Systematics of Shareholder Remediest - Origins and Developments

Author:Margit Vutt
Position:Magister iuris, Analyst of Legal Department, Supreme Court of Estonia

The effectiveness of a legal provision serves as demonstration of its actual impact in the society, as well as whether that specific provision can be implemented in practice2. Law is effective only if it is possible to enforce it. Connected with this principle is a succinct maxim often applied in Anglo-American jurisprudence: For every right, there's a remedy-a statement derived from the Latin concept of ubi ius ibi remedium3. Accordingly, law needs remedies-opportunities established for the benefit of an entitled person to eliminate the negative consequences of the violation of an obligation that occurred with respect to him or to prevent the realisation of such consequences.

The meaning of a remedy (accordant with the German concept of Rechtsmittel) is in most cases associated with a certain violation, and the objective of a remedy is primarily to rectify, in one way or another, a violation of a subjective right of a person. The meaning and objectives of a remedy may vary according to the branch of law in question. For instance, in judicial proceedings law, remedies are understood as legal opportunities that a party to a proceeding may exercise to contest a judicial decision in a court of higher instance. The legal literature notes that the objective of such remedies is primarily to correct and alter the decision while remedies may have a different procedural effect. The principle is that a party to a proceeding is granted an opportunity to contest the decisions that said party considers to be unlawful and unfavourable to him4. State liability law recognises primary and secondary remedies-with the former, the objective of the remedy is to prevent or eliminate the causation of damage, and in the second case compensation for damage is granted in the direct (i.e., monetary) sense of the term5. Environmental law too speaks of a comprehensive approach to remedies and to the violations associated with one particular area of the law6.

This article aims to investigate the specific nature and objectives of shareholders' remedies under company law and the approaches employed by different legal systems and countries to the systematics of shareholders' remedies. The paper will also provide an assessment of the regulation of this particular issue under Estonian law.

1. Specifics of remedies under company law

In the Estonian legal space, with its influences from the Germanic legal tradition, the complex concept of legal remedy has perhaps been defined best in the law of obligations, where a remedy is treated as an opportunity that a creditor has at his disposal for eliminating, when an obligation has been violated, the negative consequences of said violation or for preventing such consequences. A remedy may include both an opportunity to claim something from the other party to the obligation (the right of claim, e.g., such as an action for the compensation of damage) and the right to unilaterally alter the obligation (in German, Gestaltungsrecht, e.g., the right to withdraw from or cancel a contract). The legal literature ties the opportunity to apply a remedy in the law of obligations to the concept of liability7. Proceeding from the principle of private autonomy, it is characteristic of remedies in the law of obligations that it is up to the creditor to decide on their application and neither courts nor other institutions can interfere and apply a remedy whose application the creditor has not requested or upon which he has not relied8.

However, one certainly cannot claim that remedy as an independent legal concept is something characteristic solely to the Germanic law of obligations. The term can be found in the Principles of European Contract Law 9 , whose Article 8.101 (1) provides that whenever a party does not perform an obligation that is set forth in the contract and the non-performance is not excused, the aggrieved party may resort to remedies. These are remedies under contract law, and their systematics proceeds from the violation, providing for which remedies are available. Likewise, Chapter 3 of Book III of the Common Frame of Reference 10 contains regulation of remedies for non-performance.

Relations under company law are characterised by their multifacetness, which arises from there being numerous parties to such a legal relationship, and these relations are also multi-layered. Therefore, creation of an appropriate system of remedies is a rather challenging task in this domain. Internal relations include, simultaneously, the relations of the members of management with the company, relations between directing bodies, relations among the shareholders, and the relations of the shareholders with the members of the directing bodies. In addition, account should be taken of the relations of the public limited company, as a legal entity acting in commerce in its own name, with third parties because the legal capacity of a legal entity is realised by its management board via the members thereof11.

The dilemma under company law lies in the fact that, on the one hand, any company, in order to operate, needs a stable environment. The managers of a company need to act independently within the limits of the powers conferred upon them and to have a guarantee that, under normal circumstances, there will be no interference in the day-to-day economic activities of the entity they manage. On the other hand, there is a risk of abuses because of conflicts between the management board and the shareholders, characteristic especially of companies with fragmented holdings, as well as conflicts between the majority and minority, which are burdensome for those companies with one strong majority shareholder and a number of minority shareholders12. Contradictions may also develop, and proper remedies are necessary in the case of closed limited companies in which the shareholding is evenly split between two shareholders or between two homogenous interest groups who, whilst having similar interests and acting together, compete with each other13. Thus it can be seen that the requirements imposed on the catalogue of remedies under company law are more diverse.

A remedy under company law is, it may be said, a legal measure whose objective is to eliminate or prevent the negative consequences of violations committed by subjects in company law (such as a company, members of its directing body, or shareholders). However, a remedy under company law may, in equal measure, be directed toward the prevention of future violations.

2. The nature and objectives of the remedies for a shareholder

At the turn of the century, the theory of company law brought to the fore the company as a whole, and the interests of the shareholders, as one interest group among many, were pushed into the back seat14. This tendency has of late started to change. In the light of the financial crisis that originated in the United States of America in 2008, there has been increasing talk about broadening the rights of shareholders in order to balance the powers of the management board15. In Germany too, there is ongoing legal debate, unlike in the past, about the rights of a shareholder, even going as far as to discuss the possibility of claiming compensation for personal damages of a shareholder16.

While the legal literature discusses protection of the shareholders, the emphasis has differed: in America, it has been on protection of shareholders as a class, in contrast to Europe, where the focus is on the protection of minority and small shareholders. These approaches have been conditioned by the differences between the relevant capital markets-compared to the USA, Europe (in particular, continental Europe) features considerably more limited companies that are controlled by a majority shareholder17. Majority interest has been the basic principle guiding company law. However, as Finnish researcher Seppo Kinkki has explicitly stated, the existence of minority protection is the very reason for which a person, instead of just giving his money to a random stranger, would invest it in a limited company18. In fact, Japanese jurist Eiji Takahashi has posited minority protection to be the paramount task of modern company law19. Whilst a majority shareholder should be able to protect his rights by voting, the minority shareholder does not have that option.

The shareholder, being the original owner of the investment, will, according to the legal principle of casum sentit dominus 20 , generally bear the risks inherent to the company21. However, according to that principle, the owner bears only the so-called risk of accidental destruction 22 , while for errors of the management clearly beyond the scope of the business judgement rule 23 , the liability shall be borne by the person who made such an error. This means that the shareholder carries a risk to lose his investment should the business fail. Where the directing bodies have acted in keeping with the business judgement rule-i.e., when they have observed the due-care obligation of a prudent entrepreneur-any consequences of loss of assets invested in the company by the shareholders shall be borne by those shareholders if the business fails. However, if the directing bodies have not exercised due care in management, the shareholders need not bear the negative consequences and the members of management must compensate for the damages they have caused. Such is the principle of casum sentit dominus as expressed in the structure of a limited company as a legal entity.

A remedy available to a shareholder under company law...

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