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Shareholder Activism

Benefits and Drawbacks


Marion Hartmann

This book analyses and compares the benefits and drawbacks of shareholder activism in corporations under US American and German law, applying means of new institutional economics. The analysis concentrates on three fields of action of active shareholders in targeted corporations: nominations and elections, transaction decisions and financial decisions. The author evaluates and compares the effectiveness of the means which active shareholders use and of the limitations they face. She concludes that shareholder activism has benefits and drawbacks. Both require legal actions under the two jurisdictions, such as stronger nomination and election rights under US American law and more effective disclosure obligations under German law.
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B) Introduction to shareholder activism

← 4 | 5 →B) Introduction to shareholder activism

I) What is shareholder activism?

1) Definition of shareholder activism

Shareholders dissatisfied with the management of a corporation or corporate performance may decide for the “exit” and adopt the “Wall-street-rule” by selling their shares. They may also continue to hold their shares without doing anything, better known as “loyalty.”12 Shareholders who aim to express their dissatisfaction employ a wide range of means lying between the sale of shares and the initiation of takeovers or LBOs.13 In 1972, Hirschmann defined this “voice” option as any attempt to change rather than to escape from an objectionable state of affairs through individual or collective positions to the management directly in charge, appeals to a higher authority with the intention of forcing a change in management, or various types of actions and protests, including those meant to mobilize public opinion.14 Its function is to alert a firm or organization to its failings while giving it some time and the choice to respond to the pressures that have been brought to bear on it,15 depending on the costs of alternatives.16 Nowadays, shareholder activism refers to the interest of shareholders in shaping the direction of their company through their participation in the normal processes that shape the company, such as voting through proxies during a shareholder meeting. At the other extreme lies the popular hedge fund practice of accumulating shareholder minority positions in public companies large enough to move the companies single-handedly in one direction or the other or in whatever form the activist practice may take. As a consequence, it is clear that the term refers to attempts by different types of shareholders to use whatever power they have as owners to influence the company’s behavior regarding a wide range of topics from corporate governance issues to pure management decisions.17 Despite this broad interpretation, active shareholders need to be distinguished from the German ← 5 | 6 → phenomenon of professional opponents, whose goal is obstruction when they file legal suits against corporations to extract personal benefits. In contrast, active shareholders generally aim to exercise constructive control over the corporate administration18.19 This introductory section on shareholder activism will therefore consider the varieties of shareholder activism regarding the actors and the strategies and means they apply to pursue them.

2) Motivation to become active20

There may be good reasons for shareholders of large public corporations to remain passive instead of exerting their rights. These reasons include shareholder confidence in managerial expertise, limited returns from potential corporate value increase for individual shareholders with minimal stakes, and free-riding issues21.22 Additional reasons are the dispersed ownership amongst many shareholders–requiring complicated and costly efforts to realize joint decisions (collective-action issue23)24–the quicker and less costly “exit” solution, the limited liability of shareholders,25 and legal obstacles preventing them from using formal accountability mechanisms26.27

Nevertheless, increasing numbers of shareholders decide to become active. “The main motive for active participation of institutional investors in the monitoring of cor

← 6 | 7 → porations has been the potential to enhance the value of their personal investments.”28 The rationale for shareholder activism arises from the need to resolve agency conflicts inherent in a public corporation. Shareholders, as the (economic) owners of the corporation, delegate the decision-making to managers. The board of directors, bound by fiduciary duties towards the shareholders, is supposed to control management. This structure is intended to avoid possible agency problems such as managerial opportunism, in which managers make decisions in their own interest, rather than seeking to benefit shareholders by maximizing shareholder value. Using their delegated responsibility of hiring, firing, compensating, and monitoring the managers, the board of directors can ensure that managers act for the benefit of shareholders.29 A need for shareholder activism arises when the board is not exercising its control task,30 and, therefore, the organizational structure cannot fulfill its task in reducing agency issues resulting from the opportunistic decisions and actions of the managers. Besides the stock market and the market for corporate control, shareholder activism is a means of a non-control related monitoring by active investors that can reduce or eliminate these agency issues.31

Shareholders, such as the decreasing number of blockholders in the case of German corporations and institutional shareholders in U.S. and German corporations, are a less diversified group. Due to the size of their shareholdings they have the opportunity to overcome rational apathy problems based on free-rider issues. The larger sizes of their stakes may allow them to be compensated for their efforts to become active. Furthermore, their large total investments reduce collective action problems, while access to greater amounts of capital allows them to circumvent legal obstacles. The size of their stakes provides them with stronger incentives to become active, since it is usually difficult to choose the “exit” option by selling their stake without giving a significant discount.32

← 7 | 8 →3) History of shareholder activism

Shareholder activism has a longer history in the United States than in Germany. In the United States, shareholder activism has existed since the first half of the past century. After the adoption of the predecessor to Rule 14a-8 of the Securities Exchange Act of 1934,33 individual shareholders began to submit proposals that aimed to improve corporate governance as well as corporate performance.34 Several decades later, shareholders increasingly used these measures to focus not only on corporate governance, but also on social issues.35 Beginning in the mid-eighties, several groups of active shareholders emerged using shareholder proposals that generally aimed to raise awareness of the directors’ accountability to shareholders.36 During the mid-eighties and onward, the steadily growing amount of investments held by institutional investors37 led to their growing stakes in and impact on corporations and resulted in their active involvement, marked by the formation of the Council of Institutional Investors(“CII”). The CII started as a lobbying group for shareholder rights. Later it began to focus on advancing the perspectives of institutional investors. The CII initially focused on proxy proposals, but by the early 1990s it increasingly made use of its access to the administrations and the media. With the decline of the takeover market and the repeated amendment of securities rules beginning in the 1990s, communication among shareholders on matters of voting as well as with the administration was improved.38 The increasing ← 8 | 9 → impact of commercial shareholder advisory firms, especially of the former Institutional Shareholder Services Inc. (“ISS”),39 reduced collective action problems40 and brought the activism of institutional investors to the fore. In recent years, lightly regulated hedge funds in particular have demonstrated growing interest in participating more directly in the decision-making process of their targeted companies, thereby contributing to a partial redefinition of the activism phenomenon.41

In contrast, the phenomenon of shareholder activism in Germany is still a relatively recent one. Prominent cases involving Deutsche Börse AG, TUI AG, or CeWe Color Holding AG, which will be analyzed infra, occurred during the second half of the first decade of the new millennium.42 During the last seasons of shareholder meetings, shareholder activism became a reliable part. The number of active shareholders constantly increased in the last years, as indicated by the participation of active shareholders regarding the share capital.43 This development is based, amongst many reasons, on reforms of corporate law. These included the introduction of the record date through the UMAG44 in 2005, § 123 (3) sent. 3 AktG, making the deposit of shares superfluous while allowing even shareholders from abroad to register for participation. Other developments include the introduction of the shareholder forum, § 127a AktG, allowing shareholders to prepare common motions such as those according to §§ 122, 142 (2), 148 (2) AktG, and so on, seeking to increase ownership-based control in times of increasing freefloat and internationalization.45 Another contribution to this phenomenon is the recently enacted ← 9 | 10 → legislation permitting corporations to opt into a regime allowing shareholders to participate at a shareholder meeting and vote, both online, through amendments in their articles of incorporation, § 118 (1) sent. 2, (2) AktG. Further contributions include the increasing impact of proxy advisory firms.46 Beyond this, market prerequisites have been amended especially through the divestiture of theDeutschland AG.”47 Many of the banks,48 insurance companies, and industrial enterprises held share packages that became fragmented, leading to increased freefloat and decreasing presence rates during shareholder meetings. This made it easier for active shareholders to accumulate significant voting stakes.49 Furthermore, the resulting increase in the number of international institutional investors50 contributed to this movement. Among these were active shareholders, including particularly aggressive hedge funds,51 with relatively small shareholdings who approached management with specific requests regarding corporate policy,52 leading a change from management rule to shareholder rule.

As a consequence of the comparably short history of shareholder activism in German corporations, empirical data and experiences on the effect of shareholder activism on German corporations are correspondingly restricted. Therefore, this thesis will have to fall back on the use of data primarily from U.S. corporations’ experiences with shareholder activism, in few parts only allowing careful inferences to Germany.

← 10 | 11 →4) Actors of shareholder activism

The actors of shareholder activism vary according to the goals, strategies, and means employed. Shareholder associations such as the CII in the United States or the Deutsche Schutzvereinigung für Wertpapierbesitz (“DSW”) and the Schutzgemeinschaft der Kapitalanleger (“SdK”)53 in Germany may exercise shareholder activism. Single minority shareholders and institutional investors can pursue it; the latter concentrate mainly on financial and sometimes strategic goals.54 The significant and steady growth of the stakes in public corporations held by institutional investors—currently representing about three-fourths of the investments in the 1000 largest firms in the United States55— has made them the most important active investors. In Germany, the most active shareholders are domestic and international traditional investment funds, followed by hedge funds and other funds, including private equity funds.56 International investors represent 79 percent of the active investors in Germany.57

A generally acknowledged definition of institutional investors does not exist. They may be comprised of independent legal entities whose core business is the professional management of assets on behalf of their clients and who manage a significant amount of funds that they tend to invest in a highly diversified manner.58 Institutional investors include pension funds, mutual funds, banks, insurance companies, broker/dealers, and hedge funds.59

In the United States, hedge funds (which become active60) have proven to be the preeminent activist shareholders.61 The funds they manage have increased rapidly to about $1.7 ← 11 | 12 → trillion in 2008.62 Instead of concentrating on corporate governance, they have targeted specific aspects of the corporate business or management such as transaction decisions as shareholders of the acquirer or target63 or the amendments of the financial and capital structure of the targeted corporation. Soft forms of shareholder activism have been applied by public pension funds and mutual funds. They are mainly related to corporate governance issues and make use initially of precatory shareholder proposals and resolutions later complemented by private negotiations with the boards.64 However, in recent years, mutual funds particularly have gone beyond such a soft form of activism. For instance, they prevented the sale of the targeted corporation before a substantial rise in price, often teaming up with hedge funds, who took the lead.65 Mutual funds are legally restricted by semiannual disclosure obligations regarding their securities ownership, tax-based diversification requirements, and potential redemption requests at short notice requiring liquidity in their investments. Furthermore, regulations hinder performance-based payments to the fund management company and a lack of incentives regarding shareholder activism results from their being indexed. This is complemented by the costs related to more active activism as well as conflicts of interest resulting from their affiliation with other financial institutions.66 Public pension funds, in contrast, are not subject to diversification requirements or restraints on performance-based fees, nor do they have business ties possibly jeopardized by activism. However, they are confronted with political constraints and conflicts of interest, and their executives face low pay, making them less effective and less supported by other investors.67Hedge funds, on the other hand, are not confronted by the legal constraints facing mutual funds,68 but only by the constraints confronting regular investors.69 The conflicts of interest they are involved in are not as strong, as they are not affiliated with other financial institutions. Furthermore, management fees based on absolute return and proportionally larger investments per corporation have dramatically increased throughout the 2000s, providing hedge funds with stronger incentives to activism. This was made possible through debt-equity ratios beyond two in larger corporations as the financial resources available to hedge funds increased. Moreover, hedge funds make use of financial instruments, which allow ← 12 | 13 → them to reduce costs and strengthen their incentives to pursue activism.70 Finally, their proceedings are very sophisticated regarding their choice of targets, their strategies, and the means they use, including going public with their demands.71 There is hope that hedge funds will finally resolve the issue regarding “who will be responsible for monitoring the managers when there is a separation of ownership and control in the public corporations that dominate our economy?”72 But their precise procedures also provoke concerns.73

Active shareholders usually hold minority positions between 5 and 10 percent, the latter particularly pertaining to the United States.74 A growing stake not only increases the impact of active shareholders, but it also results in economies of scale regarding the control of management. Furthermore, larger stakes make an active shareholder more credible. In case of friction he will scarcely be able to exit the corporation quickly.75 Applicable rules have the consequence that active shareholders usually keep their shareholdings below 10 percent, particularly under the U.S. securities regulator’s short-swing profit rules, as well as additional disclosure obligations.

5) Targeted firms

Targeted firms include all industry sectors, but specialized firms seem to be preferred.76 Until recently, U.S. firms targeted by active shareholders were characterized as poor ← 13 | 14 → performing corporations, whose shares were held by many institutional investors with low inside ownership and whose governance structures were evaluated as comparably poor.77 Meanwhile, the increase in experience and data about shareholder activism in U.S. firms and the altered strategies of active shareholders have changed the overall picture of target firms. Targets still have significantly higher institutional ownership, explainable by the need to rely on the expertise and the support from fellow shareholders to implement the changes given their minority stakes in the target firms.78 Stock market liquidity possibly increases the likelihood of becoming a target because liquidity allows active investors to easily accumulate their stake and monitoring costs may be quickly compensated through trading profits.79 Targets of hedge funds80 are particularly characterized as having comparably low market to book ratio as compared to firms targeted by passive shareholders.81 However, they are characteristically profitable firms with sound operating cash flows and return on assets.82 Views on market capitalization,83 payout ← 14 | 15 → ratios,84 and cash level85 prior to intervention diverge among legal scholars. But data increasingly support the idea of a preference for small targets,86 which can be explained by the lower amount needed for substantial minority stakes and by the ability to avoid an excessive amount of idiosyncratic risk87 with low payout ratios88. They invest after judging that their input by itself can cause the value to register. They are pursuing primarily one of three strategies: to get the target to sell itself at a premium (especially when merger waves apply to the concerned industry), to get the target to sell or spin off a significant asset, so-called “unbundling” (when a discount of around 15 percent applies), or to get the target to pay out spare cash.89

Data regarding firms outside the United States seem to confirm these characteristics.90 Available data on German targets are still comparably limited. Active shareholders seem to prefer corporations possessing several of the following characteristics: strong freefloat, low shareholder presence, undervalued assets, heterogeneous fields of business, unspecified strategic position, and/or controversial management.91

← 15 | 16 →6) Strategies and means used by active shareholders

The goals pursued by active shareholders today are, based on the numbers of institutional investors among the active shareholders, mainly financial in nature and aim to increase the value of their personal investment by raising the stock price or realizing the distribution of corporate capital to the shareholders. Sole strategic goals, such as the aim to improve the general corporate governance and social aims, have become rather secondary.

