Why do Shareholder Derivative Suits Remain Rare in Continental Europe?

Abstract

The objective of this symposium piece is to explore why shareholder derivative suits are rare in Continental Europe, while they are the central mechanisms of corporate governance enforcement in the United States. I focus on Germany, France and Italy, and provide more limited references regarding derivative suits in Austria, Belgium, the Netherlands, Spain, and Switzerland. The two points I seek to make can be summarized under the headings of the “Anna Karenina Principle” and “The Path of Least Resistance.”Jared Diamond popularized the “Anna Karenina Principle” based on the first line of Leo Tolstoy’s classic novel, according to which “all happy families are alike.” Diamond varies the idea to explain that an animal species, to be susceptible to domestication by humans, needs to meet a list of criteria. It fails the test if a single one is not met. An analogous point can be made for derivative suits. Only the US and Japan seem to “get it right” with respect to all necessary criteria to make derivative litigation an attractive model for shareholders. In other words, no single factor suffices to explain the scarcity of derivative litigation in Continental Europe. Each country fails the test with respect to at least one criterion, most fail with respect to several. I survey the available explanations and additional ones, focusing on minimum share ownership requirements, the allocation of litigation risk, access to information, and limitations regarding potential defendants.The small number of derivative suits is often seen as a reason why Continental European corporate law is underenforced. While I do not attempt to disprove this claim, I suggest that that there is a significant degree of corporate law enforcement in Continental Europe. If derivative suits are difficult, disgruntled shareholders will take the “Path of Least Resistance” and resort to other enforcement mechanisms. I therefore address other ways in which shareholders can seek judicial recourse that do not take the shape of derivative litigation, namely rescission suits, which are common in several countries, but subject to a particularly intense debate in Germany; criminal enforcement, on which shareholders are able to “piggyback” e.g. in France; and the Dutch model of judicial “inquiry proceedings.” Each of these provides makes it easier for shareholders to seek redress than derivative suits, who are likely to seek the “path of least resistance” in litigation. While the success of these mechanisms that corporate law is equally strongly enforced as it is in the United States, we can identify some partial functional equivalents.