164 5 Equity and Shareholders’ Capital
The rights of shareholders attaching to shares. To begin with, the juridical
nature of the relationship between a legal entity and its shareholders depends on
the law governing the entity. In partnerships, it is typically regarded as one of
contract. In a limited-liability company, the rights of shareholders are, in any case,
governed by provisions of company law and the articles of association of the
company. Whether that relationship is regarded as a contractual one can depend
on differing ideas about whether that legal framework should be complemented by
legal background rules applicable to contracts in general.
In a German limited-liability company, the rights of shareholders are based on company
law statutes and complemented by general principles under the BGB. As that legal
framework is complete and there is little room for the application of principles of contract
law, it would be neither necessary nor meaningful to regard the relationship between
shareholders and the company, or between shareholders inter se, as a contractual one.
According to English law, a contractual relationship subsists between a company and its
members and also between its members inter se.^138 However, that contract is only a
“statutory contract” and parties to that fictive contract do not necessarily have recourse to
all company law remedies.^139
Regardless of the legal nature of that relationship, shareholders can have three
kinds of rights attaching to their shares: economic rights;^140 governance rights;^141
and information rights.^142 Those rights can overlap.
Economic rights range from (a) a right to profits that the entity distributes to its
owners to (b) a right to a share of what is left after all debts have been paid in the
liquidation of the entity.
Governance rights include a limited or an unlimited power to decide on
fundamental matters (such as the existence of the entity as a legal person, the
contents of articles of association or similar constitutional documents, and
structural change), capital and ownership structure (such as the issuance of new
shares), management matters (such as the appointment of managers and decisions
on management matters in general), and the exercise of remedies available to
owners of shares.
Information rights vested in owners of shares are complemented by the duties
of company representatives to disclose information to the public (such as the duty
to disclose financial information, see section 5.9.4 and Volume I), shareholders in
general, or a particular shareholder. The purpose of information rights vested in
shareholders is to help them, first, to take decisions on the basis of useful
information (for the usefulness of information, see Volume I) and, second, to
monitor the performance of their investments and the management of the firm.
Management of economic rights. Shareholders’ rights affect the firm in many
ways, and it is in the interests of the firm to manage the allocation of those rights.
(^138) Section 33 of the Companies Act 2006.
(^139) See Rayfield v Hands [1960] Ch 1.
(^140) In German: Vermögensrechte.
(^141) In German: Mitwirkungsrechte.
(^142) In German: Auskunfts- und Einsichtsrechte.