5.6 Legal Aspects of Equity Provided by Shareholders 169capital;^149 the withdrawal of shareholders right of pre-emption;^150 the authorisation of a
company body to decide on withdrawal of shareholders right of pre-emption;^151 the authori-
sation to acquire own shares;^152 reduction in the subscribed capital;^153 the reduction of sub-
scribed capital by compulsory withdrawal of shares;^154 and reduction in the subscribed
capital by the withdrawal of shares acquired by the company itself.^155
The continental European model can be contrasted with the US model. In a large listed
US company, the board usually has plenty of discretion to decide on the raising of equity
and its reduction. Investors are expected to reward or punish the company through the mar-
ket. They reward the company by buying or holding on to their shares (which will increase
the share price and reduce the cost of equity), or punish the company by selling their shares
(which will reduce the share price and increase the cost of equity).
It is characteristic of company laws both in the US and Europe that the exercise of the
board’s powers is constrained by open rules such as the duty to act for a proper purpose and
the principle of equivalent treatment of shareholders.
(d) In a large co-operative, members are protected in a slightly different way. Each
membership is standardised. Each member has an equal share, each share is small,
and members are expected to benefit primarily when they use the services of the
co-operative. They will exit the co-operative by requesting redemption for cash.
As each membership is standardised, management can be given some discretion to
decide on the acceptance of new members and the termination of membership.
Depending on the choice of the business form, managers may be given discre-
tion to decide on shares in different ways. (a) In a small partnership, partners
must, in practice, be responsible for management because of their personal unlim-
ited liability. There is no separate manager class that could have discretion to de-
cide on partners’ shares. A management class may, in practice, become necessary
in a large partnership such as a large law firm. Powers to decide on shares can be
vested in a management body by the partners. (b) In a limited-liability company,
the discretion of the statutory board depends on many choices relating to shares
and the distribution of power in the company (section 5.6.5).
The transferability of shares. The transferability of shares is an important
corporate governance tool which also influences the cost and availability of
equity.
In a partnership, the partners may agree on the terms of exit and how a
membership may be transferred. Because of the contractual nature of partnerships
and the unlimited liability of partners, shares in a partnership cannot, in practice,
be made freely transferable.
This can be contrasted with limited-liability companies. The transferability of
shares belongs to the core characteristics of a limited-liability company, and the
sale of shares is an important form of exit. But although shares issued by a
(^149) Article 25(2) of Directive 77/91/EEC (Second Company Law Directive).
(^150) Article 29(4) of Directive 77/91/EEC (Second Company Law Directive).
(^151) Article 29(5) of Directive 77/91/EEC (Second Company Law Directive).
(^152) Article 19(1) of Directive 77/91/EEC (Second Company Law Directive).
(^153) Article 30 of Directive 77/91/EEC (Second Company Law Directive).
(^154) Article 36 of Directive 77/91/EEC (Second Company Law Directive).
(^155) Article 37 of Directive 77/91/EEC (Second Company Law Directive).