (Finland), 8.6. See also Germain (France), no. 28.
See Bisacre, The Migration of Companies within the EU and the proposed 14th Company Law
Directive, Intern.&Comp.Corp.Law Journal 2001, 251, 267.
This right is often criticized. Hamilton, The Law of Corporations, St. Paul, Minn., 2000, p. 370,
proposes instead an auction off of the business to the highest bidder.
Gologina-Ekonomou (Greece), IV 7.


existence of serious reasons ("justes motifs" in France251 and Switzerland252, deadlock or

threat of irrecoverable injury in Japan253, "lawful reasons" in Belgium254). The right to
apply is either individual (as in France) or minority (for example 10% in Switzerland
and Japan).
2. An interesting aspect of the right to apply for dissolution is that, in common law
countries, such a right is usually provided for in the general context of an oppression
litigation, where the court has the discretionary power either to dissolve, or, alternatively,
to offer the applicant appraisal and exit, or order other measures. Thus in England,
Insolvency Act 1986 s. 122(1)(g) provides that a company may be wound up by the
court if the court is of the opinion that it is "just and equitable" that the company
should be wound up255. The petition can be filed (inter alios) by any member of the
company. But in such a case, the court may order some alternative remedy, if it thinks
that the petitioners "are acting unreasonably in seeking to have the company wound
up instead of pursuing that other remedy" (s. 125(2)). That other remedy can be a
remedy under s. 459 CA 1985, or something else256. But a petitioner may cumulate
sections 459 and 122257. It is observed that a court is more likely to make a windingup order, if a company is closely held258.
Similarly, in the US a shareholder can apply to the court for the dissolution of the
company in cases of deadlock of either the directors or shareholders, or when "the
directors or those in control of the corporation have acted, are acting, or will act in a
manner that is illegal, oppressive, or fraudulent", or, finally, when the corporate
assets are being misapplied or wasted (MBCA 14.30(2)). The court "may" dissolve
the corporation, which means that the court can exercise some discretion when
examining that measure. Moreover, courts have begun to develop alternative or
supplemental remedies, such as a mandatory buyout259.
Similar solutions are possible in some civil law countries. In Switzerland, the court may
order in lieu of dissolution another adequate measure, which is adapted to the
circumstances and acceptable by the interested parties (art. 736 no 4 CO). It is telling,
however, that the Swiss reporters present this discretion as foreign to the Swiss
system260. A similar example is Finland, where the court may, upon request of the


Art. 1844-7 of the French Civil Code. See Ripert/Roblot/Germain, op.cit., no. 1101.
Art. 736 no 4 CO.
Sec. 406-2 of the commercial code, Kawashima-Iwasaki (Japan), IV 7.
Wymeersch/Jakhian/Caeymaex (Belgium), no. 33.
The "landmark" case is Ebrahimi v. Westbourne Galleries Ltd [1973] AC 360 (House of Lords),
cited by Dine (England), VI 8.
Dine (England), VI.
It is however clear that a systematic preference for the general remedies instead of the winding-up
cannot be detected. In Re R.A. Noble & Son (Clothing) Ltd [1983] BCLC (cited by Dine (England), VI)
the judge dismissed the petition for s.459 relief and made an order for the winding up of the company
on the just and equitable ground.
Cheffins, Company Law Theory, Structure and Operation, Oxford 1997, p. 464. That the phrase
just and equitable "encompasses oppression of the minority" see P.Davies, op.cit., p. 237.
Hamilton, op.cit., p. 371.
"cette formulation inspire de lequity telle que pratique par les cours de common law donne une
latitude au juge suisse dont il na gure lhabitude. Cependant, ce jour, il nexiste pas de cas de
jurisprudence dans lequel un juge suisse a us de la possibilit de recourir une autre mesure
adquate", Trigo Trindade/Bahar (Switzerland), IV A 5 fn 408.


plaintiff, order the company to redeem the shares held by the applicant at a reasonable
price (Ch. 13 Sc. 3)261.
3. Conversely, even in some common law countries, it is possible that the court has
not an option to convert dissolution into other, milder measures. Thus, in Australia
winding up may be sought when directors act selfishly, in case of oppression, and,
generally, when this measure is "just and equitable". But then the court may only
order the winding up, not other measures, although the court may reject the petition, if
some other remedies are available262.
What one can clearly see is that many of the remedial rights are closely connected and
communicate with the general oppression remedy, allowing thus an interaction if not a
continuum between them.
4. Special Minority Rights
The general remedial rights, taken separately or in conjunction, may offer the minority
shareholders some powerful weapons for improving their position in the company, or
securing a smooth exit. However, the great degree of discretion exercised by the court,
typical in common law countries, is rarely allowed in civil law jurisdictions. In these
countries, some special pre-programmed possibilities of the shareholders are more usual.
These may be independent from court action, but even when such action is needed, the
conditions are clearly determined, so as to avoid excessive discretion. It has to be noted
that special rights exist also in common law countries, in addition to the general
remedies, described above. The list of the rights, which are mentioned below, is not
4.1. Information Rights
Company disclosure is a powerful tool that protects investors (future shareholders
included) and the market in general. The main addressees, however, are those who are
knowledgeable about the corporate account complexities and are able to understand
them and act upon them. These persons are the institutional investors and the credit
institutions. This is often mentioned as a de facto exception to the equal treatment of
1. It is not possible to make a comparative presentation of the methods and the extent of
company disclosure. The matter is closely related to the drawing and presentation of the
corporate accounts. Some general rules are common to most jurisdictions. This is the
result of the widespread use of the international accounting standards (IAS), while in
Europe a high degree of harmonization has been achieved through the first, fourth and
seventh company law directives. Many common rules relate also to disclosure to be
made by listed companies, such as prospectuses, the periodic account statements, major
holdings, etc. Disclosure is also essential and invariably imposed in cases of mergers,
divisions, and conversions. Disparities may exist, even within the same jurisdiction,

Kaisanlahti (Finland), 8.4.

Fletcher (Australia), no 42. S. 232 and s. 461(1)(e), (f) and (g) CA 2001 comprehend very similar
See Cheffins, op.cit., p. 479 ff.


having mainly to do with the type of the company (whether listed or not listed, "public"
or "private", "small" or "large" etc.), but a high degree of disclosure is generally to be
expected everywhere.
2. In the context of this report, it is essential to point to the additional possibilities of
information given to minority or individual shareholders. This information is required
for example for a better exercise of the voting rights or in order to know whether staying
in the company continues to be an interesting option. Information is considered to be a
"fundamental member right"264 in general, and the "most basic right of the minority"265,
in particular. It has even been submitted that information rights can be occasionally more
drastic than direct rights266. Besides, information is also a prerequisite for a better
exercise of the latter. Some examples can highlight the kind of information that
shareholders may request and obtain.
(a) As a rule, minority shareholders may request information, which can help for a better
understanding and assessment of the items on the agenda. Thus for example in Germany
every shareholder has the right to obtain from the management board (Vorstand)
information relating to the items on the agenda of a general meeting ( 131 I AktG).
Such information is given only at the shareholders' meeting. It is mainly useful when it
relates to mismanagement, although this is not expressly stated in the law267. The
Vorstand can refuse to supply information in some cases, for example when the
requested information is likely to be materially harmful to the company ( 131 III AktG).
If information is not supplied, the court orders the board to supply it even outside the
general meeting ("specific performance"268, 132 AktG). In Switzerland, every
shareholder has the right to obtain at the general meeting information from the directors
on the affairs of the company and from the auditors on the auditing they have conducted,
if this is necessary for the exercise of the shareholder's rights and does not create the risk
that business secrets of the company are revealed (art. 697 CO)269. If information has
been unduly withheld the court decides (art. CO 697 IV).
Similar rules exist in Sweden (CA ch. 9, s. 22)270, in France (art. L. 225-108 NCC), in
Belgium271, in Finland272 and in Poland (art. 428 CCC)273. In Greece the right to request
information depends on the percentage of the minority. A 5% ("small") minority has the
right to request information in connection with the agenda of the meeting and also about
any sums or other benefits that have been paid to directors during the last two years,
while a "big" minority (1/3 of the total capital) can request information regarding the
affairs of the company in general. In both instances the board can refuse to give such
information on the basis of serious grounds. The dispute can be settled by the court (art.
39 4-6 law 2190/1920)274.

"Ein mitgliedschaftliches Grundrecht" Karsten Schmidt, Gesellschaftsrecht, 1997, p. 625;

German Constitutional Court (BVefG) 20.9.1999 NJW 2000, 349.
Fletcher (Australia), no 116.
Hopt, Shareholders' rights and remedies: A view from Germany and the Continent, Company
Financial and Insolvency Review 2, 1997, 261-283, 263.
Hopt (Germany), IV 1.
Hopt (Germany), IV 1.
Trigo Trindade/Bahar (Switzerland), III F 2 b.
Giertz (Sweden), no. 4.2.1.
Wymeersch/Jakhian/Caeymaex (Belgium), no. 14.
Kaisanlahti (Finland), 5.3.
Katner (Poland), VIII C.
See Gologina-Ekonomou (Greece), IV 1.


(b) Sometimes the right to be informed is not confined to the items coming before a
meeting. For example in France art. L. 225-115 NCC, as amended by the law on NRE,
provides that each shareholder is entitled to obtain, on top of the annual accounts and
reports, information on the amounts paid to the "best remunerated" persons, the shares
of "parrainage" and of "mcnat", as well as the list of the contracts concluded with
directors in the ordinary course of business. This right can now be enforced through
an "injonction de faire", by which the court orders the board to supply the information
or appoints a "mandataire" who will supply it (new art. L. 238-1 NCC, added by the
law on NRE). There is also a right of a 5% minority, exercisable twice per year, and
independently of any meeting, to submit written questions on any matter, which is
likely to affect negatively the continuation of the company's business (art. L. 225-232
3. A particular problem of equal treatment arises when the board gives information
either to shareholders selectively or to third parties outside the meeting. In Germany, if
information is given directly to specific shareholders, the same information must be
provided at a meeting to other shareholders who make a request, even if this is not
connected to the items put on the agenda ( 131 IV AktG)275. In Poland, as prof. Katner
notes, the board may give information also outside of a general meeting, but in this case
such information must be disclosed to the next general meeting276. The problem is
further discussed in the Dutch and the Swiss reports277. But it is pertinently noted that it
is better for the shareholders to improve the general level of information rather than
claim information that others have received outside meetings278.
4. A special problem already mentioned relates to the possibility of the board to
refuse information if this can be detrimental to the company. In some countries in such a
case information can simply be denied or referred to the court279. An interesting
alternative exists in Finland, where, in case of doubt, the board can provide the
information to the auditors, who then submit to the Board a written statement on the
matter. Such statement is a public document and has to be sent to the shareholder who
asked for the information as well as be made available to other shareholders280.
5. Laws in the various countries are not uniform as to whether auditors can or indeed
must provide information to shareholders who make a request. German law excludes
such an obligation ( 176 AktG), but Swiss and Greek laws accept it (art. 697 CO, art. 37
law 2190/1920)281.
6. Inspection of the books and records. A right of shareholders to inspect the books of the
company, in person or by expert proxy, is recognized only subject to conditions. This is

Hopt (Germany), IV 1.
Katner (Poland), VIII C.
Timmerman/Doorman (Netherlands), no. 43; Trigo Trindade/Bahar (Switzerland), III F 2 a.
Hopt (Germany), IV 1.
For example in the Netherlands (s. 2:217(107) of the Civil Code), although with the proviso that
information will not be given "if this conflicts with a substantial interest of the company" (see
Timmerman/Doorman (Netherlands), no. 46). In Greece information can be denied upon serious
grounds (art. 39 law 2190/1920). In Belgium (art. 540 BCC) the questioning right does not extend to
information, which could "prejudice the company's, shareholders' or employee's rights", see
Wymeersch/Jakhian/Caeymaex (Belgium), no. 14.
Kaisanlahti (Finland), 5.3.
See Kokkinis in DikAE (Perakis, ed.), vol. 5, Athens 2002, p. 235.


understandable, not only for the "Trojan horse" fear, but also for the need to avoid
unnecessary harassment and disruption of the company's life. The possibility to inspect
is often designed as conditional upon authorization of the general meeting or the
board282. The court can however intervene and allow inspection283. Confidentiality
must be observed284. In some countries, notably in Sweden and Finland, the right of
inspection is stronger in smaller companies, with 10 or fewer shareholders285. On the
other hand, a special right of shareholders to inspect certain documents is provided for
in case of mergers and divisions. In such cases, shareholders can inspect at least the
documents regarding the merger (or the division) at the registered office of the
company, at least one month before the date fixed for the general meeting, which has
to decide on the draft terms of merger or division (art. 11 of the EC Directive
78/855/EEC, art. 9 of Dir. 82/891/EEC).
4.2. Special Audit
A special audit, as an investigation and disclosure mechanism, is also a powerful weapon
in the hands of the minority, complementing the information rights. Not a remedy itself,
it can be the prelude to real remedies, such as the derivative action, the oppression
remedy, the exit, or even the judicial dissolution of the company. In common law
countries a shareholders' right to a special audit is not invariably provided286, but even
when it is not, the abovementioned remedies can replace to a large extent the special
audit. In most countries, special audit is recognized as a right of minority287, although its
conditions, the applicants or the investigative extent may differ. It is observed that the
impact of the right to ask for an audit, because of its preventive effect, is greater than
what appears from its actual use288.
1. The applicants are determined in various ways: In some countries (Canada,
Switzerland) the right to apply is individual. In other countries the applicants are defined
in terms of minority percentages (Japan 3%, France 5%, Italy 10% (5% for listed
companies), Sweden and Finland 1/10 of the shares or 1/3 of the shares represented at


