168 5 Equity and Shareholders’ Capital
meeting, see above), as well as to potential investors or the public. Financial
information may have to be disclosed to existing shareholders or the public on a
regular basis (section 5.9.4 and Volume I). A company whose shares have been
admitted to trading on a regulated market must comply with extensive disclosure
obligations (section 5.9).
The management of duties of disclosure is a form of management of outgoing
information. The firm can reduce its disclosure duties in many ways. (a) The firm
may choose the business form of a partnership or at least avoid incorporation as a
public limited-liability company. (b) If the firm is incorporated as a limited-
liability company, the firm can avoid offering shares to the public. The offer of
shares to a small previously defined group of professional investors (private
placements) will trigger less extensive disclosure duties and less extensive duties
to publish a prospectus (for the duty to publish a prospectus, see section 5.9.3). (c)
The firm can also use a pyramid structure (Chapter 7) or special purpose vehicles
(Volume II) when offering shares to a small group of investors.
The extent of managers’ discretion. The way to generate value, the allocation of
value generated by the firm, and the allocation of risk belong to the firm’s most
important strategic choices. These choices should preferably be made by corporate
bodies responsible for furthering the long-term interests of the firm (Volume I).
For this reason, the board should have discretion as to how equity is raised, in-
creased, and reduced.
However, the raising and reduction of equity can adversely affect the interests
of existing shareholders. The raising of new equity by issuing new shares can di-
lute their existing powers and their share of profits. The reduction of equity by
means of buybacks, redemption, withdrawal or otherwise can, in the worst case,
mean that a shareholder is ousted from the firm or loses the value of his invest-
ment.
Depending on the choice of the business form of the firm, shareholders can be
protected against such risks in various ways. (a) In a partnership, the identity of
other partners is important because of partners’ unlimited liability for the obliga-
tions of the partnership. The partners may agree that any change requires a con-
tract between all partners. (b) Similar principles are often used in private limited-
liability companies if they resemble partnerships. The shareholders tend to regu-
late important questions of management either in a shareholders’ agreement or the
articles of association, or both. (c) As regards the protection of shareholders in
listed or public limited-liability companies, there are fundamental differences be-
tween the continental European (EU) model and the US model.
Shareholders have traditionally been protected by mandatory provisions of company law in
continental Europe. According to continental European company laws and the Second
Company Law Directive, existing shareholders have pre-emptive rights.^147 In addition,
many questions relating to shares and legal capital must be decided on by shareholders. The
Second Company Law Directive provides that the general meeting decides on: any increase
in capital;^148 the authorisation of a company body to decide on an increase in the subscribed
(^147) Article 29(1) of Directive 77/91/EEC (Second Company Law Directive).
(^148) Article 25(1) of Directive 77/91/EEC (Second Company Law Directive).