Small shareholders as consumers in Germany
(By Verbraucher - Zentrale Hamburg e.V.)

Small shareholders as consumers

I. Introduction
Shares as a form of money investment have been rather unpopular in Germany ever since. Especially consumers found risks which are connected to that kind of money investment usually too high and were afraid of losing all their invested money instead of making any profit. Those risks, of course, do still exist today. And although certain investment strategies that are often recommended by banks, for instance spreading the investment capital on multiple shares of different companies or participation in share based investment funds, might reduce these risks, they still have to be taken for granted. In spite of that, during the last years more and more Germany consumers decided to invest their savings in shares. As a milestone that seems to have reversed this trend, the release of Deutsche Telekom AG shares on the stock exchanges can be named. These shares nowadays are still often referred to as “Volksaktien” (lit.: shares for the folk). Retrospectively, it seems as if first of all Deutsche Telekom AG managed to disperse doubts which had generally been felt about shares before. The assumption that a company which previously held a monopoly on telecommunication services and was owned by the state could make considerable losses or even run into insolvency, was apparently considered unrealistic. Additionally, different from other forms of investment gains, no taxes had to be paid on profit made by increasing shareholder values during that years. And finally, shareholders of Deutsche Telekom AG were tangibly rewarded in the first years. The first day after those company’s shares were sold on the stock exchanges its value had increased for about 16 % already, and was doubled several times in the following years. After those experiences many people concluded that by buying shares a lot of money could be earned without any effort. To finance a package of shares, the assumption ran, it was even worth taking a credit and this attitude again catapulted the index of Germany’s most important shares (DAX) to a historical peak of 8136 points in March 2000. In the meantime, shareholders on Germany stock exchanges are not that enthusiastic any more. The Germany stock index mentioned above hardly ever crossed the 4000-points-line in the first months of 2004. Correspondingly, many shareholders of Deutsche Telekom AG are contemporary suffering from considerable losses and are drawing public attention by their claims for damages addressed to either the company itself or banks that had ordered its shares on behalf of their customers. In spite of that, all in all there is no doubt that shares have established themselves as a form of money investment to a broad public. On the other hand, reactions of the Germany legislator to that development were hardly notable. Only that some political parties, after shareholder values had increased immensely in the years just before the change of the millennium, felt the need to make shareholders pay taxes on their profit, was widely recognised. However, as the Germany Federal Constitutional Court in March 2004 (2 BvL 17/02) considered an act which provided an obligation for shareholders to pay taxes non-valid, the discussion about so-called “Spekulationssteuer” (lit. tax on speculation [profit]) has come to an end - at least for the moment. In the following it will be shown to which extent consumers are confronted with particular risks while dealing with shares and whether there is a need for a special regulation to protect them. To clarify the legal position of consumers as shareholders on the one hand (I.) and their legal position while buying shares on the other hand (II.), a corresponding distinction will be made.
II. Consumers as Shareholders
It has been pointed out in the introduction that shares as a form of money investment have gained ground among different social classes of the population recently. This can be formulated from another viewpoint as well. If we take a look at stock corporations (“Aktiengesellschaften”), we can see that their overall shareholder structure has undergone significant changes. Today “Aktiengesellschaften” are to a considerable extent owned by people that – due to their inexperience in business dealings – can be referred to as “consumers”. However, if we take into consideration that shares as a form of money investment – regardless of how one gets into possession of them – do not represent a form of consumption but always serve to the growth of available capital, the term “consumer” seems to be an unfitting one. Rather strictly formulated, one might even say that per definition shareholders are no consumers. To illustrate properly the change in the overall structure of shareholders as noticed in the introductory part, the following has to be taken into consideration: in comparison to the volume of the capital represented by shares currently available on the stock exchange, the number of shareholders has increased to such proportions in recent years so that the average influence of a shareholder on the respective company has weakened significantly at the same time. In other words, there are more and more minority or small shareholders (“Kleinaktionäre”). Their interests with respect to the majority or even a single person holding the majority of shares in a company (and thus controlling it) are taken into consideration by so-called “Anfechtungsrecht” (right to rescind) in Germany Stock Corporation Law. Details about the “Anfechtungsrecht” will be given (2.), after a brief overview of Germany Law of Shares in general (1.).
