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No Derivative Shareholder Suits in Europe – A Model of Percentage Limits and Collusion

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Grechenig,  Kristoffel
Max Planck Institute for Research on Collective Goods, Max Planck Society;

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http://www.coll.mpg.de/pdf_dat/2010_15online.pdf
(Preprint)

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Citation

Grechenig, K., & Sekyra, M. (2010). No Derivative Shareholder Suits in Europe – A Model of Percentage Limits and Collusion.


Cite as: https://hdl.handle.net/11858/00-001M-0000-0028-6E44-6
Abstract
We address one of the cardinal puzzles of European corporate law: the lack of derivate share-holder suits. We explain this phenomenon on the basis of percentage limits which require share-holders to hold a minimum amount of shares in order to bring a lawsuit. We show that, under this legal regime, managers will collude with large shareholders by means of settlements or bribes that impose a negative externality on small shareholders. Contrary to conventional agency models, we find that large shareholders do not monitor the management; as a consequence, there is no free riding opportunity for small shareholders.