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«Abstract In this paper, we analyze judicial review according to the German Stock Corporation Act (Aktiengesetz, §§ 243 et seqq.) and its blocking ...»

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Majority shareholder protection by variable

qualified majority rules

†‡ § ‡

André Casajus, Helfried Labrenz, and Tobias Hiller

(October 2006, this version: June 10, 2008, 15:47)


In this paper, we analyze judicial review according to the German

Stock Corporation Act (Aktiengesetz, §§ 243 et seqq.) and its blocking effect by help of concepts of cooperative game theory. In particular, we suggest a variable qualified majority rules as ingredients of arrangements which balance the interests of a majority shareholder and of the minority shareholders.

Journal of Economic Literature Classification Number: C71, G32, G34, G38, K10.

Key Words: Shapley-Shubik index, Shapley value, reorganization, ban of registration, application for judical review † HHL Leipzig Graduate School of Management, Chair of Economics and Information systems, Jahnallee 59, D-04109 Leipzig, Germany ‡ Universität Leipzig, Wirtschaftswissenschaftliche Fakultät, Professur für Mikroökonomik, PF 100920, D-04009 Leipzig, Germany § Universität Leipzig, Wirtschaftswissenschaftliche Fakultät, Professur für Externe Unternehmensrechnung und Wirtschaftsprüfung, PF 100920, D-04009 Leipzig, Germany.

corresponding author, e-mail: casajus@wifa.uni-leipzig.de We wish to thank a lot of people for their critical comments on earlier versions of this paper. In particular, we are indebted to Franziska Beltz, Esther Pittroff, Matthias Schmidt, Lothar Tröger, and Harald Wiese.

1. Introduction The application for judicial review is a powerful instrument for minority shareholders in order to enforce their interests against a majority shareholder by temporarily blocking measures that already have been resolved. Since restructuring measures and corporate actions often have to be implemented without any delay, the minority shareholders quite often achieve a higher exchange rate of share certificates or a better cash compensation, particularly with regard to restructuring processes. In this paper, we employ cooperative game theory in the discussion of judicial review according to the German Stock Corporation Act (Aktiengesetz, §§ 243 et seqq.).

We do not intend, however, to elaborate on whether and to which extent such a company suffers competitive disadvantages that were, indeed, caused by the delayed implementation of the resolved measures. We rather aim at showing the discrepancy between the de jure and the de facto distribution of power between minority and majority shareholders. An index representing the de facto distribution of power–the Shapley-Shubik (1954) index–indicates that minority shareholders, in comparison to majority shareholders, may have, due to the opportunity of an application for judicial review, too much influence on essential managerial decisions.

By initiating an accelerated process for company reorganizations1 and, eventually, for corporate actions2, the German legislation enabled the applying companies to implement such measures if the corresponding preconditions are met, despite of applications for judicial review pending with a court. The codification of this accelerated process, first, in the German Transformation Law (Umwandlungsgesetz), and, finally, in the German Stock Corporation Act, however, did not really help the majority shareholders to solve the above-mentioned problem.

The merger of the Deutsche Telekom AG (henceforth DTAG) and its subsidiary T-Online AG illustrates this state of affairs. The DTAG, holding 90.14% of T-Online AG shares at the date of the merger agreement (April 29, 2005), was, eventually, able to merge with its subsidiary, but only after the Federal Court of Justice (Bundesgerichtshof) had decided on this matter on May 29, 2006.3 Although a total Gesetz zur Bereinigung des Umwandlungsrechts (UmwBerG), (Law on Revision of Transformation Law), Bundesgesetzblatt, Teil I (1994), pp. 3214—3215.

Gesetz zur Unternehmensintegrität und Modernisierung des Anfechtungsrechtes (Law on Corporate Integrity and Modernization of Shareholder Law Suits), Bundesgesetzblatt, Teil I (2005), pp. 2802—2808.

BGH Beschluss (Decision of the Federal Court of Justice) vom 29.05.2006, II ZB 5/06.

of 99.46% of the T-Online AG shareholders supported the merger with the holding company at the shareholders’ meeting, a minority of merely 0.54%, finally, had blocked the merger for approximately one year.

