No Derivative Shareholder Suits in Europe - A Model of Percentage Limits, Collusion and Residual Owners

Kristoffel Grechenig () and Michael Sekyra

University of St. Gallen Department of Economics working paper series 2007 from Department of Economics, University of St. Gallen

Abstract: We 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)

Keywords: 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 (search for similar items in EconPapers)
JEL-codes: G30 K22 K42 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2007-06
New Economics Papers: this item is included in nep-eec and nep-law
References: Add references at CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://ux-tauri.unisg.ch/RePEc/usg/dp2007/DP-21-Gr.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:usg:dp2007:2007-21

Access Statistics for this paper

More papers in University of St. Gallen Department of Economics working paper series 2007 from Department of Economics, University of St. Gallen Contact information at EDIRC.
Bibliographic data for series maintained by Joerg Baumberger ( this e-mail address is bad, please contact ).