Active shareholders pursue several strategies to attain these objectives that vary according to the type of active shareholders.92 These range from influence on corporate governance issues to strategic operative issues. The former refer to strategies applied by traditional active investors that aim to amend the corporate rules-of-the-game, while the latter involve corporate transaction decisions or financial and capital structure related decisions of the corporate management. The latter are preferred strategies of hedge funds93 usually based on a careful prior analysis of the targeted corporation.94 In general, active shareholders concentrate on the implementation of generalized strategies related to agency issues, like changes in corporate governance or payout policies on free cash flows, rather than on issues specific to a limited number of targeted firms.95 This approach allows active investors to significantly lower costs when launching a new campaign because they can shift to the use of publicly available information while increasing the likelihood that the strategies are appreciated by market participants, resulting in inflated stock prices and support from fellow shareholders.96 Several investors often act jointly to produce the necessary impact for pursuing a corresponding strategy.

Active shareholders who have decided to raise their “voice” against management and to pursue one or several of the mentioned strategies have a wide array of specific means at their disposal. On an abstract level, active shareholders employ several means to pursue their strategies. These can range from means exercised during the shareholder meeting, such as electing directors in U.S. corporations or supervisory board members of German corporations, respectively, to those exercised at all other times, such as personal talks between active shareholders and members of the administration. These comprise means exercised prior to the formation of the corporate decision as well as those ← 16 | 17 → exercised during its formation. Others range from means explicitly mentioned by statute (shareholder approval of a merger) or precedent (approval of a fundamental corporate decision according to the Holzmüller/Gelatine jurisprudence) to means not explicitly provided by either (“Vote-no campaigns”). Finally, the means of communication may be private or public. The former can simply be a phone call or personal talk to a member of the administration while the latter can involve such means as using media campaigns addressing personal or issue-related critiques.97 Traditional active shareholders as well as hedge funds use an array of divergent means.98

The analysis will focus on three of the most relevant strategies of active shareholders that impact on the corporate governance, corporate M&A decisions, and financial structure of targeted corporations. As a corollary, the different means used by active shareholders to pursue these strategies will be analyzed.

7) Criticism regarding active shareholders

Despite pinning hope on active shareholders, especially hedge funds, to reduce agency issues and resulting costs that would consequently raise shareholder value in targeted corporations,99 their impact has often been tainted with issues concerning opportunistic behavior motivated by vested interests at the expense of the other shareholders of the target. Concerns relate to hedging strategies based on the use of new financial instruments that can lead to decoupling the financial interests of shareholders from their control rights100 as well as larger stakes in third corporations. The “sharpest” accusation ← 17 | 18 → against active shareholders is that they are only acting to realize short-term benefits to the detriment of long-term corporate performance.101 Other concerns are related to the sophistication of some of the active shareholders who may use their strategies to attain personal benefits that are not accorded to the rest of the shareholders.102

II) Theoretical background of shareholder activism – legal and microeconomic

The functional comparison of shareholder activism under U.S.-American and German law requires an understanding of the relevant theories underlying both legal systems of corporate law.

1) The concept of the firm

The theoretical understanding of the corporation as a firm is helpful regarding questions concerning the internal environment of the corporation and the parties involved who are subject to the relevant corporate law.103 It is the first step in understanding the purpose of the internal authority distribution according to both jurisdictions at stake.

The U.S.-American and German understandings of the corporation differ significantly. Under German legal theory, corporations are a legal entity. On the other hand, economically oriented scholars of corporate law who consider the firm as a nexus of contracts have influenced the U.S.-American perspective.104

The German legal theory is determined by the conception of the firm as a separate legal entity independent of its members, having its own separate objective apart from the interests of its shareholders as well as its own rights and duties.105 This conception allows a strict separation between the internal relations of shareholders amongst each other or towards the corporation and the external relations of the corporation with third persons.106 Disputes about the nature of the corporation as a legal person awarded by the ← 18 | 19 → legal system107 or a real social organization with its own body, organs, spirit and soul108 happened in the past due to its relevance for the external relations of corporations.109 Meanwhile, legislation and court rulings have made the decision superfluous.110

In the Anglo-Saxon literature, the debate has been of little relevance in the past decades.111 The growing acceptance of microeconomic approaches and knowledge of corporate law by German corporate scholars,112 a long tradition for U.S.-American scholars, seems to have rekindled this old German dispute.113 The U.S.-American understanding of the firm, introduced by the landmark paper of Ronald Coase,114 is based on the understanding that the firm constitutes an alternative to the market. While it is the price mechanism that directs the resource allocation via exchange transactions in the market, authority and directions by an entrepreneur, similar to a relation between employer and employee, accomplish the allocation of factors of production in the firm.115 Consequently, the use of the firm for the allocation of resources allows for the reduction of transaction costs under certain circumstances as compared to the use of the market mechanism.116

Jensen and Meckling objected to Coase’s understanding of the firm as an entity in which activities were governed by authority.117 According to their conception, the firm is “simply a legal fiction which serves as a nexus for a set of contract relationships among individuals.”118 This individualistic conception119 leads to a new order that allows concentrating on voluntary exchanges and occurring transaction costs as well as work-sharing delegation and delegation costs.120 The nexus of contracts of a firm comprises several agency relationships, as they exist in numerous other contractual relationships with the focus on the relationship between shareholders and management.121 Contracts are not to be understood as contracts in the sense of civil law, but rather as wholly legal relationships based on the will of the involved actors, whether directly or indirectly.122 A separate corporate interest apart from the interest of the involved individuals is not justifiable under this concept.123

← 19 | 20 → Concentrating on the individualistic character124 of the involved actors allows a shift in focus to the contractual relationship between the fiction of the firm and the reciprocity of the firm’s inputs and outputs. In this case, the question regarding what belongs to the firm and what lies outside of it loses its significance125.126 The central feature of this approach is that the consequent hypothetical market from which it cannot be distinguished may govern the company.

Even though the nexus of contracts theory appears similar to the fictional conceptions based on Savigny’s understanding of the corporation,127 it is at odds with the legal understanding of the corporation. First, it is not a legal but an economic theory.128 The significance of the term contract under this conception is far wider than the legal terminus,129 thus preventing legal scholars from drawing any direct conclusions.130 Further, it is a conception of the firm, which is not identical with the conceptions of the legal person. The former includes also business owners of companies without entrepreneurial purpose.131 Regarding its content, the conception contradicts the legal understanding of the corporation as a distinct entity and artificial person.132 This is so because a corporation not only owns the assets of the company, but it may also take action to enforce its legal rights and is responsible for its own debts apart from the rights and debts of its shareholders.133 This latter principle constitutes the basis for the concept of limited liability, allowing investors to minimize their personal risk by offsetting any risk incurred by their investment in a single corporation through diversification.134 Finally, experts have cast doubt on the consistency of the conception of the firm as a nexus of contracts.135

Despite these provisos, the contractual approach should not be completely abandoned. By deconstructing the corporate entity, it sheds light on the internal perspective of a corporation.136 It helps to focus on the relationships between the relevant actors of the firm, such as shareholders and management, who act based on reciprocal expectations and behavior.137

← 20 | 21 →2) Authority allocation in the corporation

Views about the allocation of corporate authority, particularly in the relationship between administration and shareholders, diverge, even on the question of ultimate control.

The economic foundation of the concept of shareholder primacy, which favors the maximization of wealth of the shareholders as residual claimants,138 represents the understanding that the ultimate power rests with the shareholders as the (economic139) owners of the corporation140.141 Therefore, the relationship between shareholders and directors is a principal-agent relationship142 in which corporate directors have the fiduciary duty to make decisions in the best interest of the shareholders.143

Those in favor of the team production theory provide another approach.144 This concept forms the counterpart of the contractual approach145 and is aligned with the communitarian understanding that aims to maximize stakeholder wealth analyzed infra.146 Proponents assert that the main economic function of the public corporation is to provide a vehicle through which shareholders, creditors, executives, rank-and-file employees, and other potential corporate stakeholders can, for their own benefit, jointly relinquish control over the resources to a board of directors.147 In this regard, the directors, as a mediating hierarchy, are seen as trustees of the corporation who balance the interests of competing team members rather than acting as agents.148

The main argument of the team production theory is that corporate productive activity requires contributions from multiple parties such as creditors, employees, managers, and local government, who in return expect to be compensated according to the contracts.149 Strict shareholder primacy would discourage groups from making firm-← 21 | 22 → specific investments that can be essential to the firm’s success, leading ex ante or ex post to inefficient results. Therefore, from an efficiency standpoint, corporate directors should be required to maximize the sum of all returns to the groups participating in the firm. Public corporations would then be empowered to refrain from opportunistic exploitation of non-shareholder constituents, reducing the transaction costs associated with obtaining relationship-specific investments.150 This approach represents an alternative to the principal-agent approach151 which is not able to explain problems such as the exclusion of shareholders from the board, the meaning and function of the corporation’s “legal personality,” derivative action procedures, the structure of director fiduciary duties, and the limited number of shareholder voting rights.152

This approach is limited to public corporations, assuming that non-shareholder constituents are particularly vulnerable to opportunism.153 However, supporters of the approach have not shown why non-shareholder participants in publicly held corporations are more vulnerable to opportunism than in private corporations, especially since certain facets of public corporations, such as the separation of ownership and control, render shareholders themselves more vulnerable than in private firms. Furthermore, this approach undermines the shareholder’s role as the primary monitor and severely constrains the incentive of directors to maximize anything but their own welfare, leading to increased transaction costs.

The final approach is that of director primacy.154 It is aligned with the contractual theory as well as the shareholder value approach analyzed infra. Under this approach, the authority to make decisions is vested in the board of directors, which represents not agents, but rather the embodiment of the corporate principal,155 serving as the nexus of the several contracts that make up the corporation. Since the corporation is seen as something that cannot be owned, the shareholders merely hold a contractual entitlement to a residual claim on corporate assets and profits. Even though shareholder wealth properly controls decision-making, decisions are centralized through the board, which is an essential attribute of efficient corporate governance.

The different theoretical approaches regarding the allocation of authority in a corporation are relevant to an analysis of shareholder authority regarding certain actions. Shareholder actions regarding the corporate decision-making process may be evaluated differently depending on the underlying theoretical framework and the allocation of authority in ← 22 | 23 → the corporation. Under the principal-agent–approach156 prevailing under U.S.- American law, the final authority rests with the shareholders; the director primacy theory identifies the board of directors as the principal; and finally, the team production theory focuses on the interests of all corporate stakeholders as the reason why authority is handed to a third party.

3) The purpose of the corporation

Another closely related theoretical approach relevant to the analysis of shareholder activism concerns the general purpose of the corporation that determines the actions of the administration. Two perceptions of the purpose of a corporation generally prevail. Advocates of the shareholder value157 theory or the shareholder primacy rule158 hold that the corporation’s sole purpose is to serve its shareholders and to maximize their residual claims.159 Communitarians or adherents of the stakeholder theories160 assert that the responsibilities of the corporation are not only to its shareholders but also to other stakeholders, such as creditors, employees, management, clients, suppliers, and the public.161 Correspondingly, corporate law ought to require directors to serve not only the shareholders’ interests, but also those of employees, consumers, creditors, and other corporate stakeholders}162 It does not come as a surprise that supporters of both approaches have widely divergent views on the use of corporate law to promote corporate social responsibility.163 Under the first concept, limits on corporate behavior are set through external regulations or contracts between the relevant constituencies and the corporation. Within corporate law itself, profit maximization is sacrosanct. Communitarians, on the other hand, argue that external regulations and contracts are insufficient to protect the interests of non-shareholders so that those interests should be protected through corporate law, making managers fiduciaries of all stakeholders.164 Concerning shareholders, ← 23 | 24 → communitarians put great emphasis on corporate law as a means to regulate managerial opportunism. They also urge greater shareholder voting power, broad disclosure rights, and strong fiduciary protection.165

Both views have influential supporters.166 Adherents of the communitarian approach argue that the firm constitutes several groups of stakeholders including shareholders, creditors, management, employees, clients, suppliers, and the general public.167 Each of these groups contributes to operational performance, thereby justifying their participation in the management of the firm.168 An economic advantage of this approach is that it binds employees and creditors to the corporation by making it worthwhile for them to be loyal to the corporation. Loyalty is seen as a means of diminishing friction losses.169 Failure to consider their interests in corporate decisions and actions would, in contrast, expose them to the danger of exploitation.170

Opponents of the shareholder primacy concept argue that remuneration of different factor contributions below market value would lead to the migration of the different factors avoiding exploitation.171 Furthermore, the shareholder primacy concept is said to result in management having a short-term focus, sacrificing long-term investments— particularly in research and development to assure product quality and human capital such as loyal employees—in order to maximize profit.172

Taking into account that shareholder value concerns all payment flows during all time periods, including residual value, these concerns are unconvincing.173 Furthermore, ← 24 | 25 → the corporation is primarily a performance of the shareholders, which justifies the primary consideration of their interests.174 In contrast, management’s attempt to serve the corporate interest is complicated because that term is comparably diffuse and hard to define with precision.175 It requires not only additional effort for management to consider the consequences to all stakeholders and to balance their interests, but it can also lead to legal uncertainty as prognoses depend on the premises of management.176

American corporate law generally supports the shareholder primacy approach, as reflected in several important decisions of U.S. courts underlining shareholder wealth as the main focus of a public corporation.177

In contrast, German corporate law appears open to both approaches, leaving supporters of both sides enough leeway to argue for either one.178 The case law of the German Federal Court of Justice refers to the interests of several stakeholders that have to be equally considered when determining the interest of the firm or corporation as the aim of management actions.179 The prevailing approach of legal scholars180 supports the stakeholder value concept as well.181 Similarly, the German Corporate Governance Codex182 demands management to act in the interest of the firm.

