Recent developments in European company law and capital market law have heralded a break with the traditional perception in company law that shareholders have no duties when they invest in companies. Instead, they are increasingly subjected to various duties. As part of a research project on ‘Shareholders’ duties’, we map these shareholders’ duties in order to provide an overview of current and prospective duties. This mapping shows a great variety as well as variance of shareholders’ duties.
The variety of shareholders’ duties
To give an overview of the variety of shareholders’ duties, we discuss the duties under certain headings. First, we classify shareholders’ duties according to their source, in particular statutes, contracts, soft law and case law. Interestingly, we find an increase in shareholders’ duties deriving from statutes. Modern company law can be seen as a substitute for private ordering or as a remnant of the historic role of states in granting companies their privileges. Therefore, depending on the theoretical starting point, the statutory duties of shareholders can be seen as a controversial development, assuming that the parties themselves would not have contracted for such duties, or as a necessary means to prevent opportunistic behaviour by shareholders. The other main source, capital market law, is less controversial, as the regulation of market actors may be a consequence of the need for regulation of efficient and transparent markets.
Second, we classify shareholders’ duties according to the different interests which the duties intend to protect. We find that the protected interests primarily relate to the company itself and fellow shareholders and to a lesser extent to the interests of company stakeholders. We place these duties under the headings ‘financial duties’ and ‘corporate governance duties’. Other duties, including transparency duties, intend to protect the interests of the market where the company’s shares are listed. Finally, we find that some shareholders’ duties aim at protecting wider societal interests, in particular duties imposed on states that own shares in privatized companies. Moreover, the proposed Shareholder Rights Directive, as amended by the European Parliament in 2015, is rather prescriptive on how the engagement of institutional investors should be framed in order to meet public interest objectives.
The variance of shareholders’ duties
But what determines the intensity of shareholders’ duties? In the second part of our paper, we try to identify the decisive patterns behind their variety in order to determine the most significant factors.
First, we find that shareholders’ duties change when a company is listed on a regulated market. Many jurisdictions differentiate between public and private companies. The reason for this differentiation is simple: one of the two main sources of statutory duties, namely capital market (or securities) law, only applies to companies listed on a regulated market. Nevertheless, this distinction is more ambiguous than it may appear at first glance. In fact, many company law rules as well only apply to listed companies. An obvious example is the Shareholder Rights Directive. Moreover, we find that shareholders’ duties vary according to the corporate form of the company in which shareholders invest. Despite the somewhat confusing diversity in corporate forms across the EU Member States, it is possible to make two seemingly opposing general statements: fiduciary duties are more pronounced in company forms used by smaller companies than in public companies, but the degree of mandatory regulation is typically higher for corporate forms used by large companies.
A second factor upon which the contours of shareholders’ duties depend refers to the characteristics of the shareholders. We find that the two most important elements are the size and the purpose of shareholdings. In contrast, criteria linked to the personal identity of shareholders, such as their age, gender, religion, nationality or profession, are largely irrelevant for defining their duties. However, institutional investors and state ownership seem to be exceptions to this rule.
The third and final factor is less relevant in comparison. At times, shareholders’ duties also depend on the specific business situation. For instance, specific duties apply in case of fundamental, structural changes.
The mapping of shareholders’ duties shows that shareholders’ duties are not a rare and exotic phenomenon in European company and capital market law. On a closer look, there are indeed many examples, and they form fully integrated parts of the legal system instead of being rate exceptions. In a normative sense, however, our mapping exercise is nothing more than a starting point for further research since the pros and cons of imposing duties on shareholders – and of enforcing these duties – are not yet fully understood.
Hanne S. Birkmose is a Professor of Law at Aarhus University, Denmark.
Florian Möslein is a Professor of Law at the Philipps-University Marburg, Germany.