No Derivative Shareholder Suits in Europe - A Model of Percentage Limits, Collusion and Residual Owners
AbstractWe address one of the cardinal puzzles of European corporate law: the lack of derivate shareholder suits. In the vast majority of European jurisdictions, shareholders can bring a derivative action (for damages) against the management for breach of fiduciary duty. In all of these countries, a derivative lawsuit is the only remedy against managerial misconduct. In spite of corporate fraud by managers there are no such lawsuits. We explain this apparent paradox on the basis of percentage limits. The laws of percentage limits require shareholders to hold a minimum amount of typically 5% to 10% in order to bring an action against the management and they are extremely wide-spread in Europe. Since small shareholders are not entitled to sue, there is an incentive for managers to collude with large shareholders. In a four-stage-model, we show that, given the current percentage limits, managers will misappropriate corporate assets and split the proceeds with large shareholders. Contrary to current and past approaches to agency theory, we find that, in this equilibrium, (1) large shareholders do not monitor the management, (2) small shareholders do not free ride and (3) the residual ownership is not held by the shareholders on the whole but by the managers and the large shareholders. This interpretation of the current situation is consistent with empirical studies that find a more concentrated shareholder structure in Europe than in the United States. Also published as: Columbia Law and Economics Working Paper No. 312 (http://www.law.columbia.edu/center_program/law_economics/wp_listing_1/) German Working Papers in Law and Economics: Vol. 2007: Article 2. (http://www.bepress.com/gwp/default/vol2007/iss2/art2) SSRN (http://ssrn.com/abstract=933105)
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Bibliographic InfoPaper provided by Department of Economics, University of St. Gallen in its series University of St. Gallen Department of Economics working paper series 2007 with number 2007-21.
Length: 31 pages
Date of creation: Jun 2007
Date of revision:
Agency Theorey; Derivative Suits; Shareholder Suits; Percentage Limits; Collusion; Residual Owners; Corporate Fraud; Managerial Misconduct; European Law; European Corporations; Europe; Large Shareholders; Free Rider; Collective Action; Settlements; Monitoring; Rent-Seeking;
Find related papers by JEL classification:
- K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
- K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
- G30 - Financial Economics - - Corporate Finance and Governance - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-06-11 (All new papers)
- NEP-EEC-2007-06-11 (European Economics)
- NEP-LAW-2007-06-11 (Law & Economics)
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- Sergey Stepanov, 2007.
"Shareholder Access to Manager-Biased Courts and the Monitoring/Litigation Tradeoff,"
w0106, Center for Economic and Financial Research (CEFIR).
- Sergey Stepanov, 2010. "Shareholder access to manager-biased courts and the monitoring/litigation trade-off," RAND Journal of Economics, RAND Corporation, vol. 41(2), pages 270-300.
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