!Корпоративное право 2023-2024 / 2013-study-analysis_en

5% to ≤ 10%	BG, HU, LV, RO, SK, ES
10% or more	AT, HR, DK, FI, EL, SI, SE
No derivative action	EE, LU, NL

Not classified (white): MT

All figures above are based on the public, stock exchange listed company. In private companies the threshold to bring a derivative action is potentially higher.245 The Member States vary greatly with regard to the relevant minimum. The requirements range from 1 share in Cyprus, France, Ireland, Lithuania, Poland, and the UK to 10% in Austria, Croatia, Denmark, Finland, Greece, Slovenia, and Sweden. If we also consider non-listed, closely held companies, the maximum threshold is even higher: 20% in Italy.

Conditions for bringing a derivative action

Map 3.2.b: Conditions for bringing a derivative action

245 See, e.g., Bulgaria.

201 Directors’ Duties and Liability in the EU

Legend	Country
No further conditions (except	AT, BE, BG, HR, CZ, DK, FI, FR, EL,
possibly a minimum period of	HU, IT, LV, LT, PL, PT, RO, SK, SI, ES,
time during which the	SE
shareholder must have held the
shares, or the responsible
organ, e.g. general meeting or
supervisory board, must have
decided not to pursue the
action)
The court has to grant	DE, UK
permission to pursue the claim
and considers a number of
criteria to balance the interest of
the shareholder in bringing the
action and the interest of the
company not to engage in
litigation
The shareholders can only bring	CY, IE
the derivative action if restrictive
requirements are satisfied (for
example, following Foss v
Harbottle, derivative actions are
only possible if the directors
have committed a wrong that
benefitted them personally, i.e.
they committed a fraud, and
they have de jure or de facto
control of the general
meeting246)
Not applicable because no	EE, LU, NL
derivative action
Not classified (white): MT

The vast majority of countries allow derivative actions, once the threshold for standing is passed, without particularly restrictive additional requirements. The four outliers are, on the one hand, Germany and the UK, which provide for a claim admission procedure and grant the court discretion in reviewing whether the interest of the shareholders in pursuing the claim is not outweighed by the interest of the company in avoiding litigation (for example because litigation would be disruptive, damage the reputation of the company, or come at a sensitive time when the dedication of the executives is more important), and on the other hand, Cyprus and Ireland, which apply with no significant modifications the rule in Foss v Harbottle.

Significant differences exist also within these groups. The German claim admission procedure is structured in a way that refusal by the court to grant permission should be the exception if the other requirements of the law are satisfied (the claimants must have been shareholders at the time they learned about the alleged breach of duty; they requested the company to instigate proceedings, and the company failed to do so within a reasonable time; and the claimants present a prima facie case that the loss suffered by the company is due to dishonesty or gross violation of legal provisions or the articles).247 The limited discretion of the courts can be derived from the formulation of the statute: The

246This rule makes derivative actions for negligence or in widely held companies effectively impossible.

247German Stock Corporation Act, § 148(1).

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courts shall reject the application only if enforcement of the claim is ‘outweighed by the interests of the company’.248 In contrast, UK courts enjoy a wider discretion. If one of the grounds of a mandatory refusal to grant permission is not present,249 the courts shall, in considering whether to give permission, ‘take into account’ a number of factors listed non-exhaustively in the act, for example the good faith of the claimant or the importance that a director acting in good faith would attach to continuing the claim.250

In some countries in group 1, the additional requirements, while generally easy to satisfy, may be onerous depending on the position of the shareholder and the shareholder’s intentions with regard to the investment. For example, in Slovenia, the claimants must deposit their shares with the central clearing and depository house and may not dispose of them until the issue of a final decision on the claim.

Cost rules

Map 3.2.c: Derivative action – cost rules

248ibid., sentence 2, no. 4.

249Companies Act 2006, s. 263(2).

250Companies Act 2006, s. 263(3).

203 Directors’ Duties and Liability in the EU

Legend	Country
The company pays all costs	CZ, EL, HU, LV, SI
The shareholder has to	CY, DE,251 IE, UK
advance some costs (for
example those of the admission
procedure, if any), but can claim
reimbursement from the
company under some
conditions without bearing the
litigation risk
The shareholder pays and	AT, BE, BG, HR, DK, FI, FR, IT, LT, PL,
bears the litigation risk; or the	PT, RO, SK, ES, SE
company pays but can reclaim
the costs from the shareholder
Not applicable because no	EE, LU, NL
derivative action
Not classified (white): MT

Ease of enforcement

It may be useful to integrate the three elements of derivative actions discussed above (standing, conditions to bring the derivative action, and cost rules) into a minority shareholder enforcement index in order to facilitate cross-country comparison and allow an appreciation of the overall ease with which shareholders can enforce breaches of directors’ duties in each Member State if the authorised organs of the company fail to do so. We therefore quantify the three elements on a scale from 1 to 4, with 4 indicating the most advantageous rule for purposes of minority shareholder protection, and aggregate the scores. The assignment of the scores to different statutory rules regarding the three components of the derivative action mechanism is shown in Table 3.2.b, and the constituent as well as aggregate scores per country are listed in Table 3.2.c.