Again, it is economic analysis that brings more clarity into the jungle of legal arguments, as it can provide the determining arguments in favor of shareholder primacy.183 Shareholders as residual claimants bear a comparably larger risk than the rest of the stakeholders since they only obtain what remains after the fixed claims of employees, creditors, suppliers, and others have been met.184 Correspondingly, they are the only group of stakeholders ← 25 | 26 → with the appropriate incentives.185 This circumstance has to be distinguished from the fact that all stakeholders of a corporation generally bear risks resulting from incomplete contracts, such as those resulting from hold-ups.186 Furthermore, it is the diffuse character of the shareholder’s investment that has a long-term aim. Its success depends on the right actions and omissions of the management and the economic efforts of the corporation;187 shareholders have fewer opportunities to protect themselves contractually.188 Consequently, they are the ones who most appreciate a gap-filling standard in favor of their interests.189 While other stakeholders’ interests are protected by specific rules outside of corporate law,190 shareholders depend solely on corporate law for the protection of their interests.191 Finally, a singular aim eases the control of management by diminishing management’s discretion and giving it a clear goal. In contrast, the stakeholder concept leaves management with two masters: equity holders and the community. As a consequence, management is accountable to neither group and transaction costs rise.192 Accordingly, the stakeholder approach becomes a formula of justification for almost any management action.193

Considering the stakeholder-friendly rules outside corporate law mentioned before that favor employees, creditors, consumers, and others, the necessity for management to take into account conditions set up by stakeholders to ensure their participation, and the need to satisfy the social expectation to consider interests apart from legal standards, recent German legislation models a moderate preference for shareholder interests.194 It confirms that management may pursue actions to increase shareholder value195 and may be best compared with the new, enlightened shareholder value model of the U.K. Companies Act.196

← 26 | 27 → The theory of the purpose of a corporation is particularly relevant for active shareholders, as they aim to enhance the shareholder value of the targeted corporation in order to privately benefit by having their efforts compensated accordingly. Under a system of shareholder primacy, this aligns the interests of the shareholders with those the administration is obliged to pursue as an agent of the shareholders. This would not be the case under a system of stakeholder preference, as the administration would be obliged not only to pursue shareholder interests but also those of other stakeholders. Accordingly, controlling the administration would not provide as strong an incentive for shareholders and would make shareholder activism less desirable. As the United States has historically followed the shareholder primacy approach, active shareholders have always been provided with the necessary incentives to engage in corporations. For German corporations, the growing acceptance of the enlightened shareholder value model has provided shareholders with the necessary incentives to become active. Under both legal systems, shareholder activism may therefore be evaluated as a potentially desirable corporate governance mechanism that aims to enhance corporate shareholder value of the targeted corporation.

4) The corporate decision-making process

The general decision-making process in public corporations may roughly be described as having four steps: the initiation of a decision, the ratification of the initiative to be implemented, the implementation—meaning the executing of the ratified decision—and finally the monitoring, which measures the performance of decision agents as well as the implementation of possible rewards. As the same agents usually initiate and implement corporate decisions, it may be summarized as decision management, while decision control summarizes ratification and monitoring.197

Public corporations may be characterized by a separation of residual risk bearing and decision management as well as of decision management and decision control. The specific knowledge spread throughout the corporation necessary to make an informed corporate decision as well as diffused residual claims require that corporate decisions are made by diffuse agents throughout the corporation as opposed to residual risk bearers. For cost reasons decision control and residual risk are also separated. The latter of the initially mentioned separations is intended to mitigate the resulting agency problems.198

5) The separation of ownership and control in the corporation

The separation of residual risk and decision management is also known as the separation of ownership and control introduced by Berle and Means in The Modern Corporation and Private Property (1932). Besides external monitoring via stock prices and ← 27 | 28 → the market for corporate control, organizational mechanisms are intended to control the resulting agency issues. Accordingly, internal control in a corporation is delegated by residual claimants to a board of directors, the former retaining approval rights on matters such as board membership, auditor choice, and mergers. Furthermore, management and control functions are also delegated to the board, which in turn delegates most of the decision management functions and many decision control functions to internal agents over which it retains ultimate control. The latter comprise the ratification or monitoring of major policy initiatives as well as the right to hire, fire, and to set the compensation for top-level decision managers.199 However, the latter mechanisms particularly have not always worked efficiently. Retained control rights by residual risk bearers regarding the board of directors under current corporate and securities law have been exercised inefficiently. Members of the board of directors failed to exercise their control rights unselfishly and independently. These agency issues resulted in agency costs as corporate decisions deviated from those which would have maximized shareholder value.200 This provoked the question, “Who monitors the monitors?”

According to Thompson201, shareholder activism by institutional investors, more recently that of hedge funds, represents the final of four attempts under U.S. law to deal with the issue of separation of ownership and control. After the Great Depression, the United States attempted to empower shareholders to make use of their retained control rights regarding the board of directors through the adoption of the securities regulation regime, which provided shareholders with comprehensive disclosure as well as the precatory shareholders proposal rule. The effects of securities laws in empowering shareholders to overcome the separation of ownership and control remained limited, however. Due to changes in shareholder census granting more shareholders a sufficient size and sophistication to counter traditional rational apathy barriers and the eased access to financing allowing shareholders to sell their shares when dissatisfied with corporate performance rather than voting, the market for corporate control grew in the 1980s.202 However, the growing effectiveness of defense measures like poison pills and staggered boards increasingly prevented the quick exchange of boards and left the agency issues related to the separation of ownership and control unsolved. A third attempt that took place parallel to the takeovers represented the proceedings of financial entrepreneurs who assembled the necessary financial means to buy out the entire public ownership of a company. As a consequence, this overcame the separation of ownership and control. Whenever management submitted substantial investments, these provided strong incentives to produce positive payouts. However, since many of those investments involved substantial amounts of debt, the slowdown of the business cycle made many of them ← 28 | 29 → fall.203 The substantial growth of institutional investors replacing individual shareholders seems, however, to overcome issues traditional shareholder activism had faced. The larger stake in the targeted corporations increases the benefits active shareholders reap from a successful campaign. Furthermore, the efforts and related costs necessary to convince and coordinate a reduced number of supportive shareholders may be attributed to a larger investment.204 Economies of scale could further support an active approach. Institutional investors have the necessary financial sophistication on questions of corporate governance and have the opportunity to access necessary information. Both result in lower costs. Moreover, the percentage of shares held by a relatively small number of institutional shareholders, each of them being a repetitive player and possibly involved in a number of similar procedures, reduces costs further.205 As a consequence, issues facing active shareholders from free-riding and rational apathy in controlling the board of directors are reduced. However, several concerns about the effectiveness of shareholder activism in reducing agency conflicts based on the separation of ownership and control that are related to potentially deviating interests have been raised. The remaining question is therefore whether these concerns are justified and, therefore, prevent in practice what has in theory been recognized as the potential of active shareholders to reduce agency issues and costs and increase shareholder value.

III) Systemic differences for shareholder activism in the United States and Germany

A functional legal comparison also needs to consider the systemic differences based on which shareholder activism has developed. These include different underlying legal approaches, but also characteristics of the market, politics, and related matters. Even though systemic differences may limit the ability to draw conclusions about the effect of certain legal rules, they may also be used to explain why different means may have the same function or vice versa.206

1) Organizational authority allocation within the administration

At first sight, a significant difference between the U.S.-American and German corporate governance systems lies in the organizational implementation of the allocation of authority within a corporation. Under the U.S.-American one-tier governance system, both management and control tasks are concentrated in one single organ, the board ← 29 | 30 → of directors.207 It is the board of directors that is responsible for the core management of the corporation, including the determination of medium- and long-term corporate policy and the hiring, firing, and compensation of the executive officers. Especially in public corporations, the board has delegated its principal repository of inherent power to conduct the business and affairs of the corporation208 to hired executive (officers on the highest level) and non-executive officers (the remainder of employees in accentuated positions).209 Accordingly, corporate officers have relatively little inherent power by virtue of their offices.210 While officers are directly determined by the board on the basis of the articles of incorporation or bylaws, which give them restricted authority by virtue of their office and task, the other employees only exercise contractual authority.211 The articles of incorporation usually determine whether it is necessary for the corporation to have a president or chief executive officer (“CEO”), one or more vice presidents, a treasurer, and a secretary, while the bylaws may provide for a chief financial officer (“CFO”), a chief legal officer (“CLO”), or a chief operating officer (“COO”).212 The board may consist of members who simultaneously hold an executive officer position (so-called inside directors) and persons that hold solely a board position (outside directors).

German corporate law, in contrast, requires a two-tier board structure for public cor- porations.213 It provides for two separate and independent bodies in which the tasks of management and control are distributed, the management and the supervisory board.214 The top corporate officers, who are usually absent from the first supervisory tier,215 make up the board’s second tier, while the first tier, in the case of corporations with more than 500 or more employees, also includes codetermination.216 The management board is empowered to represent the corporation and is authorized to direct the corporation and manage the daily affairs of the corporation.217 The supervisory board is generally responsible for controlling and directing the function of the management,218 including the appointment and removal of members of the management board. The control of the management board by the supervisory board is not only ex post. This is particularly the case with regard to the annual financial statements, management’s report on the corporate situation, and current reports of the management to the supervisory board, as well as the general control of the management board.219 The supervisory board also exercises ex ante control of management at different levels of intensity. These include ongoing ← 30 | 31 → discussions and consultation about the formulation of an underlying corporate policy,220 setting-up and increasing approval reserves in favor of the supervisory board, and personnel consequences.221

Nevertheless, this formal and functional distinction between the German two-tier and the U.S.-American one-tier system has started to fade.222 Under Anglo-Saxon practice, there is a tendency to increasingly differentiate between inside and outside directors223 in order to separate management and control tasks of the board between both groups. Daily business and important operational questions are transferred to a so-called management board while control is shifted to outside directors.224 Prejudices regarding the effectiveness of independent directors seem to have disappeared. Since the ratification of the Sarbanes-Oxley-Act (“SOA”), which requires independent directors to be free of any dependence on the company, there exists a tendency of personal separation to ensure the effective control of the remaining members of the board.225 Similarly, the New York Stock Exchange generally requires the independence of the majority of the board members in order to be listed.226 Further, the SOA introduced the requirement that members of the audit committee be independent.227 Under the German system, there is a parallel tendency of loosening the strict division between the responsibilities of the management board to direct and manage the affairs of the corporation and the supervisory board to control the management board. There is an increasing overlap of both functions. For instance, the supervisory board may consult the management board intensively as part of its task of ex ante management control228 or former members of the management board may become a member of the supervisory board.229 Furthermore, the Societate Europae allows the choice between a one-tier and two-tier corporate governance system.230

← 31 | 32 → This tendency of convergence231 on both sides confirms the fact that the goal of either corporate governance system is to achieve the right balance between informed, but unbiased, control. The former is maximized under the one-tier system. Due to the partial identity of managing executive officers and board members, the controlling body is usually well informed about the daily operations of the corporation, which is an important background for efficient control. On the other hand, personal identity leads to a lack of objectivity.232 The two-tier system, in contrast, grants the necessary objectivity for efficient control by providing personal diversity among members of the management and supervisory board, while members of the latter have comparably little information regarding daily corporate operations.233

2) Markets

a) Number of corporations

In contrast to the U.S.-American market, which has more than 12,000 publicly traded corporations,234 the German market has only 3263,235 compared to 80,277 closed corporations236.237 Of these public corporations, only 1100238 are listed on a German exchange, while a significant number is part of a group.239 This impacts the market for corporate control, which in the United States is still an important alternative means of management control. Takeovers in the United States are a frequent phenomenon that force management to produce increasing share prices to avoid being replaced. In comparison, the German corporate landscape allows only a comparably restricted number of takeovers.

b) Corporate finance

In the Anglo-Saxon system of corporate governance, the main source of finance for corporations is the stock market. The well-developed stock market and its underlying rules assure efficient protection for widely dispersed shareowners. They ensure that ← 32 | 33 → even investors with comparably small investments do not have to fear disadvantages and assure them a very high level of liquidity.240

The Continental system of corporate finance was in the past characterized by the predominance of banks not only as major blockholders of German corporations, but also as major creditors of most corporations. Thus, banks were able to impact corporations both as shareholders and creditors. The German capital market’s relatively low liquidity, in contrast, played in the past only a secondary role regarding corporate finance. The significance of bank loans decreased, especially for large corporations, when the German capital markets became internationally integrated, allowing them to be emancipated more and more from national debt financing by banks. Banks, on the other hand, faced increasing competition from international capital markets and foreign banks.241

The German stock market’s catching up with the global capital market has contributed a great deal to the emergence of international institutional investors under the German corporate governance system.242 International institutional investors are often well acquainted with the phenomenon of shareholder activism and are generally more active than the remaining shareholders, making them a possible catalyst for shareholder activism in German corporations. However, the increasing significance of the capital markets and their control mechanism of takeovers increases the pressure on the corporate management to assure steadily increasing share prices to avoid being replaced. This may be in the interest of shareholders but not necessarily for the remainder of stakeholders. The growing impact of the capital markets for corporate finance therefore requires thinking about corresponding amendments.243

c) Shareholder structures

A proper analysis of the significance of shareholder activism for U.S.-American and German corporations requires consideration of the significantly different shareholder structures in both countries: while freefloat in U.S. corporations usually represents the largest stake, the average shareholdings of German corporations are significantly more concentrated with few significant blockholders and comparably low freefloat.244 The shareholder structure remains not without impact on principal-agent issues. In U.S. corporations with significant freefloat, the conflict centers on the relationship of ← 33 | 34 → management and the shareholders. In German corporations with strong blockholders, agency issues shift to the relationship between minority and majority shareholders.245 To understand the development of different shareholder structures requires analyzing the relevant background.