See for example Australia, Fletcher (Australia), nos 29 ff.; Switzerland: CO 697 III, IV. See also
16.02 MBCA: A shareholder of a corporation is entitled to inspect the books and records of the
company, if he makes a demand "in good faith and for a proper purpose" (for the "proper purpose" see
Pinto/Branson, Understanding Corporate Law, New York 1999, 5.04[G]). In Japan a right of
inspection, independently of meetings, is granted to a 3% minority. The board can refuse to allow access to
the books in certain situations, mainly when this is obviously unnecessary for the exercise of the
shareholders' rights, or the inspection would harm the company, when the applicants are competitors, or
intend to make a profit out of the information they will so collect, and when the application is submitted not
in an appropriate time. Kawashima-Iwasaki (Japan), IV 1; Okushima, The Shareholders' Right to
Supervise and Correct Management of a Corporation, in: Law in Japan, vol. 27 (2001), p. 17.
Examples: US, MBCA 16.04; Switzerland, art. 697 IV; Japan, s. 293 of the commercial code.
Example: Switzerland: CO 697 III.
Giertz (Sweden), no. 4.1.1; Kaisanlahti (Finland), 5.3.
This is apparently the case in the US and also in Australia, Fletcher (Australia), no 31 at least in
the form available in the other countries. But in Canada (s. 229 CBCA) and in England (s. 431 ff. CA
1985) a right to request a special investigation does exist.
Finland, FCA Ch. 10 Sc. 14; France, art. 226 Law of 1966 (= 225-231 NCC); Germany, 142 ff
AktG; Greece, art. 40 of law 2190/1920; Italy, art. 2408 and 2409 of the Civil Code and 128 of TUIF);
Netherlands, section 2:345 of the Civil Code; Poland, art. 223 CCC; Japan, section 294 of the
commercial code; Sweden, CA, ch. 11, s. 21; Switzerland, 697a CO; Belgium, art. 168 BCC.
Hopt (Germany), IV 2.


the meeting, Poland 1/10, Greece 5% or 1/3), or percentages combined with the amount
of shares held289.
2. The special audit is usually ordered by the court, but in some jurisdictions this is done
by an administrative authority. This happens for example in England, where the
inspectors are appointed by the Secretary of State (s. 431 CA 1985) and in Qubec (by
the "inspecteur gnral des institutions financiers")290, as well as in the Nordic
countries, where the "examiner" is appointed by the County Administration (in
Sweden, CA, ch. 11, s. 21)291 or the Provincial Administration Board (in Finland, FCA
Ch. 10 Sc. 14 Para. 1) 292).
3. In most countries, the law prescribes in more or less general terms the circumstances,
which can lead to an audit. In Germany the special auditors (Sonderprfer) are
appointed when, in the context of the formation of the company or the management of
its affairs, it appears that the law or the articles of association have been gravely
violated or there are signs of improprieties. Concerning the management, this
minority right is restricted to events that took place within the last five years ( 142
AktG). In Italy the petitioners must allege "grave irregularities" ("gravi irregolarit")
(art. 2408 and 2409 of the Civil Code and 128 of TUIF)293. In the Netherlands the
inquiry is ordered if there are well-founded reasons for doubting the correctness of the
policy (minority-related reasons include violation of rules protecting minority,
deadlock in the management, insufficient or incorrect information provided to
minority shareholders)294. In Greece a minority of 1/20 can request a special audit, if it
establishes that violations of the law or the articles may have occurred, while a bigger
minority of 1/3 may also apply, arguing that the affairs of the company are apparently
not being conducted in a prudent and honest manner (art. 40 of law 2190/1920)295. In
Japan the special audit is ordered when it is suspected that the affairs of the company
are being conducted in bad faith or in breach of any law, ordinance, or article of
incorporation (section 294 of the commercial code)296. In Belgium indications are
necessary that the interests of the company "are or threaten to be seriously
prejudiced"297. Sometimes the law is not specific about the triggering events, but this
gap is filled by case law or the authors. For example in France an "expertise de
minorit" is ordered if the petitioner shows that there has been irregularities in the
management or at least there are indications that the specific "opration de gestion" is
likely to be against the interest of the company a condition not mentioned in the


In Belgium: 1% or 1,250,000 euros; in Germany: 10% or shareholders holding shares of a nominal

value of at least 1m euros; in the Netherlands: 10% of the capital or shareholders with shares of a
nominal value of 225,000 euros; in England: not less than 200 members or of members holding at least
1/20 of the shares issued; if the company has no share capital, on the application of not less than 1/5 in
number of the members.
Crte (Canada), no 4.1.
Giertz (Sweden), no. 4.2.3.
Kaisanlahti (Finland), 5.5.
Gatti (Italy), 4 (c).
Timmerman/Doorman (Netherlands), no. 49.
Gologina-Ekonomou (Greece), IV 2.
Kawashima-Iwasaki (Japan), IV 2.
Wymeersch/Jakhian/Caeymaex (Belgium), no. 18.
Cass. 10.2.1998 cited by Cozian/Viandier/Deboissy, Droit des socits, 14 ed., 2001, no 461, fn 22.


4. Shareholders have not always a direct access to special audit. In some countries some
conditions have to be met, such as the exhaustion of other means of information299, a
negative decision of the general meeting300, or at least notice given to the company301.
5. The persons appointed one or more to carry out the auditing are as a rule
independent, and sometimes chosen from a list302. Their mission is usually limited: It
is often prescribed by the appointing authority, and refers to specific acts of
management303. Therefore, it does not extend to the general state of the company's
affairs304. The appointed persons have the right to inspect the books and records of the
company and obtain information from its officers and employees (or even officers of
affiliated companies305). At the end of their work they have to prepare a report, which
they submit to various persons and authorities306, but usually to the authority that
appointed them. The court may order that the cost of the special audit be borne by the
company (so for example in France).
6. In some jurisdictions the report may serve as the basis of further measures The
Dutch case is interesting (see above, 3.1(2)(f)).

As in Switzerland, seeTrigo Trindade/Bahar (Switzerland), III F 3 b. In France the special audit

("expertise de minorit") was ordered till 2001 by the court at the request of a 10% minority (Law of
1966, art. 226 = 225-231 NCC). Following the law on NRE (15.5.2001), a preliminary phase is now
required, where a minority (now 5%) can ask questions to the board on acts of management regarding
the company or any subsidiary. If within a month no answer is given or it is not satisfactory, the court
proceeds to the appointment of the experts and determines the extent of their powers ("expertise de
gestion"). See Germain (France), no. 14.
In Germany special auditors (Sonderprfer) can be appointed by the general meeting ( 142 I). If the
general meeting rejects a proposal for the institution of such an audit, the same can be ordered by the
court at the request of a minority ( 142 II AktG). In Denmark a special audit can be decided by the
general meeting upon proposal made by any shareholder. The proposal refers to matters connected with
the administration of the company or certain items in the accounts. If such proposal is not accepted by
the meeting, but finds support by a 25% of the share capital, a shareholder may ask the court to appoint
auditors (art. 95 of the 1996 Act).
In the Netherlands a previous written notice to the company is necessary before a reasonable period,
see Timmerman/Doorman (Netherlands), no. 49.
As in Switzerland and Greece.
In France: one or more acts of management ("operations de gestion") therefore not the whole
management of the company, see Cozian/Viandier/Deboissy, Droit des socits, 14 ed., 2001, no 461.
In Germany: specific acts ("bestimmte Vorgnge") connected with the constitution of the company or
its management. In Switzerland: "des faits dtermins". In Sweden and Finland: "certain specified
matters connected with the governance or the accounts of the company for a specific past period". In
Belgium special audit is confined to "ad hoc missions", Wymeersch/Jakhian/Caeymaex (Belgium),
no. 21.
But in Greece (art. 40 law 2190/1920), if the audit has been ordered at the request of a minority of
1/3, the investigation of the auditors extends to the company's affairs in general.
As, for example, in Germany.
In France the report is addressed to the person that requested it, but it is communicated also to the
board, the attorney general, the "comit d'entreprise", and, for listed companies, to the COB. In
Germany: to the Vorstand and to the commercial registry. Upon request of any shareholder, the
Vorstand must make available to him a copy of the report ( 145 AktG). In Switzerland the report of the
controller is submitted to the judge, who transmits it to the company, which then submits it to the next
general meeting; within one year from the g.m. every shareholder can obtain a copy (Switzerland: CO
697e, 697f). In Belgium: To the plaintiff(s) and the defendants(s) and to the clerk's office,
Wymeersch/Jakhian/Caeymaex (Belgium), no. 23. In Greece the report is submitted to the Ministry
of Commerce. In Japan the inspector submits his report to the court, but any shareholders can have
access to the findings of the latter. In England the report is addressed to the Secretary of State. The latter
furnishes a copy to any member of the company (CA 1985 s. 437 (3)). In Denmark the report is submitted
to the general meeting (art. 95 of the 1996 Act).


7. As it has been noted, in common law countries special audit may be achieved with
the assistance of the oppression procedures and remedies. In England the investigation
provided for by s. 432(2) CA 1985, is ordered if it appears that there are
circumstances suggesting that the company's affairs are being or have been conducted,
mainly, "in a manner which is unfairly prejudicial to some part of its members" or
that "the company's members have not been given all the information with respect to
its affairs which they might reasonably expect". In Canada (s. 229 CBCA) the court
must be convinced that there has been intent to defraud any person, oppression or
unfair prejudice to or unfair disregard of the interests of shareholders, or that the
corporation was formed for a fraudulent or unlawful purpose or is to be dissolved for
a fraudulent or unlawful purpose, or that persons concerned with the formation,
business or affairs of the corporation or any of its affiliates have in connection
therewith acted fraudulently or dishonestly307.
4.3. Rights Concerning the Conduct of Assemblies
General provisions regarding the conduct of general meetings may protect the
minority, in the sense that they aim to ensure that all shareholders can participate
effectively, make their voice heard, vote, and be given the opportunity to exercise any
minority rights available to them. Protective rules are also those which require the
publication of the invitation or a personal invitation to shareholders, the drawing of an
agenda and the availability of some explanatory material (including proposals of
decisions to be taken), the posting at the company's premises of a notice with the list
of shareholders intending to participate, or indeed a full list of shareholders, as well as
the rules granting a right to obtain some basic documentation (including the annual
accounts, the report of the board and the auditors) or other material relevant to the
agenda. Of particular importance are national rules regarding proxy voting308. The
possibility to vote by mail309, to use electronic systems, allowing a meeting to take
place simultaneously in different places310 and other systems of modern technology,
may facilitate attendance of shareholders. Although all the above are not provided for
(at all or in the same manner) in the various countries, one can detect a tendency to
uniformity. In addition, there are several minority rights relating to the conduct of
1. That a general meeting be called. The most common right is the possibility of a
minority to request that a general meeting be called to discuss some particular items.
This is often a minority right (in terms of a percentage of the capital or a minimum
number of shares), but in some instances also an individual one. Sometimes (and quite
normally) it is easier to request that an annual (ordinary) general meeting be called to
approve the accounts and elect auditors and officers, than an extraordinary meeting311. It

Crte (Canada), no 3.3.