Two caveats are in order. First, in quantifying the regulation of derivative actions in this way, we make the assumption that the three components are of equal importance. This assumption is, in our view, warranted. Restrictive provisions on standing and the conditions for bringing a derivative action impose clear statutory limitations on the possibility of shareholders to enforce the claims of the company against the directors. Either element may have the propensity to render minority shareholders suits altogether impractical. For example, the very generous rule on standing that exists in Cyprus, Ireland, and the United Kingdom (1 share) is all but neutralised by the restrictive conditions of Foss v Harbottle (now superseded by a statutory derivative action mechanism in the UK, but still in force in the other two countries). On the other hand, a light regulation of the procedure of shareholder suits in Denmark, Greece, and a number of other countries is outweighed by the requirement that shareholders must hold at least 10% of the outstanding capital. This has, at least in large companies, the consequence that the derivative action will generally only be available to institutional shareholders. Furthermore, disadvantageous cost rules create practical, but no less effective, impediments.

Nevertheless, such schematic quantification inevitably involves simplifications and a value judgment, which is amplified by the division of the different regulatory approaches into only three (or, in the case of standing, four) groups (see Table 3.2.b below). Therefore, it must be emphasised that the

251 In Germany, the claimant has to bear the costs of the admission procedure if the application is dismissed, unless the dismissal is due to facts relating to the interest of the company that the company could have disclosed prior to the application, but did not disclose. If the application is successful, but the claim is dismissed in whole or in part, the company shall reimburse the claimant, s. 148(6) Stock Corporation Act.

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enforcement index is only intended as a rough approximation of the conduciveness of the regulatory environment to minority shareholder suits and that the availability of the derivative action in a given case will depend on a host of other factors that are not part of below calculus.

Second, a high or low score in the enforcement index should not be equated with a high or low level of minority shareholder protection in the respective jurisdiction. The jurisdiction may have developed substitute mechanisms that supplement private enforcement and give minority shareholders other avenues to complain of an alleged breach of duty or focus on public enforcement through administrative sanctions and criminal law. We will discuss the substitute mechanisms in the next section and show that a number of Member States, for example the Netherlands and the UK, use such functional substitutes to counteract the deficiencies of the derivative action.

Table 3.2.b: Minority shareholder enforcement index – quantification

		Standing		Conditions		Cost rules
4 points		1 share: CY, FR, IE,		No further conditions:		Company pays all
		LT, PL, UK		AT, BE, BG, HR, CZ,		costs: CZ, EL, HU, LV,
				DK, FI, FR, EL, HU, IT,		SI
				LV, LT, PL, PT, RO,
				SK, SI, ES, SE
3 points		> 1 share, but < 5%:		The court has to grant		The claimant has to
		BE, CZ, DE, IT, PT		permission: DE, UK		advance some costs,
						but can claim
						reimbursement under
						some conditions
						without bearing the
						litigation risk: CY, DE,
						IE, UK
2 points		5% ≤ 10%: BG, HU,		-		-
		LV, RO, SK, ES
1 point		10% or more: AT, HR,		The shareholders can		The shareholder pays
		DK, FI, EL, SI, SE		only bring the		and bears the litigation
				derivative action if		risk: AT, BE, BG, HR,
				restrictive requirements		DK, FI, FR, IT, LT, PL,
				are satisfied: CY, IE		PT, RO, SK, ES, SE
Table 3.2.c: Minority shareholder enforcement index – scores per country
Country	Standing		Conditions		Cost rules		Total
AT	1		4		1		6
BE	3		4		1		8
BG	2		4		1		7
HR	1		4		1		6
CY	4		1		3		8
CZ	3		4		4		11
DK	1		4		1		6
FI	1		4		1		6
FR	4		4		1		9

205 Directors’ Duties and Liability in the EU

DE	3	3	3	9
EL	1	4	4	9
HU	2	4	4	10
IE	4	1	3	8
IT	3	4	1	8
LV	2	4	4	10
LT	4	4	1	9
PL	4	4	1	9
PT	3	4	1	8
RO	2	4	1	7
SK	2	4	1	7
SI	1	4	4	9
ES	2	4	1	7
SE	1	4	1	6
UK	4	3	3	10

