VILNIUS UNIVERSITY GHENT UNIVERSITY PAULIUS MILIAUSKAS COMPANY LAW ASPECTS OF SHAREHOLDERS’ AGREEMENTS IN LISTED COMPANIES Doctoral dissertation Social sciences, law (01 S) Vilnius, 2014 The dissertation was prepared during the period of 2009 – 2013 at Ghent University and Vilnius University. Dissertation supervisors: Professor dr. Hans De Wulf (Ghent University, social sciences, law – 01 S). Associate professor dr. Andrius Smaliukas (Vilnius University, social sciences, law – 01 S). VILNIAUS UNIVERSITETAS GENTO UNIVERSITETAS PAULIUS MILIAUSKAS AKCININKŲ SUTARČIŲ BENDROVIŲ TEISĖS ASPEKTAI BIRŽINĖSE BENDROVĖSE Daktaro disertacija Socialiniai mokslai, teisė (01 S) Vilnius, 2014 Disertacija rengta 2009-2013 Vilniaus universitete ir Gento universitete. Moksliniai vadovai: Prof. dr. Hans De Wulf (Gento universitetas, socialiniai mokslai, teisė – 01 S). Doc. Dr. Andrius Smaliukas (Vilniaus universitetas, socialiniai mokslai, teisė – 01 S). TABLE OF CONTENTS List of Abbreviations ....................................................................................... xiv Table of Cases ................................................................................................... xv List of Charts, Figures and Tables .................................................................. xvii Concepts and Definitions ................................................................................. xix INTRODUCTION .............................................................................................. 1 Purpose and object of the research ................................................................. 5 Methodology ................................................................................................. 10 State of the art and relevance of the research ............................................... 13 Sources of the research ................................................................................. 19 Outline of the Dissertation and Structure ..................................................... 21 Statements defended in the dissertation ........................................................ 22 PART I : THEORETICAL FOUNDATIONS OF THE CORPORATE GOVERNANCE DEBATE and the role of shareholders ................................ 24 Chapter 1. Corporate Governance and Problems Within ............................. 25 1.1. What is a company and why it is important ...................................... 25 1.1.1. The significance of the company form ....................................... 25 1.1.2. Company in legal terms .............................................................. 28 1.2. Core features of the company ............................................................ 29 1.2.1. Legal personality ........................................................................ 30 1.2.2. Limited liability .......................................................................... 33 1.2.3. Centralized management ............................................................ 38 1.2.4. Transferable shares ..................................................................... 43 1.2.5. Investor ownership ...................................................................... 45 1.3. Corporate governance ........................................................................ 47 1.3.1. Brief genesis of corporate governance ....................................... 48 1.3.2. What does corporate governance mean? .................................... 49 1.4. Chapter conclusions ........................................................................... 53 Chapter 2. Legal and economic theories of the company (firm) .................. 54 2.1. Legal Theories of the company ......................................................... 56 v 2.1.1. Contractual and concession theories ........................................... 56 2.1.2. Real (or Organic), aggregate and fiction theories....................... 58 2.1.3. Relevance of legal theories ......................................................... 60 2.2. Economic Theories of the Firm ......................................................... 63 2.2.1. Transaction cost theory ............................................................... 66 2.2.1.1. The original transaction cost theory .................................... 66 2.2.1.2. Critique ................................................................................ 68 2.2.1.3. Williamson and the transaction cost theory ......................... 70 2.2.2. Nexus of contracts theory ........................................................... 72 2.2.3. Agency theory ............................................................................. 76 2.2.3.1. Principal-agent relations ...................................................... 77 2.2.3.2. Conflicts of interest .............................................................. 79 2.2.3.3. Agency costs ........................................................................ 82 2.2.3.4. Critique of agency theory .................................................... 83 2.2.3.5. The need for agency theory ................................................. 86 2.2.4. Other theories of the firm ........................................................... 86 2.2.4.1. Managerialism ..................................................................... 87 2.2.4.2. Stakeholder theory ............................................................... 88 2.2.4.3. Stewardship theory .............................................................. 89 2.2.4.4. Trusteeship theory................................................................ 90 2.3. Chapter conclusions ........................................................................... 91 Chapter 3. Corporate Governance and the Role of Shareholders ................. 93 3.1. Separation of ownership and control ................................................. 93 3.1.1. Differences in ownership structures ........................................... 