In the first part of our paper, we have a closer look on the question of why applications for judicial review are so “annoying” for companies. First, we describe the ban of registration of company reorganizations at the commercial register4 and the de facto registration ban of corporate actions in some detail. We argue that the legal reforms of the application for judicial review according to the German Stock Corporation Act are not satisfactory, particularly with respect to the register entry system, and that there is a need for further reforms.

The second part deals with a simple game theoretic model of decisions in a shareholders’ meeting. In particular, we model the shareholder structure of companies by weighted majority games. While a shareholder’s weight/relative share reflects his ownership power, we employ the Shapley-Shubik index as an indicator of a shareholder’s voting power. It turns out that, due to application for judicial review, majority shareholders have too little voting power compared to their ownership power (Berle & Means 1932). Under some simplifying assumptions, we derive a variable qualified majority rule which equalizes voting power and ownership power of the majority shareholder. This rule requires a higher quota to pass a decision than the three-quarter majority5 which is required at the shareholders’ meeting.

Even stronger, in any event, the majority shareholder needs some of the minority shareholders in order to implement the resolved measures without delay. This way, in some cases, the application for judicial review as a means to protect minority shareholders could be waived, and thus, its blocking effect could be avoided.

The concluding remarks try to integrate the discussed problem as well as the suggested solution into the existing proposals for the reform of the application for judicial review under the German Stock Corporation Act.

The German commercial register (Handelsregister) is a publicly accessible directory containing information on all enterprises in a register court’s district (e.g., the name of the company, principal office, nominal capital).

Merger decisions in a shareholder‘s meeting, for example, require the three-quarter majority according to § 65 German Transformation Law (Umwandlungsgesetz).

2. The blocking effect of the application for judicial review

2.1. Registration ban regarding company reorganizations. According to German Transformation Law (§ 16 II), a merger resolved at a shareholders’ meeting will not be entered into the commercial register and will not be implemented as long as any applications for judicial review of this resolution are pending with a court. Yet, according to German Transformation Law (§ 16 III), the competent court may pass an accelerated decision if the application for judicial review is inadmissible or obviously unfounded, or if the company’s disadvantages outweigh the minority shareholders’ ones. If the competent court passes such an accelerated decision, the resolved, but blocked measure will be under legal protection, which means, for instance, that a merger may be implemented to safeguard existing standards.

In this case, the plaintiffs have the right to seek damages, only. To which extent, however, the competent court will pass an accelerated decision is incalculable. The fact that such a lawsuit may turn into a long-time procedure and that the restructuring process may be blocked by the minority shareholders for another period is an additional disadvantage for that company.

When T-Online AG meant to merge with DTAG, the Darmstadt Regional Court (Landgericht Darmstadt), hearing the case on November 4, 2005, did not pass an accelerated decision. However, the Frankfurt/Main Higher Regional Court (Oberlandesgericht Frankfurt/Main) did, in fact, pass an accelerated decision on February 8, 2006, mainly, since the company’s merging interests overweighed the plaintiffs’ interest not to merge. But this court made its decision eligible for an appeal at the Federal Court of Justice. As a consequence, the merger could not be entered in the commercial register and had been blocked until the Federal Court of Justice decided on this case on May 29, 2006. The Federal Court of Justice, eventually, overruled the appeals against the Frankfurt/Main Higher Regional Court’s decision.

This demonstrates that measures which were resolved by a majority of shareholders could not be implemented quickly, despite of the accelerated court procedure, and that there still is a need for further reforms.

2.2. De facto registration bans regarding corporate actions. Resolutions on corporate actions, unlike resolutions on reorganizations, are not affected by a possible ban of registration at the commercial register in case applications for judicial review have been brought to a competent court. According to Voluntary Jurisdiction Law (Gesetz über die Angelegenheiten der freiwilligen Gerichtsbarkeit (FGG), § 127), however, the competent register court decides in its sole discretion whether the registration procedure is suspended when applications for judicial review are pending.