Map 3.2.d: Minority shareholder enforcement index

206 Directors’ Duties and Liability in the EU

Legend	Country
Total score of the enforcement	CZ, HU, LV, UK
index of 10-11
Total score of 8-9	BE, CY, FR, DE, EL, IE, IT, LT, PL, PT,
	SI
Total score of 6-7	AT, BG, HR, DK, FI, RO, SK, ES, SE
No derivative action	EE, LU, NL
Not classified (white): MT

Substitutes for weak private enforcement

Investigation procedures: In the Netherlands, shareholders holding at least 10% of the capital or a nominal value of EUR 250,000 can request the Enterprise Chamber of the Civil Court of Appeal of Amsterdam to conduct an enquiry into the policy and conduct of the business of the company. The court may order the suspension of directors, appointment of supervisory directors with special powers, suspension of resolutions of the management board or suspension of voting rights. This is of great practical relevance and compensates to some extent for the lack of a derivative action mechanism. Similarly, in a number of Member States minority shareholders holding between 1% and 10% of the share capital may request the court to appoint a special investigator who examines the conduct of the members of the company’s management bodies.252

Disqualification of directors: Most jurisdictions provide for disqualification of the director as a sanction in the company’s insolvency or where the director is convicted of a crime. However, as a substitute for weak private enforcement, disqualification is particularly effective where the sanction is also available outside insolvency and for management mistakes that do not amount to a criminal offence. This is the case in Finland if the director has materially violated legal obligations in relation to the business and in Ireland and the UK, among other reasons, if the conduct of the director ‘makes him unfit to be concerned in the management of a company’.253 In the latter two countries, disqualification of directors is of great practical relevance because of the strictness of the rule in Foss v Harbottle and has produced notable case law informing the interpretation of directors’ duties not only for purposes of the disqualification procedure, but for directors’ liability in general.254

Administrative and criminal sanctions: In all jurisdictions analysed, private enforcement is furthermore supplemented by administrative and criminal proceedings that may result in fines or, in serious cases, imprisonment. The breaches that give rise to such sanctions are enumerated in the company laws or penal codes and relate typically to the misappropriation of corporate assets, fraudulent misstatements in the balance sheet or the profit and loss accounts, unlawful preference of creditors, or the failure to file for the opening of insolvency proceedings. It has been pointed out by practitioners and commentators from several jurisdictions that administrative and criminal sanctions constitute the main

252For example, Austrian Stock Corporation Act, § 130(2) (10% if facts indicate a material violation of the law or the articles

(‘grobe Verletzungen des Gesetzes oder der Satzung’)); German Stock Corporation Act, § 140(2) (1%, with the same proviso as under Austrian law); Lithuanian Civil Code, Art. 2.124 (10%).

253Irish Companies Act 1990, s. 160(2)(d); UK Company Directors Disqualification Act 1986, ss. 6(1), 8(2). In addition to disqualifications, Irish company law also contains a restrictions regime, i.e. the possibility to apply for a court order prohibiting directors of insolvent companies from acting as director of another company for a period of five years, unless the court is satisfied that the director ‘has acted honestly and responsibly in relation to the conduct of the affairs of the company’ (with the burden of proof resting on the director) or the company meets heightened capital requirements, see Irish Companies Act 1990, s. 150.

254For a discussion of the relevance of disqualification orders in the UK see Davies and Worthington, n 169 above, para. 10-2. The situation is similar in Ireland. Leading cases include Re Tralee Beef and Lamb Ltd (In Liquidation); Kavanagh v Delaney [2004] IEHC 139, [2005]1 ILRM 34; Re CB Readymix Ltd (In Liquidation); Cahill v Grimes [2002] 1 I.R. 372; Re Lynrowan Enterprises Ltd, unreported, High Court, O’Neill J., July 31, 2002, discussed in the Irish country report.

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deterrent to misconduct by directors. This assessment indicates that the private enforcement of directors’ duties in the respective jurisdictions is hampered, given that the scope of application of administrative and criminal sanctions is more restrictive than directors’ duties under civil law, the evidentiary burden is higher under criminal law, and public enforcement authorities are often subject to resource constraints that do not apply in the same way to private actors. Private litigation should, therefore, be the more frequently observed enforcement mechanism. In addition, in some countries neither criminal nor civil sanctions are applied regularly. For example, it was submitted that in Cyprus discretion whether to instigate criminal proceedings lies in the hands of the Attorney General, but that these powers are used rarely and that civil liability for breach of directors’ duties, while also only litigated sparingly, is more important.