1. Germany Stock Corporation Law
According to Germany law, the “Aktiengesellschaft” is one of the legally possible forms of alliances for persons that pursue a common goal.
a) “Vereine” and “Gesellschaften”
Regarding such alliances, Germany law makes a distinction between plain personal alliances (“Gesellschaften”) on the one hand, and rather complex corporations (“Vereinen”) on the other hand. At first sight these two types can be easily distinguished by the number of persons involved. Usually, only few persons form a personal alliance (“Gesellschaft”), while corporations (“Vereine”) often have very many members. This common structure, however, does not allow a clear distinction and is, finally, not even obligatory. According to § 56 of the Germany Civil Code (BGB), in order to found a corporation (“Verein”) there should (i.e. do not have to) be 7 founding members. And how many persons close a founding contract for a personal alliance (see §§ 705ff. BGB), is in principle a matter of private autonomy. A proper distinction can only be made when taking into consideration that concrete persons as members of a corporation (“Verein”) are of far less importance than as a contracting party in a personal alliance (Gesellschafter). While to a “Gesellschaft” so-called principle of “Selbstorganschaft” applies, that is, all actions and decisions must be in principle carried out by all partners together (see §§ 709, 714 BGB), a corporation becomes formally capable to perform actions only after appointing a corresponding organ (§§ 26f. BGB), whose tasks can be carried out by persons, who do not necessarily have to be members of the corporation. Especially because of this, for the existence of a corporation it is not of vital importance when single persons leave or new persons join (§ 39 BGB). This is different in a “Gesellschaft”, which is based on a personal alliance (see § 723 BGB).
b) The “Aktienverein”
According to the differences just explained, the “Aktiengesellschaft” is a corporation. Thus, strictly taken, the term “Aktienverein” would be more precise, but is not used in the Germany legal terminology. For the shareholder, and especially for the small shareholder, this principally means, that he does not make losses or profits by his own direct actions together with other person, but shares “his” society’s economic fate as a member. Economic participation in Germany share-law are called “Vermögensrechte” (bb]). Those are to be distinguished from so-called “Mitverwaltungsrechte” (aa]), which refer to the possibility of a shareholder to influence basic actions and decisions of the “Aktiengesellschaft”. “Vermögens-” and “Mitverwaltungsrechte” of the shareholders have been stipulated in a special act which is called Aktiengesetz (AktG). Complementary - as already mentioned above - general rules of the Germany Civil Code (“Vereinsrecht”) apply to the Aktiengesellschaft.
aa) “Mitverwaltungsrechte”
Due to the character of the “Aktiengesellschaft” as a corporation, the shareholders have no considerable possibility to exert influence on their company’s daily business. Representation and business administration in an “Aktiengesellschaft” in the public is task of a special organ, which is – parallel to the provisions in the general “Vereinsrecht” called “Vorstand” (management - § 26 BGB, §§ 76ff. AktG). In an “Aktiengesellschaft” not even appointing and controlling of this leading organ is directly under the shareholders’ influence, but carried out via another organ, which is called “Aufsichtsrat” (governing or supervisory board - vgl. §§ 84, 111 AktG). Therefore the Germany legislator at this point recognised a special need for control and transparency and has even tightened corresponding provisions within the stock corporation law by enacting the “Gesetz zur Kontrolle und Transparenz im Unternehmensbereich” (KonTraG) in 1998. In this connection first of all (for further information see Lingemann/Wasmann, Betriebsberater 1998, S. 853; Claussen, Der Betrieb 1998, S. 177) the extension of the management’s reporting commitments towards the supervisory board (§ 90/1 AktG) have to be mentioned. Furthermore, the possibility to be member of a supervisory board in different companies at the same time have been (additionally) limited (§ 100/2 AktG) and the supervisory board itself is obliged to meet more often than before (§ 100/3 AktG). However, any shareholder is able to participate in the company’s administration actively as a member of so-called “Hauptversammlung” (shareholders meeting). This organ of the “Aktiengesellschaft”, which is also provided by law, elects (corresponding to labor law often together with the company’s employees) the supervisory board and makes other decisions, which are of crucial importance to the corporation, like a change of its articles, for example. Therefore the right to take part in the shareholders meeting (§ 118/1 AktG), the right to convene a meeting of the shareholders under certain circumstances (§ 122 AktG) and the right to vote at such a meeting (§ 134 AktG) are the main administration rights (“Mitverwaltungsrechte”). On the other hand, practically it can be remarked that at least small shareholders hardly ever make use of those rights. Until recently votes were often given by banks, to which usually on the occasion of ordering shares the right to vote was transferred under the condition that the actual shareholders were willing to vote themselves. This practise seems to have decreased after the Germany legislator – again by the named KonTraG – has tightened credit institutes’ duties to take care of the shareholders interests, when voting on their behalf (see § 135/1 AktG). Small shareholders nevertheless continue being rather reserved in handling their rights. Inadequate efforts to make use of them and doubts concerning their own competence are probably the reasons for that. Some shareholders transfer their rights to associations for the protection of small shareholders, so-called “Schutzgemeinschaften”.