Detailed rules exist, for example, in the US (see Pinto/Branson, Understanding Corporate Law,
New York 1999, 5.04, 7.03) or Germany ( 125, 128, 135 AktG).
See for example in France art. L. 225-107 NCC.
Cf. Kaisanlahti (Finland), 4.4.
In Australia 100 members or a 5% minority may request the calling of a meeting (CA, s 249D). If the
directors fail to act, persons representing at least 50% of the voting power of the original application
are empowered to call a meeting (CA, s 249E). Such meetings will be almost always extraordinary
meetings. The meeting can only be called for a proper purpose. In Canada: "If for any reason it is
impracticable to call a meeting of shareholders of a corporation in the manner in which meetings of


is even easier to ask the board to add items on the agenda of a general meeting, which is
already about to be convened or has already been convened312. The applicants have to
address a petition to the board, but if the latter does not take action, the court can call the
meeting itself or authorize the applicants to proceed themselves. A similar right (for
example in Germany) is to post counter-proposals to the proposals of the board on the
items on the agenda. According to 126 AktG such counter-proposals have, save
exceptional cases, to be brought by the board to the attention of the general meeting.

those shareholders may be called, or to conduct the meeting in the manner prescribed by the by-laws
and this Act, or if for any other reason a court thinks fit, the court, on the application of a director, a
shareholder entitled to vote at the meeting or the Director, may order a meeting to be called, held and
conducted in such manner as the court directs" (CBCA s. 144). In the US a 10% of the votes eligible to
be cast on an issue can request a special meeting describing the purpose for which it is to be held
(MBCA 7.02(a)(2)). However, any shareholders can obtain a court order for a meeting, "if an annual
meeting was not held within the earlier of 6 months after the end of the corporation's fiscal year or 15
months after its last annual meeting" (MBCA 7.03(a)(1)). - In the EC most of the countries provide
for a minority right to ask the company to call a general meeting. In France a general meeting can be
requested in case of urgency by any interested party ("tout intress"), otherwise by a 5% minority or
an association of shareholders provided in art. L. 225-120 NCC and is ordered by the court, which
appoints a "mandataire" (art. L. 225-103 NCC). In Germany a request to call a general meeting can be
made also by a 5% minority. The request is addressed to the management board (Vorstand). If the
meeting is not called the court authorizes the applicants to convene it themselves, at the expense of the
company ( 122 AktG). In Greece a 5% minority is also sufficient (art. 39 law 2190/1920). In the
Netherlands a 10% minority can call the general meeting, if so authorized by the court, and provided
that the company was previously summoned (s. 2:220(110) of the Civil Code). But for the mandatory
general meetings every shareholder alone can proceed (s. 2:222(112) of the c.c.). In Finland a 10%
minority has also the possibility to request the calling of a extraordinary meeting (FCA Ch. 9 Sc. 6
Para. 2). In Italy a 20% minority is needed (for listed companies 10%). Failing convocation, the judge
orders it through a "decree", by which the chairman is also appointed (art. 2367 of the c.c., 125 TUIF).
In Belgium a general meeting is convened at the request of a minority representing 1/5 of the capital
(art. 532 BCC). In England, a single member can require the holding of an annual general meeting
(AGM) of a private company (which may otherwise elect not to hold one) and, in the event of default,
the Secretary of State may direct the holding of such a meeting (s. 366A CA 1985). Also members
representing not less than 10% of the total voting rights may require the holding of an extraordinary
general meeting (s. 368(1) CA 1985). The same applies to the new Societas Europaea ("SE", Reg.
2157/2001), where a 10% minority can apply for a meeting (art. 55). If the meeting is not called within
a month, the competent judicial or administrative authority orders that the meeting be convened or
authorizes the requesting shareholders to convene the meeting themselves. - In Switzerland,
shareholders representing 10% of the capital may request the calling of a general meeting (art. 699 III
CO); if the board does not comply, the court calls the meeting itself (art. 699 IV CO). Japan: 3% of the
capital (if they are have been shareholders for at last 6 months) may request a general meeting (s. 237 of
the commercial code). This is a self-executing right, with no necessity to seek court approval. In Poland,
shareholders of 10% can request that an extraordinary general meeting be called or that some new items are
placed on the agenda. Otherwise the court can authorize the requesting shareholders to call the general
meeting themselves. For Spain see art. 100.2 L.S.A. For Portugal see art. 375 C.S.C.
In Sweden and in Finland the right to put matters before a meeting due to be held belongs to each
shareholder. In other countries a minority is required. For example in France a 5% minority is needed
(art. L. 225-105 NCC), in Germany a 5% minority or shareholders holding shares of a nominal value of
500,000 euros ( 122 II AktG), whereas in Switzerland the proposal is accepted if made by
shareholders with shares having a nominal value of 1 million SF (art. 699 III CO). Regarding the SE, a
10% minority can request that one or more additional items be put on the agenda of any general meeting
(Regulation, art. 56). In Australia, 100 members or a 5% minority at a general meeting may require a
company to circulate notice of a resolution they propose to move (CA, s 249N), or a statement
concerning a resolution or any other matter that may properly be considered at a general meeting (CA,
s 249P). In Poland a minority of 10% is needed. In Japan 1% of the capital or 300 shares may make the


2. That the taking of a resolution be postponed. Usually an adjournment of the

meeting or of the discussion of any item on the agenda is decided by the meeting
itself313. But in some countries this is compulsory, if shareholders request it. In
Sweden adjournment of a resolution regarding the accounts is possible if 1/10 of all
shares request it314. In some other countries (for example in Italy315 or in Greece316)
adjournment is allowed for any item on the agenda.
3. Other rights. There is no uniformity in relation with other minority rights relating to
the conduct of assemblies317.
4.4. Right to Directly Appoint or Request the Judicial Appointment of a Company
Officer Right to Request his Removal
The representation in the organs of the company (board, supervisory body, auditors) is
an important method for the minority to participate in the management or share the flow
of information. This is of course an exception to the majority rule, and usually left to the
articles, rather than the law itself.
1. The representation of the minority in the board of directors is the most recurrent
theme. A well-known way to obtain such a representation is "cumulative voting". In the
US, where the device was invented 318, cumulative voting is permitted, if provided for in
the articles (MBCA (2001) 7.28) ("opt-in" system, also followed in some other
countries319). It is also possible to provide that separate classes of shares are entitled to
elect specified numbers of directors (MBCA 8.04)320. In some other countries,
cumulative voting is permitted by law, unless the articles exclude it ("opt-out" system).
For example, in Japan cumulative voting is possible if any shareholder asks for it, but the
request (s. 232-2 of the commercial code). In Iran a 20% is necessary.
So in Japan, Kawashima-Iwasaki (Japan), IV 3 b.
Giertz (Sweden), no. 4.2.3.
At the request of 1/3 of those present, art. 2374 of the Civil Code. See Gatti (Italy), 4 (d).
At the request of 5% of those present, art. 39 law 2190/1920. See Gologina-Ekonomou (Greece),
IV 3 b.
For example in England every shareholder has the right "to demand a poll", whose purpose is to bend
the rule that every member has one vote. According to art. 54 of "Table A", "on a poll every member
shall have one vote for every share of which he is the holder". In England, again, shareholders
representing 1/20 of the voting rights or 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, have 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 (s. 376(2) CA 1985). In Greece, a minority of 1/20 of the capital can ask for
a ballot by name for any decision of the general meeting (art. 39 law 2190/1920). In Poland, at the request
of 10% minority a three-member commission is appointed, in order to check the attendance list (art. 410
CCC). In Switzerland, a right to object to the illicit participation at the general meeting of a shareholder is
given to any shareholder (art. 691 CO). Similarly in Japan, shareholders holding 1% of the capital may ask
for the appointment of an inspector, in order to inspect the convening process of a general meeting and
the procedure of its resolution (Sec.237-2 of the commercial code, see Kawashima-Iwasaki (Japan),
IV 10). A right to obtain copies of the minutes of general meetings, often being part of a more general right
of inspection, as in the US, is allowed in countries where such general right does not exist (for example in
Greece, art. 7b 12 law 2190/1920. See Gologina-Ekonomou (Greece), III 6).
The device consists in the right of shareholders "to multiply the number of votes they are entitled to
cast by the number of directors for whom they are entitled to vote and cast the product for a single
candidate or distribute the product among two or more candidates" (see MBCA (2001) 7.28(c).
See for example Trigo Trindade/Bahar (Switzerland), I B 2 b; Kaisanlahti (Finland), 2.1.
Hamilton, The Law of Corporations, St. Paul, Minn., 2000, p. 312.


articles may provide otherwise (s. 256-3 of the commercial code)321. Also in Poland, for
the election of the supervisory organ a 1/5 minority may request "voting by groups"
(art. 385 CCC)322.
Another way for the minority to obtain representation in the board is direct appointment,
if permitted by the articles. In Germany the articles may provide that a specific
shareholder or any person holding specific registered shares may directly appoint one or
more (up to 1/3 of the total number of the) members of the supervisory board
(Aufsichtsrat 101 AktG). Similarly, in Greece, art. 18 3 of law 2190/1920
provides that the articles of association may entitle a particular shareholder to directly
appoint up to 1/3 of directors. In both countries, however, a 1/10 minority can apply to
the court for the removal of the persons so appointed upon serious grounds323. Similarly,
in Switzerland the articles may provide that categories of shares or specific minority
shareholders have the right to elect representatives in the board (art. 709 CO)324, while in
Spain a system of "proportional representation" is available (art. 137 L.S.A. and R.D.
2. The appointment by the minority of other officers is more rare. A provision that a 10%
minority can require that the court appoint liquidators is to be found in Poland (Article
463 2 of CCC)325. The appointment of auditors by a minority is also rare. Exceptions
are Italy (art. 2368 of the Civil Code and 148 TUIF)326, and the Nordic countries327.
3. The reverse problem is also interesting, i.e. the possibility for a minority to cause the
removal of unfriendly or incompetent officers, liquidators or auditors. The case of
Germany and Greece, as regards the removal of directors directly appointed by
shareholders has already been mentioned. In the USA a shareholder may apply to the
court for the removal of a director, in cases of fraudulent conduct, gross abuse, or
intentionally inflicted harm on the corporation, and provided that the court considers
that such a removal would be in the best interest of the corporation. This remedy is
meaningful when the director has sufficient voting power to prevent his own
removal328 and is permitted if the shareholder complies with the requirements of the
derivative action (MBCA (2001) 8.09). A similar remedy exists in Japan, when the
general meeting has refused to remove a dishonest director. In such a case a 3%
minority may apply to the court for the removal of a director within thirty days after
the general meeting (Sec.257-3 of the commercial code)329. Auditors can also be
removed from office by the court in France "pour juste motif" or in case of impediment
at the request of a 5% minority (art. L. 225-230 and 225-233 NCC). A similar
possibility exists in Germany, where a 10% minority can apply to the court to replace
the auditor for some reason relating to his person (HGB 318 III).

Kawashima-Iwasaki (Japan), IV 10; Okushima, The Shareholders' Right to Supervise and Correct
Management of a Corporation, in: Law in Japan, vol. 27 (2001), p. 17, 19.
Katner (Poland), V 2.
103 III AktG (also shareholders with shares with a nominal value of 1m euros), art. 18 4 law
Trigo Trindade/Bahar (Switzerland), I B 2 b.
Katner (Poland), VII 5.
Gatti (Italy), 4 (b).
Sweden (CA, ch. 10 s. 9, Giertz (Sweden), no 4.2.3), Finland (FCA Ch. 10 Sc. 1 Para. 4, Kaisanlahti
(Finland), 5.4), Denmark (art. 61a of the 1996 Act).
Hamilton, op.cit.,, p. 236.
Kawashima-Iwasaki (Japan), IV 10.


4.5. Pre-emption Rights in Respect of Actual or Potential Share Capital Increases

Most jurisdictions accept the right of shareholders to subscribe to new shares following
an increase of capital, before such shares are offered to third parties ("pre-emption" or
"pre-emptive right") a right often extended to convertible bonds or bonds exchangeable
against shares. This is the most efficient anti-dilution measure, although a different
approach is made in the US, where other methods are available330. It is also an efficient
means to prevent unfairly low issue prices benefiting third buyers.
1. In most countries the right of existing shareholders to subscribe pro rata to new capital
is expressly provided by the law, for example in Australia (CA 2001 s. 254D but only
for proprietary companies), Switzerland (art. 652b CO), or Japan (s. 280-5-2 of the
commercial code, but only for the closely held companies, i.e. those, whose shares
cannot be transferred without an approval of the broad331). In the EC this right is
provided by art. 29 of Directive 77/91/EEC332, although only for considerations in cash.
Member states have complied333, but some Greek deviating legislation has provoked
the intervention of the ECJ334.
2. In some countries, for example in England335, pre-emption rights are granted in
principle by the law but can be excluded by the articles ("opt-out clause"), whereas in
some other countries, notably the US336, the right exists only if granted by the articles
("opt-in clause").
3. Even where pre-emption rights are legally mandatory, their suppression or
restriction can be exceptionally decided by the general meeting, usually by qualified
majority337. A delegation of the decision to the board, especially when articles
permitting it increases the capital itself, is not excluded338. Suppression often requires a
special report submitted to the meeting by the board, containing the reasons for such a

In the US the courts are less generous to shareholders whose participation is diluted by an unfair
allocation of new issues (see Hamilton, op.,cit., p. 202), but in that case oppression can be remedied
under the general rules.
Kawashima-Iwasaki (Japan), IV 6.
Art. 29 I Dir. 77/91/EEC "Whenever the capital is increased by consideration in cash, the shares
must be offered on a pre-emptive basis to shareholders in proportion to the capital represented by their
shares". Derogations are permitted "to the extent that such derogations are necessary for the adoption
or application of provisions de-signed to encourage the participation of employees, or other groups of
persons defined by national law, in the capital of undertakings" (art. 41).
See for example France (art. L. 225-132 NCC); Germany ( 186 AktG but see Hopt, IV 6 for the
1994 amendment), England (CA 1985 s. 89 ff.); Kaisanlahti (Finland), 3.3; Gologina-Ekonomou
(Greece), IV 6 (for Greece see also Panagiotou, The pre-emptive right in Greek company law, Int. and
Comp.Corp.Law Review, 2001, 449); Giertz (Sweden), no. 4.2.2; Wymeersch/Jakhian/Caeymaex
(Belgium), no. 32.
ECJ C-381/89, 24.3.92, ECR 92, I-2111 = ZEuP 95, 633, Sindesmos Melon Evangelikis Ekklisias.
See also ECJ C-134/91 and C-135/91, 12.11.92, ECR 92, I-5699, Kerafina.
For example in England pre-emption rights can be excluded by the memorandum or articles of a private
company (Dine (England), IV). See also Gower's Principles of Modern Company Law (by P.Davis),
1997, p. 309, who find this possibility "unfortunate".
In the US the MBCA (2001) provides that: "The shareholders of a corporation do not have a
preemptive right to acquire the corporation's unissued shares except to the extent the articles of
incorporation so provide" ( 6.30 a). The usual provision in the statutes is that "the corporation elects
to have preemptive rights'' (or words of similar import) ( 6.30 b). It is noted, however, that even when
the articles do not allow pre-emption rights, equitable principles may limit the power of the company to
issue and allocate new shares on an unfair or oppressive basis (Hamilton, op.cit., p. 197).
Trigo Trindade/Bahar (Switzerland), III B.