4. Directors’ duties and liability in the vicinity of insolvency

This section summarises the findings in relation to directors’ duties in companies approaching insolvency. In most jurisdictions, directors’ duties have primarily been designed to address managerial agency problems and – partly depending on the prevailing ownership structures – conflicts between majority and minority shareholders. Underlying this approach is a notion of shareholders as residual risk-bearers within the corporation.255 This view is economically justified as long as the company possesses a substantial amount of equity capital, which is the value at risk from the shareholders’ perspective. However, once a company approaches insolvency – i.e. the equity capital “evaporates” – the economic risk borne by shareholders also disappears; this changes the incentives of both directors and shareholders.256 In this situation, the economic risk is mainly borne by the company’s creditors, who assume the role of residual claimants.257 All EU Member States have developed legal responses to address the problems associated with changed incentives (and roles) as companies approach insolvency.258

In the following sections we describe the strategies adopted by Member States in relation to this problem, focussing in particular on the legal framework applicable in situations where a company attempts to trade its way out of insolvency. Our findings in relation to the insolvency-related duties seem to be of particular importance when combined with the private international law framework of different Member States. This will be addressed in more detail in Section 5, dealing with cross-border issues.

255See J Winter et al., Report of the High Level Group of Company Law Experts on a Modern Regulatory Framework for Company Law in Europe (Brussels, 2002), available at http://ec.europa.eu/internal_market/company/docs/modern/report_en.pdf; see also PL Davies, ‘Directors’ Creditor-Regarding Duties in Respect of Trading Decisions Taken in the Vicinity of Insolvency’, (2006) 7 European Business Organization Law Review 301.

256See e.g. Davies, ibid; T Bachner, ‘Wrongful Trading – A New European Model for Creditor Protection?’ (2004) 5 European

Business Organization Law Review 293; H Eidenmüller, ‘Trading in Times of Crisis: Formal Insolvency Proceedings, workouts and the Incentives for Shareholders/Managers’ (2006) 7 European Business Organization Law Review 239.

257Davies, ibid, at 324.

258See also S Kalss and G Eckert, ‚Generalbericht‘ in: S Kalss (ed), Vorstandshaftung in 15 europäischen Ländern (Vienna: Linde 2005).

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4.1 Duty to file for insolvency and wrongful trading prohibitions

Summary of the country reports in tabulated form

Table 4.1.a: Duty to file for insolvency and wrongful trading prohibitions

Country	duty to file for insolvency or
	wrongful trading
Austria	duty to file
Belgium	duty to file
Bulgaria	duty to file
Croatia	duty to file
Cyprus	wrongful trading prohibition
Czech Republic	duty to file
Denmark	hybrid approach (both)259
Estonia	duty to file
Finland	duty to file
France	duty to file
Germany	duty to file
Greece	duty to file
Hungary	duty to file
Ireland	wrongful trading prohibition
Italy	duty to file
Latvia	duty to file
Lithuania	duty to file
Luxembourg	duty to file
Malta	duty to file
Netherlands	wrongful trading prohibition
Poland	duty to file
Portugal	duty to file
Romania	wrongful trading prohibition
Slovakia	duty to file
Slovenia	duty to file
Spain	duty to file
Sweden	duty to file
United Kingdom	wrongful trading prohibition

259 Case law has established a rule similar to the UK wrongful trading prohibition. Directors who know (or ought to know) that the company has no reasonable prospect of avoiding insolvency must minimise the potential losses to creditors, or else will be held liable. In addition, a duty to file for insolvency also applies.

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Discussion

Map 4.1.a: Duty to file for insolvency and wrongful trading prohibitions in Europe

	Legend	Countries
	Duty to file	AT, BE, BG, DE, EE, EL, ES, FR, FI, HR, HU, IT, LV,
		LT, LU, MT, PL, PT, SE, SI, SK
	wrongful trading	CY, IE, NL, RO, UK
	Both	DK

All Member States examined by us employ one of two main legal strategies to ensure creditors’ interests are properly taken into account in near-insolvent companies.260

First, the vast majority of Member States provide for a duty on the part of a company’s directors to timely file for insolvency. Typically, this strategy is then buttressed by a consequential liability of directors for any depletion of the company’s assets resulting from the delayed insolvency filing. In most Member States employing this strategy, this liability can only be enforced by the liquidator, and thus results in a proportional satisfaction of all creditors’ claims.

260 Denmark combines the two approaches; see the Danish Report in Annex I.

210 Directors’ Duties and Liability in the EU