Remedies Against Minority Shareholders Expropriations

Legal strategies against minority shareholders expropriations are of course pointless without appropriate remedies and enforcement mechanisms. In order to have appropriate remedies, minority shareholders should be easily able to prove the wrongdoing (Djankov et al., 2008; Conac et al., 2007). Accordingly, ex post disclosure is required first in annual reports and periodic filings which in turn facilitate the scrutiny of related-party transactions by minority shareholders.

Disclosure of the related parties’ transactions is costly in a general system if centralised reporting is not already in place. When public companies make periodic disclosures in any case, full disclosure of self-dealing is nearly costless (Kraakman, 2004, p. 105).

The U.S. has the most significant disclosure requirements. U.S. securities law requires all companies to disclose annually all compensation paid to their top five managers, as well as all managerial transactions with the company that exceed USD 60,000.[1]

In the U.K., directors are required to disclose in notes to the annual accounts, amongst other things, any credit transactions covered by Section 330 of Companies Act of 1985, and transactions, entered into by the company or by a subsidiary, in which directors have, directly or indirectly, a material interest. Disclosure has to comprise also the nature of the interested person’s interest. As to the decision whether an interest is material, the statute defers to the board’s judgment.[2]

In France, corporate law requires that the internal auditors have to report to the general meeting about all the self-dealing transactions authorized by the board of directors or which should have been submitted to the board for authorization (Enriques, 1998, p. 30).

Table 6: Remedies against minority shareholders expropriations

Disclosures required in periodic disclosures (e.g., annual reports).
Minority shareholders can sue derivatively either benefited director or the approving bodies or both for damages that the firm suffered as a result of the transaction
Rescission is available when the transaction is unfair or entails a conflict of interest
Ease in holding interested director and the approving body civilly liable
Ease access to evidence

Adopted from Djankov et al. (2008)

In the case of approving self-dealing transactions, minority shareholders should be able to pursue legal actions without any obstacles to sue either the interested director or the approving bodies or both for damages that the firm suffered as a result of the transaction. In France, individual shareholders have traditionally been able to sue directors on behalf of the corporation (French Commercial Code, Articles L. pp. 225-52). In Italy, standing to sue was granted in 1998 to shareholders in listed companies owning at least 5 percent of the shares, while the 2003 corporate law reform made derivative suits available to shareholders in unlisted corporations, but restricted it to those owning at least 20 per cent of shares (Djankov et al., 2008, p. 437; Conac et al., 2007, p. 20).

The third aspect of remedies against expropriation is granting the courts the right to nullify the transaction when approval is fake, or in bad faith, or negligent, or when the transaction is merely unfair, or involves a conflict of interest and damages the company. The legal system should facilitate the shareholder plaintiff’s mission in the case of a rescinded decision. Fourth, the law should facilitate holding the interested director and approving body civically liable if it can be proved that they acted in bad faith, acted with negligence, or the transaction was unfair or involved a conflict of interest.

Finally, plaintiffs are more likely to prevail if access to evidence is extensive. Some examples of access to evidence are: (1) whether plaintiffs can request the court to appoint an inspector to examine the affairs of the company; (2) whether plaintiffs must identify by providing title and author for example of the specific documents that they seek to review; and (3) whether plaintiffs can directly question defendants and non-parties in court (Djankov et al., 2008, p. 437).

[1] SEC Regulations S-K, Item 402 (Executive Compensation); Item 404 (Certain Relationships and Related Transactions)

[2] Companies Act of 1985, Section 232, in connection with Schedule 6, numbers 15-28.