As discussed previously, the Anglo-Saxon system of corporate governance depends on the stock market as its main source of financing. The stock market is accordingly well developed, highly liquid, and has widely spread share ownership. As far as corporate governance is concerned, management of corporations with significant freefloat lies mainly in the hands of the board of directors, while control through dispersed shareholder meetings remains relatively weak.246

In the Continental system, the stock market was mainly a secondary source of finance, since most of the companies were financed through bank loans. The stock market was thus correspondingly less developed. Major shareholdings were in the hands of few economic actors (a network of families, insurance companies, banks, and industrial companies, collectively referred to as Deutschland AG), while corporate freefloat was insignificantly low. Banks not only provided the major portion of corporate financing via loans, but they also played a paramount role by holding significant stakes in most large companies.247 This combination of strong shareholder meeting majorities, delegation of supervisory board representatives, the exercise of proxy voting rights for minor shareholders (the impact of which was reduced by the KonTraG248,249 while the ARUG250 enhanced it in order to increase presence during shareholder assemblies251), and their influence as creditors252 allowed banks to function as a strong control mechanism of management. There was little need to protect them against management opportunism. The German legislator issued regulations corresponding to the underlying circumstances of blockholding shareholders and little freefloat, concentrating on the protection of minority shareholders. As an example, the German group law (Konzernrecht) contains rules that guarantee compensation to minority shareholders for the disadvantages they may suffer at the hands of dominant shareholders.253

However, the dual impact of banks in the German corporate governance system has faded. The increasing impact of the global capital market as a financial source to German corporations has not only dislodged banks from their positions as corporate creditors but ← 34 | 35 → has also started to erode their control positions as major shareholders. This development has occurred not only because the banks have aimed to increase their share price and market capitalization in order to prevent being taken over, but also because they have attempted to make themselves capable of acquiring third banks. Preferring to increase their own share price and based on tax law amendments allowing them to do so with significantly less costs, banks decided to give up their long-term industrial participations. They have become increasingly like typical investors who concentrate on areas of business and accounting with strict separation of business areas, allowing transparent capital market communications. Furthermore, a withdrawal from large industrial participations has allowed banks to improve their reputation and to concentrate on higher-profit activities such as investment banking. Banks had suffered from several scandals involving house banks that held significant stakes and control positions in corporations. Finally, agency costs to obtain reliable information on debtors, which were previously available primarily to house banks, have been reduced by increased corporate transparency rules.254 As a consequence, banks have withdrawn from their historical role as corporate controllers for the entire German corporate landscape.255

The increasing withdrawal of banks from their positions as corporate blockholders represents only an example of an entire movement of disentanglement of long-term reciprocal blockholdings by participants of “Deutschland AG”, caused mainly by the effort to catch up with the global capital market.256

These changes relating to the access of German corporations to the global capital market have impacted the shareholder structure of German corporations. Besides the internationalization and institutionalization of shareholders, freefloat has increased as blockholdings have decreased. The tendency of increasing freefloat is still ongoing and has not been stopped by the financial crisis257. Data provided by the daily press, the Max Planck Institute for the Study of Society, and the Monopoly Commission indicate a correlation between high freefloat and international shareholders, strong added value, and high market capitalization.258 According to data collected and evaluated by the author regarding freefloat in German corporations as of 2008, freefloat in DAX259 corporations amounts to 66 percent, compared to a lower average of 51 percent freefloat in German M-DAX260 corporations.261 The leading corporations united in the DAX increasingly ← 35 | 36 → resemble U.S.-American corporations in their shareholder structure. This trend makes it easier to apply data derived from the application of U.S.-American securities and corporate rules to German corporations, since the German and the U.S. models of corporate governance are becoming increasingly similar.262 However, the remarkable difference in freefloat between the largest 30 and the next 50 largest prime standard corporations in Germany demonstrates the unique characteristics of DAX corporations and the time the general trend toward greater freefloat takes.

The evolving freefloat in German corporations results in increased management power due to the decrease in blockholders among rationally passive minority shareholders and a corresponding shift of agency conflicts from majority-minority shareholder relations to management-shareholder relations.263 The declining prevalence264 of blockholders therefore makes new control structures regarding the agency conflict between management and shareholders necessary.265 One way to overcome the resulting control gap may be through shareholder activism. Shareholder activism may help overcome rational passivity of shareholders and therefore increase the control of management while reducing agency costs resulting from agency issues between management and shareholder authority. The catching up of the German stock market with the global capital market has contributed significantly to the emergence of international institutional investors under the German corporate governance system.266 International institutional investors are often well acquainted with the phenomenon of shareholder activism and are generally more active than the remaining shareholders. They therefore play an important role in filling the control gap through shareholder activism. The reform policy of the German government in amending corporate law stepwise may therefore be understood, among other reasons, as a reaction to the corporate governance shift caused by increasing freefloat267. The question to be raised in this context is whether additional amendments are necessary to respond to this shift and the growing relevance of shareholder activism.

The shareholder structure has an impact on active shareholders. In U.S.-American corporations involving a high ratio of freefloat, the small stakes make the majority of ← 36 | 37 → shareholders rationally passive. As a consequence, active shareholders have to make more intense efforts to convince the relevant quorum of shareholders to support them in their strategy. In addition, corporate management has fewer anchor shareholders it may convince to support its strategy against the impact of active shareholders. On the contrary, the historic shareholder structures of German corporations had the potential to allow blockholding shareholders to exercise comparably intense control on the administration. This made active shareholders with minority positions insignificant in controlling the administration and less successful in the presence of blockholding shareholders who used their influence to reach agreement with the administration upon amendments informally. However, since the shareholder structure of larger listed corporations is changing toward more and more freefloat, the strategies of active shareholders are becoming more efficient.

3) Decision-making practice of the shareholder meeting

Closely related to the different shareholder structures of U.S.-American and German corporations are the different mechanisms for shareholders to participate in the corporate decision-making process.

In the United States, proxy voting is the dominant mode of corporate decision-making in publicly held corporations. The corporate management and sometimes shareholder groups solicit shareholder votes in annual or special shareholder meetings held for the election of directors and the approval of other corporate actions. This is governed by the SEA, while the compliance, particularly the necessary disclosure to shareholders, is assured by the SEC.268 High freefloat is one of the reasons for the currency of proxy voting. This implies that the investment per corporation in relation to the diversified investments of typical U.S. investors is comparably small. In addition, U.S. shareholders, even though investing in U.S. firms, are very dispersed due to the geographic size of the country. For them, it is therefore not worth the effort to visit each shareholder meeting of the many corporations they have invested in. Physical attendance at a shareholder meeting often represents an “uneconomical use of a shareholder’s time” if he can vote by proxy.269 A proxy is a written instrument embodying the authority to vote shares on a shareholder’s behalf. In order to obtain a proxy, the person seeking the proxy must systematically contact shareholders and urge them to execute and return the proxy forms authorizing the proxy holder to cast the shareholder’s votes as designated in the proxy form or according to the proxy holder’s discretion. Section 14(a) SEA authorizes the SEC to promulgate Proxy Rules270 that govern the private conduct of proxy voting, primarily ← 37 | 38 → for disclosure purposes.271 As a consequence of the U.S.-American proxy system, the outcome of the shareholder meeting is usually determined even before it has begun.272

Under German corporate law, the general formation of shareholder opinion takes place during the shareholder meeting through the vote of the present shareholders273. The differences between the systems have been lessened, however, by changes in German law.274 Besides admitting that shareholders grant proxy authority to banks, the German legislator has restricted the limitations on administrational proxy authority. This was initially aimed at preventing corporate organs from exercising voting rights for their shareholders resulting in a self-stabilizing system.275 In 2001, the NaStraG276 amended § 134 (3) sent. 3 AktG a.F. Even if it did not explicitly refer to the admissibility of an authorization of a corporate representative, its admissibility was implied through the underlying legislative materials277 determining it constituted admissible proxy voting.278 The legislative intent was to compensate the increasing withdrawal of banks from proxy voting.279 Similarly, the DCGK recommends that a corporation select a representative who must exercise voting rights according to the directions of the concerned shareholders. The installation of an appropriate corporate representative may be considered a partial reception of the U.S.-American system of proxy voting. Its adoption, however, was limited to material law, and the provisions especially on disclosure and enforcement are not comparable to U.S. securities law and the SEC280. The recent adoption of the ARUG followed the general trend of relaxing the requirement of personal presence during shareholder meetings. Besides introducing online participation and online voting, it supports proxy voting through banks as compared to proxy voting through the administration. By increasing its flexibility through a total make-over of § 135 AktG, it intends to increase ← 38 | 39 → shareholder presence during shareholder meetings to increase shareholder control, since the latter has so far not proven to be a useful alternative281.

4) Politics

The impact of politics on legislation, especially regarding the balance of authority between shareholders and the administration of the company, should not be underestimated. The United States, especially Delaware,282 pursued for many years a policy in favor of a strong corporate management.283 Necessary amendments on the legislative or administrative level in favor of increased shareholder power were repeatedly blocked or delayed. The tide seemed to turn with the inauguration of President Obama. In 2009, he declared giving shareholders increased power in the financial system a key goal, including authorizing the SEC to grant shareholders more voice in corporate elections.284 Changes have not only affected the composition of the SEC. In Germany, Christian- and Social-Democratic governments285 took care of the interests of the established industries and those of the trade unions.286 However, the European policy of strengthening shareholder rights has substantially impacted German corporate and capital market law. This is reflected in the Shareholders’ Rights Directive,287 implemented in German corporate law through the ARUG, as well as past288 and expected amendments to the Transparency Directive289. In the United States, resentments against strong banks were very popular, leading to restrictions against strong financial institutions (the Glass-Steagall-Act of 1933), which may represent only one reason for the comparably high freefloat in U.S. corporations.290 Some argue that former German political support for, in contrast, strong banks has led to soft financial regulations that in the past resulted in concentrated ownership in German corporations.291

← 39 | 40 →5) Labor interests according to German law

Closely related to the impact of politics on corporate governance is their impact on the representation of labor interests in corporate governance. Social-Democratic governments in Germany have assured that corporate management respects employee interests, not only through co-determination. At the same time, the control allocation in favor of labor under German corporate law weakens the ability of investors to control management. Because of the mandatory representation of labor interests in the supervisory board of private and public corporations, the extent to which the controlling organ represents the interests of the economic owners of the corporation may be reduced to as little as the half. This is of particular significance, as the interests of employees and management run rather parallel and in tension with the interests of the capital providers, who aim primarily for increased shareholder value. Accordingly, management aims for an expansion of the firm for reasons of authority, prestige, and pay. Employees prefer an increase in size for better promotion opportunities while downsizing may leave them unemployed. Shareholders, in contrast, aim for efficient firms with good shareholder value. Managers as well as employees are risk averse, as both have tied up their human capital in one firm aiming to prevent risks to their jobs and careers. Shareholders, in contrast, have usually diversified their risk externally, aiming to maximize their shareholder value and preferring high-risk investments as long as the elevated risk is offset by correspondingly elevated return potential. Managers and employees prefer making use of available equity, before restructuring, while shareholders prefer the opposite. Finally, employees prefer high wages and shareholders lower wages, while management with substantial discretion on wages is not likely to fight as strongly for the interests of the shareholders.292 Besides the coherence of interests between managers and employees, the representation of labor on the supervisory board restrains the impact of the economic owners on the composition of the management board; the two-tier system requires impact on the supervisory board before doing so. This is particularly important because the threat to or the actual impact on the management board composition represents one of the means for active shareholders to impact pure management decisions. This control allocation weakens the ability of investors to control management because the interests of labor may capture management’s interests more easily. To make up for this deficiency, investors need to form larger control blocks in the corporation. As a consequence, managers would be monitored more, but not necessarily in the shareholders’ interests.293 This is also reflected in a usual discount on the value of the firm.294

← 40 | 41 →6) Relevant law levels

Finally, it is necessary to keep in mind the different levels of law relevant to the legal analysis of means and limits of shareholder activism that exist under U.S.-American and German jurisdiction. In the United States, securities laws,295 the common law of corporations,296 and listing rules297 need to be considered as relevant law on the prevailing federal level. Corporate law provided on the state law level (this thesis will concentrate on Delaware Corporation Law) represents an additional and secondary rule level.298 Even though corporate law is generally regulated at the state level, the federal legislator has imposed a distinct system of securities law which covers part of the corporate governance rules regarding listed corporations. The federal proxy rules contained in the Securities Exchange Act of 1934 are of particular relevance for this work.

In Germany, European law, the federal corporate, capital market, and co-determination law, and the DCGK are the relevant legislation. European law enjoys primacy and has significantly impacted German corporate and capital market law. The administrations of listed corporations are obliged to state whether or not they have followed the recommendations of the DCGK, § 161 AktG.

IV) Structure and initial thesis

The following analysis will concentrate on the comparison of three of the most frequently applied strategies by active shareholders to actively exercise control over the administration under U.S. and German law.

The first part concentrates on the comparably less active strategy of traditional active shareholders impacting the corporate governance of a targeted corporation by amending the underlying corporate rules-of-the-game. The nomination and election rules regarding directors and supervisory board members, respectively, are the rules-of-the-game that relate most closely to the corporate accountability mechanism of the shareholder franchise. Accordingly, the first part of the analysis will focus on the admissibility of four rule-of-the-game provisions which are important for the effectiveness of this mechanism and therefore for the responsiveness of the agents to the interests of their principals. The admissibility of their implementation has involved many controversies. The second and third part concern more active strategies that are mainly used by hedge funds, which tend to be supported by other active shareholders. Instead of relating to abstract rules-of-the-game, their impact targets the control of specific corporate management decisions. The second part analyses the impact of active shareholders on three specific types of ← 41 | 42 → corporate transaction decisions that have a large impact on the corporation and its shareholders, therefore frequently providing active shareholders with sufficient incentives to become active. The third part of the work focuses on how active shareholders facilitate three different measures relating to the corporate capital structure. The analysis of both the second and third strategy will concentrate on the means and limitations active shareholders are provided and confronted with as well as the effectiveness of the latter to restrict potential opportunistic behavior of active shareholders.

