Shareholder Suits in German Company Law – An Empirical Study

A.Introduction

The German version of often vexatious and sometimes frivolous shareholder suits is to challenge conclusions taken by the majority of the shareholders of public companies before the courts. To become effective, important decisions like, e.g., capital increases, squeeze-outs, mergers etc., need the approval of the shareholders and do not become effective before registration in the commercial register. If a shareholder files a suit against such a decision taken by the majority of the shareholders, the registrar will suspend the registration until the civil court has decided on the merits of the contesting action. Very frequently however, these suits are settled by an agreement between the plaintiff and the company which will usually have a strong interest that the measure becomes effective without further delay. The settlement will provide for an indirect and often lucrative compensation for the plaintiff.

The German legislator has several times tried to amend the respective rules in order to limit the abuse of the hold up-situation created by the registration requirement. Legislative interference in this area is difficult because one does not want to destroy the incentives of investors to take justified actions and weaken the control of dominant shareholders and/or the management by smaller investors. The last amendment of the Stock Corporation Act in this regard has become effective in September 2009. One goal of this amendment was to speed up the registration process when suits with low chances of success have been tabled or when the plaintiff asserts only minor defects of the shareholders´ conclusion. We have tried, following up on similar former studies carried out by us earlier, to analyze the development of shareholder suits before and after the enactment of the reform bill of 2009 and its empirical effects.

B.Methodology and Findings

B.1.Number of Suits and of Frequent Litigants

We have conducted a complete, exhaustive descriptive survey for all shareholders suits against German public companies (regulated market) for the years July 2007 throughout July 2011. The data have been collected from the (electronic) Official Gazette, the (electronic) Commercial Registers and the courts. Our main findings are: Shareholders suits have significantly decreased since 2009. This cannot however be traced back to the 2009 Reform Bill amendments solely. Economic activities requiring shareholder approval which then may be subject to contesting actions also decreased during the period investigated. However, the percentage of suits tabled by “frequent litigants” (measured by specific criteria) stayed at the same level. Furthermore, the total number of frequent litigants increased. Within the group of the “Top 20 professional litigants” the settlement amount was higher than € 500,000 in about half of the cases. In our last study of 2007 this had been the case in 73.2 % of the lawsuits.

Table: Selected Economic Activities Requiring Shareholder Approval/Shareholder Suits

Source: Baums/Drinhausen/Keinath (2011)

B.2.Type of Resolutions and Reasons for Contesting

Looking at the type of resolutions that were contested one can see a significant increase in “discharge” decisions in the years of 2007 and 2008 (board members need to ask shareholders for formal discharge annually). Since then these figures are falling again. The number of suits against squeeze outs and reorganizations declined significantly relative to the development of the total number of claims, but increased relative to the frequency of squeeze outs and reorganizations. Looking at the reasons for contesting, alleged infringements of the right to information decreased. Non-compliance with reporting duties has been asserted more frequently. Moreover, the loss of the voting right of a major shareholder because of his breach of Securities Laws (breach of reporting duties regarding major holdings in listed companies) is a frequent complaint. Violations of the “comply or explain” rule of § 161 AktG/Stock Corporation Act are also put forward.

B.3.Duration of Lawsuits, Settlement and Approval Processes

Our findings show that the duration of lawsuits decreased considerably since the Reform Bill of 2009 came into force. Law suits have been less often than in the past ended by settlement. If a sentence is passed the action is dismissed in most of the cases (fully in 63 % of the cases and partially in 17% of the cases). The Stock Corporation Act provides for an injunctive relief allowing that a shareholders conclusion be entered into the register before the civil court has decided on the merits of the claim. The numbers of such preliminary actions have decreased by half since 2009. On average these injunctive reliefs can be obtained within 100 days after the respective petition.

C.Policy Recommendations

Although the Reform Bill of 2009 has shown a significant effect further reforms in this area are required. We recommend to consider the following amendments:

1. The incentive for frequent litigations is the (indirect) compensation in the case of a settlement. The plaintiff´s attorney and the plaintiff himself is remunerated depending on the agreed “value” of the settlement. This value should be subject to a judicial review, precisely as it is being reviewed and fixed by the court when the judicial procedure is ended by judicial decision of the case.

2. The Federal States in Germany are authorized to concentrate judicial competences in company law matters. This could professionalize courts and speed up legal procedures. By now only a few states have insofar made use of this. We recommend taking this opportunity.

3. A further question is whether violations of notification requirements should lead to the loss of the voting right ipso iure. One possible solution could be that the Financial Supervisory Agency (BAFin) would have to take a decision on that before. An elegant solution would be to require that the plaintiff hold a minimum percentage of shares in the company.

References:

Baums/Drinhausen/Keinath, Anfechtungsklagen und Freigabeverfahren. Eine empirische Studie, ZIP 2011, 2329 ff (abridged version; the full article is available at: http://www.ilf-frankfurt.de/uploads/media/ILF_WP_130.pdf )

Habersack/Stilz, Zur Reform des Beschlussmängelrechts, ZGR 2010, 710 ff.

Arbeitskreis Beschlussmängelrecht, Vorschlag zur Neufassung der Vorschriften des Aktiengesetzes über Beschlussmängel, AG 2008, 617 ff.

Baums/Keinath/Gajek, Fortschritte bei Klagen gegen Hauptversammlungsbeschlüsse – Eine empirische Studie, ZIP 2007, 1629 ff.