174 5 Equity and Shareholders’ Capital
credit enhancements for the debts of the firm. Usually, the owner of a small busi-
ness tends to be personally liable for some or all debts of the firm regardless of its
legal form because lenders typically require personal undertakings by the owner.
In practice, the focus will be on the firm v non-controlling shareholder relation-
ships, because the firm v controlling shareholder relationships will be managed by
the controlling shareholder rather than the firm: this is what being a controlling
shareholder means.
The rights of shareholders. Both controlling shareholders and minority
shareholders have rights that act as a constraint on management (for controlling
and minority shareholders’ corporate governance tools, see Volume I).
The principle of equivalent treatment of holders of securities of the same
class protects in particular minority shareholders. This principle belongs to the
general principles of Member States’ company and securities markets laws (see
Volume I).
Shareholders may have pre-emptive rights. Shareholders’ pre-emptive rights
mean the right to subscribe for new shares issued by the company in proportion to
existing shareholdings. In addition, pre-emptive rights may include the right to
buy existing shares sold by the company. Shareholders’ pre-emptive rights belong
to the most fundamental principles of continental European company laws. In con-
trast, this was not the case in England before the Second Company Law Directive
was implemented by the Companies Act 1980.
The Second Company Law Directive does not require pre-emptive rights for all
shareholders.^172 First, the Directive applies only to public limited-liability compa-
nies. For example, the new Finnish Company Act of 2006 made pre-emptive
rights optional for private limited-liability companies. Second, the Directive pro-
vides for pre-emptive rights “whenever the capital is increased by consideration in
cash”.^173 The laws of a Member State will therefore not need to apply those rights:
when capital is not increased at all (this would require, as in Finnish company law,
the separation of shares and capital); when capital is increased by consideration
other than cash (such as shares in another company); or to the decision to issue
share option rights, convertible loans, or warrants (capital will necessarily have to
be increased only when those rights are exercised). Third, the laws of a Member
State need not apply pre-emptive rights to shares which carry a limited right to
participate in distributions and/or in the company’s assets in the event of liquida-
tion.^174
Shareholders have information rights (Volume I). (a) In the EU, a private
limited-liability company must disclose basic information to the public according
to the First Company Law Directive.^175 (b) It must disclose periodic information
according to the standards set out by the Fourth and Seventh Company Law Direc-
(^172) Article 29(1) of Directive 77/91/EEC (Second Company Law Directive).
(^173) Article 29(1).
(^174) Article 29(2)(b). Distribution includes in particular the payment of dividends and of in-
terest relating to shares.
(^175) Directive 68/151/EEC (First Company Law Directive). See also Directive 89/667/EEC
on single-member private limited-liability companies (Twelfth Company Law Direc-
tive).