measure339. In Finland (FCA Ch. 4 Sc. 2 Para. 2) there must be some "weighty
financial reason of the company", for example issue to employees 340, while in
Switzerland (652b II CO) some "juste motif" must be present341, considered with
objective criteria, such as the acquisition of the business by a buyer342 or the participation
of employees343. It is often stressed that an important parameter is the price paid by the
third parties, which has to reflect the actual value of the participation acquired by the
newcomer, including the hidden reserves344. In England the board must justify the
amount to be paid for the equity securities to be allotted (CA 1985 s. 95(5)). The
principle of proportionality is also considered to apply. Consequently the limitation of
the pre-emption rights makes more sense in public companies345.
4. A possible complication may arise when full pre-emption rights are allowed, but the
majority increases the capital at a time when minority shareholders are not in funds to
subscribe. In such cases the general rules regarding a possible majority abuse can
5. Situations similar to the capital increase and the risk of dilution are present also in
other cases, such as the disposal by the company of its own shares347, the reduction of
capital348 or buy-backs taking place outside public markets349. But national laws do not
contain adequate rules in all such instances.
4.6. Right to Receive a Minimum Mandatory Dividend
Provided that a correctly drawn up balance sheet shows profits, shareholders expect to
receive a minimum dividend and prevent the formation of excessive reserves.
Therefore, the meaning of a right to a minimum dividend is that shareholders are
entitled to receive some income independently of the will of the majority.

Trigo Trindade/Bahar (Switzerland), III B (within limits fixed by the general meeting);
Kaisanlahti (Finland), 3.3. See also art. 29 V Dir. 77/91/EEC: "5. The laws of a Member State may
provide that the statutes, the instrument of incorporation or the general meeting, acting in accordance
with the rules for a quorum, a majority and publication set out in paragraph 4, may give the power to
restrict or withdraw the right of pre-emption to the company body which is empowered to decide on an
increase in subscribed capital within the limit of the authorized capital. This power may not be granted
for a longer period than the power for which provision is made in Article 25 (2)".
See Art. 29 I Dir. 77/91/EEC "4. The right of pre-emption may not be restricted or withdrawn by the
statutes or instrument of incorporation. This may, however, be done by decision of the general meeting.
The administrative or management body shall be required to present to such a meeting a written report
indicating the reasons for restriction or withdrawal of the right of pre-emption, and justifying the
proposed issue price. The general meeting shall act in accordance with the rules for a quorum and a
majority laid down in Article 40. Its decision shall be published in the manner laid down by the laws of
each Member State, in accordance with Article 3 of Directive 68/151/EEC."
Kaisanlahti (Finland), 3.3.
Trigo Trindade/Bahar (Switzerland), III B.
Trigo Trindade/Bahar (Switzerland), III B.
Trigo Trindade/Bahar (Switzerland), III B.
Trigo Trindade/Bahar (Switzerland), III B.
Trigo Trindade/Bahar (Switzerland), III B.
Trigo Trindade/Bahar (Switzerland), III B.
But it is generally accepted that the rules on preemptive rights do not need to apply (Trigo
Trindade/Bahar (Switzerland), III B).
Trigo Trindade/Bahar (Switzerland), III B, Fletcher (Australia), no 42 ("selective capital
Kaisanlahti (Finland), 6.2.


National diversities regarding dividend distribution have produced stimulating

studies. According to La Porta et al.350 (see also below, 6.2), the mandatory dividend is
provided for mainly in legal systems with low-level shareholders' protection, to
compensate for this deficiency. These authors have found that this happens "only" in
French civil law countries (although not in France itself), where, according to them, the
lowest protection is provided. However, it is further established that high-level
protection leads to higher dividends, but at the same time, because shareholders are
confident that their investment is well protected, fast grow firms can pay lower dividends
("outcome model"). Under the other "substitute" model, more frequent in low-protection
countries, firms pay dividends to establish a reputation for decent treatment of minority
It is true that in most "protective" countries meeting the criteria of La Porta et al. (for
example in England352, the US (unless a dividend policy is agreed in the articles)353,
Australia354, Germany (cf. 58 IV AktG), the Netherlands355 or Japan356) a right to a
minimum dividend does not exist. The absence of such a right is compensated by the
power of the court to control the sufficiency of reserves already existing and to
disallow any further accumulation357. However, this usually presupposes that
shareholders will successfully challenge the decision of the general meeting, which
approves the accounts and that will not be always easy. Furthermore, it is unlikely
that the court may itself fix the fair dividend that, under the circumstances, should be
distributed. The Netherlands is an exception, where a court thought that after
nullification of the decision approving the accounts, "it was competent to decide on a
reasonable dividend itself"358. The Swiss reporters are also of the opinion that such a
court ruling is possible359.
In some other countries a mandatory minimum dividend is explicitly provided. One
example is Greece, where there is a compulsory distribution of a minimum dividend
(6% of the capital, or 35% of the annual profits, whichever is the higher provided
that there are sufficient profits360). Another system exists in Finland, where a 10%
minority can require the company to distribute at least half of the distributable profits
of the financial year, up to a maximum of 8% of the equity, but the articles may
provide for a higher dividend (FCA Ch. 12 Sc. 4 Para. 4)361.
4.7. Other


La Porta/Lopez-de-Silanes/Schleifer/Vishny, Law and Finance, [1998] Journal of Political

Economy 106, 1113-55.
La Porta/Lopez-de-Silanes/Schleifer/Vishny, Agency Problems and Dividend Policies Around the
World, [2000] Journal of Finance 55, 1-33.
Dine (England), IV.
Hamilton, The Law of Corporations, St. Paul, Minn., 2000, p. 592.
Fletcher (Australia), no 40.
Timmerman/Doorman (Netherlands), no. 54.
Kawashima-Iwasaki (Japan), IV 5.
See for example in Germany 254 AktG, Hopt (Germany), IV 5; Switzerland, Trigo
Trindade/Bahar (Switzerland), III E; France, Cozian/Viandier/Deboissy, Droit des socits, 14 ed.,
2001, no 442 ("abus de majori").
Timmerman/Doorman (Netherlands), no. 5.
Trigo Trindade/Bahar (Switzerland), (Switzerland), IV A 1 a.
Gologina-Ekonomou (Greece), IV 5.
Kaisanlahti (Finland), 6.1.


Other special rights also exist, such as the right to rectify shareholders' registries362, to
discharge members of the board by individual voting363, or even to apply for
admission to official listing364.
4.8. Conclusive Remarks on the Rights of Minority Shareholders
In chapters 3 and 4, an overview was made of the shareholders rights available in the
reported countries. The "remedial rights", presented in chapter 3, and the "special
minority rights", presented in this chapter, compose a program of minority protection,
with several interesting aspects. Diversity is the first aspect, and is readily observable:
Minority rights do not constitute a coherent system. Much depends upon the principles
that are most accepted in each national law, for example if prevalence is given to equal
treatment, property considerations, fairness, protection or the corporate "interests" and
the like. The second aspect is a lack of clear orientation, regarding their development.
Some of the rights tend to expand, for example information, while some of them tend to
shrink, for example derivative suits. One could say that when a higher degree of court
intervention is needed, or the business judgment rule is restricted, rights generally tend to
shrink. A third aspect is the distinction of rights. Here the world is divided, as usual, into
common law countries in which the general remedial rights are frequently provided,
and civil law countries in which remedial rights are rare. In the latter the special rights
can compensate for the absence of equitable remedies, but only in part.
To be fair, if one sticks to the practical purposes of the rights and their end result,
similarities and predictability, at least for some of them, become obvious. For example,
one might expect that under any law shareholders may apply for additional information
at meetings, ask for a general meeting to take place, or exercise pre-emption rights. A
warning should be made though, that such rights may not be all provided for by the law,
but only by the articles (therefore prior advice is necessary, before entering the
company), or that they may be granted only to shareholders with minimum participation
rights (good relations with fellow shareholders may be therefore necessary), or that some
prior action has to be taken.
5. Some Special Issues
5.1. Limits to the Exercise of Rights Protecting Minority Shareholders
A first issue is the possible limits to the exercise of minority rights. The very existence
of such rights means that a portion of the majority power is shifted into the hands of a
minority. This automatically creates a reverse agency problem, which also needs to be

See for example in Canada, CBCA s. 243: "If the name of a person is alleged to be or to have been
wrongly entered or retained in, or wrongly deleted or omitted from, the registers or other records of a
corporation, the corporation, a security holder of the corporation or any aggrieved person may apply
to a court for an order that the registers or records be rectified" (Crte (Canada), no 3.3).
In Germany the annual discharge of the members of the Vorstand or the Aufsichtsrat, collectively, is
given by the general meeting. However, shareholders representing 10% of the capital or holding shares of a
nominal value of 1m euros can request that a separate vote be taken for an individual member ( 120 I
See Gologina-Ekonomou (Greece), IV 8 it is, however, a debated issue whether this is actually
See P.Davies, Introduction to Company Law, 2002, p. 218.


For those who see minority rights as "functional" ("droits fonctionnels"), in the sense
that they have to be exercised in the interest of all shareholders and the company, by a
minority acting as a "subsidiary organ" of the latter366, the limits are obvious: Such
rights are permitted only in so far as their exercise is beneficial to the community of
shareholders. However, these views are not largely adhered to, and a selfish exercise
of the rights is not excluded. For practical purposes minority rights are defensive
rights not rights for the general welfare.
1. The problem is rather how to stop abuse of rights and strike suits, i.e. minority
action or opportunistic litigation in order to harass the company, blackmail, seek
revenge or act for competitors. Such action may be under the circumstances highly
detrimental to the company, cause enormous trouble when resolutions are reversed by
being declared void, cause general disruption, generate loss of time or costs, even
cause the company's paralysis or breakdown. In this connection reference might also
be made to "greenmailing", "kamikaze" or "greedy" capitalism, to predatory or
"professional" shareholders ("les soldats du droit des socits"367, "raberische
Aktionre"368), i.e. persons holding very small participations (maybe two shares), or
who purchase them in order to apply for a special audit, to institute a derivative action
or to seek redress from oppression.
2. The law itself often sets special thresholds for the access to certain rights.
Sometimes shareholders have to show that they are not "newcomers" or just "picked
up" for the job i.e. they are in possession of their shares already for some time to
warrant that they are serious; or they have to block their shares while rights are being
exercised; or the court may order a different measure that the one requested; or the
law prohibits the exercise of certain minority rights when the minority is represented
in the board369, or when the applicants have not voted against a general meeting
resolution; or there are various conditions and red tape aiming at preventing abuses,
such as the "screening" or the litigation committees in derivative actions. Addressing
the problem on a case-by-case basis is rather the English attitude370.
3. The duty of loyalty (wherever admitted, as in Germany) is an eligible general clause,
which can be conveniently used to prevent excesses. It is praised as "more specific" than
the abuse principle371. However, owing to the national difficulties in accepting a general
duty of loyalty between shareholders, the prohibition of abuse is a more frequent

For example D.Schmidt, Les droits de la minorit dans la s.a., 1970, no. 15.
Cozian/Viandier/Deboissy, op.cit., no 767, with examples.
Bayer NJW 2000, 2613.
For example the rights of information and special audit in Greece (art. 39 5 and 40 3 of law
See the English Law Commission Report 246, Shareholder Remedies (1997), p. 5: "Shareholders
should not be able to involve the company in litigation without good cause, or where they intend to
cause the company or the other shareholders embarrassment or harm rather than genuinely pursue the
relief claimed. Otherwise the company may be "killed by kindness" or waste money and management
time in dealing with unwarranted proceedings. The importance of this principle increases if the
circumstances in which the individual shareholders can bring derivative actions are enlarged.
Nuisance or other litigation of this nature has to be identified on a case by case basis. This means that
the requisite control has to be exercised by the courts, with increased powers if necessary". See also
Hopt, Shareholders' rights and remedies: A view from Germany and the Continent, Company Financial
and Insolvency Review 2, 1997, 261-283, 267.
Hopt (Germany), VI. See also Karsten Schmidt, Gesellschaftsrecht, 1997, p. 594.