Each of the following three parts will consist of five subparts. After an introduction and initial thesis on each of the three strategies, each part will continue with the analysis of the relevant U.S. law for the strategy analyzed before drawing a conclusion regarding its impact on the thesis. The fourth subpart will continue with the analysis of the relevant German law and the final subpart will then conclude on the initial thesis of the part.

The answer this thesis intends to provide through the analysis of the three frequently applied strategies of active shareholders is, “What are the benefits and drawbacks of shareholder activism?” The question is to be understood in terms of whether current legal regimes need to be amended by, for instance, loosening the requirements for active shareholders to have more access to means granting them the opportunity to create impact. On the other hand, the question is also directed at the effectiveness of the legal limitations under current legal regimes relevant to restricting active shareholders, especially considering accusations of opportunistic behavior often leveled at active shareholders as they pursue their strategies, and, therefore, whether there is need to increase the currently applicable legal limitations.


12Gillan & Starks, The Evolution of Shareholder Activism in the United States 6, (2007); but see Ruffner, Die ökonomischen Grundlagen eines Rechts der Publikumsgesellschaft, 2000, 441 et seq.: distinguishes Exit, Passivity and Control.

13Gillan & Starks, The Evolution of Shareholder Activism in the United States, 5 et seq., (2007); Gillan & Starks, A Survey of Shareholder Activism: Motivation and Empirical Evidence 4, (1998).


15Id. at 33.

16Id. at 136.

17Bassen, Einflußnahme institutioneller Investoren auf Corporate Governance und Unternehmensführung, 2001, 4 et seq., 7 et seq.; Bertaccini, 31 CARDOZO L. REV. 267, 267 (2009); Gillan & Starks, The Evolution of Shareholder Activism in the United States 5 et seq. (2007); Kahan & Rock, 155 U. Pa. L. Rev. 1021 (2007); Schneider, AG 2006, 577 (577).

18For practical reasons, this work will refer, where possible, to the “administration” when referring to supervisory board and/or management board and/or board of directors and/or executive officers.

19Dreher, ZHR 157 (1993), 151 (167); Götze, in: Von Rosen, Die Hauptversammlung vor neuen Herausforderungen, DAI studies issue 41, 2008, 119 (120): Thaeter/Guski, AG 2007, 301 (301 n.3); Werner, Zur Treupflicht des Kleinaktionärs, in: Bierich et al., FS Semler, 1993, 419 (420 et seq.).

20Arnold, ZCG 2008, 221 (225); Gillan & Starks, A Survey of Shareholder Activism: Motivation and Empirical Evidence 13, (1998); Winkler, Die Verantwortung institutioneller Anleger als Aktionäre in Publikumsgesellschaften in Deutschland und den USA, 2008, 90 et seq.

21CLARK, CORPORATE LAW 94 (1986): “[F]reerider problem – the temptation faced by each individual member of a large group, like the shareholders of a public corporation, to fail to make the effort needed to contribute to a group action, because he hopes that the other will do the work and he will benefit anyway.”

22Garrido & Rojo, Institutional Investors and Corporate Governance: Solution or Problem in HOPT & WYMEERSCH, CAPITAL MARKET AND COMPANY LAW 427, 428 (2003).

23EASTERBROOK & FISCHEL, THE ECONOMIC STRUCTURE OF CORPORATE LAW 66 et seq. (1991); Ruffner, Die ökonomischen Grundzüge eines Rechts der Publikumsgesellschaft, 2000, 174 et seq., for more details see note 306.

24Black, 89 MICH. L. REV. 520, 525 (1990): noting that shareholder passivity is less a problem of collective action than of legal barriers.

25Fleischer, ZGR 2001, 1 (17).

26Black, 89 MICH. L. REV. 520, 530-66 (1990): summarizing legal obstacles; Briggs, 32 J. CORP. L. 681, 701 (2007).


28Gillan & Starks, The Evolution of Shareholder Activism in the United States 34, (2007); Götze, in: Von Rosen, Die Hauptversammlung vor neuen Herausforderungen, DAI studies issue 41, 2008, 119 (123).

29Jensen & Meckling, 5 J. FIN. ECON. 305 (1976), available, 5: referring to an agency relationship as a contract under which one or more persons (the principals) engage another person (the agent) to perform some service on their behalf, which involves delegating some decision-making authority to the agent, but despite monitoring and bonding expenditures, the decisions of the agent will still diverge from the decisions that would maximize the welfare of the principal; Gillan & Starks, The Evolution of Shareholder Activism in the United States 13, (2007).

30Gillan & Starks, A Survey of Shareholder Activism: Motivation and Empirical Evidence 13 (1998).

31Fama & Jensen, 26 J. L. & ECON. 301, 313 (1983), available referring to the stock market, the market for takeovers, expert boards as methods to control the agency problems of common stock; Arnold, ZCG 2008, 221 (225).


33The Securities Exchange Act of 1934 (hereinafter „SEA") refers to §§ 78a and following of title 15 of the United States Code (15 U.S.C. §§ 78a et seq.).

34Gillan & Starks, The Evolution of Shareholder Activism in the United States 34, (2007).

35Gillan & Starks, A Survey of Shareholder Activism: Motivation and Empirical Evidence 6 et seq., (1998).

36Gillan & Starks, The Evolution of Shareholder Activism in the United States 7 et seq., (2007).

37ABA/Section of Business Law, 65 BUS. LAW. 107, 135 (2009): estimating that in 2006 private stock ownership had fallen to 33 percent of U.S. equity, in 2007 76,9 percent of the largest 1000 companies were already owned by institutional investors; Kahan & Rock, Embattled CEOs 11, (2008).

38Anabtawi & Stout, 60 STAN. L. REV. 1255, 1279 (2008); David Ben-Ur/Corbin Capital Partners, Shareholder Activism 2, (2007): Besides comparably strong liquidity of corporations in the middle of the first decade of the new millennium, the corporate scandals of the early 2000’s spurred substantial regulatory reform, like the Regulation Fair Disclosure and Sarbanes-Oxley Act, which enhanced the powers of shareholders at the expense of management teams and corporate boards, and more general the malfeasance at major corporations like WorldCom, Enron, and Tyco reduced the reputations of executives and boards and increased the public acceptance of activist programs. More importantly, traditional investors have come out strongly in favor of improved governance practices and their presence has substantially strengthened the hand of activist funds, efficiency enhancing technologies improving the activist tool-kit, and finally slimmer profit opportunities, resulting in many managers gravitating towards activist approaches.; Black, Shareholder Activism and Corporate Governance in the United States 1, (1997): pointing out the modest success of the 1992 amendments of the proxy rules in reducing barriers to coalition building amongst institutions; Briggs, 32 J. CORP. L. 681, 686 (2007); Briggs, 50 BUS. LAW. 99, 99, 147 (1994): Even though only intended to improve communication amongst passive shareholders, active investors have also reaped many of the benefits. But the 1992 amendments did not go far enough. Free speech continued to be chilled by the Proxy Rules and Rule 13(d) SEA; DAVIS & STEIL, INSTITUTIONAL INVESTORS 312 (2001); HAWLEY & WILLIAMS, THE RISE OF FIDUCIARY CAPITALISM 123 (2000): regarding the 1992 reforms to Rule 14a-2 SEA, id. at 149: regarding the 1992 reforms of Rule 13 (d) SEA; Winkler, Die Verantwortung institutioneller Anleger als Aktionäre in Publikumsgesellschaften in Deutschland und den USA, 2008, 123.

39ISS exercised its impact from the late 1980s until 2007, profiting from a regulation of the Department of Labor requiring that pension funds and of the SEC that mutual funds hired someone to vote their shares. According to a Memorandum of the BRT in 2003, 28 et seq.,, 40 percent of its companies were voted by ISS, making the support of ISS essential to the success of a vote on an (corporate governance) issue.

40Anabtawi & Stout, 60 STAN. L. REV. 1255, 1277, 1279 (2008); Briggs, 32 J. CORP. L. 681, 692 (2007); Kahan & Rock, Embattled CEOs 18 et seq., (2008).

41Anabtawi & Stout, 60 STAN. L. REV. 1255, 1278 (2008); Gillan & Starks, The Evolution of Shareholder Activism in the United States 4, 30 et seq., (2007); Park & Tonello, Avoiding Shareholder Activism, THE CONFERENCE BOARD – EXECUTIVE ACTION SERIES, 1, 8, (search “avoiding shareholder activism”) (2009).

42Götze, in: Von Rosen, Die Hauptversammlung vor neuen Herausforderungen, DAI studies issue 41, 2008, 119 (121).

43DAI/McKinsey, Investorendialog im Umbruch, 2009, 9, 17.

44Gesetz zur Unternehmensintegrität und Modernisierung des Anfechtungsrechs [UMAG] [Act on Corporate Integrity and Modernization of the Rescission Right] Sept. 22, 2005, BGBl I at 2802 (F.R.G.).

45Stellungnahme des Bundesrates zum RegE eines Gesetzes zur Unternehmensintegrität und Modernisierung des Anfechtungsrechts [UMAG] [Statement of the Federal Council on the Draft Law of the Federal Government on an Act on Corporate Integrity and Modernization of the Rescission Right], Jan. 7, 2005, BR-Drucks 3/05, 28; Schmolke, ZGR 2007, 701 (727); Seibert WM 2005, 157 (158 et seq.).

46Duve/Basak, BB 2006, 1345 (1345 et seq.): The UMAG helps institutional investors by decreasing requirements regarding extraordinary audits as laid down in §§ 142 (2), 148 AktG, from 10 percent to 1 percent, therefore increasing the available measures for shareholders to pressure the administration; Götze, in: Von Rosen, Die Hauptversammlung vor neuen Herausforderungen, DAI studies issue 41, 2008, 119 (122 et seq.); Heinemann et al., Shareholders Activism-Aktiver Umgang mit aktiven Aktionären, Deutsches Eigenkapitalforum, Nov. 10 – 12, 2008, 12,; Schaefer, NZG 2007, 900 (900): The record date introduction, the in practice lowered significance of the „Depot" proxy, the availability of professional proxy advisors supporting institutional investors, the statutory squeeze out provisions, delisting case law, and so on have contributed to the movement.

47DAI/McKinsey, Investorendialog im Umbruch, 2009, 3; Der stille Ausverkauf, HANDELSBLATT, Jan. 20, 2011, 6: pointing out a tax reform liberating the sales of participations from tax consequences as the main reason for the dissolution of the Deutschland AG; MartinHöpner/Böckler Stiftung, Ende der Deutschland AG?, DIE MITBESTIMMUNG 46 (2000), 11 et seq.

48Interview with Reinhard Schmidt, Boeckler foundation, Und wer kontrolliert die Manager?, MAGAZIN MITBESTIMMUNG 06/2006, available at “This was mainly enforced by the state secretary of the Federal Chancellery Hans Martin Bury, who agreed with some business attorneys of law like Michael Adams that something needed to be done against the power of the banks, which has been successful. All the laws in support of the capital market are, bank authority hindering laws. For me, the lack of bank authority results in a lack of management control.”

49Götze, in: Von Rosen, Die Hauptversammlung vor neuen Herausforderungen, DAI studies issue 41, 2008, 119 (119 set seq.).

50Der stille Ausverkauf, HANDELSBLATT, Jan. 20, 2011, 6: The participation of German in German DAX corporations has decreased from 64,5 percent in 2001, to 44,5 percent in 2011. Accordingly, the number of international investors has increased to 55,5 percent.

51Götze, in: Von Rosen, Die Hauptversammlung vor neuen Herausforderungen, DAI studies issue 41, 2008, 119 (122).

52DAI/McKinsey, Investorendialog im Umbruch, 2009, 3.

53Smend, ZCG 2008, 53 (53).

54Smend, ZCG 2008, 53 (53 et seq.).

55ABA/Section of Business Law, 65 BUS. LAW. 107, 135 (2009).

56DAI/McKinsey, Investorendialog im Umbruch, 2009, 9; Von Rosen & Wieandt, Activist Shareholders: Consensus Instead of Confrontation, FINANZPLATZ 3/2009, 22 et seq.

57DAI/McKinsey, Investorendialog im Umbruch, 2009, 16.

58Garrido, Optimism and Pessimism: Complementary Views on the Institutional Investors' Role in Corporate Governance in HOPT & WYMEERSCH, CAPITAL MARKETS AND COMPANY LAW 449, 452 (2003): Pointing out that the unsolved question of a definition of the term institutional investors underlines different perceptions of institutional investors between Germans and U.S.-Americans, with Germans thinking of banks and Americans thinking of pension and investment funds, proposing pension funds, investment funds, and investment companies; Gerke et al., The Changing Role of Institutional Investors – A German Perspective in HOPT & WYMEERSCH, CAPITAL MARKET AND COMPANY LAW 357, 359 (2003); Pozen, Institutional Perspective on Shareholder Nominations of Corporate Directors 1, (2003); Ruffner, Die ökonomischen Grundlagen eines Rechts der Publikumsgesellschaft, 2000, 436 et seq.; Schmolke, ZGR 2007, 701 (704 et seq.): abstaining from a more specific definition of institutional shareholders as it depends strongly on the regulatory context.

59Kahan & Rock, 155 U. PA. L. REV 1021, 1028 (2007); Kahan & Rock, Embattled CEO's 9, 11, 14, (2008); Schmolke, ZGR 2007, 701 (734, n.98).

60Kahan & Rock, 155 U. PA. L. REV 1021, 1026, 1046 (2007): referring to J.P. Morgan, Global Mergers and Acquisitions Review, 2006, 89; Kahan & Rock, Embattled CEO’s 13, (2008): only 5 percent of all hedge funds.

61Kahan & Rock, 155 U. PA. L. REV 1021, 1028 (2007); Kahan & Rock, Embattled CEO's 13, (2008); Klein & Zur, 64 J. FIN. 187, 214 (2009): noting that 65 percent of the initially stated purposes of hedge funds are aggressive as compared to 46 percent of the initially stated purposes of other entrepreneurial activists.