95 3.1.2. Ownership structure in Lithuania ............................................... 96 3.1.3. Differences in shareholder protection ......................................... 97 3.2. Three agency problems ...................................................................... 99 3.3. The chicken or the egg debate ......................................................... 103 3.4. The role of the shareholders ............................................................ 111 3.4.1. Shareholders as a group and voting rights ................................ 111 3.4.2. Legal nature of the voting right ................................................ 116 vi 3.4.3. Minority shareholders ............................................................... 119 3.4.4. Rational shareholder apathy ..................................................... 120 3.4.5. Coordination costs .................................................................... 123 3.4.6. Incomplete contracts ................................................................. 124 3.5. Theoretical difficulties for a legal scholar ....................................... 126 3.5.1. Agency ...................................................................................... 127 3.5.2. Contract ..................................................................................... 128 3.6. Chapter conclusions ......................................................................... 130 Chapter 4. Legal strategies for reducing corporate agency costs ............... 132 4.1. General remarks ............................................................................... 132 4.2. Regulatory strategies ....................................................................... 134 4.2.1. Rules and standards .................................................................. 134 4.2.2. Entry and exit ............................................................................ 135 4.3. Governance strategies ...................................................................... 137 4.3.1. Selection and removal............................................................... 137 4.3.2. Initiation and ratification .......................................................... 139 4.3.3. Trusteeship and reward ............................................................. 140 Chapter 5. Shareholders and EU initiatives ................................................ 141 5.1. General remarks ............................................................................... 141 5.2. EU legislation .................................................................................. 142 5.2.1. Transparency requirements regarding shareholders’ agreements .......................................................................................... 143 5.2.2. Directive on shareholders’ rights .............................................. 145 5.3. Action plans of the European Commission ..................................... 146 5.3.1. Action plan 2003 ....................................................................... 147 5.3.2. Action plan 2012 ....................................................................... 148 5.4. Report on the proportionality principle ........................................... 149 5.5. Debate on the power of the shareholders in the EU and the US ..... 151 5.6. Chapter conclusions ......................................................................... 153 : SHAREHOLDERS’ AGREEMENT: THEORETICAL AND COMPARATIVE APPROACH ..................................................................... 155 vii Chapter 1. Theoretical aspects of shareholders’ agreements ...................... 156 1.1. Shareholders’ agreements and publicly listed companies ............... 157 1.2. Concept of the shareholders’ agreement ......................................... 159 1.3. Aims of the shareholders’ agreement .............................................. 164 1.3.1. The aim to concentrate control ................................................. 165 1.3.2. The aim to protect the interests of the minority shareholders .. 169 1.3.3. Other aims ................................................................................. 171 1.3.4. Confidentiality .......................................................................... 176 1.4. Qualifying characteristics of the shareholders’ agreement ............. 177 1.4.1. General qualifying characteristics ............................................ 178 1.4.2. Subject matter of the shareholders’ agreement......................... 181 1.4.3. Parties to the shareholders’ agreement ..................................... 184 1.4.4. Form of the shareholders’ agreement ....................................... 190 1.4.5. Shareholders’ agreement as a sui generis contract ................... 192 1.4.6. Classification of shareholders’ agreements .............................. 194 1.4.7. Closing remarks ........................................................................ 202 1.5. Shareholders’ agreement and the impact on the relations among shareholders ............................................................................................ 204 1.6. Chapter conclusions ......................................................................... 208 Chapter 2. Regulation of shareholders’ agreements in Lithuania .............. 209 2.1. Voting agreement ............................................................................. 211 2.1.1. General comments .................................................................... 211 2.1.2. Special proxy ............................................................................ 212 2.1.3. Statutory restrictions on voting agreements ............................. 215 2.1.4. Voting agreement and the interests of the company................. 222 2.1.5. Breach of voting agreements and available remedies .............. 228 2.1.6. Enforcement of voting agreements ........................................... 