limitation372 (in the author's view the criteria of "reasonableness and fairness", used in
Dutch company law373, are not substantially different from abuse). In Germany the
principle of proportionality (Verhltnismigkeitsgrundsatz) is also a measure for
setting limits to the exercise of rights, for example the right to speak at general
4. A similar problem arises when the minority blocking power is misused (negative
abuse, "abus de minorit"), i.e. where a minority prevents some vital actions from
being taken, such as the increase of the capital, or the prorogation of the duration of
the company. Is such cases the prohibition of abuse375 (or here again the duty of
loyalty376) can provide assistance. A special and difficult problem here is whether the
court should be given the power to replace the dissenting (or missing) votes of the
minority shareholders, and convert them into positive votes ("dcision valant vote").
Both views have been held377, but generally, compensation seems to be more easily
accepted, while in France a possibility of the court to appoint a "mandataire", who
will vote for the minority is a form of a milder court intervention378.
5.2. Minority Rights and Groups of Companies
The position of minority shareholders in groups of companies ("outside" shareholders,
"auenstehende Aktionre") is a very important and difficult topic. When groups are
formed, minority shareholders lose, as a rule, the control premium (see above 2.1(2)),
while distribution of power is conveniently made among the members of the
controlling group. Following the formation of the group, the company operates as part
of the "single economic unit" for the benefit of the group as a whole379.
1. Some national laws cope with group situations through fiduciary principles,
restitution mechanisms (mainly damages or liability for the debts of dependent
companies), exit rights, and piercing of the corporate veil, before or after insolvency.
German corporate law is the most cited legal system with a special treatment for the
groups of companies ( 15 ff., 291 ff. AktG).
2. The principle is that in most countries minority protection is afforded to the
shareholders of each particular company. This is the case of France380, Switzerland381,
and probably Australia382, where, however, existing remedies (mainly the "Part 2F.1"

Wymeersch/Jakhian/Caeymaex (Belgium), no. 57; Gologina-Ekonomou (Greece), VII;

Kawashima-Iwasaki (Japan), VII 1.
Timmerman/Doorman (Netherlands), no. 66.
German Constitutional Court (BVefG) 20.9.1999 NJW 2000, 349.
See for example in France Ripert/Roblot/Germain, Trait de droit commercial, 1-2 (2002), no.
1556-1; Boizard, L'abus de minorit, Rev.Soc. 1988, 365; in Belgium Del Marmol, Protection des
actionnaires minoritaires en droit belge, volution rcente, Etudes offertes a R.Houin, Paris 1985, p.
169, 174.
See for example Lutter, Treuepflichten und ihre Anwendungsprobleme, ZHR 1998, 164; Henze,
Treupflichten der Gesellschafter Kapitalgesellschaftsrecht, ZHR 1998, 186. See also Hopt (Germany),
See Cozian/Viandier/Deboissy, op.cit., no 446. A characteristic example of a court decision "valant
droit" see in Paris 25.5.1993 D. 1993 J. 541.
378 9.3.1993 JCP E 1993, II, 448.
See Ripert/Roblot/Germain, op.cit., no. 2009.
Germain (France), no. 5.
Trigo Trindade/Bahar (Switzerland), I, A.
Fletcher (Australia), no 106.


relief, dealing with oppression and the derivative action) have been used to address
some group problems383. It must be mentioned that in all such countries consolidated
accounts are drawn up and made available to the shareholders of the companies of a
3. There are countries, however, where the usual minority rights, notably the right to
request a special audit, are expressly extended to cover group situations. For example in
France, following the recent law NRE (15.5.2001), the special audit ("expertise de
minorit") can relate also to the affairs of subsidiaries. In such a case, the request for the
audit must be examined on the basis of the "interest of the group" (art. L. 225- NCC). In
Germany, special audit can be ordered at the request of a shareholder regarding the
business relations of the company with a controlling company or another company of
the same group ( 315 AktG 385). In England, inspectors appointed under CA 1985, s.
431 or 432 have also the right, when necessary, to investigate the affairs of a subsidiary
or a holding company, or the subsidiary of its holding or the holding of its subsidiary
(CA 1985, s. 433)386. In Canada, under s. 229 CBCA, at the request of any shareholder
or a director, the court can issue an order for an investigation to be made in the
corporation and any of its affiliated corporations. In Japan, an "exclusive inspector"
can extend his audit, where necessary, to the affairs of subsidiaries387.
4. Other rights can be also adapted to group situations. In Canada, the derivative action
can be initiated for damages suffered by a subsidiary388. There is now an analogous
possibility in France under recent case law389. In Germany, Sweden and Finland the right
of shareholders to be informed extends to the company's relations with other companies
within the group390. In Japan a 3% minority in the controlling company can apply to
the court for leave to inspect the books and records of a subsidiary, while any
shareholder can inspect and copy the minutes of the board, the articles, and the
register of shareholders of subsidiaries with the approval of the court, when it is
necessary for the exercise of the shareholders' rights391.
5. The most rare and complex (but also most interesting) case is the German model of
groups, where outside shareholders are protected against the change of the corporate
structure, which was the basis of their expectations392. In general, a minority exceeding
25% can block an "Unternehmensvertrag", i.e. an agreement whereby, through various
means, such as the management ("Beherrschungsvertrag") or the taking of the profits of
a company by another ("Gewinnabfhrungsvertrag"), a dependency relation is created
( 291 ff. AktG). Moreover, the management of each company has to submit a detailed
report to the general meeting, explaining the details of the agreement and the

Fletcher (Australia), no 109.

Fair remark by Trigo Trindade/Bahar (Switzerland), III F.
Hopt (Germany), IV 2.
Dine (England), VIII.
Kawashima-Iwasaki (Japan), VIII a.
In Canada, the CBCA (ss. 239 and 241) permit the court to allow a "complainant" to bring a
derivative action "in the name and on behalf of a corporation or any of its subsidiaries" and also
permits the filing by a shareholder of an oppression complaint by the company "or its affiliates".
Cass. 4.4.2001 D. 2002, 1475, note Scholastique.
See 131 I, 326 AktG (Germany), Giertz (Sweden), no. 4.1.1, Kaisanlahti (Finland), 5.3.
Kawashima-Iwasaki (Japan), VIII a.
That the law of groups of companies is a path-dependent difference with other European countries
see Hopt, Common Principles of Corporate Governance in Europe? The Clifford Chance Millennium
Lectures, Oxford 2000, p. 105, 124.


compensations offered to outside shareholders ( 293, 293a AktG). In such a situation,

the controlling company has to make good the deficit of the dependent company. The
claim of the dependent company cannot be waived, unless the outside shareholders
assent to it, and provided that a 10% minority does not oppose such waiver ( 302
The compensation offered to outside shareholders is of two kinds: Firstly, a fair
("angemessener") periodical "equalization payment" ("Ausgleichszahlung"),
corresponding to the expected (and lost) dividend, calculated on the basis of past years.
Any outside shareholders may contest the fairness of the payment, as provided for in the
"Unternehmensvertrag", and ask the court to fix a fair amount ( 304 AktG). Secondly,
the agreement must provide for a fair indemnity, payable to outside shareholders who
wish to exit. The indemnity may consist in shares of the controlling company, if the
dependent company is not a subsidiary of the former, otherwise in shares or cash. If the
controlling company is foreign, only cash is permitted. Here again, outside shareholders
may ask the court to check fairness ( 305 AktG). It is also noteworthy that the
management of the controlling company is liable to the dependent company for the
instructions that they gave to the managers of the latter. The dependent company may
waive the relative claim only if the outside shareholders assent to it, and provided that a
10% minority does not oppose such waiver ( 309 AktG). Here, a derivative action is
made available to individual shareholders ( 309 IV AktG see also 310 IV, 317 IV
and 318 IV).
5.3. Associations of Shareholders and the Maxim "nul ne plaide par procureur"
In many countries notably the US associations of shareholders are allowed and very
active. Such associations, operating as pressure devices, can multiply the powers of
minorities and allow access to rights that individual shareholders could not have.
However, neither the mission of these associations, nor their powers to represent their
members are the same in the various countries. Some associations are simple clubs of
shareholders, giving them information or making suggestions for the exercise of their
rights or facilitating the gathering of proxies. They may also advertise the ethical
parameters of the company's business and mission393. Some others have a more active
union-like mission, voicing the minority grievances. A more advanced and wellorganized association has also law permitting394 the possibility to represent
shareholders at the general meeting or before the courts. Otherwise the problem of the
rule "nul ne plaide par procureur" can be circumvented if the association holds itself one
Sometimes the law establishes conditions for the formation or the operation of
shareholders' associations. For example in France, there are two kinds of associations396:
The "associations agres de dfense des investisseurs" are general investors'
associations provided for by a law of 1994, with powers to take court action in the name
of their members. They are like associations of consumers. For listed companies,
associations of shareholders holding together at least 5% of the capital (less for big

See Trigo Trindade/Bahar (Switzerland), I B 2 c.

On the liberal (but heavily criticized) attitute adopted recently by the Belgian Courts ("Dminor
case") see Wymeersch/Jakhian/Caeymaex (Belgium), no. 5.
See for Switzerland Trigo Trindade/Bahar (Switzerland), I B 2 c.
See (various authors), Les associations d'actionnaires et d'investisseurs, Rev.Soc. 1995, 207.


companies) are allowed to represent the interests of their members in the company and
exercise the minority rights provided for by the law. Membership in such associations is
possible for shareholders holding registered shares for at least two years (art. L. 225-120
NCC). They are very active ("machines procs"397), as in the US. In Italy an
shareholders' association must have no fewer than fifty physical persons as members
institutional investors are therefore excluded each of whom must own no more
than 0.1% of the voting shares398.
A similar but different problem is the frequent holding of shares through intermediaries.
There is definitely a need of protection of those persons behind the legal title of
nominees or custodians and a problem of integrity of the register of members. But
technically these are no minority protection issues.
5.4. Minority Rights and the Type of the Company
An interesting matter would be to compare minority rights in various types of
companies: Big and small, public and private, listed and not listed companies, etc. Some
national reporters note that in all situations the corporate structure is the same and that
minority rights are also similar399 ("one-size-fits-all" system). It is often stressed,
however, that the unitary regime of minority rights and protection in all companies
(despite differences, which are exceptional rather than the rule) is a major defect of the
protection system400.
On the other hand, minority rights and protection are often modified or remodeled to suit
one category of companies or another. For example appraisal and exit rights are not
needed in listed companies, as they are in non-listed, where "voice" is more essential. A
requirement that certain rights are exercisable not only by a percentage of the capital
(which is very unlikely to be reached), but also by shares of a total minimum value, suits
mainly listed companies401. A system of forwarding communications to shareholders
and also a system of proxies are appropriate in the case of public companies. On the
other hand some rights are more extensive in the case of privately held companies.
The Swedish and Finnish example of a stronger right to inspect books in smaller
companies (with 10 or fewer shareholders) has been mentioned402.
5.5. Problems in the Exercise and Enforcement of the Rights of Minority
There is no doubt that shareholders have a monitoring role in the company ("watchdog"
role) and that it is beneficial for them but also for the company and the fellow
shareholders that such rights and deriving influence are effectively exercised. But, as

Cozian/Viandier/Deboissy, Droit des socits, 14 ed., 2001, no 766. See also Germain (France),
no. 15.
Gatti (Italy), 4 (e).
For example: Dutch company law hardly contains any provisions that differentiate between listed
and unlisted companies, see Timmerman/Doorman (Netherlands), no. 57. In the US the legal model
of the company is considered to be "an idealized model that is not tailored specifically either for the
close corporation or the publicly held corporation". Hamilton, The Law of Corporations, St. Paul,
Minn., 2000, p. 3. Wymeersch/Jakhian/Caeymaex (Belgium), no. 41.
See for example Ripert/Roblot/Germain, op.cit., no. 1385; Trigo Trindade/Bahar (Switzerland),
I, B, 1; Spyridonos, The rights of the minority in the limited company, Athens 2001, p. 583 (in Greek).
This is envisaged in Germany, for example for the special audit. See Hopt (Germany), IV 2.
Giertz (Sweden), no. 4.1.1; Kaisanlahti (Finland), 5.3.