62Hovanesian, Attack of the Hungry Hedge Funds, BUSINESS WEEK, Feb. 20, 2006,; Kahan & Rock, Embattled CEO's 9, 11 14, (2008).

63Kahan & Rock, Embattled CEO’s 11, (2008).

64Kahan & Rock, 155 U. PA. L. REV 1021, 1042 (2007); Kahan & Rock, Embattled CEOs 13 et seq., (2008).

65Kahan & Rock, Embattled CEOs 13 et seq., (2008).

66Kahan & Rock, 155 U. PA. L. REV 1021, 1049 et seq. (2007).

67Id. at 1057 et seq.

68Schmolke, ZGR 2007, 701 (725): In Germany, in addition to non-specific restrictions, hedge funds are confronted with a limited number of specific restrictions, which are not able to hinder them from proceeding as active shareholders, however. According to § 112 InvG, they constitute “Sondervermögen mit zusätzlichen Risiken”, which requires them to obey the principle of diversifying risks (see § 112 (1) InvG). Their ability to invest in illiquid financial means is further restricted by the quarterly obligation to repurchase, § 116 sent. 1 InvG.

69Kahan & Rock, 155 U. PA. L. REV. 1021, 1049 (2007).

70Anabtawi& Stout, 60 STAN. L. REV. 1255, 1280 (2008).

71Bratton, 95 GEO. L.J. 1375, 1384 (2006); Briggs, 32 J. Corp. L. 681, 711 et seq. (2007); Clifford, 14 J. CORP. FIN. 323, 325 (2008); Engelhardt, Activist Investing aus Unternehmenssicht, M&A Review 4/2008, 194 (195); Kahan & Rock, 155 U. PA. L. REV. 1021, 1062 et seq. (2007); Klein & Zur, 64 J. Fin. 187, 190 (2009); Mayer Brown Rowe & Maw, Securities Update – Hedge Fund and Institutional Shareholder Activism, Apr. 21, 2006,; Partnoy & Thomas, Gap Filling, Hedge Funds, and Financial Innovation 3, 24, 25 (2006); Schmolke, ZGR 2007, 701 (724 et seq.); Seifert, Invasion der Heuschrecken, 2006, 115 et seq.; Thompson, The Limits of Hedge Fund Activism 1 et seq., (2006).

72Thompson, The Limits of Hedge Fund Activism 1, (2006).

73Gillan & Starks, The Evolution of Shareholder Activism in the United States 34, (2007): referring to empty voting, hidden ownership and short-termism; For a discussion of empty voting and hidden ownership, see generally Hu & Black, Hedge Funds, Insiders, and the Decoupling of Economic and Voting Ownership: Empty Voting and Hidden (Morphable) Ownership, (2007); Hu & Black, 79 S. CAL. L. REV. 811 (2006); Hu & Black, 61. BUS. LAW. 1011 (2006); For an argument that the sharpest accusation against activist funds is a focus on short-termism at the expense of long-term profitability, see Kahan & Rock, 155 U. PA. L. REV. 1021, 1022 (2006): determining short-termism at the cost of long-term profitability as the sharpest accusation against activist funds.

74Active shareholders hold typically less than 10 percent. DAI/McKinsey, Investorendialog im Umbruch, 2009, 14; HAWLEY & WILLIAMS, THE RISE OF FIDUCIARY CAPITALISM 128 (2000); Kahan & Rock, 155 U. PA. L. REV. 1021, 1088 (2007): noting that hedge funds acquire “rarely more than 5 to 10 percent.”

75Ruffner, Die ökonomischen Grundlagen eines Rechts der Publikumsgesellschaft, 2000, 459.

76Böhm/Grothe, Hedgefonds-Aktivismus in Deutschland, BVAI Newsletter IV 2009, 14 (15), (choose BAI Newsletter IV/2009): noting that no specific industries are preferred; Clifford, 14 J. FIN. 323, 328 (2008).

77Gillan & Starks, The Evolution of Shareholder Activism in the United States 15, (2007); John & Klein, Shareholder Proposals and Corporate Governance 4, (1995): data relating to shareholder proposals concerning corporate governance; Karpoff, The Impact of Shareholder Activism on Target Companies: A Survey of Empirical Findings 23 et seq., 26, (2001); Karpoff et al., 42 J. FIN. ECON. 365 (1996), available at, abstract: Shareholder-initiated corporate governance resolutions tend to target poorly performing firms, as measured by market- to-book ratio, operating return, and recent sales growth.; Smith, 51 J. FIN. 227 (1996), available at, abstract: Firm size and level of institutional holdings are found to positively related to the probability of being targeted.

78Brav et al., Hedge Fund Activism: A Review 22, (2010).

79Id. at 22 et seq. n.7: pointing out models concluding with the opposite result; Norli et al., Liquidity and Shareholder Activism passim, (2010).

80Klein & Zur, 64 J. Fin. 187, 204 (2009): pointing out the difference between targets of other entrepreneurial activists, which resemble rather the historic opinion of activist targets, and those of hedge funds, which are significantly better performing.

81Boyson & Mooradian, Hedge funds as shareholder activists from 1994-2005 3, (2007); Bratton, 95 GEO. L.J. 1375, 1390 (2007); Brav et al., Hedge Fund Activism: A Review 20, (2010); Brav et al., The Returns to Hedge Fund Activism 2, (2008); Clifford, 14 J. FIN. 323, 328 (2008); Greenwood & Schor, Investor Activism and Takeovers 9, (2009).

82Boyson & Mooradian, Hedge funds as shareholder activists from 1994-2005 3, (2007); Brav et al., Hedge Fund Activism: A Review 20, (2010); Brav et al., The Returns to Hedge Fund Activism 2, (2008); Clifford, 14 J. FIN. 323, 328 (2008): pointing out large returns on equity and assets and that in addition targets of hedge funds have better operating performance prior to the intervention of blockholders.

83Bratton, 95 GEO. L.J. 1375, 1415 et seq. (2007): the market capitalization and the size of targets of active shareholders tends to be mid to large; Klein & Zur, 64 J. FIN. 187, 205 (2009): the market capitalization of hedge fund targets tends to be larger compared to the one of targets of other entrepreneurial investors; Brav et al., Hedge Fund Activism: A Review 20, (2010): target firms are generally smaller than non-target firms and larger firms are less likely to be targeted by hedge funds possibly because of the large amount of capital a hedge fund would need to invest in order to amass a meaningful stake; Brav et al., The Returns to Hedge Fund Activism 2, (2008): Relatively few targeted companies are large-cap firms, which is not surprising given the relatively high cost of amassing a meaningful stake in such a target.

84Clifford, 14 J. FIN. 323, 328 (2008): indistinguishable pay-out ratio; Brav et al., The Returns to Hedge Fund Activism 2, (2008): payout by companies targeted by hedge funds before intervention is lower than that of a matched sample.

85Boyson & Mooradian, Hedge funds as shareholder activists from 1994-2005 11, (2007): firms with excess cash; Bratton, 95 GEO. L.J. 1375, 1415 et seq. (2007): only 61 percent of the small pay-out targets were cash rich; Clifford, 14 J. FIN. 323, 328 (2008): noting that firms targeted by activist have lower cash levels; More carefully Klein & Zur, 64 J. FIN. 187, 205 (2009): The targets of active shareholders have more cash on their balance sheets (even though there may be some basis to the argument that hedge funds target cash-rich companies, they also note that none of the activist samples' cash ratios are significantly different from their control samples' ratios, nor are there discernible differences in debt between the activist groups and control samples) when compared to the targets of other entrepreneurial activists.

86Böhm/Grothe, Hedgefonds-Aktivismus in Deutschland, BVAI NEWSLETTER IV 2009, 14 (15), (choose BAI Newsletter IV/2009): arguing that the targets of hedge funds are primarily Prime Standard Mid-Cap corporations (68 percent), while a few are listed MDAX and SDAX corporations (each 8 percent), and very few are DAX corporations (5 percent), the average market capitalization being €981 million; Boyson & Mooradian, Hedge funds as shareholder activists from 1994-2005 2, 3, 10, 11, 23 (2007); Brav et al., Hedge Fund Activism: A Review 20, (2010); Greenwood & Schor, Investor Activism and Takeovers 9, (2009=; Klein & Zur, 64 J. FIN. 187, 205 (2009); Mietzner & Schweizer, Hedge Funds versus Private Equity Funds as Shareholder Activists – Differences in Value Creation 18, (2008).

87Brav et al., Hedge Fund Activism: A Review 20, (2010).

88Id. at 20 et seq.

89Bratton, 95 GEO. L.J. 1375, 1390 et seq. (2007).

90See Brav et al., Hedge Fund Activism: A Review 23 et seq., (2010): referring to the results regarding shareholder activism in Japan and the U.K.

91Götze, in: Von Rosen, Die Hauptversammlung vor neuen Herausforderungen, DAI studies issue 41, 2008, 119 (125).

92Klein & Zur, 64 J. FIN. 187, 189 (2009).

93Gillan & Starks, The Evolution of Shareholder Activism in the United States 30, (2007).

94Kahan & Rock, 155 U. PA. L. REV. 1021, 1022 (2007): hedge funds focusing on corporate governance and control; DAI/McKinsey, Investorendialog im Umbruch, 2009, 23: Active investors focus on four different strategies: corporate governance, M&A, capital structure, and strategic-operational changes; Götze, in: Von Rosen, Die Hauptversammlung vor neuen Herausforderungen, DAI studies issue 41, 2008, 119 (123 et seq.).

95Bratton, Hedge Funds and Governance Targets: Long-Term Results 2, (2010); Brav et al., Hedge Funds Activism – A Review 23, (2010).

96Bratton, Hedge Funds and Governance Targets: Long-Term Results 2, (2010); Brav et al., The returns to hedge fund activism 7 et seq., (2008).

97DAVIS & STEIL, INSTITUTIONAL INVESTORS 312, 314 (2001): distinguishing between formal means taking usually place during the annual shareholder meeting as opposed to informal means that may be used at all other times, as well as between private and public communication with members of the administration; Gillan & Starks, A Survey of Shareholder Activism: Motivation and Empirical Evidence 4, (1998); Pozen, Institutional perspective on shareholder nominations of corporate directors 3, (2003).

98Gillan & Starks, The Evolution of Shareholder Activism in the United States 30, (2007); Kahan & Rock, 155 U. PA. L. REV. 2021, 2042 et seq. (2007): pointing out the traditional active institutional investors focus on precatory shareholder proposals or in following more active shareholders in their strategies; Brav mentions hedge funds as active shareholders with the widest array of means. He categorizes tactics of hedge funds in categories of increasing aggressiveness, from communication with the administration, to seeking board representation without proxy contest or confrontation, to formal shareholder proposals or public critique, to threats to wage a proxy fight to gain board representation, or to suing the company for a breach of duty. The most aggressive means is an actual proxy fight to replace board members, the hedge funds suing the company and finally the hedge funds intending to take control of the company. Brav et al., Hedge Fund Activism, Corporate Governance, and Firm Performance 43, (2008).

99Arnold, ZCG 2008, 221 (225); Clifford, 14 J. FIN. 323, 323 (2008); Kahan & Rock, 155 U. PA. L. REV. 1021, 1028 et seq. (2007).

100A similar effect results from the increasing involvement of intermediaries (like mutual funds, pension funds, insurance companies, and foundations) who hold publicly traded equity securities for their investors and who may pursue interests apart from increasing the shareholder value of the targeted corporations. Fisch, 34 SEATTLE U. L. REV. 877, 878 (2010), available at However, this issue relates specifically to institutional investors and not to active shareholders in general and has been analyzed by the comparative thesis of Sylko Winkler, Die Verantwortung institutioneller Anleger als Aktionäre in Publikumsgesellschaften in Deutschland und den USA, 2008, who focuses on the responsibility of institutional investors as shareholders of public corporations in Germany and the United States.

101Kahan & Rock, 155 U. PA. L. REV. 1021, 1083 et seq. (2007).

102Anabtawi & Stout, 60 STAN. L. REV. 1255, 1283 et seq. (2008); Briggs, 32 J. CORP. L. 681, 701 et seq. (2007); Kahan & Rock, 155 U. PA. L. REV. 1021, 1070 et seq. (2007).

103Bachmann, Private Ordnung, 2006, 112.

104Gillan & Starks, A Survey of Shareholder Activism 5, (1998); Walz, AG 1996, 161 (165).

105Eidenmüller, JZ 2001, 1041 (1042); Hueck/Winbichler, Gesellschaftsrecht, 2003, § 20 mn.1; Schmidt, Gesellschaftsrecht, 4, 176; Raiser, Recht der Kapitalgesellschaften, 2001, § 3 mn.8.

106Wiedemann, Gesellschaftsrecht, Vol. 1, 1980, § 1 V 1 a, 83.

107Savigny, System des heutigen römischen Rechts, Vol. 2, 1840, 236, 239.

108Gierke, Das Wesen der menschlichen Verbände, 1902, 33.

109Bachmann, Private Ordnung, 2006, 114.

110Id.; Hueck/Windbichler, Gesellschaftsrecht, § 2 mn.8.

111Bachmann, Private Ordnung, 2006, 114.

112Adams, Eigentum, Kontrolle und Beschränkte Haftung, 14 et seq., Zöllner, AG 2003, 2 (12); Eidenmüller, JZ 2001, 1041 (1041); Walz, AG 1996, 161 (168 et seq.).

113Bachmann, Private Ordnung, 2006, 114.

114Coase, 4 ECONOMICA 386, 404 (1937).


116Eisenberg, 24 J. CORP. L. 819, 821 (1999).

117Id. at 822.

118Jensen & Meckling, 3 J. FIN. ECON. 305, 312 (1976), available

119Eidenmüller, JZ 2001, 1040 (1042).

120Walz, AG 1996, 161 (165).

121Ruffner, Die ökonomischen Grundlagen eines Rechts der Publikumsgesellschaft, 2000, 131.

122Zöllner, AG 2003, 2 (10).

