178 5 Equity and Shareholders’ Capital
enforcement rights are (1) compliance with legal rules and (2) management of the
size and voting power of minority shareholder blocks.
The extent of managers’ discretion. In continental Europe, shareholders have
traditionally been protected by mandatory provisions of company law that govern
the authorised capital and the distribution of power in the company. The general
meeting decides on the amendment of the company’s statutes as well as on an in-
crease or decrease in the number of shares (section 5.10.3). In addition, actions by
the board are constrained by the general principle of equivalent treatment of hold-
ers of securities that belong to the same class and general principles according to
which the board must act for a proper purpose (Volume I). Such rules and princi-
ples are likely to decrease the board’s discretion to issue shares and buy them back
or to redeem or withdraw them.
However, there are two main ways to increase board discretion. The first can be
used ex ante and the second ex post. First, the discretion of the statutory board will
depend on many choices relating to shares.
- Depending on the governing law, the limited-liability company may need to
have an authorised capital such as a share capital. If it has an authorised capital,
each share can be regarded as a share of the authorised capital (as under Ger-
man company law). Alternatively, shares are not linked to authorised capital
(this is the case according to Finnish company law). The latter alternative is li-
kely to increase management discretion, because a change in the number of
shares will not necessarily require a change in the authorised capital, and vice
versa. The lack of an authorised capital would increase flexibility even more.^185 - In the EU, the public limited-liability company must have an authorised mini-
mum capital.^186 Depending on the governing law, the statutes of the company
may provide that the authorised capital may be changed within the limits of a
minimum and maximum capital without amending the statutes. The use of a
minimum and maximum capital instead of a fixed capital is likely to increase
management discretion. - The same can be said of information about the number of shares in the compa-
ny’s statutes.^187 The use of a minimum and maximum number is again likely to
increase flexibility. - Depending on the governing law, the shares can have a nominal value or an ac-
countable par value. The Second Company Law Directive provides that “shares
may not be issued at a price lower than their nominal value, or, where there is
no nominal value, their accountable par”.^188 There will be more flexibility, if
the company chooses an accountable par value for its shares instead of a nomi-
nal value.
(^185) See Enriques L, Macey JR, Creditors Versus Capital Formation: The Case Against the
European Legal Capital Rules, Cornell L R 86 (2001) pp 1165–1204; Armour J, Legal
Capital: an Outdated Concept? EBOLR 7 (2006) pp 5–27.
(^186) Article 6(1) of Directive 77/91/EEC (Second Company Law Directive).
(^187) Articles 3(a) and 3(b) of Directive 77/91/EEC (Second Company Law Directive).
(^188) Article 8(1) of Directive 77/91/EEC (Second Company Law Directive).