235 2.1.7. Closing remarks ........................................................................ 244 2.2. Transfer of voting rights agreement ................................................ 246 2.2.1. General remarks ........................................................................ 246 2.2.2. Transfer of voting rights and proxy .......................................... 248 viii 2.2.3. Aim and purpose of the transfer of voting rights agreement .... 251 2.2.4. Legal consequences of the transfer of voting rights ................. 255 2.2.5. Restrictions on the transfer of voting rights ............................. 257 2.2.6. Transfer of voting rights and voting trust ................................. 260 2.2.7. Closing comments .................................................................... 262 2.3. Some other aspects of legal regulation of shareholders’ agreements in Lithuania .......................................................................... 264 2.4. Chapter conclusions ......................................................................... 267 Chapter 3. Regulation of shareholders’ agreements in Belgium ................ 269 3.1. Voting agreement ............................................................................. 270 3.1.1. General remarks ........................................................................ 270 3.1.2. Voting agreement and interests of the company ...................... 273 3.1.3. Statutory restrictions on the subject matter of the voting agreements .......................................................................................... 277 3.1.4. Legal consequences for breach of statutory restrictions ........... 280 3.1.5. Enforcement of voting agreement ............................................ 283 3.1.6. Closing remarks ........................................................................ 285 3.2. Securities lending agreement ........................................................... 287 3.2.1. General observations ................................................................ 287 3.2.2. Qualification of the agreement ................................................. 289 3.2.3. Securities lending and transfer of votes .................................... 291 3.2.4. Closing remarks ........................................................................ 292 3.3. Some other aspects of legal regulation of shareholders’ agreements in Belgium ........................................................................... 293 3.4. Chapter conclusions ......................................................................... 296 Chapter 4. Regulation of shareholders’ agreements in the UK .................. 298 4.1. Voting agreement ............................................................................. 300 4.1.1. General remarks ........................................................................ 300 4.1.2. Restrictions on the voting agreements formulated by the courts ................................................................................................... 302 4.1.3. Company as a party to the agreement ....................................... 308 ix 4.1.4. Enforcement of voting agreements ........................................... 311 4.1.5. Closing remarks ........................................................................ 312 4.2. Securities lending agreement ........................................................... 313 4.2.1. General comments .................................................................... 313 4.2.2. Qualification of the agreement ................................................. 313 4.2.3. Closing remarks ........................................................................ 316 4.3. Relationship agreement ................................................................... 317 4.4. Some other aspects of shareholders’ agreements in the UK ........... 320 4.5. Chapter conclusions ......................................................................... 324 : EMPIRICAL ANALYSIS OF SHAREHOLDERS’ AGREEMENTS .............................................................................................. 326 Chapter 1. Empirical data and methodology .............................................. 327 1.1. Introductory comments .................................................................... 327 1.2. Data and methodology ..................................................................... 333 1.2.1. Data sample .............................................................................. 333 1.2.2. Data sources .............................................................................. 334 1.2.3. Accuracy of the data ................................................................. 336 1.2.4. Date of the shareholders’ agreement ........................................ 338 1.2.5. Parties to the shareholders’ agreement ..................................... 339 1.2.6. Floating shares .......................................................................... 339 1.2.7. Subject matter of the shareholders’ agreement......................... 339 1.2.8. Agreements not included in the empirical survey .................... 339 1.2.9. Process of empirical study and methodology ........................... 342 1.2.9.1. AB "PANEVĖŽIO STATYBOS TRESTAS" example .... 342 1.2.9.2. AB InBev NV example ...................................................... 344 Chapter 2. Analysis of the empirical data ................................................... 345 2.1. General findings and indications ..................................................... 346 2.1.1. Relation of the findings to the Report on the proportionality principle .............................................................................................. 349 2.1.2. Shareholders’ agreements and protection of shareholders’ rights ................................................................................................... 351 x