Currently, register courts tend to suspend the registration procedure, unless the competent trial court decides on the applications. Since entering the commercial register depends on the register court’s sole discretion and is, currently, usually not admitted, the result is a de facto registration ban.

When the UMAG6 was passed on September 27, 2005, the accelerated court procedure, which had already been codified in German Transformation Law (§ 16 III), was introduced into the German Stock Corporation Act under § 246a. Hence, resolved corporate actions can be implemented early and without heavy losses if the competent trial court makes the necessary accelerated decision. However, a company faces the same problem as with restructuring measures–the accelerated decision depends on the register court’s sole discretion. In addition, the blocking period depends on the competent regional court’s workload; the term of three months, as codified in § 246a III, cannot be complied with in all cases. As we have already mentioned in Section 2.1, this matter of fact displays a dissatisfactory circumstance for those companies, which again calls for reforms.

3. Variable qualified majority rules

In this section, we analyze the discrepancy between ownership power on the one hand and voting power under fixed majority rules on the other hand by means of cooperative game theory. Following Leech (1988), we model the shareholder structure of public companies by weighted majority games which also have been employed to model committees like the UN Security Council (Bailey & Daws 1998) or parliaments (Felsenthal & Machover 2001, Carreras & Owen 1988, Rapoport & Golan 1985). In order to measure the voting power in such a meeting, we employ the well-known Shapley-Shubik (1954) index. Alternatively, we could have utilized the Banzhaf index (Dubey & Shapley 1979) or some other concept surveyed by Gambarelli (1994), Felsenthal & Machover (1998), or Felsenthal & Machover (2005), for example. In order to demonstrate the basic idea of our approach, however, we focus on the Shapley-Shubik index.

Gesetz zur Unternehmensintegrität und Modernisierung des Anfechtungsrechtes (Law on Corporate Integrity and Modernization of Shareholder Law Suits), Bundesgesetzblatt, Teil I (2005), pp. 2802—2808.

It turns out that in general a shareholder’s voting power does not coincide with his actual share in the company. In order to resolve this incongruence, we propose a variable qualified majority rule for public companies with a majority shareholder.

Our proposal rests upon the simplifying assumption that the other shares float free.

We provide a simple and workable formula for our variable qualified majority rule.

For example, this formula suggests about a three quarters majority in case the majority owner holds slightly more than 50% of the shares.

–  –  –

3.2. Variable majority rules. In the following, we consider a public company with a majority shareholder (player 1) and some minority ones. Its shareholders’ meeting can be modelled by a weighted majority game where the weights reflect the players’ share and where 1 w1 1.

Without minority protection, the simple majority rule is in effect, i.e., q = 1. 2 By w1 q, the majority shareholder is pivotal in all rank orders, and therefore Sh1 [q; w1,..., wn ] = 1 and Shi [q; w1,..., wn ] = 0 for all i 6= 1. Obviously, the voting power of the majority shareholder exceeds his ownership power, 1 w1, i.e., there is no minority protection.

Current legislation can be interpreted as an attempt to address this imbalance.

The German legislator introduced the blocking effect of the application for judical review which–at least temporarily–reduces the voting power of the majority shareholder. As argued in Section 2, this de facto leads to a quota of q = 1, i.e., it is necessary to make decisions unanimously. Then, in all rank orders, the last player is pivotal, i.e., we have Shi [q; w1,..., wn ] = n for all i ∈ N. Again, this outcome is not satisfactory, because this distribution of voting power does not reflect the ownership structure of the company. In a sense, the minority shareholders are over-protected.

Now, the delicate question arises which level of minority protection is the “right” one. The following criterion immediately comes to mind: The majority shareholder’s voting power should equal his ownership power, i.e., Sh1 [q; w1,..., wn ] = w1. In general, of course, this cannot be achieved by a fixed quota. Therefore, we suggest a qualified majority rule which depends on the majority shareholder’s share. In order to avoid extensive case distinctions and in order to derive a simple and workable rule, we assume that the minority shares float free. This can be modelled as follows.

–  –  –

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