Vol 10 (2013) - Issue 5

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How Are Shareholders’ Control Rights Justified? – Parts II and III

Introduction
This article is a continuation of the discussion set out in a previous contribution to this volume, essentially looking at the changing legal nature of the company share. Part II examines the inapplicability of property law as the doctrinal basis of control rights. It will be argued that given the redefinition of the share, the proprietary nature of the right to hold a share has so dramatically changed that it is now possible to say that control rights are no longer based on property law but on contract law; the right to control is best viewed as one of the rights being given rise to by the contract for the acquisition of shares but not as one of the rights inherent in the proprietary nature of the right to hold a share. This argument synergistically relates to the question whether it is justifiable for contracting parties to expect, every time a contract for the acquisition of shares is entered into, that control rights should be part of that contract. Finally, part III explores a number of themes with a view to constructing a defensible basis for justifying that expectation on grounds of efficiency.

Part II
A. The inapplicability of property law as doctrinal basis for control rights
In order to prove that the right to control the management of the company is not an incidence of the property right to hold a share, an analogy may be drawn between the position of a shareholder and the position of a creditor, which then both can be contrasted with the position of a beneficiary under a trust. This comparative exercise bears upon the proprietary and contractual issues addressed in the previous part of the essay.
Once a dividend is declared, the relationship of the company with the shareholder is analogous to a debtor/ creditor relationship in the sense that the declaration of a dividend creates a debt due from the company to the shareholder which is equivalent to the amount of the dividend. Once a dividend is declared, a shareholder, just like a creditor, has a personal right as against the company to be paid the amount due. Unless or until the debt or dividend is paid, that personal right is a right or claim to pure exchange value. As far as the creditor is concerned, this right is given rise to by the debenture whereas in the case of the shareholder the personal right to receive dividends is one of the rights which together constitute the property right to hold a share which itself is the product of contract between the company and the shareholder. The difference between the right to exchange value held by a debtor and the right to exchange value held by a shareholder is that when debts are collected, the right to exchange value is extinguished and is replaced by the property right to own the cash received; but when dividends are paid out, the right to exchange value is not extinguished because the shareholder can still assert that right in respect of future dividends. Also, in similar words, once the amount due is received, the right to claim under the debt is exhausted because a debt comprises only of the right to receive the amount due. Conversely, the receipt of the declared dividends does not exhaust the right to hold a share because that right also comprises of other rights not necessarily dependent on the right to receive dividends.