noted recently by the "High Level Group of Company Law Experts", appointed by the
European Commission, "[e]xercise of influence by shareholders presupposes that it is,
indeed, possible to influence the company and, in addition, appears attractive for
shareholders to do so"403.
The general question whether the rights and the influence of the minority "appear
attractive" and are effectively used, has to be negatively answered. In almost all national
reports it is stressed that more often than not, minority rights are toothless they do not
bite. Shareholders' "passivity", "inactivity", "apathy" or "absentisme" is thought to be
the main reason for this. Even in the form of "rational apathy", i.e. reluctance to take
action that would involve costs and would benefit free-riders404, the low interest of
shareholders is a common phenomenon in the world, bearing similarities with political
indifference and high electoral abstention.
What produces apathy? Some answers, as given by national reporters:
1. High cost. As always, "there is no such thing as a free lunch". The association of the
exercise of minority rights with high cost is a big incentive for passivity405. This is worse
when the exercise of such rights bears no immediate personal benefit, as in the case of
derivative suits406. Therefore, litigation is economically sensible, where "the plaintiff
has deep pockets, a major investment to protect or can see no other way of recovering
anything from the situation"407, but also where attorneys can assume the risk and the
expense. The latter depends very much on the methods of computation of attorney fees.
The legislator can provide that the cost of the exercise of minority rights, including
litigation, will be borne, in whole or in part, by the company, but this may lead to the
other extreme, mainly to frivolous actions, blackmail, and tensions408. A very careful
ad-hoc allocation of the cost by the court is therefore necessary.
Another source of (non-recoverable) costs is the "collective action" problem. These costs
are generated when shareholders are dispersed, and they have to communicate with each
other in order to make the exercise of the rights effective or indeed possible409.
2. Time consuming action, judicial bureaucracy and the role of the courts. The
shortcomings of the legal system in general may cause the feeling that the effects of
judicial action are produced only too late, and therefore the exercise of rights is pointless.
This issue is connected with the role of the courts, and how much they can interfere in
the company's affairs410. It is clear that courts have a major role to play in common law
countries, where the general protective schemes, such as the oppression remedies or the

See "A Modern Regulatory Framework for Company Law in Europe: A Consultative Document of
the High Level Group of Company Law Experts", 3.1, I, at
Pinto/Branson, Understanding Corporate Law, New York 1999, 5.04[1]. See also Hopt,
Shareholders' rights and remedies: A view from Germany and the Continent, Company Financial and
Insolvency Review 2, 1997, 261-283, 265.
Dine (England), X; Kaisanlahti (Finland), 8.5; Trigo Trindade/Bahar (Switzerland), IV A 1 a;
Katner (Poland), IX.
Dine (England), IV; Germain (France), no. 20; Kawashima-Iwasaki (Japan), IV 1; Kaisanlahti
(Finland), 7.2; Crte (Canada), Introd.
Fletcher (Australia), no 120.
Crte (Canada), Introd.
See P.Davies, Introduction to Company Law, 2002, p. 140.
See Hopt, loc.cit., p. 269.


winding-up, if this is "just and equitable", require a great deal of judicial talent and
insight. It is therefore understandable, that an "active case management by the courts"
has been advocated in England, in such matters as the security for costs, the power of
the court to dismiss claim without any prospect of success, the adjournment to
facilitate alternative dispute resolution mechanisms (ADR), the determination of how
facts are to be proved (including the exclusion of irrelevant issues), and cost
sanctions411. But it is clear that a better judicial education and a good management of
cases would be necessary everywhere.
3. Obscurity and complexity of the law/lack of experience and familiarity with the
marketplace. This point cannot be over-emphasized.
4. Burden of proof. This is an important disincentive, owing to the asymmetries in the
possession of information and evidence. An interesting solution is the reversal of the
burden of proof in some cases, as provided by Australian law. In Australia, ASIC or
some affected party can ask the court to enjoin the company or its officers from taking
some action, which would contravene the law. Where such a request is made with
regard to the fairness of a capital reduction, the prejudices to creditors in a share buyback, the effects of financial assistance to acquire company shares, or insolvency
arising from those actions, the court is required to assume that a breach has occurred,
unless the company can prove otherwise (CA 2001, s. 1324(1B)412. A recommendation
for the adoption of "presumptions" is also made by the English Law Commission413.
5. Lack of strategy and difficulty to make contractual arrangements. The simple
intention to exercise minority rights is not enough. Even in a system of effective
minority protection, a "blind" suit may be fruitless or have adverse consequences for
those who filed it. Pressure on the management is not efficient, if a strategy is not fixed
and the means are not carefully chosen. In other words, a plan of action is needed each
time to select what minority rights will be exercised, when, and against whom. Minority
shareholders may also select to temporize, to group, to create voting trusts, to ally with
or sell shares to potential hostile raiders etc. As a preventive measure, shareholders may
insist in signing proper agreements (amendments to the articles, shareholders
agreements, employment agreements etc.) or agreements for the settlement of disputes
(including ADR). But all this is not easy for common shareholders, especially in public
6. Unfriendly predisposition of the management. Minority has a special status in the
company. Even when it is not a friend, it is not necessarily the enemy of the
management. As prof. Michel Germain notes, minority is "the active conscience of the
collective interest"414. This, however, is a normative rather than a factual observation.


The English Law Commission Report 246, Shareholder Remedies (1997), no 2.2 and ff.
Fletcher (Australia), no 82.
"We recommend that there should be legislative provision for presumptions in proceedings under
sections 459-461 that, in certain circumstances, (a) where a shareholder has been excluded from
participation in the management of the company, the conduct will be presumed to be unfairly
prejudicial by reason of the exclusion; and (b), if the presumption is not rebutted and the court is
satisfied that it ought to order a buy out of the petitioners shares, it should do so on a pro rata basis".
The English Law Commission Report 246, Shareholder Remedies (1997), no 3.30. Presumptions
should also apply for non-listed companies, see no 3.39.
Germain (France), no. 27.


In fact the management usually sees minority as a nuisance that should simply
disappear. This creates problems of communication and understanding.
7. Hostile minority groups. This is often the case, when the management conspires with
certain shareholders, in order to divide minority and avoid or disrupt minority action. A
problem of equal treatment and abuse is obviously involved here, but by the time it is
resolved action will have been frustrated.
8. Impossibility to bridge information asymmetries, because of privileged information
possessed by certain big (institutional) investors. Personal contacts and technology
account a great deal for the gap415.
9. Informed shareholders = insiders. An adverse consequence of obtaining
information (either because a shareholder obtains inside information from the
management, or because he is represented in the board) is that shareholders are no
longer legally able to trade. This may discourage a minority from pressing the
management to give information.
10. General attitude to minority problems. Sometimes the weakness of minority does
not come from the majority, but from a social indifference, or preference to the
interests of the company or the shareholders in general or even the company's
workforce. This is particular the case of Japan. According to prof. KawashimaIwasaki416, "minorities have to fight unsupported, because reinforcements may not be
sent". Etc.
5.6. Complementary and Substitute Mechanisms
In view of the above difficulties, many efforts are being made today to improve
company law, to give shareholders incentives to participate in the life of the company,
to make general meetings more popular and use the technology to bridge distance and
communication gaps. In this connection the proposals made by the Expert Group will
have a major impact417.
Another course for the protection of minority might be to set in motion other parallel
mechanisms that would assist minority or secure the necessary action by other means.
The following are some examples:
1. The most obvious parallel mechanism is the various capital market and supervision
authorities (SEC and the like), which have already been mentioned (see above, 1.4).
Their mission is to protect the investing public in general, but their intervention is
beneficial to all shareholders who do not belong to the controlling groups. In some
instances, the interests of the minority are specifically taken into account. For example in
England (CA 1985, s. 431), the Secretary of State may appoint one or more inspectors
to investigate the affairs of the company and to report on them in such manner as he

See Cheffins, Company Law Theory, Structure and Operation, Oxford 1997, p. 479 ff.
Kawashima-Iwasaki (Japan), XI.
See the above Consultative Document, 3.2. - Of particular importance is, in the author's opinion, the
views taken and the proposals made in the report of the English Law Commission (Report 246,
Shareholder Remedies, 1997). Regarding proposals made by the Deutsche Schutzvereinigung fr
Wertpapierbesitz e.V. see Hocker, Minderheitenschutz und Rechte der Aktionre in Europa, in:
Festschrift fr Bezzenberger, Berlin/New York 2000, p. 147.


may direct, on the application of the company itself, if the court orders it or on the
application of members of the company (see above, 4.2(2)). The investigation is
ordered if it appears that there are circumstances suggesting that the company's affairs
are being or have been conducted, mainly, "in a manner which is unfairly prejudicial
to some part of its members" or that "the company's members have not been given all
the information with respect to its affairs which they might reasonably expect" (CA
1985, s. 432(2)). Another example is Australia, where ASIC investigations, although
not expressly a minority right, are broadly similar and may be initiated upon
shareholder complaints418.
2. Another supplementary mechanism for the protection of minorities is to allow third
parties to exercise the same rights that minority shareholders might (but do not
actually) exercise. This presupposes or even creates a convergence of interests. For
example in Australia some executive officers can also exercise the derivative action
against the board419. In the Netherlands the Advocate General or an association of
employees may apply for a special audit420. In France, following the recent law NRE
(15.5.2001), the special audit ("expertise de minorit") can be requested also by the
attorney general, the "comit d'entreprise", and, for listed companies, by the COB (art.
L. 225-231 NCC).
3. The refusal of company registrars to accept registration of deeds that may be
detrimental to a minority ("Registersperre") may also be a supplementary mechanism.
But this is possible only exceptionally421.
6. Final Chapter: Protection of the Minority and the Rule of Law
At the end of this report, it is not easy to summarize or to conclude. Similarities and
differences between countries and between legal systems cannot be quantified with
precision, much more so, that the number of jurisdictions presented in this report is
relatively small (despite the importance of those presented), and general conclusions
are bound to be superficial. That minority rights are protected everywhere would be a
rather pedant conclusion. That the system is in most countries ineffective is less
pedant, but also commonplace. Whether in such countries protection should be
generally stronger than it is today is a very intricate problem. Firstly, because the
majority as well has to be safeguarded against over-protection of the minority.
Secondly, because the matter depends very much on the talents of the courts and also
the extent of protection that a minority actually needs: "A" minority rather than
"minority", because the needs may dramatically differ from case to case. Thirdly,
because minority protection is sometimes a false problem, hiding clashes of personal
interests, as it often happens in proxy fights, class actions, oppression suits etc.
To close with such an agnostic conclusion would not be appropriate. Instead, the
author would like to present some views and theories concerning the function of the
rule of law, which in his opinion, can greatly enrich the debate about the amount of
protection needed and the possible convergence of the systems. The question to ask

Fletcher (Australia), no 110.

Fletcher (Australia), no 53.
Timmerman/Doorman (Netherlands), no. 49.
See for example art. 32 of the Swiss Ordinance on the commercial registry of 7.6.1937. In Greece a
registrar is not allowed to control whether a resolution of a general meeting constitutes an abuse against
the minority (see First Instance Court of Heraklion 414/2001, EEmpD 2002, 81).


would be the following: Are the rules of law regarding minority protection determined
by the structure of the economy and the general conditions of each country (including
concentration of ownership, level of income etc.), and/or dictated by the practical needs
of the transacting parties? Or do the rules themselves determine the economy?
6.1. Reality Determines the Law
For the rights of minority shareholders two schools would be interesting: The economic
analysis of law and the "path dependencies".
A. The Law Mimics the "Hypothetical Bargaining Model"
1. Unless driven by reputation of the managers or excessive optimism, people are
normally not willing to invest in companies, unless they are offered an acceptable level
of protection. The Law and Economics school would see here a contractual solution to
the agency problem. This is in line with the "Coase Theorem"422, which would assume
that investors, as the best judges of their own welfare, might agree with managers or
controlling shareholders on a minimum level of protection. If full information was
available, contracts were enforceable and no transaction costs were involved (as it
happens in a "perfect Coasian world"), most legal regulations regarding minority
protection would be unnecessary, because the parties themselves would be in a position
to know and agree on what to do.
2. It is common knowledge that the world is "imperfectly Coasian". It would not be
realistic to rely on the possibility of every investor to negotiate an enforceable contract
about the control that he would retain over the management. A complete agreement
would not be possible anyway, because the management should retain "residual control
rights", i.e. the power to make decisions in circumstances not contractually foreseen423. A
"free-rider" problem may also discourage shareholders from seeking to enter into any
contract. Besides, such contracts may occasionally not be fully enforceable, or the
business judgment rule may prevent courts from intervening, or individual shareholders
may not be willing or sufficiently informed to seek enforcement, or there are mandatory
rules, disallowing private contracts etc. But even when none of the above happens, it
would not be practical for the management to abide by a bundle of contracts, not
necessarily identical. Therefore, predictability and equality require a single status of the
minority shareholders, and that can be achieved only through legal protection424. This
does not mean that the actual negotiation and contractual arrangements are abandoned,
but a state intervention is considered as justified.
3. Economic analysis, however, stresses the idea that the "hypothetical bargaining
model", i.e. what transactors would agree to under ideal contracting conditions, can
provide assistance for the development of welfare-maximizing legal rules, because
lawmakers will try to mimic the results of such a free bargaining, in order to
accommodate most company participants, and lower the cost of contracting425. As
pointed out by Brian R. Cheffins, "[t]he state can perform a 'gap filling' function and

Coase, The Problem of Social Cost, The Journal of Law and Economics 3 (Oct. 1960), 1-44. See
also The Firm, the Market and the Law, The University of Chicago Press, 1988. See also
Easterbrook/Fischel, The Economic Structure of Corporate Law, 1996.
Schleifer/Vishny, A Survey of Corporate Governance, [1997] The Journal of Finance 52, 737-783.
For the insufficiency of private contracting see La Porta/Lopez-de-Silanes/Schleifer/Vishny,
Investor Protection and Corporate Governance, [2000] Journal of Financial Economics, 58, 3-27.


