10* See also mfra 4.1.2 (discussing corporate groups).

to? ciiorjAfetiengestt(shareholder may only vote on management issues if asked by the management board).

even take major corporate decisions into their own hands. In Germany and the Netherlands boards have more insulation from controlling shareholders, but protecting minority shareholders falls well behind the principal legal objective of arbitrating conflicts between labor and capital. In particular, German law focuses on protecting minority shareholders chiefly within the context of corporate groups rather than individual firms (see Chapters 4 and 5).110 Only U.S. law, which actively encourages independent directors to bargain with controlling shareholders, makes significant use of the trusteeship strategy to protect minority shareholder interests.

3.2.4 The reward, constraints, and affiliation rights strategies

We group together the remaining strategies for protecting minority shareholders because there is the least to say about them in a Chapter devoted to the governance system. Consider first the reward strategy. A particular kind of reward strategy—a norm of equal treatment or 'shared returns'—is the principal strategy employed by every jurisdiction to protect minority shareholders. All jurisdictions provide that dividends must be paid to shareholders pro rata within a given class of shares. It follows that corporate distributions that benefit controlling shareholders must benefit minority shareholders too. Other rules that aim at pro rata distributions are to the same effect; for example, rules prohibiting the firm from repurchasing shares from selected shareholders to the exclusion of others, or coat-tail rules that give minority shareholders an option to piggyback on the sale of a control block of shares. We deal with these rules in greater depth in Chapters 6 and 7..m

Legal constraints—principally in the form of standards such as the duty of loyalty, the oppression standard, and the remedies for abus de majorite—are also widely used in our major jurisdictions to protect the interests of minority shareholders. We examine these standards more closely in Chapter 5.m

Finally, the entry and exit strategies are at least as important to minority shareholders in our core jurisdictions as they are to the shareholder class, albeit not in the same way. The principal entry strategy is, of course, mandatory disclosure. To the extent that disclosure, as a condition of entering the public markets, reveals controlling shareholder structures and conflicted transactions, it enables market prices to reflect the risks of controller opportunism and penalize specific instances of it. In addition, disclosure provides the information necessary to support the protection of minority shareholders through other strategies, such as direct voting or litigation to enforce fiduciary duties. As we develop in Chapter 8, all major jurisdictions provide significant protection to minority shareholders today, through mandatory disclosure rules, securities laws, and

'i° See infra 4.2.2.2, 4.2.3.3, and 5.2.

111 See, e.g., mfra 6,4 (corporate distributions) and 7.3.3 (mandatory bid).

112 See infra 5.2.3.

listing requirements—although the scope of mandatory disclosure requirements remains most extensive in the U.S. and the UK.113

By contrast, the exit strategy is used more sparingly to protect minority shareholders. Permanency of investment is a hallmark of the corporate form, unlike the partnership, for which exit—either through voluntary withdrawal or limited terms of investment—is a central governance device for protecting minority investors. As we address in Chapters 5, 6, and 7, corporate law provides limited exit rights in some jurisdictions, but only upon egregious abuse of power by a controlling shareholder or upon the occurrence of major transactions that threaten to transform the enterprise. For example, the possibility of appraisal rights (a mandatory buyout option) upon the occurrence of a fundamental transaction in the U.S. or Japan;114 or the mandatory bid rule triggered by a sale of control that is featured in the City Code and the company laws of several major European jurisdictions.115

3.2.5 Reflecting on the minority-majority shareholder conflict

In some respects the protection of minority interests in the corporate governance system is inversely proportional to the power of shareholders as a class. In France, concentrated ownership and a shareholder-friendly corporate law give the shareholder majority undisputed mastery over corporate policy in most companies; as we note in Chapter 5, large-block minority shareholders can protect their interests chiefly by petitioning the courts to appoint an inspector for suspect transactions.116 Board structure gives minority shareholders only marginally more leverage in Germany and Japan. Although Japanese law favors minority shareholders on its face, Japanese corporate practice—with insider-dominated boards—is deeply manager!alist. The German law of co-detenrunation dilutes the power of all shareholders as a class, but this is unlikely to dilute the power of controlling shareholders vis-a-vis minority shareholders. Finally, the dispersed ownership of most public companies in the U.S. and UK 1 predictably reduces minority-majority shareholder conflict. But this result follows as a matter of ownership structure rather than law. The wide-open law of corporate governance in the UK hardly restricts the discretion of controlling shareholders. Only U.S. law aggressively protects minority shareholders by emphasizing independent directors, direct voting rights, and fiduciary duties.

