5.6 Legal Aspects of Equity Provided by Shareholders 167In a partnership, partners have unlimited liability. In company law, some jurisdictions apply
the doctrine of lifting the veil or Durchgriff or particular legal rules to make the controlling
(or sole) shareholder liable (section 10.6), and incorporation in a certain jurisdiction means
that the mandatory provisions of its company and insolvency laws will apply. The firm can
also ensure that its obligations are secured by guarantees or collateral given by controlling
shareholders.
A further way to reduce the risk of bad management decisions is transparency and
the disclosure of information.
Management of information rights. Part of the management of outgoing
information (Volume I) consists of the management of shareholders’ information
rights and the entity’s or its representatives’ duties to disclose information to the
public, to shareholders in general, or to particular shareholders.
Disclosure can be in the interests of the firm. Disclosure of information to
shareholders may help the firm to reduce shareholders’ perceived risk and the cost
of equity. Disclosure can also be used as a monitoring tool for the purpose of
mitigating agency risks, in particular the risk of bad management decisions.
However, disclosure is not always in the best interests of the firm. The firm can
manage the duty to disclose financial information to the public through the choice
of its business form (for example, partnership v limited-liability company) and
share ownership structure (for example, a privately-owned limited-liability
company v a listed company; or a listed company with public disclosure
obligations as a major owner of shares). This is one of the reasons why large
German discounters such as Aldi and Lidl tend to be privately-owned and
secretive.
Such choices will also influence duties to disclose information to shareholders
in private. A shareholder typically has unlimited information rights where the
shareholder is personally liable for the obligations of the entity (for example, in
partnerships). In limited-liability companies, however, there is a higher risk that
shareholders will abuse information disclosed to them or reveal it to third parties
to the detriment of the firm. This risk can be mitigated by limiting their
information rights in general,^145 by limiting rights to selective (private) disclosure,
and by ensuring that effective non-disclosure obligations and sanctions for breach
of confidentiality obligations are in place before making any selective
disclosure.^146
Duties of disclosure. The firm may have to disclose information to shareholders
in various ways. There are few mandatory rules on the disclosure of information in
partnerships. However, there are plenty of mandatory rules for limited-liability
companies.
For example, a limited-liability company is required to disclose information
when it decides on a new share issue or the reduction of outstanding shares.
Information may have to be disclosed to the body, often the general meeting, that
decides on the transaction (for issues that must be decided on by the general
(^145) For example, see § 131 AktG; § 51a GmbHG.
(^146) See, for example, Articles 6(2) and 6(3) of Directive 2003/6/EC (Directive on market
abuse).