Mapping Types of Shareholder Lawsuits Across Jurisdictions

Mapping Types of Shareholder Lawsuits Across Jurisdictions

Martin Gelter

August 28 2017

When corporate law scholars explore shareholder litigation abroad, they often start by looking for types of shareholder litigation familiar from the US. The objective of the paper is to go beyond this relatively limited comparative analysis and the typical dichotomy between derivative and direct suits. Other jurisdictions sometimes employ different types of shareholder lawsuits that fulfill similar functions. To that end, this chapter attempts to create a functional (but likely incomplete) international taxonomy of shareholder lawsuits.

In analyzing the available remedies across key jurisdictions, we can identify a number of patterns. Looking at suits redressing harm to the corporation, US law is comparatively liberal in permitting shareholder to initiate litigation, while UK and other Commonwealth laws is more restrictive for derivative suits. Most Continental European countries provide for some form of minority enforcement mechanism, although often it is similarly limited to a qualified minority, and to claims against directors, but not, for example, controlling shareholders. For a variety of reasons, derivative suits remain rare in Europe; however, they spread as a relatively prevalent enforcement mechanism to a number of Asian civil law jurisdictions across the divide between common and civil law, among which at least Japan and Korea have seen a fair number of lawsuits. By contrast, in the UK and other “Commonwealth” jurisdictions, the derivative suit is often eclipsed by the “unfair prejudice” or “oppression” remedy, which tends to be popular because of the broad spectrum of remedies available.

The taxonomy is more complicated for suits providing redress for harm to shareholders. While direct suits exist in many other jurisdictions, class actions are typically not available, or they are based on an opt-in model that does not give the same level of bargaining power to plaintiff’s attorneys. In European countries, shareholder votes are typically required for a larger number of significant transactions than in the US, e.g. dividends, increases and reductions of capital as well as mergers and divisions. Consequently, a suit against shareholder decisions pushed through by the controlling shareholder is equivalent in effect. Second, a suit against a transaction automatically has a class effect because it affects all shareholders. Given the hurdles that derivative suits sometimes face in these jurisdictions, this type of lawsuit is often the main mechanism keeping controlling shareholders in check, at least in certain circumstances.

The paper further identifies common policy issues that determine whether particular types of suits are likely to be prevalent in a jurisdiction. These including limits to standing to sue, such as minimum ownership thresholds. Furthermore, the allocation of cost and risk in the suit is important. This includes the policy decision whether to reimburse the winner for litigation cost (or some of it), the availability of contingency or conditional fees for plaintiff lawyers, and statutes that require plaintiffs to post bonds to sue.  Finally, the paper surveys an example of a common law of lawsuit that American readers typically are not familiar with, namely German rescission lawsuits. Up to the late 2000s, litigation was extremely common and arguably exploited by a set of repeat plaintiffs that used lawsuits to make a profit of publicly traded firms. With a number of key legislative changes, the level of litigation appears to have decreased to a reasonable level in recent years. Contrary to the assumption of some of the literature, in Germany and other Continental European jurisdictions corporate law does not appear to suffer from underenforcement, as far as harm to shareholders by means of dilution is concerned.