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No Derivative Shareholder Suits in Europe – A Model of Percentage Limits and Collusion

Author

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  • Kristoffel Grechenig

    () (Max Planck Institute for Research on Collective Goods, Bonn)

  • Michael Sekyra

    (Vienna University of Technology, Austria)

Abstract

We address one of the cardinal puzzles of European corporate law: the lack of derivate share-holder suits. We explain this phenomenon on the basis of percentage limits which require share-holders to hold a minimum amount of shares in order to bring a lawsuit. We show that, under this legal regime, managers will collude with large shareholders by means of settlements or bribes that impose a negative externality on small shareholders. Contrary to conventional agency models, we find that large shareholders do not monitor the management; as a consequence, there is no free riding opportunity for small shareholders.

Suggested Citation

  • Kristoffel Grechenig & Michael Sekyra, 2010. "No Derivative Shareholder Suits in Europe – A Model of Percentage Limits and Collusion," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2010_15, Max Planck Institute for Research on Collective Goods.
  • Handle: RePEc:mpg:wpaper:2010_15
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    Keywords

    Collusion; Derivative Shareholder Suits; Percentage Limits; Monitoring; Free Riding;

    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

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