ensure that cases are resolved in accordance with terms which match what parties
would have bargained for, acting rationally and under ideal conditions"426. In this
perspective the above author argues that members of closely held companies are in a
better position to litigate than if a company is widely held427. In fact, the expectations
shared by minority shareholders in closely held companies are more intense and more
intricate than those, which exist in public companies, and disappointment ends up in
litigation rather than exit. "Consequently, it is easier to make a case for intervention on
the basis of a gap-filling rationale when such enterprises are involved"428.
Although the above author cautions against a massive court intervention in the affairs of
the company429, one can say that the "hypothetical bargaining model" and the "gapfilling" rationale are proper to common law systems, where courts have a wider
discretion and are more energetic in terms of adapting the rules to the circumstances of
the case. The Canadian report has an interesting part on these powers of the courts430.
Therefore this method has some comparative law relevance, but it is interesting mainly
because it suggests patterns for legislative convergence.
B. "Path Dependencies"
Several authors (notably Mark Roe431) have argued that differences in the corporate
governance between countries, such as patterns of ownership or shareholders' rights,
are caused by certain determinants, called "path dependencies". These are on the one
hand the corporate structures of an economy of each country, in the sense that earlier
structures influence subsequent choices, and on the other hand the corporate rules.
The latter are themselves influenced by the economy's initial pattern of corporate
structures. These restraints set barriers to any approximation of laws, European
harmonization or indeed the globalization. It is obvious that the theory of "path
dependencies" can support a fruitful comparative approach to the national systems of
minority protection. For example prof. Klaus J. Hopt lists among the German
national path dependencies the co-determination of employees, the concentration of
ownership in the hands of banks, and the law of groups of companies432.
6.2. "Law Matters"
In "sharp contrast" to the economic analysis and in partial contrast to the pathdependence idea, some more recent studies try to reverse the picture, and prove that
legal rules are the basic determinants of the financial and corporate environment

Cheffins, Company Law Theory, Structure and Operation, Oxford 1997, p. 129, 264 ff.;
Easterbrook/Fischel, The Economic Structure of Corporate Law, 1996, p. 34.
Cheffins, op.cit., p. 466.
Cheffins, op.cit., p. 463 ff.
Cheffins, op.cit., p. 470.
Cheffins, op.cit.
Crte (Canada), no 3.2.
See Roe, Strong Managers, Weak Owners, The Political Roots of American Corporate Finance,
Princeton 1994; Bebchuk/Roe, A Theory of Path Dependence in Corporate Ownership and
Governance, [1999] Stanford Law Review 52, 127. For German "path dependencies" see Hopt,
Common Principles of Corporate Governance in Europe? The Clifford Chance Millennium Lectures,
Oxford 2000, p. 105, 118.
Hopt, Corporate Goernance: Aufsicht oder Markt? berlegungen zu einem internationalen und
interdisziplinren Thema, in: Max Hachenburg, Dritte Gedchtnisorlesung 1998, Heidelberg 2000, p.
9, 14 ff.


("legal approach to corporate governance"). This approach has also a strong

comparative element.
1. Most notably, Professor La Porta et al.433 have used a sample of 49 countries to show
that legal protection of minority shareholders (legal rules and law enforcement) is an
empirically significant determinant for the size and extent of capital markets. Comparing
legal systems, they have reached some impressive conclusions: That common law
countries have the best protection of investors, French civil law countries the worse,
while German and Scandinavian law countries are located in the middle; that this has
permitted to businesses in more protective countries a better access to external finance;
that levels of protection are not associated with income levels (although the quality of
accounting standards rises with per capita income); that the quality of enforcement of the
existing rules does not necessarily compensate for legal deficiencies (in enforcement
German and Scandinavian countries are the best, but French civil law countries are again
the worst); also, that ownership is concentrated everywhere (the Berle and Means
model is problematic even in the US), although it is more dispersed and less
concentrated when protection of shareholders is stronger (French civil law countries are
found to have an unusually high degree of concentration)434.
2. Further to these findings, these authors have argued that strong shareholders
protection is decisive in many aspects. For example, valuation of assets is higher where
minority cannot be easily expropriated435, dividends are also higher436, whereas stronger
investor protection enhances effective corporate governance, as reflected in valuable
financial markets, dispersed ownership of shares and efficient allocation of capital across
firms437. In the same tune Prof. Johnson at al. have also argued that assets and profits
are more likely to be transferred (legally!) out of companies to controlling shareholders
("tunneling") in (even developed!) French civil law countries438. As a corollary to all
such findings Prof. John C. Coffee Jr. proposed a "functional convergence" in corporate
governance, i.e. international harmonization of securities regulation and disclosure
standards or even migration of firms to the US439.

La Porta/Lopez-de-Silanes/Schleifer/Vishny, Legal Determinants of External Finance, [1997]

Journal of Finance 52, 1131-1150. Law and Finance, [1998] Journal of Political Economy 106, 111355. Investor Protection and Corporate Governance, [2000] Journal of Financial Economics, 58, 3-27.
Agency Problems and Dividend Policies Around the World, [2000] Journal of Finance 55, 1-33. See also
La Porta/Lopez-de-Silanes, Capital Markets and Legal Institutions (Harvard University paper for
Latin America), 1998; Schleifer/Vishny, A Survey of Corporate Governance, [1997] The Journal of
Finance 52, 737-783.
See also John C. Coffee Jr., The Rise of Dispersed Ownership: The Role of Law in the Separation
of Ownership and Control. Dec.2000. Columbia Law and Economics Working Paper No. 182; abstract
in; Burkart/Panunzi/Schleifer, Family
Firms, Jan. 2000, at
La Porta/Lopez-de-Silanes/Schleifer/Vishny, Investor protection and corporate valuation, [2002]
The Journal of Finance 57, 1147-1170.
La Porta/Lopez-de-Silanes/Schleifer/Vishny, Agency Problems and Dividend Policies Around the
World, [2000] Journal of Finance 55, 1-33. See also above, 4.6.
La Porta/Lopez-de-Silanes/Schleifer/Vishny, Investor protection and corporate governance,
[2000] Journal of Financial Economics 58, 3-27.
Johnson/La Porta/Lopez-de-Silanes/Schleifer, Tunnelling, NBER Working Paper 7523,, National Bureau of Economic Research, Cambridge MA, 2000
(with case examples from France, Belgium and Italy).
John C. Coffee Jr. ,The Future as History: The Prospects for Global Convergence in Corporate
Governance and its Implications, February 1999, Columbia Law School Center for Law and Economics
Studies Working Paper No. 144. Abstract in


3. The promoters of the legal approach to corporate governance argue that emphasis on
the legal rules "stands in sharp contrast to the traditional 'law and economics'
perspective on financial contracting"440. They propose three "crucial principles" of
reform: The first is that "legal rules do matter". The second is that "good legal rules
are the ones that a country can enforce". The third is that "government regulation of
financial markets may be useful when court enforcement of private contracts or laws
cannot be relied upon". "Functional convergence" may also be needed, as suggested by
John C. Coffee Jr.441.
4. It is not easy to make an assessment of the data used by the above authors, nor to
claim a better understanding of the international system of minority protection. It is
legitimate, however, to make some comments.
(a) The first comment concerns the shareholders rights that have been taken into account
by the above authors. In "Legal Determinants of External Finance" and in "Law and
Finance", these rights have been: (a) Voting rights under the "one-share-one-vote"
system; (b) rights that support the voting mechanism against interference by the insiders
("anti-director" rights), i.e. right to vote by mail, no shares blocked before the meeting,
cumulative voting, mechanism to be used against oppression (including derivative suits,
judicial venue to challenge management decisions or exit right), (c) the right to call an
extraordinary general meeting; (d) finally, the right to a mandatory dividend.
At first sight these rights appear to make a good sample. However, some important rights
are missing, which might make a difference. These are, for example, pre-emption rights
(which are not a solid part of the Anglo-American system of protection)442, or the right to
request a special audit, more "voice" than "exit"-oriented, which, again, is generally not
available in the US, but quite important and actively proposed in Europe443.
(b) On the other hand, a qualitative assessment of the rights seems to be missing. Rights
bearing the same name may not be the same everywhere, and a method of yes/no
regarding their existence is not sufficient. If one takes the example of the derivative suit,
one can compare the red tape accompanying such a suit in the US with the relatively free
exercise of the "action ut singuli" in France. Although practice may be different in these
two countries, it may be questionable if the US can merit the "perfect 5" awarded to it by
La Porta et al., for the anti-director rights, while France gets "the worst legal
protection" mark. Another example is the possibility of judicial review of management
decisions (also included in the anti-oppression mechanisms by La Porta et al.), which
may be more extensive in countries where the business judgment rule is less applied than
in the US. Therefore saying "yes" to the question if such a possibility exists hides the
intensity of the judicial control. Procedures and enforcement also matter, as pointed out

La Porta/Lopez-de-Silanes/Schleifer/Vishny, Investor Protection and Corporate Governance,

[2000] Journal of Financial Economics, 58, 3-27.
La Porta/Lopez-de-Silanes/Schleifer/Vishny, Investor Protection and Corporate Governance,
In "Law and Finance" (fn. 4) the authors acknowledge the criticism made to them by European
scholars for omitting this right. They write that they have subsequently analysed data on this right, but
the comparison of the systems was not materially affected.
See "A Modern Regulatory Framework for Company Law in Europe: A Consultative Document of
the High Level Group of Company Law Experts", 3.1, III, at


by Babchuk and Roe: "Principles are important, but the 'devil is in the details', and
implementation counts a great deal. Two countries may be hostile to self-dealing in
principle, but their overall legal treatment of self-dealing might differ greatly because of
differences in the procedures that corporations must follow in approving a self-dealing
transaction, in the nature and timing of the disclosures that the firm or the controller
must make, in the incentives that public investors or plaintiffs' lawyers have to sue, in
the procedures that such suits have to follow, in the standards of scrutiny that courts use,
in the level of deference that court give to the insiders' judgment, in the extent to which
an effective discovery process is available, and in the ways in which evidence will be
brought and considered"444.
(c) Furthermore: One may find that a right exists in one country but not in another.
However, this may not be the whole story, since other rights can replace the missing one.
For example, oppressed minority mechanisms are reported to exist in England, but not to
Finland. But the Finnish reporter, Dr. Timo Kaisanlahti445, finds this to be "the most
puzzling [outcome] of the study of La Porta et al." from a Nordic point of view.
Another example might be the constitutional protection of shares as property rights,
frequent in civil law, infrequent in common law countries, which can add strength to
the available protection. Similarly, the missing obligation to deposit shares before a
meeting can be occasionally offset by other requirements, such as the need to have
been in possession of shares for a minimum time period.
(d) Another remark is that rights are part of the law of minority protection therefore of
the total sum of checks and balances (see above, 1.3) and that the latter also matters.
For example a system of disclosure and transparency, as well as a system of general
reporting of major events affecting the life of the company can greatly reduce
asymmetries and assist minorities. A good functioning of the market can make the Wall
Street option easier and thus prevent litigation. The interpretation and application of
general principles of law (such as good faith or prohibition of abuse) are not only
connected with "rights". Another example can be drawn from differences in corporate
culture: The efforts of foreign raiders in Japan, and the battles about the exercise of
minority rights by greenmailers have often failed or been despised, because raiders
have not given proper regard to the non-confrontational way of doing business in
Japan446. The problem of "path dependencies"447 has to be also mentioned here.
(e) A comparative work on minority protection might detect similarities, hidden by
differences in semantics. For example, while efficiency is a main characteristic of the
common law world, this is not ignored everywhere else. The German Constitutional
Court (BVerfG) has been sensitive to efficiency requirements (without saying the word)
when, at the level of property protection, it considered that it is not unlawful for the
majority to squeeze-out minority (see above, 3.4(A)(2)).
(f) Another problem is connected with the observation made by prof. Paul Davies, when
he supported the thesis that: "the law addresses the agency problems of minority
shareholders as against majority shareholders less effectively than it does the agency

Bebchuk/Roe, A Theory of Path Dependence in Corporate Ownership and Governance, [1999]

Stanford Law Review 52, 127, 155.
Kaisanlahti (Finland), 8.
See Pauline Reich, T.Boone Pickens and Corporate Governance in Japan: A Retrospective View of
Three Sides of the Story and Recent developments, in: Law in Japan, vol. 27 (2001), p. 27.
See Bebchuk/Roe, loc.cit.


problems of the shareholders as a class against the board"448. This seems to mean that in
countries with concentrated ownership the law has a more difficult task, than in countries
with dispersed shareholders. If this is so, the findings of La Porta et al. might be
reversed, in the sense that it is not poor laws that produce concentration, but
concentration that makes laws work poorly. This might be an interesting proposition to
(g) In the author's view, the most serious reservation against the findings of La Porta et
al. is the following warning of comparative law methodology, as stated by Zweigert and
Ktz: "The comparatist can rest content if his researches through all the relevant
material lead to the conclusion that the systems he has compared reach the same or
similar practical results, but if he finds that there are great differences or indeed
diametrically opposite results, he should be warned and go back to check again
whether the terms in which he posed his original question were indeed purely
functional, and whether he has spread the net of his researches quite wide enough"449.
I am afraid that a "step back" is really messing in the abovementioned studies.
5. Despite all this, the author of this report would agree that common law has indeed
certain aspects that make minority protection more efficient. Not necessarily in the sense
that in common law countries protection is "better", and that in civil law countries
(especially of French tradition) it is "worse". This would need a much more extensive
analysis, for evaluating the actual need of protection, as already mentioned. But there are
definitely one or two reasons that make common law minority rights stronger.
(a) Some critical aspects of the law, such as the duty of loyalty of the management, are
more protective in common law countries (see above, 2.3(1)). But the single most
important protection tool, i.e. the general oppression remedy, is almost unknown in civil
law countries. This remedy is by nature "equitable" and contains a long list of judicial
powers available to a competent and wise court. This list includes such corrective action
as rescission of corporate acts unfair to the minority, regulation of the company's affair in
the future (positively or negatively), authorization to sue directors or other persons,
appointment of a provisional director, orders for the purchase of shares of certain
members by other members, even the dissolution of the company. A court has therefore a
lot of possible choices. For example, an oppression remedy may be followed by a
derivative action, the dissolution of the company, the appraisal of the applicants'
shares or other measures. Oppression remedies communicate also with other rights,
which are otherwise independent, such as again the right to file a derivative suit or
exit rights (the latter are almost unknown in civil law countries). There is thus a
"continuum", which gives flexibility and efficiency. Ideally, the oppression remedy can
be seen as a "general clause" for the protection of the minority, which in civil law
countries is felt as "missing"450. La Porta et al. (who compose a bundle of "antidirector rights") do not seem to praise this characteristic of the common law systems.
(b) A second advantage of common law countries (noted by La Porta et al.), is their
judiciary, which, although generally reluctant to intervene in the company's affairs451, as

See P.Davies, Introduction to Company Law, 2002, p. 253.

