No derivative shareholder suits in Europe: A model of percentage limits and collusion

We address one of the cardinal puzzles of European corporate law: the lack of derivate shareholder suits. We explain this phenomenon on the basis of percentage limits which require shareholders to hold a minimum amount of shares in order to bring a lawsuit. We show that, under this legal regime, managers will collude with large shareholders by means of settlements or bribes that impose a negative externality on small shareholders. Contrary to conventional agency models, we find that large shareholders do not monitor the management; as a consequence, there is no free riding opportunity for small shareholders.

Research highlights▶ In Europe, there are virtually no derivate shareholder suits. ▶ The fact that not every single shareholder can bring a lawsuit allows for collusion. ▶ It is optimal for managers to collude with large shareholders. ▶ Contrary to comparable agency models, there is no monitoring and no free riding.