Shareholder protection in share issues: the legal capital model versus the contractual model

When companies issue new shares to raise capital, several conflicts of interest can arise between the management or the controlling shareholder on the one hand, and the minority shareholders on the other. Corporate law needs to strike a balance between protecting shareholders in these conflict situations, and at the same time retaining enough flexibility for companies to raise capital.

In the prevalent approach in the European Union, shareholders are protected in share issues through the rules on legal capital: shareholders’ rights are allocated on the basis of (mostly mandatory) legal rules and protection against dilution is offered through pre-emption rights (the “legal capital model”). The United States, on the other hand, have long abolished legal capital. They allow shareholders’ rights to be allocated in a contractual manner and shareholders are protected through general fiduciary duties of directors (the “contractual model”). However, there is a trend in several European countries to incorporate elements of the contractual model, which leads to a hybrid model.

These different approaches to shareholder protection have not yet been subject to fundamental comparative and evaluative research. This research wants to fill this gap, using the method of “comparative law and economics”. It compares the different approaches to shareholder protection and analyzes their advantages and disadvantages in the context of the different legal regimes in which they exist. This way, the research aims to contribute to the debate on legal capital and its alternatives.