Magister iuris, Analyst of Legal Department, Supreme Court
Shareholder's Derivative Claim - Does Estonian Company Law Require Modernisation?
Whether and to what extent a member or shareholder should be able to influence the organisation as a whole is one of the most general conceptual issues in the development of company law provisions2. The nature and protection of shareholders' rights are closely related to the question of whether and to what extent shareholders as the providers of certain resources to the company should have the right to check the use of these resources3. One of the ways to answer this question is that a shareholder's rights with respect to the company should indeed be limited, because a public limited company is led by the directing bodies (directly or indirectly) elected by the shareholders and the company should be protected from shareholders' excessive interference. This approach is based on the premise that a shareholder is, first and foremost, an investor -- they deliver funds to the company, expecting to gain profit over time. On the one hand, the directors of a company are relatively independent agents acting in the interests of the shareholders; on the other hand, the shareholders should have some kind of control over the directors4. To counterbalance the agency theory, it is stressed that a shareholder should be interested in the functioning of the company as a whole and this interest should not be limited to financial aspects, as the company's assets belong to an independent person -- the public limited company5. However, it is a common view these days that in well-organised corporate governance, the shareholders, as the company's residual claimants6 should have at their disposal an effective means of influencing the company's activities when necessary7. For example, it is noted in Winter's report8 that as shareholders focus on wealth creation, they are very suited to act as "watchdogs" who act not only on their own behalf, but also on behalf of other stakeholders. It has been noted in legal literature that in response to the rather extensive powers of the directing bodies, restoring the role of the shareholders has recently come to light again in Europe, amongst other things in legal regulation9. Protection of shareholder rights has also been stressed in various European Union documents as a priority area10.
Where a majority shareholder finds that a member of a directing body of the company has infringed or is infringing his or her obligations, the shareholder can usually respond to the situation, at a minimum, by replacing the member of the directing body and thus ensuring the possibility of claiming damages on behalf of the company. A minority shareholder's possibilities to influence the directing bodies are minimal. In most Member States of the European Union (including Estonia), the law vests special protective rights in shareholders representing a certain amount of share capital; such rights include the right to call the general meeting, to request a special audit, and other minority rights11. These are some of the most common ways for minority shareholders to intervene. The shareholders' right to claim damages on behalf of the company from a member of a directing body is a much less common legal remedy, which is not available under the company law of all countries. Usually it is the Anglo-American legal system that affirms the possibility of the shareholders' derivative claim, while in continental Europe the attitude to the permissibility of such intervention has been rather reserved.
The extent of harmonisation of company law has varied greatly in different areas; the main priorities in the protection of shareholders' rights have concerned the holding of general meetings and voting issues (such as the extension of possibilities of distance voting), also the right to receive information12. Even so, shareholders' intervention is now more regulated in many European countries than in Estonia. Major changes have also lately taken place in the regulation of derivative claims in the UK law, which is part of the Anglo-American legal system13. Thus, convergence is noticeable when it comes to the protection of shareholders' rights in the European Union, while the nature of the convergence is horizontal rather than vertical.
The objective of this article is to analyse the nature of derivative claims of shareholders' of a public limited company and the provisions and judicial practice concerning this legal remedy in various legal systems, particularly as exemplified by the USA, UK, and Germany. The subject is topical, amongst other reasons, because Germany has also gradually transposed and improved the regulation of derivative claims, while Estonia used the German example when devising the two-step management structure of public limited companies. The article seeks an answer to the question of whether Estonian company law would require modernisation, as the rights of shareholders, including minority shareholders, are being enhanced in Europe.
There is a contract-like relationship under the law of obligations between a member of a directing body and the company; of all the existing types of contracts, this relationship stands closest to an authorisation relationship14. Therefore, a member of a directing body will primarily have obligations to the company as the quasi-mandator. The legal remedies arising from an obligation (including rights of claim) are, however, relative -- they pertain not to everyone, but to a specific person -- the other party to the obligation15. In the same way, this right can usually be exercised only by the other party to the obligation (the entitled person), which is why in a situation where a member of a directing body infringes his or her obligation and causes damage to the company, it is the company that is entitled to assert a claim. However, a legal person is an artificial subject of law created by law,16 which acts via its directing bodies, and this principle may preclude the assertion of a claim against a member of a directing body, if there is no mechanism to eliminate the infringer's possibility to influence the assertion of the claim. This problem arises especially sharply in the conflict between minority and majority,17 because a majority shareholder can influence the violator (at least theoretically) via control of directing bodies. In addition, positive law usually creates a mechanism that takes the decision over the assertion of a claim "one step higher" (in the event of a two-step management structure, to the competence of the supervisory board or general meeting).
Due to the above, the company laws of many countries have extended the shareholders' right of interference and, in certain circumstances, allowed shareholders representing a certain proportion of share capital to file a claim for compensation in the courts against a member of a directing body who has infringed his or her rights. Such a legal remedy has been also called actio pro socio in legal literature. In the event of actio pro socio, a claim is not filed directly to protect the claimant's own right, but also the right of others (who are connected to him or her under company law or otherwise)18. Therefore, the nature of the rights being protected differs from the rights protected by one's own claim: a derivative claim is mainly aimed at protecting the company's interests, while a shareholder's personal claim is only aimed at protecting the shareholder's own financial interests19. There is also a distinction based on whether the shareholders can only decide over the assertion of a claim or can actually file the claim independently. The latter case is the classic derivative claim: the claim is brought by a shareholder or shareholders, not by the company (via a representative elected by the shareholders), although it is the company which is sought to be compensated20.
Although the guarantee of shareholders' rights should be considered important, it has been mentioned in legal literature that giving shareholders an easy possibility of claim could lead to a situation where groups of displeased shareholders would disturb the company's operations with their constant claims and thus reduce shareholder value21. This is why the possibilities for such claims are limited even in those legal orders that allow for derivative claims.
As mentioned above, different legal orders have different approaches to the position of shareholders in a company and hence the legal remedies afforded to them. It has even been argued in literature that the degree of protection of shareholders' rights varies a great deal depending on the legal system or family of law. A group of economists led by Rafael La Porta, Florencio Lopez-de-Silanes, and other authors have noted in their series of articles titled "Law and Finance",22 which evoked responses from many legal scientists, that common law countries offer better shareholder protection than continental Europe23. It is, of course, true that in German company law, the structure of directing bodies is mainly based on the theory of independent supervision, according to which an independent supervisory body is considered to be the best protector of the company's interests24. Udo Brändle has criticised the...