Zweigert/Ktz, An Introduction to Comparative Law3, Oxford, 1998, p. 40.
See for example in Greece Spyridonos, The rights of the minority in the limited company, Athens
2001, p. 619 (in Greek).
See Cheffins, Company Law Theory, Structure and Operation, Oxford 1997, p. 308 ff.


in all other jurisdictions, is more eager to assume its responsibilities in dealing with ad
hoc business problems. According to John C. Coffee Jr.452, common law judges apply a
"smell test", to feel if unprecedented conduct constitutes a violation of the fiduciary duty
or contradicts fairness and is unfair to outside investors. The oppression remedies are
tailored for this judiciary. Civil law judges may also be able to do this, as the Finnish
reporter argues453, but they are admittedly not trained for this nor always assisted by
the "bright line rules" of the law454. In any case, as La Porta et al. observe, the role of
courts, important as it is, should not be necessarily overestimated, as courts may be promanagement and not pro-shareholders455.
(c) However, for many other differences of the two systems it is difficult to say if they
ultimately assist minority or the management. For example common law often favors
compensation against detrimental action rather than the reversal of the latter, while in
civil law countries the opposite is more usual (see for example above, 3.4(B)). But it
is debatable whether this is a favor or not to minority.
6. In fact gray, rather than black and white, is the dominant color. John C. Coffee Jr.
notes456 that it would be a mistake to think of common law and civil law countries as
completely homogenous groups; that common law countries themselves have converged
much more at the level of securities regulations, than at the level of substantive corporate
law; and that civil law countries protect shareholders more efficiently against the forms
of abuse that were well-known in systems of concentrated ownership, than against
abuses that typically characterize systems of dispersed ownership.
7. The personal feeling of the author of this report is that the merits of the findings of La
Porta et al. are less in the field of comparative law and more in two other directions:
The first is the association of shareholders protection with efficiency and growth, with a
clear "race to the top" corollary. The second is the proposition that "Legal rules matter".
Although it is difficult to say whether these propositions might be separated from the
comparative conclusions, they have an obvious significance of their own. One should
expect the discussion to go on.
6.3. "Norms Matter"
A very interesting reaction came by John C. Coffee Jr.457, who proposed an alternative
criterion to good minority protection, associated not with legal rules, but with norms, as
instruments of social control. The association of low crime rates with a high level of
social cohesion and the lowest level of social and political disruption might explain the
good records of Scandinavian countries in minority shareholders protection (although
not in the US, where crime is high).

John C. Coffee Jr., Privatization and Corporate Governance: The Lessons from Securities Market
Failure, October 1999, Columbia Law School, Center for Law and Economics Studies, New York.
Working Paper No. 158.
Kaisanlahti (Finland), 1.1 at least for Finland.
That this is a deficiency is often felt in civil law countries, example Greece, Spyridonos, op.cit., p.
La Porta/Lopez-de-Silanes/Schleifer/Vishny, Investor Protection and Corporate Governance,
[2000] Journal of Financial Economics, 58, 3-27.
John C. Coffee Jr. , Privatization etc., loc.cit.
John C. Coffee Jr. , Do Norms Matter?: A Cross-Country Examination of the Private Benefits of
Control, January 2001. Columbia Law and Economics Working Paper No. 183. Abstract in


One can wonder if a "mobile system" of legal rules and social norms could be a more
advanced idea: When law is weaker, social norms have to be stronger (this is already
proposed by Coffee), but also vice-versa.


Appendix I: National Reporters

1. Australia: Dr. Keith Fletcher, Reader, T.C. Beirne School of Law, The University of
2. Belgium: Prof. Dr. E. Wymeersch, Universiteit Gent, Fakulteit van de
Rechtgeleerdheid/Mr. Grgoire Jakhian, Universit Libre de Bruxelles, Facult de
Droit/M. B.Caeymaex, Avocat.
3. Canada: Prof. Raymonde Crte, Facult de Droit, Universit Laval.
4. England: Prof. Janet Dine, University of Essex.
5. Finland: Dr. Timo Kaisanlahti LL.D. (Helsinki), M.Sc. (Econ.), KLegal Oy
6. France: Prof. Michel Germain, Universit Paris II.
7. Germany: Prof.Dr.Klaus J.Hopt, Director, Max-Planck-Institute for Foreign Private
and Private International Law, Hamburg.
8. Greece: Ms. Eleni Gologina-Ekonomou, Assistant Professor, University of
9. Iran: Prof. Mahmoud Erfani, Docteur en Droit (Paris II), University of Tehran.
10. Italy: Prof. Serafino Gatti, Universit di Roma "La Sapienza".
11. Japan: Prof. Izumi Kawashima-Iwasaki, Faculty of Law, Senshu University
12. The Netherlands: Prof. Dr. L.Timmerman/Mr. Alexander Doorman, University of
13. Poland: Prof. Wojciech Jan Katner, Deputy Minister of Economy, University of
Lodz, Faculty of Law.
14. Sweden: Ms. Magdalena Giertz, Uppsala Universitet, Juridiska Fakulteten
15. Switzerland: Prof. Rita Trigo Trindade, Facult de Droit, Universit de
Genve/Rashid Bahar, Avocat, Assistant la Facult de Droit, D.E.S. en Droit.


Appendix II: Some Sources of Law and Abbreviations

1. Australia: Corporations Act 2001 (CA 2001), by which a long awaited interaction
between state and federal officials and courts was finally achieved. Also Australian
Securities and Investments Commission Act 2001.
2. Belgium: The Companies Code (BCC).
3. Canada: Canada Business Corporations Act (CBCA) of 1985.
4. England: Companies Act 1985 (CA 1985), as subsequently amended, the Insolvency
Act 1986. Also several Statutory Instruments (SI). Some codes of good practices; the
Stock Exchange Regulations, the latter aiming mainly at the equal treatment of all
shareholders. Case law of course has played a major role.
5. Finland: Finnish Companies Act of 1978 (FCA), Finnish Securities Markets Act of
1989 (FSMA), the Auditing Act of 1994 and the Accounting Act of 1997.
6. France: Companies Law of 1966, now Book II ("Des Socits Commerciales et des
Groupements d'Intrt Economique") of the New Code de Commerce, partie lgislative
(NCC), enacted by Ordonnance n 2000-912 of 18.9.2000. The NCC has been
modified recently by the important law of 15.5.2001 "Nouvelles Rgulations
Economiques" (NRE). The Decree no 67-236 complementing old Law of 1966 on
companies is still applicable. Civil Code, art. 1832 ff., as amended by law 78-9 of
4.1.1978. Securities legislation.
7. Germany: German Stock Corporation Act of 6.9.1965 (AktG), as amended
(interesting recent amendments are those made by the laws on the control and the
transparency of 27.4.1998 (KonTraG) and on the registered shares and the
facilitation of the exercise of the right to vote of 18.1.2001). Third Book of the
Commercial Code of 1897, containing now the law on accounting and group
accounting. Securities legislation (Stock exchange Act of 1998, "BrsG", and the
Securities Trading Act of 1998, "WpHG"). German Corporate Governance Code (of
February 2002).
8. Greece: Law 2190/1920, as amended; securities legislation.
9. Iran: Law of 24 Esfand 1347 solaire (15 March 1969).
10. Italy: Civil code of 1942, as amended, and also the Single Text regarding Financial
Intermediaries ("Testo unico delle disposizioni in materia di intermediazione
finanziaria", decreto legge 24.2.1998, n. 58, "TUIF").
11. Japan: Commercial Code (amended in 2001), Special Act relating to auditing
procedures, and the Securities and Exchange Act.
12. The Netherlands: Mainly Book 2 of the Civil Code ("CC") dating of 1976 but also
securities law. The Dutch reporters refer to the great importance of the "Enterprise
Section" of the Amsterdam Court of Appeal. On the other hand the report by the Peters
Committee on the Corporate Governance (1996, 1997) makes recommendations, the
adherence to which remains optional.
13. Poland: Commercial Companies Code (CCC) of 2000. Act of Public Trading in
Securities (1997 - APTS) and the Act on Accounting of 1994.


14. Sweden: Companies Act 1975, Annual Accounts Act, the Book-keeping Act.
15. Switzerland: Code des Obligations (CO, 1911), major revision in 1991, but also Stock
Exchange legislation (1995). Codes of Corporate Governance, especially for listed
companies, such as the Swiss Code of Best Practice (2001). Decisions of the Takeover
Commission (Commission des Offres Publiques d'Acquisition) and of the Commission
fdrale des Banques.
16. US: In the absence of national report, the Model Business Corporation Act, 3rd revised
edition (2001) (MBCA 2001, elaborated by the American Bar Association, ABA) has
been considered, as a representative legislation.
17. Also various EC legislative materials, such as Regulations and Directives.


Appendix III: Selected Bibliography

Note: A general reporter must present a bibliography (even "selected") with the greatest
caution, especially when a matter of such a magnitude as the minority rights is involved. In
fact all National Reports have presented valuable information about their respective
countries, and any separate bibliographical indications by the general reporter do not serve
any real purpose. The present list has been made for the personal use of the general reporter
rather than the education of any reader.
Bebchuk/Roe, A Theory of Path Dependence in Corporate Ownership and Governance,
[1999] Stanford Law Review 52, 127.
Bebchuk/Kahan, Adverse Selection and Gains to Controllers on Corporate Freezeouts, in:
"Concentrated Corporate Ownership" (R.Morck, ed.), 2000, p. 247.
Berle/Means, The Modern Corporation and Private Property, New York 1932.
Boizard, L'abus de minorit, Rev.Soc. 1988, 365.
Boros, Minority Shareholders' Remedies, Oxford 1995.
Burkart/Panunzi/Schleifer, Family Firms, Jan. 2000, at
Cheffins, Company Law Theory, Structure and Operation, Oxford 1997.
Claessens/Djankov/Fan/Lang, Expropriation of Minority Shareholders: Evidence from East
Asia, [2002] Journal of Finance, 57.
Cozian/Viandier/Deboissy, Droit des socits, 14 ed., Paris 2001, no 448.
Danziger, Judicial appointment of investigators and the disclosure of information as a remedy
against oppression, Int. and Comp.Corp.Law Review, 1999, 349.
Davies, Introduction to Company Law, 2002.
Dine, Company Law, 2001.
Easterbrook/Fischel, The Economic Structure of Corporate Law, Cambridge Ma./London
Enriques, The Law on company's directors' self-dealing: A comparative analysis, Int. and
Comp.Corp.Law Review, 2000, 297.
Forstmoser/Meier-Hayoz/Nobel, Schweizerisches Aktienrecht, Berne, Staempfli 1996.
Gower's Principles of Modern Company Law (by P.Davis), 1997.
Habersack, Grenzen der Mehrheitsherrschaft in Stimmrechtskonsortien, ZHR 2000, 1.
Hamilton, The Law of Corporations, St. Paul, Minn., 2000, p. 489.
Henze, Treupflichten der Gesellschafter Kapitalgesellschaftsrecht, ZHR 1998, 186.
Hocker, Minderheitenschutz und Rechte der Aktionre in Europa, in: Festschrift fr
Bezzenberger, Berlin/New York 2000, p. 147.
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