123Adams, Eigentum, Kontrolle und Beschränkte Haftung, 14 et seq.; Ruffner, Die ökonomischen Grundlagen eines Rechts der Publikumsgesellschaft, 2000, 168; Walz, AG 1996, 161 (165), Zöllner, AG 2003, 2 (8).

124Eidenmüller, JZ 2001, 1040 (1042).

125Zöllner, AG 2003, 2 (11).

126Ruffner, Die ökonomischen Grundlagen eines Rechts der Publikumsgesellschaft, 2000, 130.

127Walz, AG 1996, 161 (165).

128Bachmann, Private Ordnung, 2006, 115.

129Id. at 115; Hueck/Windbichler, Gesellschaftsrecht, 2003, § 1 mn.28, n.48.

130Hueck/Windbichler, Gesellschaftsrecht, 2003, § 1 mn.28 n.48.

131Id. at § 1 mn.1.

132Cheffins, Company Law 32 (1997).


134Posner, Economic Analysis of Law 424 ET SEQ (2007).

135Eisenberg, 24 J. CORP. L. 819, 836 (1999).

136Bachmann, Private Ordnung, 2006, 118.

137Cheffins, Company Law 32 (1997).

138Easterbrook & Fischel, The Economic Structure of Corporate Law 35 -39 (1991).

139Spindler, in: MüKo AktG, 2008, preliminary comment § 76 mn.2; Winkler, Die Verantwortung institutioneller Anleger als Aktionäre in Publikumsgesellschaften in Deutschland und den USA, 2008, 91 n.210.

140Jensen & Meckling, 3 J. FIN. ECON. 305 (1976), available at; Rich- ter/Furubotn, Neue Institutionenökonomik, 2003, 173 et seq., 224 et. seq.; Ruffner, Die ökonomischen Grundlagen eines Rechts der Publikumsgesellschaft, 2000, 135 et seq.

141Fleischer, Hdb Vorstandsrecht, 2006, § 1 mn.30.

142This is also referred to, in a broader sense, as the shareholder primacy approach.

143Bebchuk, 105 HARV. L. REV. 1435 (1992); Black, 89 MICH. L. REV. 520 (1990); EASTERBROOK & FISCHEL, THE ECONOMIC STRUCUTURE OF CORPORATE LAW (1991); Fama & Jensen, 26 J.L. & ECON. 301 (1983); Fleischer, ZGR 2001, 1 (7 et seq.); Jensen & Meckling, 3 J. FIN. ECON. 305 (1976), available, 5 et seq.; POSNER, ECONOMIC ANALYSIS OF LAW § 4.7, 420 n.3 (2007); Semler/Spindler, in: MüKo AktG, 2004, Vor § 76 mnn.90 et seq.; Smith, 23 J. Corp. L. 277 (1998), available at

144Blair & Stout, 85 VA. L. REV. 247, 248 (1999).

145Id. at 254: pointing out their approach as more consistent with the way a corporation actually works than are prominent contractarian interpretations; Klöhn, ZGR 2008, 110 (139).

146Blair & Stout, supra note 144, at 253.

147Id. at 255.

148Id. at 280 et seq.

149Blair & Stout, 85 VA. L. REV. 247 (1999); Blair & Stout, 79 WASH. U. L. Q. 403, 411-14 (2001), available

150See Meese, 43 WM & MARY L. REV. 1629 (2002), available, 5.

151Blair & Stout, 85 VA. L. REV. 247, 253 (1999); see also Meese, 43 WM & MARY L. REV. 1629 (2002), available, 5.

152Blair & Stout, 85 VA. L. REV. 247, 253 (1999); see also Meese, 43 WM & MARY L. REV. 1629 (2002), available at, 5.

153Blair & Stout, 85 VA. L. REV. 247, 281 (1999).

154Anabtawi, 53 UCLA L. REV. 561, 598 (2006): arguing that while shareholders have widely divering interests that may give them incentives to pursue their private objectives, directors are best suited to manage corporations as they, unlike individual shareholders, owe fiduciary duties to all shareholders; Bainbridge, 97 NW. U. L. REV. 547, 563 (2003).

155Bainbridge, Director Primacy: The Means and Ends of Corporate Governance, UCLA, School of Law Research Paper No. 02-06 (2002).

156Adams, AG 1990, 63 et seq.; Adams, ZIP 2002, 1325 (1330); Richter/Furubotn, Neue Institutionenökonomik, 2003, 173 et seq.

157RAPPAPORT, SHAREHOLDER VALUE 12 (1995); Eidenmüller, JZ 2001, 1041 (1044); Fleischer, Shareholders vs. Stakeholders: Aktien- und übernahmerechtliche Fragen, in: Hommelhoff et al., Hdb Corporate Governance, 2003, 129 (135); Wiedemann, Gesellschaftsrecht, Vol. 1, 1980, § 1 V 1 b, 84.

158Berle, 45 HARV. L. REV. 1365, 1361 (1932); Smith, 23 J. CORP. L., 211, 218 (1998), available at; EASTERBROOK & FISCHEL, THE ECONOMIC STRUCTURE OF CORPORATE LAW 36 et seq. (1991).

159Wöhe/Döring, Einführung in die allgemeine Betriebswirtschaftslehre, 2008, 55, 15.

160Freeman & McVEA, A Stakeholder Approach to Strategic Management, in HITT ET AL., THE BLACKWELL HANDBOOK OF STRATEGIC MANAGEMENT 189, 192 et seq.; Hazen, 69 N.C. L. REV. 213 (1991); Millon, 50 WASH. & LEE L. REV. 1313 (1993); MITCHELL, PROGRESSIVE CORPORATE LAW (1995); V. Werder, Ökonomische Grundfragen der Corporate Governance, in: Hommelhoff et al., Hdb Corporate Governance, 2003, 3 (8 et seq.).

161Wöhe/Döring, Einführung in die allgemeine Betriebswirtschaftslehre, 2008, 55 et seq., 15.

162See Blair & Stout, 85 VA L. Rev. 241, 253 (1999).

163Gordon Smith, God, Mammon & Corporate Law, THE CONGLOMERATE, Nov. 8, 2003,


165Palmiter, Corporations, 6 (2003).

166For arguments in favor of shareholder primacy, see RAPPAPORT, SHAREHOLDER VALUE, 12 et seq. (1995); Bebchuk, 119 HARV. L. REV. 1784, 1813 (2006); Bebchuk, 118 HARV. L. REV. 833, 835 (2005); Bebchuk, 59 BUS. LAW. 43, (2003); Eisenberg, 24 J. CORP. L. 819, 832 (1999); Mülbert, ZGR 1997, 129 (156); For arguments in support of the communitarian or stakeholder view, see POST ET AL., REDEFINING THE CORPORATION – STAKEHOLDER MANAGEMENT AND ORGANIZATIONAL WEALTH 17 (2002); Raiser, Recht der Kapitalgesellschaften, 2001, § 7 mnn.14 et seq.; Windbichler/Hueck, Gesellschaftsrecht, 2009, § 20 mn.15, § 23 mn.15.

167FREEMAN & MCVEA, A STAKEHOLDER APPROACH TO STRATEGIC MANAGEMENT IN Hitt et al., The Blackwell Handbook of Strategic Management 189, 192 (2001).

168Fleischer, Hdb Vorstandsrecht, 2006, § 1 mn.26, Wöhe/Döring, Einführung in die allgemeine Betriebswirtschaftslehre, 2008, 55-57.

169Interview with Reinhard Schmidt, Boeckler foundation, Und wer kontrolliert die Manager?, MAGAZIN MITBESTIMMUNG 06/2006, available at

170Fleischer, Shareholders vs. Stakeholders: Aktien- und übernahmerechtliche Fragen, in: Hommel- hoff et al., Hdb Corporate Governance, 2003, 129 (133).

171See Fleischer, Shareholders vs. Stakeholders: Aktien- und übernahmerechtliche Fragen, in: Hom- melhoff et al., Hdb Corporate Governance, 2003, 129 (133), who counters that a remuneration below market value would result in migration of the concerned groups; Fleischer, Hdb Vorstandsrecht, 2006, § 1 mn.27; Wöhe/Döring, Einführung in die allgemeine Betriebswirtschaftslehre, 2008, 78 et seq.

172Bea/Haas, Strategisches Management, 2005, 84; Bodie, Final Thoughts on the Progressive Dilema, Dec. 9, 2005, THE CONGLOMERATE,

173Fleischer, Shareholders vs. Stakeholders: Aktien- und übernahmerechtliche Fragen, in: Hommel- hoff et al., Hdb Corporate Governance, 2003, 129 (134); Fleischer, Hdb Vorstandsrecht, 2006, § 1 mn.27; Rappaport, Shareholder Value, 54 et seq. (1995).

174Fleischer, Shareholders vs. Stakeholders: Aktien- und übernahmerechtliche Fragen, in: Hommel- hoff et al., Hdb Corporate Governance, 2003, 129 (135); Fleischer, Hdb Vorstandsrecht, 2006, § 1 mn.30; Wiedemann, Organverantwortung und Gesellschafterklagen in der Aktiengesellschaft, 1989, 33.

175Hüffer, AktG, § 76 mn.15.

176Klöhn, ZGR 2008, 110 (141).

177Revlon, Inc. v. Mac Andrews & Forbes Holdings, Inc. 506 A.2d 179, 181-184 (Del. 1986); Dodge v. Ford Motor Co., 170, N.W. 668 (684) (Mich. 1919).

178Fleischer, Hdb Vorstandsrecht, 2006, § 1 mn.29; Groh, DB 2000, 2153 (2158); Klöhn, ZGR 2008, 110 (136); K. Schmidt, Gesellschaftsrecht, § 28 II 1, 812 et seq.; Raiser, Kapitalgesellschaftsrecht, § 14 mn.13; Spindler, in: MüKo AktG, 2008, § 76 mn.77; Zöllner, AG 2003, 2 (7 et seq.); For restrictions in the case of paretetic codetermination Ulmer, AcP 202 (2002), 143 (159); more in detail EMPT, CORPORATE SOCIAL RESPONSIBILITY, 2004, 119 et seq., 138 et seq.

179BGH, Urt. v. 23.06.1997, Az.: II Z 132/93, NJW 1997, 2815 (2816); BGH, Urt. v. 07.03.1994, Az. II ZR 52/93, NJW 1994, 1410 (1411); BGH, Urt. v. 05.05.1975, Az.: II ZR 156/73; NJW 1975, 1412 (1413); Henze, BB 2000, 209 (212).

180Hüffer, Aktiengesetz, § 76 mn.12; K. Schmidt, Gesellschaftsrecht, § 28 II 1a, 813 et seq.

181Klöhn, ZGR 2008, 110 (111).

182Nos. 4.1.1., 4.3.3., 5.5.1. DCGK: Obligation of the members of the management and supervisory board to act in the interests of the enterprise, which according to the Codex's preamble is the “obligation of the Management Board and the Supervisory Board to ensure the continued existence of the enterprise and its sustainable creation of value in conformity with the principles of the social market economy”.

183Fleischer, Hdb des Vorstandsrechts, § 1 mn.25.

184EASTERBROOK & FISCHEL, THE ECONOMIC STRUCTURE OF CORPORATE LAW 36 (1991); Fleischer, Hdb des Vorstandsrechts, § 1 mn.28.

185Ruffner, Die ökonomischen Grundlagen eines Rechts der Publikumsgesellschaft, 2000, 166.

186V. Werder, Ökonomische Grundfragen der Corporate Governance, in: Hommelhoff et al., Hdb Corporate Governance, 2003, 3 (8).

187Klöhn, ZGR 2008, 110 (152 et seq.).

188Fleischer, Hdb des Vorstandsrechts, § 1 mn.28; Klöhn, ZGR 2008, 110 (152 et seq.); Ruffner, Die ökonomischen Grundlagen eines Rechts der Publikumsgesellschaft, 2000, 169.

189Ruffner, Die ökonomischen Grundlagen eines Rechts der Publikumsgesellschaft, 2000, 167.

190Fleischer, Shareholders vs. Stakeholders: Aktien- und übernahmerechtliche Fragen, in: Hommelhoff et al., Hdb Corporate Governance, 2003, 129 (134).

191Fleischer, Hdb Vorstandsrecht, 2006, § 1 mn.28.

192Easterbrook & Fischel, The Eonomic Structure of Corporate Law 38 ET SEQ. (1991).

193Eidenmüller, JZ 2001, 1041 (1044); Fleischer, Hdb Vorstandsrecht, 2006, § 1 mn.28; Klöhn, ZGR 2008, 110 (146).

194Fleischer, Shareholders vs. Stakeholders: Aktien- und übernahmerechtliche Fragen, in: Hommelhoff et al., Hdb Corporate Governance, 2003, 129 (136 et seq.); Fleischer, Hdb Vorstandsrecht, 2006, § 1 mn.31; Seibt, in: Schmidt/Lutter, AktG, 2010, § 76 mn.12; Semler/Spindler, in: MüKo AktG, 2004, Vor § 76 mn.91: supports a moderate shareholder value approach; Weber, in: Hölters, AktG, 2011, § 76 mn.22.

195Several rules have been implemented recently that favor a shareholder value oriented approach by the management board: a corporation may acquire own shares (§ 71 (1) No. 8 AktG), management may be granted share options (§ 192 (2) No. 3 AktG), and international accounting standards may be applied (§ 315 a HGB); Ulmer, AcP 2002, 143 (158 et seq.).

196Fleischer, Shareholders vs. Stakeholders: Aktien- und übernahmerechtliche Fragen, in: Hommel- hoff et al., Hdb Corporate Governance, 2003, 129 (136); Fleischer, Hdb Vorstandsrecht, 2006, § 1 mn.31.

197Fama & Jensen, 26 J. L. & Econ. 301, 303 et seq. (1983).

198Id. at 322 et seq.

199ID. AT 312 ET SEQ.; Cheffins, Company Law 44 (1997); Cooter & Ulen, Law & Economics 139 ET SEQ. (2004); Posner, Economic Analysis of Law 441 (2007).

