Strike Suits in German and New Zealand Company Law

Abstract

The most recent wave of governance scandals has re-focused the public debate on how public companies should be best governed and how to enforce honest management conduct. This happens while not all legal responses to earlier scandals have yet proven to reliably function smoothly. The most important tool for minority shareholders to enforce good corporate governance under German company law is to contest Shareholder Resolutions that are unlawful, as they infringe the rules of the company’s Constitution or the Companies Act. Other than the case where state authorities are in charge of supervising companies, if every single shareholder is entitled to sue the company or its boards there is an inherent threat that the power is abused. One form of abuse is known as Strike Suit. This covers suits brought primarily for their nuisance value by a small shareholder whose interest in the corporation is insignificant. Knowing that the cost of defending such a suit is high as are the costs of a hold-up of the company’s management once such suit is filed, the shareholder sues hoping for a private settlement. At the outset, this paper will address the German issue with Strike Suits based upon contesting Shareholder Resolutions. First, the general working mechanisms of Shareholder Resolutions are referred to as a base to explain in a second step the way in which this shareholder right is abused to squeeze money out of companies. In the final section, various attempts of courts and legislation to find a remedy to his problem will be examined and deliberations with respect to other possible solutions will be made.

In the second part of this paper, the company law of New Zealand will be addressed. By closely scrutinizing shareholder remedies available under New Zealand law, parallels will be drawn to the Strike Suit problem as it exits in Germany and it will be attempted to be identified why Strike Suits seem not to be a serious problem there, despite the fact that the enforcement rules of good corporate governance are widely laid into shareholders’ hands. For this purpose, the general concepts of making and contesting Shareholder Resolutions under New Zealand law will be examined, as will be their proneness to be abused. As further means for shareholder participation, the paper will turn to the Derivative Action and the Action of Oppression, generally and in particular with respect to their instruments to avoid abuse. As Strike Suits in Germany will be found to occur comparatively often in takeover situations, the enforcement mechanisms of shareholders under the Takeovers Act 1993 and the Takeovers Code 2001 will be investigated on functioning and avoiding abuse. A brief consideration of a particular remedy against abuse shareholder suits under the Securities Markets Act 1988 will eventually round this paper up.