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AUTHOR:
Kristoffel R. Grechenig and Michael Sekyra
TITLE:
No Derivative Shareholder Suits in Europe - A Model of Percentage Limits, Collusion, and Residual Owners
SUGGESTED CITATION:
Kristoffel R. Grechenig and Michael Sekyra
(2007)
"No Derivative Shareholder Suits in Europe - A Model of Percentage Limits, Collusion, and Residual Owners",
German Working Papers in Law and Economics:
Vol. 2007:
Article 2.
http://www.bepress.com/gwp/default/vol2007/iss2/art2
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ABSTRACT:
We address one of the cardinal puzzles of European corporate law: the lack of
derivate shareholder suits. In the vast majority of European jurisdictions,
shareholders can bring a derivative action (for damages) against the management
for breach of fiduciary duty. In spite of corporate fraud by managers there are no
such lawsuits. We explain this apparent paradox on the basis of percentage limits
which require shareholders to hold a minimum amount of shares (typically 5% to
10%) in order to bring an action. In a four-stage-model, we show that, given the
current percentage limits, managers will misappropriate corporate assets and split
the proceeds with large shareholders. Contrary to current and past approaches to
agency theory, we find that, in this equilibrium, (1) large shareholders do not
monitor the management, (2) small shareholders do not free ride and (3) the residual
ownership is held by the managers and the large shareholders.
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