200Clifford, 14 J. CORP. FIN. 323 (2008); Jensen & Meckling, 3 J. FIN. ECON. 305, 312 (1976), available, 5 et seq.

201Thompson, The Limits of Hedge Fund Activism 4, (2006).

202Id. at 7.

203Id. at 9.

204Schmolke, ZGR 2007, 701 (708).

205Black, 89 MICH. L. REV. 519, 580 (1990); Schmolke, ZGR 2007, 701 (708); Thompson, The Limits of Hedge Fund Activism 10 et seq., (2006).

206Dannemann, Comparative Law: Study of Similarities or Differences? in THE OXFORD HANDBOOK OF COMPARATIVE LAW 383, 398 (2006).

207Leyens, RabelZ 67, 57 (69).

208Hamilton, Corporations, 350 (1992).

209Merkt/Gothel, US-amerikanisches Gesellschaftsrecht, 2006, mn.543, 575, 605, n.102.

210Hamilton, Corporations 350 (1992).

211Windbichler, ZGR 1985, 50 (65).

212Merkt/Gothel, US-amerikanisches Gesellschaftsrecht, 2006, mn.605.

213Kraakman et al., The Anatomy of Corporate Law 56 (2009).

214Leyens, RabelsZ 67, 57 (70).

215§ 105 AktG; Kraakman et al., The Anatomy of Corporate Law 13 (2009).

216Kraakman et al., The Anatomy of Corporate Law 100 N.49 (2009).

217§§ 76 (1), 78 (1) AktG; Hueck/Windbichler, Gesellschaftsrecht, § 23 mn.2.

218Drygalla, in: Schmidt/Lutter, AktG, 2010, § 111 mn.11.

219Leyens, RabelZ 67 (2003), 57, 86.

220BGH, Urt. v. 25.03.1991, Az.: II ZR 188/89; BGHZ 114, 127 (132); Hueck/Windbichler, Gesellschaftsrecht, § 20 mn.26.

221Henze, BB 2001, 53, 59.

222Böckli, Konvergenz: Annäherung des monoistischen und des dualistischen Führungs- und Aufsichtssystems, in: Hommelhoff et al., in: Hommelhoff et al., Hdb Corporate Governance, 2003, 201 (212 et seq.); Spindler, in: MüKo AktG, 2008, Vor § 76 mn.74.

223Besides functional convergence, the Sarbanes Oxley Act also leads to a formal convergence, Donald WM 2003, 705 (712 et seq.); An increasing functional convergence of the corporate governance systems is also confirmed by: Coffee 93 NW. U. L. REV. 641, 657 (1999); Gilson, 49, AM. J. COMP. L. 329, 337 et seq. (2001); Leyens RabelsZ 67 (2003), 57, 76 and 88; and Baums, ZIP 1995, 11 (15).

224Spindler, in: MüKo AktG, 2008, § 76, mn.2; Windbichler, ZGR 1985, 50 (71): autonomization of management to fulfill daily management happens in a formalized way with legal reactions being the adaptation of boards duties including the duty of care regarding its task of election and control.

225See H.R. 3763, sec. 301, 3; Spindler, in: MüKo AktG, 2008, Vor § 76, mn.74.

226See §§ 303 A.01, 303A.00 New York Stock Exchange Listed Company Manual (2004).

227See H.R. 3763, sec. 301.

228BGH, Urt. v. 25.03.1991, Az.: II ZR 188/89; NJW 1991, 1830 (1831); Drygalla, in: Schmidt/Lutter, AktG, 2010, § 111 mn.5.

229Spindler, in: MüKo AktG, 2008, Vor § 76 mn.74.

230Since December 2004, a public corporation may be incorporated as a Societas Europaea in Germany according to European law and German implementing law, and it may be set up with a one- tier or two-tier structure.

231V. Werder, Ökonomische Grundfragen der Corporate Governance, in: Hommelhoff et al., Hdb Corporate Governance, 2003, 3, 20, n.87.

232Donald, WM 2003, 705 (713).

233Id.: Davies, ZGR 2001, 268 (284 et seq.).

234As of 2006, 11,898 companies filed annual reports with the SEC under the SEA. See Smaller Reporting Company Regulatory Relief and Simplification Act, Securities Act Release No. 8819, Exchange Act Release No. 56,013, 73 Fed. Reg. 934, 935 (Jan. 4, 2008), available at

235Statistisches Bundesamt, Statistisches Jahrbuch 2008, 497.


237Lammers, Verhaltenspflichten von Verwaltungsorganen in Übernahmeauseinandersetzungen – Eine rechtsvergleichende Untersuchung des US-amerikanischen, deutschen und europäischen Rechts, 1994, 103 et seq.

238Freudenberg, AG Report 2007, R 375.

239Lammers, Verhaltenspflichten von Verwaltungsorganen in Übernahmeauseinandersetzungen, 1994, 104.

240Garrido & Rojo, Institutional Investors and Corporate Governance: Solution or Problem in HOPT & WYMEERSCH, CAPITAL MARKET AND COMPANY LAW 427, 431 (2003).

241Von Hein, Die Rezeption US-amerikanischen Gesellschaftsrechts in Deutschland, 2008, 383 et seq.; Garrido & Rojo, Institutional Investors and Corporate Governance: Solution or Problem in HOPT & WYMEERSCH, CAPITAL MARKET AND COMPANY LAW 427, 432 (2003).

242Garrido & Rojo, Institutional Investors and Corporate Governance: Solution or Problem in HOPT & WYMEERSCH, CAPITAL MARKET AND COMPANY LAW 427, 437 (2003).

243Interview with Reinhard Schmidt, Boeckler foundation, Und wer kontrolliert die Manager?, MAGAZIN MITBESTIMMUNG 06/2006, available at

244Cheffins, Does Law Matter?: The Separation of Ownership and Control in the United Kingdom 2, (2000); Gourevitch & Shinn, Political Power and Corporate Control 160 (2005); Roe, 120 Harv. L. REV. 460, 495 (2006), available at

245Schäfer/Ott, Lehrbuch der ökonomischen Analyse des Zivilrechts, 2005, 645.

246Garrido & Rojo, Institutional Investors and Corporate Governance: Solution or Problem, in HOPT & WYMEERSCH, CAPITAL MARKET AND COMPANY LAW 427, 431 (2003).

247Id. at 432.

248Gesetz zur Kontrolle und Transparenz im Unternehmensbereicht [Law for Control and Transparency in Business], Mar. 5, 1998, BGBl. I, at 768.

249Gourevitch & Shinn, Political Power and Corporate Control, 163 (2005).

250Gesetz zur Umsetzung der Aktionärsrechterichtlinie [Act Implementing the Shareholder Rights Directive], Jul. 30, 2009, BGBl. I at. 2479.

251Freshfields Bruckhaus Deringer, Das ARUG tritt in Kraft, Aug. 2009, 3,

252Klöhn, ZGR 2008, 110 (151 et seq.); Von Hein, Die Rezeption US-amerikanischen Gesellschaftsrechts in Deutschland, 2008, 383.

253Arnold, ZCG 2008, 221 (224).

254Von Hein, Die Rezeption US-amerikanischen Gesellschaftsrechts in Deutschland, 2008, 385-395.

255Id. at 395.

256Seibert, AG 2002, 417 (418).

257Bundeszentrale für politische Bildung [Federal Agency for Civil Education], Aktionärsstruktur von DAX Unternehmen, 3 et seq., : data for freefloat (stakes below 5 %) in DAX corporations, from year 2001 till 2009: rise from 64,5 % to 82,5 %.

258Von Hein, Die Rezeption US-amerikanischen Gesellschaftsrechts in Deutschland, 2008, 380.

259DAX evaluates the performance of Germany's 30 strongest corporations of the prime-standard measured by market capitalization, stock exchange turnover, and freefloat (blue-chips).

260M-DAX contains the next 50 corporations in market capitalization, freefloat, and stock exchange turnover which also belong to the prime standard of German corporations.

261Freefloat refers to shareholdings below three percent. The data have been collected between January and June 2008. The collected data are based on information provided by the FAZ as well as the BaFin as far as the DAX corporations are concerned, and on information from the BaFin and the Unternehmensregister as far as the M-DAX corporations are concerned.

262Garrido & Rojo, Institutional Investors and Corporate Governance: Solution or Problem in HOPT & WYMEERSCH, CAPITAL MARKET AND COMPANY LAW 427, 432 (2003).

263Their efforts under a system with several blockholders may allow them to “counterpower” the impact of the blockholders, but may as well give them no impact on the blockholders at all, since institutional investors due to their diversification strategy only invest relatively small stakes. Furthermore, the institutional investors may even be impacted by financial institutes, which additionally hold significant stakes resulting in even higher impact of the blockholders on the minority shareholders, id. at 437.

264Schmolke, ZGR 2007, 701 (722).

265Schäfer/Ott, Lehrbuch der ökonomischen Analyse des Zivilrechts, 2005, 633 et seq.; Seibert, AG 2002, 417 (418).

266Garrido & Rojo, Institutional Investors and Corporate Governance: Solution or Problem in HOPT & WYMEERSCH, CAPITAL MARKET AND COMPANY LAW 427, 437 (2003).

267Seibert, AG 2002, 417 (418).

268Eisenberg, Corporations and other Business Organizations cH. 5, § 2 (B) (2005).

269Id., at § 3.

270This is established in the Exchange Act Rules 14a-1 to 14a-20 (11 C.F.R. §§ 240.14a-1-14a-20), of which the most fundamental are the following: Rules 14a-4 and 5 addressing the proxy's format, Rule 14a-3 and Schedule 14A laying down the disclosure requirements in relation to transactions that demand shareholder approval as well as proxies for the election of the directors solicited on behalf of the corporation, backed up by Rule 14a-9, prohibiting false or misleading statements in relation to the solicitation of proxies, Rule 14a-6 governs the filing requirements of the proxy materials with the SEC, while Rule 14a-2 concerns the coverage of solicitations to which the subsequent rules apply. The latter two will be analyzed infra in more detail. Rules 14a-7 and 8 provide shareholders with means to communicate with each other, the former through access to a list of shareholders or the circulation of the requesting holder’s materials, the latter through shareholder proposals to be added to the corporate ballot.

271Eisenberg, Corporations and Other Business Organizations cH. 5, SEC. 3 (2005).

272Eisenberg, 83 HARV. L. REV. 1489, 1494 (1970); Hofstetter, ZGR 2008, 560 (572).

273Marsch-Barner, in Marsch-Barner/Schäfer, Hdb börsennotierte AG, Aktien- und Kapitalmarktrecht, 2005, 1077 et seq.

274Butzke, in: Von Rosen, Die Hauptversammlung vor neuen Herausforderungen, DAI studies issue 41, 2008, 66 (70).

275Hüffer, AktG, § 134 mn.26.

276Namensaktiengesetz [Law on Registered Shares], Jan. 18, 2001, BGBl. I at 123.

277Beschlussempfehlung und Bericht des Rechtsausschusses zum Entwurf eines Gesetzes zur Namensaktie und zur Erleichterung der Stimmrechtsausübung [NaStraG] [Recommendation and Report of the Legal Committee regarding the Draft Law of an Act on Registered Shares], Nov. 15, 2000, BT-Drucks 14/4618, 14 left col.

278Hüffer, AktG, § 134 mn.26a.

279Von Hein, Die Rezeption US-amerikanischen Gesellschaftsrechts in Deutschland, 2008, 252: opposing opinion: Hüffer, AktG, § 134 mn.26a; Spindler, in: Schmidt/Lutter, AktG, 2010, § 134 mn.55.

280Von Hein, Die Rezeption US-amerikanischen Gesellschaftsrechts in Deutschland, 2008, 254.

281Hüffer, AktG, 2010, § 135 mn.3.

282Becker, Verwaltungskontrolle durch Gesellschafterrechte, 1997, 16 mn.24.

283ID. AT 394; Kraakman et al., The Anatomy of Corporate Law 61, 269 (2009).

284See Remarks by President Obama on Wall Street Reform, New York, Apr. 22, 2010,

285Gourevitch & Shinn, Political Power and Corporate Control 160 ET SEQ. (2005).

286Kraakman et al., The Anatomy of Corporate Law 191 (2004).

287European Parliament and Council Directive, 2007 O.J. (L 184) 17.

288Berndt, Global Differences in Corporate Governance Systems 11 (2002).

289European Parliament and Council Directive, 2004 O.J. (L 290) 38.

290Berndt, Global Differences in Corporate Governance Systems 5 (2002); Roe, Strong Managers, Weak Owners pASSIM (1996).

291Roe, Strong Managers, Weak Owners pASSIM (1996); Berndt, Global Differences in Corporate Governance Systems 15 ET SEQ. (2002).

292Roe, 53 STAN. L. REV. 539, 550 et seq. (2000).


294Controversial: For a negative impact: Eidenmüller, Ausländische Kapitalgesellschaften, 2004, § 1 mn.20; more careful with regard to the efficiency effects of codetermination: Oetker, in: Großkomm AktG, 2008, Vor Mitbest mn. 32-34; Roe, 53 STAN. L. REV. 539, 550 n.18 (2000): proposing a discout of 10 – 20 %; no negative impact: Vitols, Ökonomische Auswirkungen der paritätischen Mitbestimmung – Eine ökonometrische Analyse, 2006, 11; more differentiated: Jirjahn/Boeckler, Ökonomische Wirkungen der Mitbestimmung in Deutschland: Ein Update, 2010, 39 et seq., 51: in contrast to older studies, more recent studies increase evidence that codetermination positively impacts productivity and provide more differentiated evidence with regard to the impact of co-determination upon profitability and evaluation on the capital market.

295Especially the Securities Act 1933 and the Securities Exchange Act 1934, as well as rules adopted on their basis.

296Especially the Sarbanes-Oxley Act adopted in 2002.

297Especially the Listed Company Manual of the New York Stock Exchange.

298Becker, Verwaltungskontrolle durch Gesellschafterrechte, 1997, 105 et seq.; Merkt/Gothel, US-amerikanisches Gesellschaftsrecht, 2006, mn.182 et seq.