bb) “Vermögensrechte”
The claim for payment of annual profit corresponding to the number of shares (so-called dividends “§ 58/4 iVm § 174 AktG”), the right to acquire new (young) shares in case of capital increase (§ 186 AktG) and the right to take part in liquidation proceeds after the corporation’s dissolution (§ 271 AktG) are usually considered as the main “Vermögensrechte” of the shareholders. And theoretically, it is especially the right to receive dividends that seems to be of great importance from the shareholder’s point of view. At first sight only in this way the fruits of the invested capital can be reaped. Practically, even that claim is usually not of great importance. This is firstly, because the majority of the shareholders in order to accrue reserves, which, of course, are up to a certain extent also legally provided (see § 150 AktG), tend to vote against such a payment at the meeting. Secondly and above all, it is well-known that at least holders of those shares that are sold on the stock exchanges do not speculate on a corporation’s profit in the first place, but in most cases exclusively on their shares value on the market. Increasing and decreasing of the shareholder value, on the other hand, is influenced by many factors which can hardly be foreseen nor controlled by law.
2. Rescinding of the shareholders meeting’s decisions
As already mentioned, in order to protect small shareholders Germany Stock Corporation Law first of all provides so-called “Anfechtungsrecht” (right to rescind). According to §§ 243ff. AktG, any shareholder can rescind decisions of the shareholders meeting if they are either breaking the law or the corporation’s article. This entitlement to make a certain decision being considered non-valid can only be carried out if the shareholder had made use of his right to attend and vote at the shareholders meeting in which this particular decision was made. Following the distinction of a shareholder’s rights which has just been explained, the right to rescind is a “Mitverwaltungsrecht”, too, and means, when taking a somewhat closer look at it, a deviation from general principles of Germany civil law in favour of principally valid decisions of a shareholders meeting. Principally, those decisions are considered as a case of so-called “Rechtsgeschäft” (act of legal significance) to which § 134 BGB applies. And according to this provision, acts of legal significance which are against law are non-valid, no matter whether they are rescinded or not. Non-validity of decisions of the shareholders meeting has been provided in Germany Stock Corporation Law only in a few rather drastic cases, for instance if the shareholders meeting had not been formerly convened (see § 241 AKtG). Hence, a decision reached at a shareholders meeting from a structural point of view shows remarkable similarities to a public administration act, which is also invalid only exceptionally and otherwise – just like decisions of a shareholders meeting – only rescindable within 4 weeks after it had been made (see § 246 AktG, § 70 Verwaltungsgerichtsordnung). Practically, the possibilities of abuse are a matter of discussion in the first place. The Germany federal court, for example, had to judge a case (BGHZ 135, S. 244ff.) in which a single shareholder had rescinded a shareholders meeting’s decision, in this way temporarily hindered the execution of a fusion that was basically lucrative for the corporation and offered a withdrawal for a remarkable payment. Especially among the leading staff cases like these have risen the estimation that a usage of the right to rescind is possible only to the detriment of corporations. This attitude sounds somewhat arrogant but might have a point, as the right to rescind is not of great importance to the average shareholder. Usually, they can neither oversee the legal nor the economical meaning of such decisions. The existence of the right to rescind, i.e. at least a principal possibility to control majority shareholders, is on the other hand most probably indispensable (for further details see Zöllner, Die Aktiengesellschaft 2000, S. 147).
III. Consumers as purchasers of shares
Persons, who are buying shares, but are rather inexperienced on the market of financial-services, may – different from shareholders as such -, be called “consumers”. According to Germany Law, there is no doubt that especially the purchase of shares-offering banks have to inform their customers about risks which are connected to shares as form of money investment. In case a bank neglects this duty and suggests a fixed minimum profit expectation, the bank is liable for less profits and must pay damages in case the shareholder value decreases. Such cases, however, are rare when consumers buy shares directly. The speculative character of shares is all in all well-known. Problems – this seems worth being mentioned in the end – rather exist in the field of alternative forms of money investment, which in fact base on shares, but are often marketed as far less risky. When marketing share based investment funds for instance sometimes the impression is transmitted, that in this way secure investment that still allows maximum tax exempted profit is possible. In fact, of course, there is still a risk of considerable losses. Additionally, consumers sometimes have to pay disproportional administration fees and this becomes clear in many cases only via voluminous information brochures, by which financial service provider try to satisfy their duty of disclosure. Those brochures, however, are in many cases not understood by consumers.
IV. Conclusion
As a conclusion it can be said that special risks, which are connected to shares as a form of money investment, are principally the nature of shares. Anybody who dares to make such an investment must principally know that it is a kind of gambling in the widest sense. With this information, of course, consumers have to be provided by shares marketing and distributing companies. And the way those risks are sometimes disguised within alternative share-based forms of money investment is more than questionable. Furthermore, it looks like legal protection of share handling consumers will be rather hard to legitimate.