In short, jurisdictional differences in minority protection seem less important than the simple fact of differences in ownership structure. In our view, those who

113 Infra 8.2 (mandatory disclosure for public issuers). See also infra 4.2.1 (accounting and other financial disclosure requirements for open and closed corporations) and 5.2.1 (disclosure of related party transactions by controlling shareholders).

m Infra 6.2.2.1.

115 Infra 7.3.3.

"« See mfra 5.20.

explain the structure of share ownership in terms of the law must look beyond the governance system for jurisdictional differences sturdy enough to carry the explanatory burden.117 Indeed, the remarkable fact is how little the principal corporate law jurisdictions are willing to bend corporate governance rules to protect minority shareholders, regardless of the modal ownership structure of public companies.

3.3 PROTECTING NON-SHAREHOLDER CONSTITUENCIES

Even though the corporate governance system gives relatively little protection to minority shareholders, several European jurisdictions rely heavily on it to protect a woM-shareholder constituency: namely, the firm's employees. In theory any non-shareholder constituency could be protected by board representation, but in practice only tabor is protected by it in some European jurisdictions.118 By contrast, to the extent that other non-shareholder constituencies are protected by corporate law at all, it is chiefly in the form of duties and standards that exhort or instruct corporate officers and directors to consider the welfare of the 'enterprise' and all of its constituencies. We consider these standards below. (Bear in mind, however, that we focus on governance-based protections in this Chapter, not on transaction-based systems of regulation such as creditor protection, which are addressed in Chapter 4.)

117 La Porta et at., supra note 58, 1130-1 describe an 'anti-director' index of six elements of corporate law that purports to measure legal protection of minority shareholder rights. Of these, four relate to the governance system. One is present in all of the core corporate law jurisdictions (the right to mail a proxy prior to a shareholder meeting). Three, in our view, arc of minimal importance (the absence of a ban on cumulative voting, a 10% share threshold for calling extraordinary meetings, and the requirement that bearer shares cannot be withdrawn from the institution in which they are deposited fot several days surrounding a shareholder vote). The remaining two (oppression remedy and preempuon rights) are transactional constraints rather than governance matters. Even on the La Porta scale, however, it is noteworthy that Delaware law assumes the same middling values as does French law (3 out of 6).

n> To some extent labor's interests are protected by strategies other than appointment rights and trusteeship as well. For example, the European Works Council Directive [1994] OJ L 254/641 requites that Member states establish procedures for informing and consulting employees in every firm with at least 1,000 employees. German and Dutch works councils also have limited direct decision rights. Sections 87 et seq. of the German Betriebsverfassungsgeserz permit works councils to co-decide (with management) matters such as the internal working order of factories, daily working times, health and safety regulations, and local principles of remuneration. The Dutch Works Council Act has similar provisions. There arc also instances of the reward strategy in the form of legally sanctioned sharing regimes. For example, the U.S. has tax-favored employee stock ownership plans, see Henry Hansmann, THE OWNERSHIP OF ENTERPRISE 87 (1996). France mandates both extensive information and more limited profit sharing rights in all firms with more than 50 workers. Sec Art. L. 431-1, 432-1, and 442-1 Code du travail; Cozian et al., supra note 39, N"922-3 (employees information rights are at least equal and go sometimes beyond those of shareholders) and 929-31 (profits must only be shared if the taxable return on own funds exceeds 5% and must not be distributed for 5 years).